8. Memorandum Prepared in the Central Intelligence Agency1
[Omitted here are a cover sheet and a table of contents.]
- Prospects for US Access to World Oil Over the Next 15 Years or So
- Existing US volume controls on imports of petroleum are abolished.
- The US continues to have access to petroleum produced in Alaska and Canada.
- Imports will provide about one-quarter of US consumption by 1975 and about one-half in the early 1980s.
- Canada and Venezuela will provide the bulk of the US imports during most of the 1970s, with sources outside the Western Hemisphere becoming major suppliers thereafter.
I. Trends in the World Oil Industry
1. World oil production and consumption have grown dramatically since World War II. In the last decade alone, world production has doubled, to over 38 million barrels per day (bpd) in 1968. The booming market for petroleum has spurred extensive exploration; as a result, the number of oil exporting countries3 has risen steadily. At the time of the Suez crisis in 1956, there were only four principal exporters; in 1967 there were eight; in the next few years there will be a dozen or more. The continuing intensive search for yet more oil deposits seems certain to have results. Moreover, newly discovered large natural gas deposits have further diversified the energy sources for the major oil and gas consuming nations. And, of course, nuclear power and other technological developments, for example in utilization of oil shales, will add other alternative sources of energy.
2. Seven companies4 still dominate the international oil trade, but their share of that trade has dropped from about 90 percent in 1952 to some 75 percent in 1968. Some of the most substantial recent discoveries have been made by smaller US and European firms; moreover, the producing countries have demanded and received partial ownership in many recently formed exploitation companies. In the past several years, the producing countries also have begun to move into refining, marketing, and transportation of oil on a small but steadily increasing scale. Thus, the ownership of oil and the control over international marketing of it are becoming less and less centralized; this trend seems certain to continue.
3. The growing number of owners and producing nations, however, does not mean that the regional distribution of proved foreign reserves has shifted significantly in recent years. Only Africa has enjoyed important discoveries in entirely new areas. Of the world’s proved oil reserves, the Middle East still accounts for over half; an additional 10 percent is in North and West Africa. In general, the costs of production in the Middle East and Africa are well below those prevailing in South America or in such countries as Indonesia and Australia. This is likely to remain true, although the host governments in the Middle East and Africa will continue pressing for increased revenue per barrel.
4. Such factors as chemical composition and transportation costs are likely to be of diminishing importance as determinants of marketability. Growing concern with air pollution has led to increased demand [Page 27]for low sulfur oil; in turn, research into cheaper ways of desulfurization has increased and probably will result in significant technological breakthroughs within the next several years. And as more and bigger supertankers enter service, distance between the well and the market will be of less economic significance. Nevertheless, some producers with exceptionally fortunate combinations of location and crude oil low in pollutants, e.g., Libya, will continue to enjoy favored positions for the foreseeable future.
5. Obviously, the greater the diversity of petroleum sources, the harder it becomes for any single producing country or combination of producers to prevent importing nations from obtaining oil. The major oil exporting states, joined in the Organization of Petroleum Exporting Countries (OPEC), have cooperated to improve their own share in oil income, but they have shown little ability to agree on more controversial subjects. With the continuing expansion of OPEC membership, the organization will become even less likely to agree on anything so against self-interest as an embargo of a major oil market, especially since all the major exporting states are heavily dependent on oil revenues both to finance their budgets and to finance future economic growth. We do not believe that this dependence will decline substantially in the next 15 years or so.
6. The dominant position of US companies in the world petroleum industry is an important buffer against any concerted threat to US access to imported oil. More than half the oil moving in world trade is foreign oil produced and sold by US firms; this petroleum comes from widely dispersed areas of the world. At present, the US firm participating in a concession typically controls its share of the crude oil as soon as it is removed from the ground; the host government usually has little say in the final destination of oil produced by a foreign-owned company. In any crisis situation, we assume that US companies would do their best to insure that US requirements were met. It would probably be extremely difficult for any country or group of countries to make an embargo effective, especially in view of the complexities of the international oil trade.
7. It should be noted, however, that the role of US companies in the international oil trade is changing. The governments of host countries are taking a more active part in all aspects of the oil business; concession terms are becoming more onerous from the companies’ point of view. National oil companies from the principal importing nations are competing for concessions and are offering long term purchase contracts as inducements to the exporting states. Nevertheless, the US will almost certainly remain the world’s largest single source of oil expertise and of investment funds available to high risk endeavors. Moreover, the abandonment of US import controls will increase the volume of foreign oil brought into the US, thus enhancing the commercial [Page 28]leverage of US companies. With world production rising steadily, the quantity of oil controlled by US companies should continue to go up at a healthy rate, though the percentage of world production owned by US interests will probably decrease.
8. On the narrow question of an embargo directed solely against the US, only access to Venezuelan oil is significant in the short run. However, either a broader embargo—directed against Western Europe as well as the US—or some other serious disruption of world oil supplies could also interfere indirectly with US access to imported oil. In the Eastern Hemisphere, a combination of Arab producers is the only conceivable source of trouble serious enough to create a shortage of oil on international markets and thus to induce severe rationing of oil in Western Europe and Japan, perhaps bringing those markets into competition with the US for Canadian and Venezuelan oil. Moreover, access to Arab oil is expected to assume increasing importance for the US after 10 or 15 years. The following discussion, therefore, concentrates on likely developments in Venezuela and in the Arab world.
II. Prospects for Access to Venezuelan Oil
9. In our view, it is highly unlikely that during the next few years Venezuela would deny its petroleum to the US for reasons either of internal Venezuelan politics or of strained relations between the two countries. We believe this will be true even if anti-US sentiments continue to flourish and grow in Latin America during this period. We believe, too, that civil strife destructive enough to disrupt Venezuela’s ability to produce and export oil is not in the offing for the foreseeable future.
10. The policy of the present Christian Democratic (COPEI) government, like that of Democratic Action party governments before it, has been to increase Venezuela’s share of the US oil market. As oil constitutes over 90 percent of the value of Venezuela’s exports, governments since 1958 have counted on it to “seed” the country’s economic and social development. Venezuelan administrations have for years been seeking the sort of preferred access to the US market that Canada and Mexico enjoy. Realizing that the US has been reviewing its oil policies, President Caldera has publicly expressed his concern about Venezuela’s decreasing percentage of the US market over the last 10 years and has stressed the importance of an enlarged share if his country is to progress.
11. The Caldera government is weaker than its predecessors, and the political atmosphere is more restive than in the recent past. Although COPEI won the December 1968 presidential election, it received a mere 29 percent of the vote, and it lacks even a plurality in Congress. On important issues such as petroleum, Caldera must not only form coalitions with other parties but must also reconcile factions within his own party. Yet a strong consensus now prevails among all political [Page 29]groups, not only on the oil question (no group of any consequence advocates nationalization), but also on preserving representative civilian government. Having lived under a predatory military regime in 1958 and been threatened by insurgency during the early 1960s, most politicians are wary of taking actions that risk a return to such conditions.
12. We believe that Venezuela, under almost any foreseeable government, will be anxious to expand its sales to the US market as rapidly as possible. The new Minister of Mines has already announced his desire to have service contracts for exploration in southern Lake Maracaibo signed by the end of the year.5 The oil now produced is relatively high cost and generally has a high sulfur content; access to an enlarged US market would spur exploration and exploitation of undeveloped and perhaps more competitive deposits. So long as the Venezuelans can produce oil and market it in the US, we see no reason to believe that they would choose to cut off production or to divert oil to remote and less profitable markets such as Japan and Western Europe.
13. Economic benefits from greatly expanded sales to the US would probably tend to strengthen moderate civilian rule, like that of Caldera. If domestic squabbling over oil policies produced political instability, or if a concerted drive by politicians produced policies that were both anti-US and costly to the Venezuelan oil industry, the generally conservative military establishment would be likely to apply pressure in the interests of maintaining order and profits and might intervene directly. Leftist insurgents now constitute only a minor political problem, and there is little chance that they will revive sufficiently during the next several years to pose a serious challenge to the government. In short, though Venezuela may suffer from increased political instability over the next several years, the most likely replacement for the present moderate civilian government, in the event of a prolonged political crisis, would be a conservative military regime disposed to do business with the US.
III. Longer Run Prospects in the Eastern Hemisphere
14. It is more difficult to see beyond the next few years with any confidence and to make specific predictions about conditions in those countries that might become important suppliers to the US in the 1980s. Almost all the major oil exporting states are candidates for domestic instability in varying degrees. Given the large number of countries involved and the long time period (10 to 15 years) concerned, assorted succession crises, civil wars, and insurgency movements are possible [Page 30]in all and probable in at least some. Under some circumstances, individual exporting nations might blame the US for their troubles and seek to deny petroleum to the US. Some of the oil producing countries have shown themselves capable of taking action for political and even emotional motives, without regard to economic consequences. Experience has shown, however, that in the longer run there is a tendency—though it cannot be absolutely relied on—for economic interests to re-assert themselves. In any case, it seems unlikely that enough exporting countries would simultaneously be in a state of internal violence or political crisis to affect the world’s oil production substantially for any extended period of time.
The Arab States
15. The most likely source of a serious disruption of world oil supplies that would affect US access to oil is the Arab world, where the prospect is for increasing radicalism and growing hostility to the US. This possibility would be much greater in the event of another Arab-Israeli war. An Arab-Israeli war itself seems a likely prospect, although no one can be sure when or how it might occur. If a war breaks out, it seems probable that the Arab states (which produce half the oil moving in world trade) would attempt to deny oil to the US and perhaps to some Western European countries. Any such move also might be accompanied by punitive measures against US oil companies. While the force of emotional and irrational factors on Arab behavior makes any judgment uncertain, we doubt that they could successfully maintain an embargo for more than a brief period. As in the aftermath of the 1967 Arab-Israeli war, any effort to sustain such an embargo would be weakened by the differing degrees of determination to damage US interests among the Arab states and by the temptation for some countries to cash in on the self-denying abstinence of others. In 1967, the Arabs argued the matter heatedly and reached the conclusion that they could not pursue either their internal or external policies without oil income.
16. We believe that the reasons for this decision will remain compelling. Most of the major producing countries have strong financial reasons for continuing to sell oil to the US and other hard currency customers; they, rather than the radical states, are the arbiters of oil export policies. Over and above economic considerations, Saudi Arabia, Libya, and Kuwait do not want to weaken or sever ties to the West lest they become much more vulnerable to Nasser and other radicals. If the conservative regimes fall, US access to Arab oil will probably be on less favorable terms—as witness the case of Iraq—and less firmly assured. We believe, however, that even the most radical states would continue to want to sell oil.
17. The Palestinian commandos are much less concerned with financial considerations than are the Arab governments. But while the [Page 31]commandos might seek to destroy oil facilities, their successes are likely to be limited, and the damage they could inflict probably would be fairly easy to repair. Moreover, we anticipate that oil companies will maintain sufficient excess capacity in various areas of the world to permit them to compensate for temporary disturbances in specific countries.
18. The importance of oil revenues to Arab economic and military strength does, however, raise another possibility—an Israeli attack on such major oil installations in the Arab world as pipelines, pumping stations, refineries, and ports. The Israeli intention would be to greatly decrease oil revenues, particularly those of Kuwait, Saudi Arabia and Libya. Since those countries subsidize the UAR and Jordan, the Israelis might hope that a sudden drop in income might force the latter states to give in. Israel would be reluctant to attempt this operation because of hostile reaction in the US and Western Europe. We do not consider such a move likely, but we cannot rule it out, especially if the Israelis became involved in a major, protracted war with the Arabs.
19. All the major Arab oil exporting states are susceptible to domestic strife; in all, coups, uprisings, and even civil war are conceivable; and any of these contingencies might affect oil production. The succession issue probably is most acute in Libya, where an aging king rules a country in which provincial rivalries are not dead and the crown prince appears exceptionally inept. In a turbulent situation, Libyan oil facilities might be attacked; they would be extremely vulnerable. Libya is so dependent on oil revenues that we see little reason to anticipate any internal political developments likely to lead the Libyans to attempt to deny oil to the US.
20. Saudi Arabia is another potential scene of political turmoil. Any number of contingencies could lead to sabotage of the pipeline through which some Saudi oil normally flows to the Mediterranean. That line, however, carries only a small and declining percentage of Saudi output, and in any case its throughput is not used to supply US markets. Political upheaval in Saudi Arabia, perhaps during a succession crisis, might entail attempts to sabotage oil facilities in the Eastern Province. Nonetheless, barring a lengthy civil war in the Eastern Province itself, we believe that Saudi oil would continue to be produced and exported. Internal political considerations are not likely to become so compelling that any Saudi regime—even a revolutionary one—would be willing to risk oil revenues in an attempt to embargo the US.
21. Kuwait and Abu Dhabi are creations of the international oil business; we cannot conceive of an eventuality that would lead either of them to voluntarily suspend oil exports for more than a short period. It is possible that Iraq might at some time attempt to take over Kuwait; the motive, however, would be to seize Kuwait’s oil and sell it for Iraqi benefit, not to hold it off the market. Iraq, for its part, [Page 32]probably is the least dependable major oil source in the world. The Kurds, who are in chronic revolt against the Baghdad government, might at some time seize and heavily damage the oil facilities in northern Iraq. The Kurds, the Syrians, or the Israelis could sabotage the pipeline from the northern fields to the Mediterranean, and the southern Iraqi fields are vulnerable to sabotage either from local dissidents or from Iran. For all Iraq’s record of unreliability, however, the successive radical regimes in Baghdad have shown continuing interest in selling oil to the West.
22. Algeria may or may not discover sufficient new reserves to permit it to remain an important producer. Oil revenues are Algeria’s only real hope for prosperity in the years ahead; if they continue to grow, Algeria would have some reluctance to risk them by taking drastic actions which might undermine this source of income. In any event, France rather than the US probably would be the major sufferer from any interruption of Algerian oil exports.
23. Iran, like any other country ruled by one strong individual, could be in for turmoil if the Shah died or lost control. A political struggle, however, would probably be centered in Teheran, many hundreds of miles from the oil producing areas. If so, it probably would have little or no impact on oil production. Nor do we anticipate that a successor government would be anxious to forego the oil revenues that have become vital to the Iranian economy.
24. There is some possibility over the longer term that the Arab population of Iran’s oil producing area might attempt an uprising, probably with some assistance from Iraq. This could become a particularly acute threat in the event of another Arab-Israeli war leading to Arab attempts to deny oil to the West. Such action might seriously hamper Iranian oil production, perhaps for an extended period of time. On balance, however, we would expect the Iranian army and security forces to be able to provide reasonable security for the oil producing installations.
25. The only issues we can now foresee that could cause serious differences between the Shah and the Western companies concern the amount of revenue from oil production. The Shah sincerely feels that his record of cooperation with the West entitles Iran to increased production and revenues that outstrip those accorded to other oil exporting nations. This leads to acrimonious negotiations every year between the Iranians and the oil companies. If major new markets in the US are opened to imported oil, and he does not receive what he considers a fair share of the consequent increase in worldwide production, he will be sorely tempted to take punitive action against Western concessionaires. His objective, however, would be to increase his sales in Western [Page 33]markets, not to deny oil to the West. While there are other potential irritants in government-to-government relations between the US and Iran, the Shah or a successor would probably not let them interfere with continued oil production or with exports to the US.
26. Nigeria is likely to be unstable for years to come. But we doubt that output, which will be spread widely throughout much of the southern half of the country as new areas come into production, would be totally disrupted for long periods. Xenophobia is on the rise in Nigeria, and whatever government structure evolves in the area is likely to assert increasing control over the activities of the oil companies. However, deliberate denial of oil to the US for political reasons seems unlikely over the next two decades.
27. A return to political instability in Indonesia could easily hamper oil production and export; in any event it would discourage new investment. The most likely source of trouble for the petroleum industry would be a resurgence of ultranationalism on the Sukarno pattern. This would probably lead to Indonesian demands for renegotiation of oil contracts, to harassment of foreign firms, or even to further nationalization of the oil industry. We believe, however, that such moves would fall short of attempts to oust major foreign producers. We doubt that any regime in Djakarta would wish to jeopardize the oil exports upon which it will largely depend for its hard-currency earnings from Japan, Australia, and the US. It is possible that prolonged civil strife or communist insurgency might bring disruptions in oil production and shipment. However, in such a case, regional military commanders would probably take charge and make their own arrangements with the oil companies.
IV. The Soviet Role
28. We cannot foresee circumstances under which the USSR could become a substantial supplier of oil to the US. The USSR may have available from its own resources as much as 1.3 million bpd of oil for export outside Eastern Europe by the mid-1970s and somewhat more by 1980. In the unlikely event that the Soviet Union were to abandon the other oil markets in the industrialized West that it has been cultivating since the mid-1950s, the total quantity available for export to the US would represent only about eight percent of the US demand forecast for 1980. The Soviets probably would see more advantage in selling any surplus to Western Europe than to the US.
29. An attempt by the USSR to capture world oil supplies and deny them to the US could take several forms: communist takeover, under Soviet leadership, of major oil exporting countries; a Soviet [Page 34]effort to replace the US as concessionaire and major distributor for foreign oil; or Soviet-inspired anti-US actions by oil exporting states with governments sympathetic to the Soviet Union. Given the weakness of the communist movement in most of the oil states, any sweeping conversion to communism seems unlikely. Even if communists took over in a major exporting country they would not necessarily refuse to sell oil to the US. If the Soviets tried to replace Western firms in oil exploration and exploitation, they would have to be prepared to risk their own capital. They do not appear to be willing to engage in such ventures on a scale sufficient to affect seriously US sources of supply. And even if the Soviets should gain a major role in distribution, we believe that they would choose to sell the oil for hard currency rather than hold it off the market in hopes of creating supply difficulties for the US. Preemptive buying would be prohibitively expensive, since very large quantities of oil would have to be withheld over an extended period. It seems highly unlikely that the Soviets could induce the oil exporting states to mount a large scale embargo and even less likely that such an embargo would be effective.
30. In sum, we consider it highly unlikely that the US would encounter serious difficulties in obtaining its foreign oil requirements over the next 10 to 20 years, given the assumed termination of import restrictions. There are several major reasons for this judgment. Even 10 years from now, US import requirements would amount to only about 15 percent of the total amount of oil which, it is estimated, would then be moving in world trade. Given the great and growing diversification of major sources of crude oil, supply is becoming increasingly invulnerable to disruption—voluntary or involuntary—by individual countries. Hence, although we would expect political upheavals to occur sporadically in various producing countries in the years to come, often with the chance of disrupting oil production for a time, such instances are unlikely seriously to curtail American access to world oil. Moreover, the oil producing states are heavily dependent on petroleum revenues. Even another Arab-Israeli war would probably not unite the Arab oil producers enough to let them long maintain an anti-US embargo. All things considered, the US, with the cooperation of US oil companies, would find it relatively easy to overcome the effects of any selective embargos that might occur from time to time.
31. In stating these conclusions we note, however, the distinction between control and access. Many trends—including the growing role of exporter governments and the increased competition from the oil companies of major consuming nations—are converging to reduce the virtually complete control over the international oil trade that a few Western companies once enjoyed. Such reduced control may lead to [Page 35]less favorable commercial terms, but it is not likely to impede US access to foreign oil.
- Source: National Archives, Nixon Presidential Materials, White House Central Files, Staff Member and Office Files, Council of Economic Advisers, Hendrik Houthakker, Box 38, Oil Import Control TF—CIA Report. Secret. This memorandum was produced solely by the CIA’s Office of National Estimates and was coordinated with the Office of Current Intelligence, the Office of Economic Research, the Office of Strategic Research, and the Clandestine Services. A September 2 supplement focused on the coup in Libya. (Ibid.) The Cabinet Task Force briefly summarized the CIA memorandum on September 2. (Ibid., RG 220, Records of the Cabinet Task Force on Oil Import Control, Box 23, Task Force Meetings, NSC on Foreign Policy Alternatives)↩
- Supplied by the Cabinet Task Force on Oil Import Control, which requested this assessment. [Footnote in the original.]↩
- The US and the USSR are the world’s two largest oil producers, but neither is a principal exporter. [Footnote in the original.]↩
- Standard Oil of New Jersey, Shell, Gulf, Texaco, Standard Oil of California, Mobil, and British Petroleum. [Footnote in the original.]↩
- Present oil concessions are due to begin expiring in 1983 and the companies are anxious to conclude new agreements well in advance of that date. The Caldera government and its predecessors have indicated that present concessions would be replaced by service contracts after their expiration. [Footnote in the original.]↩