In the name of Allah

the most
.Compassionate and Mercif ull
The Center for the Publication of
the U.S. Espionage Den's document*
Ayatollah Taleghani and Dr. Mofatteh intersection,
P . O . Box: 15815-3489 Tel: 824005
 SECRET

were also discussed with officials of Chase Manhattan Bank and Fit '
*
National City Bank of New York, and with Walter Levy. At various ltf

times, the broad subject, but not the specific questions, was dis I$
with a substantial number of second echelon officials of the cap 4
listed above and with officials of overseas affiliates of most of 4
the total nuntoer of individuals who contributed their viewsonthc I&

list of questions was about 100. Conversations on the same subjc , e

held during the last year with an additional 100 company official ..
41
Same companies had given a great deal of thought to the sub11
* @ I
changing conditions in company-government relations in producing
consuming areas; othersaFparently have preferred to react to evi
Â
*.
not to try to anticipate them. With a few exceptions, however, 4
not possible to speak of an unflawed, mnolithic "coipany posit11 '
Feelings and attitudes inside most companies, as in the Departinei 4
State -- not to mention the Federal Government -- vary considers!
And finally there are fairly well known differences in approach

attitudes m n g the tcp executives of the industry as a whole;

traditionally have taken a .quite rigid line, others a more conpi 1 4

one. In this report, the specific views of no company and no it +

will be identified.

SECRET
 Man's a c c e s s t o c r u d e o i l may be t r a c e d back t o s e v -
e r a l t h o u s a n d y e a r s , b u t i t i s n o t more t h a n a c e n t u r y
t h a t he s u c c e e d e d t o d r i l l o i l w e l l s i n North America
and pump o u t huge q u a n t i t i e s o f i t . Ever s i n c e , t h i s so-
u r c e o f e n e r g y h a s b e e n g r a d u a l l y making i t s p l a c e i n
1 industry. The o i l i n d u s t r y h a s d e v e l o p e d a l o n g w i t h o t -
her i n d u s t r i e s , p r o v i d i n g t h e p o s s i b i l i t i e s o f e x p l o r i n g ,
e x p l o i t a t i o n and r e f i n i n g o f o i l o n a l a r g e s c a l e . on
a c c o u n t o f b e i n g a c h e a p and p r o f u s e s o u r c e o f e n e r g y f o r
m e e t i n g human n e e d s , t h e f l o w o f o i l h a s become t h e l i f e -
vein of i n d u s t r i e s . Development o f o i l s i d e - i n d u s t r i e s ,
l i k e p e t r o c h e m i c a l s , d u r i n g t h e l a s t few decades h a s g r e -
a t l y enhanced t h e i m p o r t a n c e of o i l a s a raw m a t e r i a l f o r
these i n d u s t r i e s . The p r o d u c t s of such i n d u s t r i e s l i k e
polymers and p l a s t i c goods h a v e found numerous c a s e s of
u t i l i z a t i o n due t o t h e i r low c o s t o f p r o d u c t i o n and f a c i -
l i t y of i n d u s t r i a l a p p l i c a t i o n . Due t o t h e r a p i d d e v e l o -
pment of polymer t e c h n o l o g y and t h e s c i e n t i f i c know-how,
t h e u t i l i t y and i m p o r t a n c e o f t h i s m a t e r i a l i s s t e a d i l y
i n c r e a s i n g . F o r t h i s r e a s o n u s e of p e t r o l e u m a s f u e l i s
c o n s i d e r e d t o be one of i t s w r o s t k i n d of u t i l i z a t i o n .
D e s p i t e t h e g r e a t e f f o r t s and l a r g e i n v e s t m e n t s which
have been p u t t o work by t h e i n d u s t r i a l i z e d c o u n t r i e s f o r
f i n d i n g a n a l t e r n a t i v e s o u r c e of e n e r g y , no s i g n i f i c a n t
s u c c e s s h a s y e t been a c h i e v e d . Due t o h i g h c o s t s and ma-
s s i v e equipments, a p p l i c a t i o n of nuclear energy has i t s
own l i m i t a t i o n s and c a n n o t p l a y s u c h a s i g n i f i c a n t r o l e .
I t is w o r t h mentioning t h a t d u r i n g t h e y e a r 1975, 65.88
of t h e world energy r e q u i r e m e n t were met by g a s and p e t r -
oleum, and 26.7% by c o a l , whereas t h e s h a r e of o t h e r sou-
r c e s o f e n e r g y ( i n c l u d i n g n u c l e a r e n e r g y ) was a meagre
7.51 . I n any c a s e , p e t r o l e u m h a s m a i n t a i n e d i t s t o p po-
s i t i o n a s t h e f o r e m o s t s o u r c e o f e n e r g y and w i l l c o n t i n u e
t o do s o i n t h e f o r e s e e a b l e f u t u r e a s w e l l . I f we l o o k
a t t h i s problem from t h e economic p o i n t o f view, i t a s s u -
mes even g r e a t e r and more s i g n i f i c a n t d i m e n t i o n s . The
problem o f o i l c o n t i n u e s t o i n f l u e n c e t h e economic p o s i t -
i o n o f n a t i o n s and t h e i r d e s t i n i e s w i t h a n e v e r f a s t e r
pace, and t h e impact of t h e f l u c t u a t i o n s i n t h e o i l mark-
e t on t h e i r economies i s deepening. I n order t o procure
Â

c e r t a i n c r i t e r i a i n t h i s r e g a r d , t h e remarks Of one of
t h e economics e x p o r t s of t h e C.I.A. made i n August 1978
about t h e i n c r e a s e i n o i l p r i c e s a r e quoted here:
"We calulate that on o i l price increase of 101 now has the sane
economic impact as a 601 increase in 1973,when the weight of o i l in

*During t h e y e a r 1973, t h e o i l p r i c e s touched a n unprece-

d e n t e d h e i g h t i n t h e world m a r k e t , and i n c r e a s e d from $ 3
p e r b a r r a l t o $12 p e r b a r r a l . (These p r i c e s a r e a p p r o x i -
mates, which is s u b j e c t t o change a c c o r d i n g t o v a r i o u s
t y p e s of c r u d e o i l . )
 economic a c t i v i t y was much smaller. Every 101 r i s e in real crude
prices today would cut one-half a percentage point off OECD GNP gr-
owth, boost unemployment by some 500,000 persons, and add s l i g h t l y
more than one-half a percentage point t o inflation, besides adding
t o the already severe balance-of-payments problems of many nations."
F r a n k l y s p e a k i n g , i f t h e m a r g i n a l changes t a k i n g p l a -
c e i n t h e o i l market can alarm t h e world plunderers t o
s u c h a n e x t e n t , s o , how t h e c o n t r o l o f o i l market would
be a c h i e v e a b l e ? How d o t h e y manage t o s u p p r e s s , t h e l e -
g i t i m a t e l i g h t s o f t h e r i g h t f u l owners o f t h e o i l income,

i . e t h e oppressed people o f t h e o i l exporting c o u n t r i e s ,

how do t h e s q u a n d e r e r s o f o i l s t e e r t h e r u l i n g b o d i e s o f
t h e s e c o u n t r i e s i n t h e d i r e c t i o n of meeting t h e i r p o l i t -
i c a l p u r p o s e s ? How i s i t t h a t d i f f e r e n t p o l i t i c a l p a r t i e s
coming t o power i n a c o u n t r y l i k e America a r e t r a n s f o r m e d
i n t o a n i m p e n e t e r a b l e u n i t e d f r o n t o n t h i s i s s u e ? From
where c a n be f o u n d t h e a n s w e r s t o t h e s e and many more
s u c h b a s i c q u e s t i o n s ? The r e a l i t y i s t h a t t h e i n f o r m a t i o n
a b o u t many o f t h e s e i s s u e s c a n n o t be o b t a i n e d t h r o u g h t h e
s t u d y o f r e p o r t s a n d a r t i c l e s p r i n t e d i n mass media. In
most c a s e s c o n f i d e n t i a l r e p o r t s a n d c l a s s i f i e d m a t e r i a l s
c a n p r o v e a u s e f u l g u i d e f o r t h e s c r u t i n i z i n g and p r o b i n g
of such i s s u e s .

*Quoted form one o f t h e a n a l y s e s , made by t h e C . I . A . , fo-

und among t h e documents o f t h e E s p i o n a g e Den.
 Numerous documents of h i g h s i g n i f i c a n c e which a r e ma-
i n l y i n p o s s e s s i o n o f t o p c l a s i f i c a t i o n and d e a l i n g w i t h
o i l i s s u e , h a v e b e e n r e c o v e r e d from t h e U.S. Espionage Den
B e f o r e t h e s e i z u r e o f t h e Embassy t h e y w e r e f i l e d s e p a r a -
f
t e l y u n d e r t h e same c l a s s i f i c a t i o n by t h e Embassy a u t h o r -
ities. The s i g n i f i c a n c e o f t h e s e documents w i l l be r e a l -
i z e d o n l y when one comes t o know t h a t t h i s i s t h e f i r s t
i n s t a n c e t h a t such s e c r e t a n d h i g h l y c o n f i d e n t i a l r e p o r t s
r e g a r d i n g t h e m a t t e r o f o i l a r e b e i n g p u b l i s h e d , and f o r
t h e f i r s t t i m e a r e b r o u g h t t o th.; f u l l knowledge o f t h e
public. For t h e same r e a s o n , t h e i n p o r t a n c e of t h e i r s t u d
a n d a n a l y s i s i s much more r e a l i z e d . These documents h a v e
b e e n a r r a n g e d i n a p r o p e r o r d e r , and w i l l be p u b l i s h e d
e v e n t u a l l y , may God w i l l s o .
The P r e s e n t Document: The I n t e r n a t i o n a l O i l I n d u s t r y I n
1980:
-

A f t e r t h e d i s c o v e r y o f v a s t o i l f i e l d s i n America t h e
E u r o p e a n s , who found t h e m s e l v e s l a c k i n g t h i s g r e a t s o u r c e
of energy, s t a r t e d t o s e a r c h f o r o i l i n t h e i r c o l o n i e s
and t h e c o u n t r i e s t h a t were under t h e i r i n f l u e n c e . The
B r i t h i s h d i s c o v e r e d o i l i n t h e Middle E a s t , . p a r t i c u l a r l y
i n t h e e r e a o f t h e P e r s i a n G u l f , which t h e l a r g e s t o i l
f i e l d s a r e l o c a t e d i n t h a t r e g i o n . T h e i r a v a r i c e and g r e e d
on t h e one h a n d , and t h e i g n o r a n c e and c a r e l e s s n e s s o f
t h e r e g i o n a l r u l e r s o f t h e t i m e on t h e o t h e r h a n d , i n c r e -
 ased t h e l u s t f o r e x p l o i t i n g t h e o i l . Hence f o r t h e s a k e
o f p l u n d e r i n g t h e s e s o u r c e s , t h e y tempted t h e r e g i o n a l
r u l e r s and a l l u r e d them t o s i g n u n j u s t and u n i l a t e r a l ag-
reements. The c o n t r a c t s s i g n e d b e t w e e n Naseruddin shah
and Baron J u l i o s De R e u t e r , who was a n Englishman and Mu-
z a f f a r u d d i n shah and W i l l i a m Knox D'Arcy, ( a l s o an E n g l i -
shman), a r e among t h o s e a g r e e m e n t s . Reuter obtained, the
monopoly r i g h t s f o r a l l m i n e r a l r e s o u r c e s , w i t h t h e e x c e -
p t i o n o f g o l d , s i l v e r and p r e c i o u s s t o n e s mines, f o r a
p e r i o d o f s e v e n t y y e a r s i n exchange f o r t h e nominal paym-
e n t o f 40,000 pounds. But t h i s agreement was a n n u l l e d due
t o t h e strong opposition of T z a r i s t Russia. Afterwards
D'Arcy s e c u r e d s p e c i a l p r i v i l e g e s and monopoly r i g h t s o f
e x p l o r i n g , d r i l l i n g and e x p o r t i n g o i l , p e t r o l e u m , g a s , t a r
and n a t u r a l wax f o r a p e r i o d o f s i x t y y e a r s t h r o u g h t h e
s o n o f t h e p r e v i o u s Shah. These r o y a l t i e s were t r a n s a c t e d
f o r a payment o f j u s t 20,000 pounds i n c a s h and 20,000
s h a r e s o f t h e d r i l l i n g company, w h e r e a s t h e t o t a l number
o f t h e s h a r e s o f t h e company was more t h a n 600,000. As a
r e s u l t o f t h e s e c o n t r a c t s , t e c h n i c a l l y named a s c o n c e s s i -
o n a r y a g r e e m e n t s t h e n a t i o n a l w e a l t h o f t h e poor c o u n t r i e s
was p l a c e d a t t h e d i s p o s a l o f t h e p l u n d e r e r s , and day by
day t h e y became more d e p e n d a n t t o t h e i r e x p l o i t e r s . For
a n example, i n 1917 A.D. (1295-96 H. SH. P e r s i a n c a l a n d e r )
t h e n e t p r o f i t s o f t h e A n g l o - p e r s i a n O i l Company (which
was e s t a b l i s h e d i n 1909 by t h e B r i t i s h government f o r t h e
 p u r p o s e o f m a i n t a i n i n g t h e r o y a l t i e s o b t a i n e d by D'Arcy
who f a c e d f i n a n c i a l d i f f i c u l t i e s and was u n a b l e t o c o n t -
inue.) a f t e r the deduction of d e p r e c i a t i o n , i n t e r n a l
d u t i e s , and r o y a l t i e s was amounted t o 344,109 pounds.
I n t h a t y e a r t h e r o y a l t i e s which were t o be p a i d t o t h r
I r a n i a n government t o t a l e d 3829 pounds, b u t was c o n f i s c -
a t c d i n l i u c o f damages c a u s e d t o t h e company's p i p e l i n e
by t h e I r a n i a n t r i b e s .
R e l a t i o n s between t h e o i l companies, t h e p r i n c i p a l
p l u n d e r e r s o f o i l , and t h e o i l - p r o d u c i n g c o u n t r i e s were
s o o n e - s i d e d t h a t t h e American o f f i c i a l s a l s o had t o c r -
i t i c i z c them i n s e v e r e t e r m s . In t h i s context t h e l o l l -
owing e x t r a c t t a k e n o u t from t h i s v e r y book i s n o t e w o r t h y :
"The attitude, common 60 or even 20 years ago, was that o i l
copanies made the resource, without t h e i r efforts, science and cap-
i t a l , the o i l would stay i n the ground. The natives, therefore,
should be grateful f o r whatever the companies gave them--and t h i s
should not be very much."
"Unfortunately, there are s t i l l many in the governments and un-
i v e r s i t i e s of the producing countries who have not seen that the o i l
companies have changed."
An a n a l y s e s o f s u c h p h r a s e s a s ' t h e c h a n g e s i n t h e
c o m p a n i e s ' , which a r e m e n t i o n e d i n a n a p p r o v i n g t o n e , and
t h e changes i n favour of t h e o i l producing c o u n t r i e s ' ,
which a r e r e f e r r e d t o a s a n e s s e n t i a l and p o s i t i v e s t e p ,
i s i n d i c a t i v e o f t h e f a c t t h a t t o what e x t e n t t h e r o y a l t y
agreements and b u s i n e s s r e l a t i o n s of t h e o i l companies
with t h e o i l - p r o d u c i n g c o u n t r i e s , i n t h e p a s t , were one-
sided. I n any c a s e , i n t h e s u c c e s s i v e y e a r s , t h e s e a g r -
eements were renewed w i t h minor c h a n g e s , which were made,
due t o t h e p r e s s u r e e x e r t e d b y t h e p u b l i c o p i n i o n of t h e
countries possessing o i l reserves. T h i s was t h e s o l e
d e t e r m i n i n g f a c t o r i n i n c r e a s i n g t h e o i l revenues o f t h e
r e a l owners, who had y e t r e c e i v e d an i n s i g n i f i c a n t p a r t
o f t h e o i l income.
The m a t u r i t y o f t h e p u b l i c o p i n i o n and t h e r e l a t i v e
d i s i l l u s i o n m e n t o f t h e masses i n t h e s e c o u n t r i e s , a l o n g
w i t h t h e changes t h a t o c c u r r e d i n governments t o some
e x t e n t h a v e been d i s r u p t i n g r e g u l a r o i l e x p o r t s by p a s t
conditions. S h a r p r e a c t i o n s a g a i n s t t h i s k i n d of p i l l a g e
and r e p u d i a t i o n o f t h e p l u n d e r e r s h a d o c c u r r e d i n r a p i d
succession. But t h e s e r e a c t i o n s were u s u a l l y d i s p e l l e d
by means o f p o l i t i c a l f o r c e s and sometimes were d e f e a t e d
by t h e means of more a c u t e measures l i k e coup d ' e t a t s .
The d e e p - r o o t e d s t r u g g l e o f t h e I r a n i a n p e o p l e d u r i n g t h e
y e a r s 1948-1953 A.D. (1328-1332 H.Sh.), which l e d t o t h e
n a t i o n a l i z a t i o n o f t h e o i l i n d u s t r y i n 1950 (1329 H.Sh.1
and e x p e l l i n g o f t h e B r i t i s h , i s one o f t h e most remark*
a b l e i n s t a n c e s o f a k i n d i n t h i s r e g a r d and t h e coup
d ' e t a t e o f Aug 1953 (Murdad 28) i s a n example o f t h e k i n d
o f r e s p o n s e s g i v e n by e x p l o i t i n g c o u n t r i e s t o t h e s e str-
uegles.
 With time t h e s i t u a t i o n changed. The m a t u r i t y o f
p u b l i c o p i n i o n expanded t o s u c h an e x t e n t t h a t i t became
d i f f i c u l t t o s u p p r e s s t h e p u b l i c demands i n o i l producing
c o u n t r i e s and a l s o t h e i r governments were i n e v i t a b l y co-
mpelled t o r e f l e c t them. Thus, t h e wave o f d i s s a t i s f a c -
t i o n a n d a n g e r grew u n c o n t r o l l a b l y e x p l o s i v e d u r i n g 1970
(1348-1349 S h . ) , and f o r c e d t h e p l u n d e r e r s t o r e e v a l u l a t i
t h e c o n d i t i o n s w i t h utmos care. A s e c r e t document o f
t h e U.S. S t a t e Department is i n c l u d e d i n t h i s book, i n
which t h e above-mentioned i s s u e h a s been s t u d i e d and an-
alyzed. As mentioned e a r i e r , t h e s p e c i f i c c o n d i t i o n s
and c i r c u m s t a n c e s p r e v a l e n t i n t h e o i l market and t h e o i
i n d u s t r y a r e s u c h t h a t t h e y demand d p e c i f i c s t e p s t o be
t a k e n f o r c o n t r o l l i n g them. The c i r c u m s t a n c e s have r e -
ached a s t a g e t h a t t h e OPEC c o u n t r i e s may make c e r t a i n
d e c i s i o n s which c o u l d c a u s e i r r e t r i e v a b l e l o s s e s t o t h e
o i l companies and consumers, and t h i s would l e a v e them
f a c i n g a completed a c t . T h e r e f o r e , t h e U.S. S t a t e Depar-
tment h a s decided t o t a k e c e r t a i n measures i n o r d e r t o
c o o r d i n a t e t h e d e l i b e r a t i o n s o f v a r i o u s groups and s o c i -
e t i e s t h a t d e t e r m i n e t h e o i l p o l i c y o f t h e U.S.A. These
s o c i e t i e s a r e i n the following order:
-The a u t h o r i t i e s of t h e U.S. government i n d i f f e r e n t
d e p a r t m e n t s s u c h a s t h e Department o f I n t e r i o r , t h e Dep-
a r t m e n t o f Commerce, t h e Department o f S t a t e , t h e Depar-
tment o f J u s t i c e a n d e t c .
 -The i m p o r t a n t and main American banks l i k e , t h e Chase
Manhattan, t h e F i r s t N a t i o n a l C i t y Bank of New York and
etc.
-The management o f t h e p r i n c i p a l o i l companies o f Am-
u r i c a , t h e m a j o r i t y o f whom a r e t h e members o f t h e Seven
S i s t e r s , Texaco, S t a n d a r d O i l C a l i f o r n i a , S t a n d a r d O i l
New J e r s y , Gulf and Mobil.*
- I n d e p e n d e n t American O i l companies:
A t l a n t i c R i c h f i e l d , C o n t i n t e n t a l , Marathon, A c c i d e n t a l
and S t a n d a r d I n d i a n a . The main aims o f t h e s p e c i f i c a c -
Lions which come u n d e r t h e j u r i s d i c t i o n o f t h e S t a t e De-
partment a r e i n t h e f o l l o w i n g o r d e r :

-To propound v a r i o u s q u e s t i o n s whose answers w i l l h e l p

t o d e t e r m i n e a n d r e s o l v e t h e p r e s e n t i s s u e s , and t h e de-
c i s i o n s t a k e n by t h e c i r c l e s .

- F o r w a r d i n g t h e s e q u e s t i o n s t o t h e above-mentioned
special circles. To s e e k t h e i r o p i n i o n . (the questions
a r e g i v e n i n t h e l a t e r p a r t o f t h e r e l e v a n t document i n
t h e form o f a n a p p e n d i x . )
- A comprehensive a n a l y s i s of t h e problems, enabling t h e

decision-making bodies t o have a c l e a r p i c t u r e of t h e

existing situation.
- P r o p o s i n g measures t o be t a k e n f o r t h e s o l u t i o n o f
t h e e x i s t i n g problems. The c o n t e n t s o f t h e document a r e
*Two o t h e r E n g l i s h companies a r e B r i t h i s h P e t r o l e u m and
Royal Watch S h e l l H o l l a n d i s h .
q u i t e c l e a r and p r e s e n t a c l e a r p i c t u r e o f t h e r o l e t h a t
U.S.A. p l a y s i n t h e o i l market and i n d u s t r y . This r o l e
i s s o m o n o p o l i s t i c and u n i l a t e r a l t h a t i t cannot be f u l l y
comprehended u n l e s s one p r o b e s t h e c o n t e n t s of t h e docum-
e n t s , which a r e e x p l i c i t s t a t e m e n t s o f U.S. A d m i n i s t r a t -
ion officials. But t h e r e a r e some p o i n t s i n t h e q u o t e d
document, which s h o u l d be c o n s i d e r e d w i t h s p e c i a l a t t e n -
tion. A minute s t u d y o f t h e s e p o i n t s g i v e s us a much
d e e p e r i n s i g h t i n t o t h e c r u c i a l problem of o i l , and ena-
b l e s u s t o p r e p a r e o u r s e l v e s a s a n o i l p r o d u c e r and a s
one of t h e i m p o r t a n t members of t h e OPEC t o a d o p t e f f e c -
t i v e measures v i s - a - v i s t h e p o l i t i c s o f i n t e r n a t i o n a l o i l
d e v o u r e r s and t h e i r propaganda s t u n t s .
S i g n i f i c a n c e o f O i l I n American Economy:

A p a r t from b e i n g a n i n d u s t r i a l i z e d c o u n r t y w i t h t h e
h i g h e s t d e g r e e o f e n e r g y consumption i n t h e w o r l d , t h e
U.S.A. i s i n v i t a l need o f t h i s s o u r c e o f e n e r g y . From
t h e economic p o i n t o f view o i l is o f g r e a t s i g n i f i c a n c e
t o her. The huge and e x h o r b i t a n t p r o f i t s which a r e e a r -
ned t h r o u g h o i l t r a n s a c t i o n s , a r e v e r y i m p o r t a n t f o r t h e
U.S.A. i n many r e s p e c t s . I t is enough t o r e c a l l t h a t
f i v e of t h e s e v e n major o i l companies t h a t devour t h e
world r e s e r v e s a r e American, and t h e y e n j o y l o i n ' s s h a r e
i n e x p l o i t i n g , r e f i n i n g , m a r k e t i n g and s u p p l y i n g t h e o i l
o f t h e non-comunist world. I n t h i s r e s p e c t i t w i l l be
h e t t e r t o l o o k a t t h e s u b j e c t from American p o i n t o f v i e w .
Me r e a d t h e f o l l o w i n g e x c e r p t from t h e remarks o f a Depar-
r e n t of S t a t e a n a l y s t :
"The contribution of the international o i l industry t o our bal-

ance of payments i s about a s great a s that of a l l other investments

4lÈroa combined and, hence, i s another reason for our concern that
È o i l companies remain healthy and productive."
I t i s f o r t h e s e r e a s o n s t h a t t h e Americans a r e n o t
p r e p a r e d t o g i v e up e v e n one c e n t o f t h e i r huge p r o f i t s ,
which is i n f a c t t h e l e g i t i m a t e r i g h t o f t h e o p p r e s s e d
p*oples and t h e c o u n t r i e s p o s s e s s i n g o i l r e s e r v e s . Wh-
n e v e r the question o f the partnership o f the countries
m i n e t h e o i l f e i l d s i n t h e o i l e x t r a c t i n g companies,
la r a i s e d by t h e s e c o u n t r i e s , a s a s t e p towards r e c e i v i n g
more p r o f i t s , t h e w i d e s p e c t r u m o f t h e U.S. authorities,
a p a r t from t h e n a t u r e o f t h e i r c o n n e c t i o n s w i t h t h e p r o -
blem o f o i l , form a u n i t e d f r o n t t o oppose them and d e c -
l a r e s u c h a demand a s a t h r e a t t o t h e i r i n t e r e s t s :
. each percentage increase in participation could mean a
l i t t l e less than an additional cent per barral of o i l produced, ..."
In any c a s e , i t i s c l e a r t h a t t h e Americans a r e n o t
l o i n 8 t o r e t r e a t e v e n a s t e p from t h e i r f o r t i f i e d p o s i t -
i o n o f making enormous p r o f i t s :

"We would not wish, however, t o indicate openly a t any time

@hat nationalization of o i l and converting companies i n t o purchasing
--mtractors would be i n any way acceptable t o us."
-
Other Ways f o r P r o c u r i n g Crude O i l f o r Reducing t h e Dep-
endence on t h e P r e s e n t S o u r c e s :

A s mentioned i n t h e b e g i n n i n g o f t h i s p a p e r , v a r i o u s
e f f o r t s have b e e n made f o r f i n d i n g o t h e r s o u r c e s of ene-
r g y , b u t due t o v a r i o u s o b s t a c l e s and l i m i t a t i o n s t h e i r
p r o d u c t i o n a n d u t i l i z a t i o n accompanies many d i f f i c u l t i e s .
I n t h i s document t h e p o s s i b i l i t i e s o f o b t a i n i n g c r u d e o i l
h a v e been a s s e s s e d a n d a n a l y z e d . The most i m p o r t a n t ap-
proaches a r e a s follows:
- O b t a i n i n g o i l from c o a l .
- E x t r a c t i n g o i l from t a r s a n d .
-The s e c o n d a r y and t e r t i a r y methods o f r e c o v e r i n g o i l
from t h e w e l l s , whose p r e s s u r e h a s become low.
- E x t r a c t i n g o i l from S h a l e .
I n view o f t h e h i g h c o s t o f p r o d u c t i o n and e x t r a c t i o n
o f c r u d e o i l by a b o v e - m e n t i o n e d methods, t h e p r i c e of t h e
c r u d e o i l o b t a i n e d by t h e s e methods c a n n o t compete w i t h
the p r i c e of o i l obtained through t h e o r d i n a r y process.
I n t h i s document a l s o , a s r e f l e c t e d i n t h e f o l l o w i n g p a s -
s a g e , a s e n t i m e n t o f d i s a p p o i n t m e n t and f r u s t r a t i o n c a n
be noticed:
' I n any case, there can be very l i t t l e doubt that the hydrocar-

bon needs o f the United S t a t e s w i l l ultimately beat l e a s t p a r t i a l l y

covered by o i l produced from these two sources, o r that these are the
i
major reserves o f the world.

reserves we are presently considering."

They are also the most c o s t l y o f the
I
 . the consuming countries could take l e s s o i l , but t h i s i s
e f r c e l y a credible threat as they have no alternatives for t h i s o i l
.Ither from non-OPEC sources or from other types of energy."

T h i s s h o u l d be k e p t i n mind t h a t i n t h e documents qu-

4t.d above, t h e a n a l y s t h i m s e l f h a s shown t h e d i f f e r e n c e
hetween t h e c o s t o f o i l o b t a i n e d t h r o u g h t h e s e methods and
IIO c u r r e n t p r i c e of o i l a s lower than t h e a c t u a l c o s t i n
m o t h e r p a p e r p r e p a r e d by t h e C . I . A . , i n which t h e s u b j e c t
r s s t u d i e d w i t h g r e a t e r t e c h n i c a l a c c u r a c y , b u t more neg-
n l v e r e s u l t s a r e indicated. T h e r e f o r e i t o u g h t t o be b e -
r v e d t h a t t h i s s u b j e c t h a s b e e n viewed o p t i m i s t i c a l l y
mil t h e s e s o u r c e s a r e g i v e n f a r g r e a t e r v a l u e t h a n t h e y
13 t u a l l y deserve.
i n Power o f O i l P r o d u c e r s v i s - a - v i s t h e O i l Devourers:

I The e x p r e s s i o n , ' o i l a s a p o l i t i c a l weapon' h a s acqu-

b l e d c u r r e n c y i n modern t e r m i n o l o g y . The spokesman who
~ m tto emphasize ' t h e i s s u e o f t h e power o f t h e oppressed
* - o p l e o f o i l - p r o d u c i n g c o u n t r i e s ' a l w a y s make u s e o f i t .
i c u s e o f o i l a s a p o l i t i c a l weapon h a s b e e n always c r i t -
l i e d by t h e i n d u s t r i a l l y p o w e r f u l c o u n t r i e s and t h e y de-
bqnnce i t a s a n a c t o f i n j u s t i c e . Though i n t h i s k i n d of
~ u p a g a n d ahuman moral v a l u e s and p r i n c i p l e s a r e o f t e n b e i n g
* p h o s i z e d , b u t i t i s dubbed a s a n a c t o f v i o l a t i o n o f t h e
v ~ t r r n a t i o n a al g r e e m e n t s . y e t i f one s t u d i e s i t s r o o t s ,
à m o t i v e s c a n be found l y i n g somewhere e l s e . The t r u t h
i s t h a t t h e d e v o u r e r s o f o i l and t h e i n d u s t r i a l i z e d c o u -
n t r i e s have b e e n always g r e a t l y alarmed a t t h e u n i t y o f
t h e c o u n t r i e s p o s s e s s i n g o i l r e s e r v e s and have been alw-
a y s t r y i n g t o c r e a t e o b s t a c l e s i n t h e way o f t h e f o r m a t -
i o n of a u n i t e d f r o n t o f t h e o i l p r o d u c i n g c o u n t r i e s .
I n t h i s document t h e e x t e r m e weakness o f t h e o i l - d e v o u r -
e r s against t h e c o u n t r i e s possessing o i l reserves can be
seen i n t h e from o f a c l a s h o f p r i n c i p l e s . I n t h i s way, even
t h e i r a t t e m p t t o s e e k r e f u g e i n t h e term 'weapon1 is i t -
s e l f i n d i c a t i v e o f t h e k i n d o f a u t h o r i t y and power which
t h e o i l p r o d u c i n g c o u n t r i e s w e i l d , and which t h e p r i n c i -
p a l o i l consuming c o u n t r i e s t r y t o weaken through c r e a t -
ing obstucles. The o r g a n i z a t i o n o f t h e O i l E x p o r t i n g
C o u n t r i e s (OPEC), a s t h e o n l y f r o n t formed by t h e c o u n t -
r i e s p o s s e s s i n g o i l r e s e r v e s , h a s always caused c o n s i d e -
r a b l e dismay among t h e d e v o u r e r s o f o i l . The u s e o f s u e
e p i t h e t s as ' O i l C a r t e l q "the organization o f eagles"
f o r t h i s o r g a n i z a t i o n is i l l u s t r a t i v e o f t h e f a c t t h a t
every f a c t o r of u n i t y which r e s u l t s i n t h e uniformity of
t h e o i l p o l i c i e s and c o n s e q u e n t l y s a f e g u a r d s t h e i n t e r e -
s t s of t h e r e a l e x p o r t e r s o f o i l , always becomes t h e t a -
r g e t of grudge a n d m a l i c e of t h e e x p l o i t i n g c o u n t r i e s .
The o p e r a t i o n s o f t h i s o r g a n i z a t i o n up t o t h e d a t e of thi
document (1971) gave r i s e t o t h e s e n s e o f i n t e n s e weakn-
e s s among t h e d e v o u r e r s o f o i l v i s - a - v i s t h i s o r g a n i z a t -
i o n , and t h i s c a n be n o t i c e d i n t h e f o l l o w i n g l i n e s o f
t h e document:
"With minimal cooperation i n s i d e OPEC, (and the cooperation i n

the l a s t year has been considerable), the OPEC countries should be

able t o force p r i c e s considerably higher i n 1976; a t the conclusion
of the Tehran agreements; and a t the same time w i l l be able t o force
the companies t o accept "participation" on OPEC terms, i n fact they
could do t h i s much e a r l i e r i f they can work together.
Subsequently t h e a n a l y s t a s s e s s e s t h e consequences
o f t h e c o a r s e and incongorous a t t i t u d e o f t h e major o i l
companies i n t h e f o l l o w i n g words:
"A r e t u r n t o an overtly, exclusively pro-Israel position would
negate most and probably a l l of the other s t e p s the United S t a t e s
could take t o secure o i l supplies."
From t h e p o l i t i c a l p o i n t o f v i e w , i t s h o u l d b e n o t i -
c e d a s t o what e x t e n t t h e r e a c t i o n s o f t h e c o u n t r i e s DO-

s s e s s i n g o i l r e s e r v e s were taken i n t o account:

Now i t i s n e c e s s a r y t o a n a l y z e r e a s o n f o r t h e monop-
o l i z a t i o n o f S a u d i A r a b i a n o i l r e s e r v e s b y ARAMCO a n d
t h e p l u n d e r i n g a s s a u l t s of i n d u s t r i a l i z e d c o u n t r i e s and
o i l companies o v e r t h e o i l p r i c e s o n t h e one hand, and
o n t h e o t h e r , t h e r e a s o n why t h e U.S. g o v e r n m e n t s h a m e f -
acedly is c o n t i n u i n g t o s u p p o r t t h e i n t e r n a t i o n a l zionism.
Can i t s r e a s o n b e o t h e r t h a n t h e d i s u n i t y and d i s c a r d
among t h e Muslims a n d t h e v a u n t a n d d e p e n d e n c e o f t h e
h e a d s a n d r u l e r s o f t h e r e a c t i o n a r y A r a b s t a t e s upon t h e
imperialists?
 I t w i l l n o t b e i m p r o p e r t o r e f e r t o t h e problem a s
d i s c u s s e d i n t h e t e x t o f t h e document. Shaykh Zaki Yam-
a n i , t h e o i l m i n i s t e r of S a u d i A r a b i a , i n t h e B e i r u t co-
n g r e g a t i o n o f American s t u d e n t s i n t h e b e g i n n i n g o f 1967,
d e s c r i b e d ARAMCO a s f o l l o w s :
' I n early 1967. Saudi o i l minister Yamani described ARAMCO t o
Arab student in Beirut as a " m i l k Cow, not t o be abused, so that the
Saudi farmer can exploit i t for a l l it i s worth." "

Such a weak a t t i t u d e , t h a t t o o , f o r e x p l a i n i n g t h e
s h a m e f u l a c t i o n s o f t h e p a s t , shows where l i e s t h e main
s o u r c e of t h e problem. I n t h e f o l l o w i n g s t a t e m e n t , which
g i v e s a n e s t i m a t i o n o f t h e o p p o s i t e s i d e a s compared w i t h
t h e s t r e n g h of t h e o i l p r o d u c i n g c o u n t r i e s , t h e d i f f e r e -
n c e between ' w h a t h a s t o b e 1 and 'what i s 1 c a n be u n d e r -
s t o o d i n a b e t t e r way:
"But even though some company o f f i c i a l s as well, may yrean for
the good old days, their strength in dealing with governments has
been largely dissipated."
I n s h o r t i t c a n be summarized a s f o l l o w s :

* The T e h r a n Agreemenent was s i g n e d i n 1971 between t h e

OPEC and a three-member committee s e l e c t e d by o i l compan-

ies. Of t h e most i m p o r t a n t f e a t u r e s o f t h i s agreement

i t c a n be n o t e d t o a 5 5 % i n c r e a s e i n t a x p a y a b l e by e x t r -

a c t i n g companies t o t h e o i l p r o d u c i n g c o u n t r i e s o f t h e

P e r s i a n Gulf a r e a and a n i n c r e a s e o f 3 3 c e n t s p e r b a r r e l
of t h e p r i c e of P e r s i a n Gulf c r u d e o i l . T h i s agreement was
e n f o r c e d on F e b r u a r y I S , 1971.
 ' I n short, the high trumps are a l l in the hands of the producing
countries and w i l l be for next twenty years."

"The companies and the consuming governments, including our own,

s t i l l have a few good cards which will be described i n the next sec-
tlon, b u t they w i l l have to be played very carefully t o avoid a cru-
Â¥ihindefeat ."

Western f r a u d s f o r c r e a t i n g t h e d e s i r e d s i t u a t i o n and
relations:
Under t h i s h e a d i n g t h e p r e s e n t s o l u t i o n s s u g g e s t e d by
t h e v a r i o u s o r g a n i z a t i o n and b o d i e s f o r r e d u c i n g damages
und l o s s e s i n c u r r e d by t h e d i s r u p t i o n o f t h e o i l s u p p l y ,
o r t h e ways t o f r o e s t a l l t h e p o s s i b i l i t y o f such a s i t u a -
t i o n have been s t u d i e d . On t h e one s i d e , t h e enormous
.imounts o f f o r e i g n exchange which a r e p a i d by t h e i n d u s t -
r i a l i z e d c o u n t r i e s f o r p u r c h a s i n g o i l h a s come under g r e a t
1 onsideration. One o f t h e o b j e c t i v e s o f t h e proposed s o -
l u t i o n s was t o f i n d o u t t h e ways o f t r a n s f e r r i n g back a
- 0 n s i d e r a b l e amount o f f o r e i g n exchange t o t h e c o u n t r i e s
h y which i t was p a i d . Fhese s o l u t i o n s w e r e c o n c e i v e d on
t h e b a s i s o f a f f e c t i n g and i n t e n s i f y i n g economic, p o l i t i -

u l and m i l i t a r y dependence o f o i l - p r o d u c i n g c o u n t r i e s

l o n g w i t h t h e e x p a n s i o n o f t r a d e r e l a t i o n s w i t h them.

I'his c a n o b v i o u s l y s e e n ins p o r t i o n o f t h e document:

 "The great manufacturing countries could win a large portion o f
t i n s back from the producing governments i n increased trade" j

T h i s aim was a t t a i n e d b y t h e i n d u s t r i a l i z e d c o u n t r i e s t

I
through t h e expansion of t r a d e r e l a t i o n s with t h e o i l - p r -
educing countries. L e t u s now t u r n t o s c r u t i n i z e t h e pu-
I
r p o s e o f t h e s e c o u n t r i e s i n g i v i n g t e c h n i c a l , economic and

c u l t u r a l assistance t o the countries possessing o i l reso-

urces :
"As the 01W countries develop, however, t h i s relaince on f o r i -
egn goods and foriegn technical a s s i s t a n c e w i l l grow and i t i s c e r t -

a i n l y to the interest of thcconsuming countries t o a s s i s t the develo-

pment of the OPEC countries. The creation of large middle c l a s s e s

througout the OPEC area and the bringing of t h e e n t i r e population

i n t o the moneycconomy, w i l l indead increase these countries' reliance

on the o i l consuming countries, which supply goods i n return."

When t h e t h i r d w o r l d c o u n t r i e s a r e a l l u r e d b y t h e d r -

eam o f a b r i g h t f u t u r e w i t h t h e s l o g a n s o f ' a d v a n c e m e n t ,

p r o g r e s s and m o d e r n i z a t i o n ' t h e n on t h e propaganda f r o n t

e x t e n s i v e c u l t u r a l e f f o r t s a r e b e i n g made i n o r d e r t o k e e p
t h e l i d on r e a l motives and i n t e n t i o n s , and long-cherished

hopes of t h e p l u n d e r e r s a r e f u l f i l l e d . The o i l - p r o d u c i n g

c o u n t r i e s a r e d i s p o s s e s s e d o f t h e i r weapon, a n d t h e oppo-

s i t e s i d e determines a s towhat they have t o do. This s i t u a -

i o n is a n a l y z e d i n t h e f o l l o w i n g words:

"This plan, which has been advanced by the EEC o f f i c i a l s i n Bru-

s s e l s , would favor the close i n t e g r a t i o n of the economies of produciq

and consuming countries, and would guarantee t h a t an o i l embargo by
 the producer would do at least as much demage t o i t s own economy as

it would t o that of the consumer. This increasing mutual dependence

would thereby provide adequate guarantee of s t a b i l i t y of supply.''

S u p p l y i n g h i g h l y s o p h i s t i c a t e d weaponary and c r e a t i n g

m i l i t a r y a l l i a n c e s / d e p e n d e n c i e s would e n f o r c e t h e c o n t r o l
l e v e r a g e o f o i l - p r o d u c i n g c o u n t r i e s and enhance i t ' s e f f -

ectiveness. By f a n n i n g t h e f i r e o f n a t i o n a l , r e l i g i o u s
and t e r r i t o r i a l d i f f e r e n c e s among t h e c o u n t r i e s of a p a r -

t i c u l a r region the regional tensions a r e increased, s o

t h a t a f a v o u r a b l e ground f o r p u r c h a s i n g weaponary would

be c r e a t e d . Subsequently, s t e p s a r e taken t o s e l l t h e
weapons, s o t h a t i n t h i s way a l s o , huge p r o f i t s a r e made

by t h e a r m s - m a n u f a c t u r e r s . On t h e o t h e r h a n d , t h e y a l s o

make t h e i r p o l i t i c a l p o s i t i o n s t r o n g e r v i s - a - v i s t h e c o u n -

t r y p u r c h a s i n g t h e s e weapons. I n t h i s connection the fo-

l l o w i n g p a s s a g e needs t o be p r o b e d :
"The o f f i c i a l U.S. position in Saudi Arabia i s buttressed by gr-

owing Saudi desire f o r American military equipment and technical ass-

istancc, manifested by the corps of Engineers' consultant role, Royt-

heon1s Hawk Missile program, and the growing American o f f i c i a l and

private roles i n modernizing the Saudi A i r Force, Army logistics, Na-

tional Guard, coast guard and Navy.

I n c o c l u s i o n , i t c a n be s a i d t h a t dependance of e v e r y

k i n d and e v e r y form c a u s e s more harm t h a n b e n e f i t t o t h e

o p p r e s s e d c o u n t r i e s p o s s e s s i n g o i l r e s o u r c e s and i s advan-

t a g e o u s t o t h e p l u n d e r e r s t a t e s , which a r e d e t e r m i n e d t o
 des troy these sources.

"And i f i t ever appears possible to t i e any of the major produ-

ccrs firmly to the western consumers, considerable effort should be

expended i n doing it ."

R i v a l ry i n t h e C a p i t a l i s t w o r l d :

The p i l l a g e o f t h e o i l r e s o u r c e s o f t h e o p p r e s s e d c o -
u n t r i e s by means o f e x c e s s i v e e x p l o i t a t i o n o f t h e i r o i l -
f i e l d s , p u r c h a s i n g i t c h e e p l y , and t a k i n g back a l l t h e
money which were p a i d t h r o u g h imposing t h e economic a l l i -
a n c e on them, h a s b e e n d i s c u s s e d s o f a r . Another n o t i c e -
a b l e p o i n t i s t h e u n s a t i a b l e g r e e d and a v i d i t y o f t h e c a -
p i t a l i s t c o u n t r i e s w h i c h a r e keen t o p l u n d e r e a c h o t h e r s '
r e a s o u r c e s . The s i t u a t i o n i s such t h a t t h e U.S. endeavors
t o s i g n a c o n t r a c t w i t h Canada f o r s e c u r i n g a p a r t o f i t s
crude o i l . The a n a l y s t p r o p o s e s t h a t i n c a s e Canada does
n o t a g r e e t o s i g n t h i s c o n t r a c t , t h e c o n t r o l and s u p e r v i -
s i o n o f t h e Canadian o i l s h o u l d be l i f t e d and i t s import
i n t o America s h o u l d be d e c l a r e d f r e e . A s a consequence
o f t h i s a c t g r e a t e r commercial p r e s s u r e w i l l be e x e r t e d ,
on t h e Canadian o i l and g a s , which w i l l r e s u l t i n t h e g r -
e a t e r e x p l o r a t i o n and e x p l o i t a t i o n o f i t s r e s o u r c e s .
The L a s t Word-:
,
In t h e p r e s e n t c i r c u m s t a n c e s w i d e - s p r e a d and e s c a l a t -
i n g e f f o r t s a r e made by t h e o i l d e v o u r e r s t o weaken t h e I

u n i t e d f r o n t o f t h e o i l - p r o d u c i n g c o u n t r i e s . These e f f o r t s w h i c h 1
a r e made due t o t h e r e l a t i v e s t a g n a t i o n i n t h e o i l m a r k e t ,
and a r e s u p p o r t e d by t h e v a s t p r o d u c t i o n o f c r u d e o i l i n
t h e r e g i o n o f t h e North s e a t h r o u g h England, Norway and
o t h e r non-OPEC p r o d u c i n g c o u n t r i e s a r e aimed a t l a u n c h i n g
t h e p r i c e w a r ' among t h e o i l p r o d u c e r s and e v e n t u a l l y
e n t r u s t i n g c o n t r o l of t h e o i l market t o t h e purchasers
instead of t h e producers w i t h a n e s c a l a t i n g pace. Paral-
l e l t o t h e s e e f f o r t s , i t is a l s o p r e t e n d e d t h a t t h e days
o f t h e a u t h o r i t y o f t h e o i l - p r o d u c i n g c o u n t r i e s a r e gone,
and now t h e i n i t i a t i v e i s i n t h e hands o f t h e o i l consum-
ing c o u n t r i e s . Due t o t h e o b s t i n a t e a c t i o n s of c e r t a i n
o i l - p r o d u c i n g c o u n t r i e s , among whom some members o f t h e
OPEC a r e a l s o f o u n d , a f a v o u r a b l e ground f o r t h e o i l - d e v -
o u r e r s a n d t h e t r u m p e t e r s o f t h e i r propaganda machinary
i s p r e p a r e d , who a r e d e c l a r i n g t h a t t h e d i s s o l u t i o n o f t h e
OPEC i s p r o c e e d i n g . However beyond a l l t h e s e t u m u l t s what
i s a p p a r e n t i s t h e unending f e a r o f t h e i n d u s t r i a l i z e d
o i l - c o n s u m e r c o u n t r i e s on t h e one h a n d , and t h e u n p r e c e n -
d e n t e d power o f t h e o i l - p r o d u c e r s on t h e o t h e r . If the
p r o d u c e r s o f t h e o i l , d e s p i t e a l l t h e i r d e f e c t s and weak-
n e s s e s , take a firm s t a n d t o defend themselves a g a i n s t t h e
c o n s p i r a c i e s and v a r i e d f r o n t o f t h e o p p o s i t e camp, w h i t -
h o u t any d o u b t t h e i r power w i l l s t e a d i l y i n c r e a s e i n t h e
forthcoming y e a r s . We s h o u l d have a c o n v i c t i o n t h a t o i l
i s a weapon, a s s a i d by o u r d e a r l e a d e r , t h e Imam Khomeini:
 "Which weapon t h a t you p o s s e s s and t h e world d o e s n o t
p o s s e s s i s t h e weapon o f o i l . The w o r l d i s i n need o f
y o u r weapon. I t is t h e l i f e - v e i n o f t h e w o r l d . This
weapon which i s e n t r u s t e d t o you b y t h e Almighty God i s
t o b e u s e d by you i n t h e p a t h o f t h e Almighty".
T h i s weapon h a s p r o v e d i t s e f f i c i e n c y i n some m a t t e r s ,
b u t s o f a r has never acted with i t s f u l l s t r e n g t h . I f we
p r o c e e d w i t h f i r m n e s s and show p a t i e n c e a g a i n s t h a r d s h i p s ,
we c a n make f u l l u s e o f t h i s weapon. No d o u b t , t h e f a t e
o f t h e m u l t i n a t i o n a l companies and t h e p l u n d e r e r s t a t e s ,
i n t h e i r owii words, w i l l b e ' a n a n n i h i l a t i n g d e f e a t ' .

Muslim S t u d e n t s F o l l o w i n g
t h e Line o f t h e Imam.
W i n t e r 86
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THE INTERNATIONAL OIL INDUSTRY THROUGH 1980

Department of state

December 1971

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 THE INTERNBTIONaL OIL INDUSTRy THROU3H 1980

Siiniery and Conclusions

The w r l d is new experiencing what is very likely its l a s t brie

buyers' market for conventional o i l . By 1975,and possibly e a r l i e r ,

w i l l have entered a permanent s e l l e r s ' nark&, with any one of sever

major producers being able to create a supply c r i s i s by cutting off

supplies. 'Sne United States i t s e l f can. see its current relatively

confortable energy position continuously deteriorating to the point

by 1980, it w i l l be forced to @rt half of its o i l requirements --
laxgely f m the Eastern ?wizrLere. I
Â¥Bi United S t a t e s and its a l l i e s survived the current OPEC c r i s i

without undue damage by a show of consumer solidarity and by diplomat

pressure and persuasion in several of the OPBC countries. The prospe

of success w i l l probably be snail and shortlived, even i f achieved,
unless the o i l companies are willing to discuss with the producing gc
rents saw form of a new relationship after 1976.
The USA and its allies have small chance of forcing OPEC to

w i t h our wishes. The o i l producers w i l l have to be convinced t h a t tl

are being treated f a i r l y , and t h a t they have more t o gain by s t a b i l i l

over a long period than they can by creatinq chaos and high short tea
prof its.

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The U S should c a l l an end to the interminable "studies" on energy

problems and start taJcLng action. Decisions must be taken i n the United
States within the next two years which w i l l enable us to secure our own
in energy for the next two decades. These decisions to redm r a t e
of growth of consumption and to raise domestic production and imports

(ran secure sources w i l l be as unpopular a s they w i l l be costly. ¥Bie will

require a good deal of political courage, and the State Department should
play a leading role in proposing and defending them.
Action inthe QBCD to follow coordinated policies on energy matters

mi a oonron front vis-a-vis the producing countries, and action in the

1% to persuade it (or selected OPEC countries) to adopt policies which

w i l l insure s t a b i l i t y in worlc" - s i l supplies a t predictable prices, will

lunstitute a major diplomatic activity of the United States i n the next

two years.
Ihe short-run problem of the current OPEC damrd for revision of

payments as a result of the dollar "devaluation" can probably be met only

ly the oonpanies agreeing to sane higher posted price, o r sane new basis
for paynents. We ass- this w i l l be done; the c a p n i e s are already
Â¥hewin considerable flexibility here.

The second current O P E demand for "participation" w i l l be mre

difficult. The companies believe it is i n contravention of the Tehran

Â¥qreementand we agree. Most of them will r e s i s t the demand and we should

{live them diplomatic support. We believe, however, t h a t it will be possible

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to successfully forestci l l OPEC action which anild go as far as con

tion of properties, only i f the ocnpanies are willing to start now

discussing new ocinpany-governnent relationships after 1976.

If it should not be possible to delay the current moves toward

participation, our timetable for working out the new producer-company-/

oonsuner relationships w i l l s*ly have to be advanced fran 1976. A

steady supply of o i l on reasonable terms, i . e . , terms consumers can p<
and can count on over an extended period, is of f i r s t importance.

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Contents

I . ........................
Preamble

I1. Goals of the Companies and the Government . . . . . . . .

I11. Reserves. Production and Demand. . . . . . . . . . . . .

r/. ¥Bi Conventional Concessions . . . . . . . . . . . . . .

V . The Issues of participation and D o l l a r Devaluation . . .

VI . Balance of Paynents Considerations. and Income for OPEC

Governments ....................
VII . The Strength of the Prc^r"nq ~ove&ts in Dealing
with the Cunpaniefa. . . . . . . . . . . . . . . . .

VIII . Strengths of the Conpanies . . . . . . . . . . . . . . .

EC . Weaknesses of Consuming Countries vis-a-vis OPBC . . . .

X. Alternative Sources of Energy before 1980. . . . . . . .

XI . Gas. . . . . . . . . . . . . . . . . . . . . . . . . . .

X I 1. New Relationships between Consum and Producing

Governments . . . . . . . . . . . . . . . . . . . .
XI11 . New Relationships between Consumer Governments and the
Ocirpanies.....................
XIV . Political Relations with Producer States as They Affect
..............
Security of O i l Supplies

XV . Capital Requirements of the N e x t Decade. . . . . . . . .

XVI . Conclusions. . . . . . . . . . . . . . . . . . . . . . .

XVII . Proposed Actions . . . . . . . . . . . . . . . . . . . .

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I. Preamble

Over the l a s t four years, officers of the Department of State have

discussed the subject of the future of the international o i l industry

with o f f i c i a l s of almost a l l of the o i l ocnpanies which have interests

abroad. Such discussions have k e n ad hcc and -ally have keen

centered around events of imnediate urgency. In 1970 and early 1971,

the discussions grew in frequency, although they remain unstructured w i

no agenda and few conclusions; and there were no recannendations for
action. In July 1971, in an e f f o r t to focus attention more sharply on

the subject, particularly on goals and on actions which might be taken

by the industry and the g o v e m n t t o achieve these goals, we drafted
and sent to the industry a series of qiestions (Annex 1). The questions
were not meant to be exclusive or to indicate any course of action;
they were merely indicative of the problems which would have to be faced

and answered before there could be any serious planning for the next 1
decade.

In the l a s t four months, we have had meetings with the five Americ
majors, G u l f , Mobil, Standard O i l of California, Standard O i l of New Jed
and Texaoo; with Shell (but not with British Petroleum); with five large

"independents", Atlantic Richfield, Continental, Marathon, Occidental and

Standard O i l of Indiana. The questions were sent to several other inde-

pendents but, a t this writing, no response has been received. The questi

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 SECRET 2

be also discussed with o f f i c i a l s of Chase Manhattan Bank and F i r s t

pglonalCity Bank of New York, and with Wter Levy. A t various other

Èm8 the broad subject, but not the specific questions, was discussed
ti a substantial nuitoer of second echelon o f f i c i a l s of the oonpanies

total nunker of individuals who contributed their views on the specific

Seme companies had given a great deal of thought to the subject of

to try to anticipate them. With a few exceptions, however, it is

px.sible to speak of an un£l& m n o l i t h i c ''ozatpany p s i t i o n . "

d o r officers in the company were substantially different from those

1airly well known differences in approach and a t t i t u d e s among the top

itives of the industry a s a whole; seine traditionally have taken a

i f i c views of no company and no individual w i l l be identified.

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We have also sent the list of questions and asked the views of our
posts in O P E capitals and i n themin consuning centxzs. lbeir respr

have also been incorporated in this paper. Ctie post suggested that am
panics have m t h e n s t r i c t l y honest i n that they m
> know there -dl1
dmrqes in the international o i l scene a,therefore, m2 have made
elaborate plans to meet these changes. this post believed that the
ocnpanies deliberately had overstated their intransigence in order to
try to gain f u l l U.S. Government backing i n future confrontations w i t h

the producers. In a sense it would be comforting to believe that the

industry was foresighted and imaginative and had carefully orchestrate?
its plans for facing the serious problems of the 1970's. This, of coin
would N u t e to the o i l indust-.; a prescience, a high degree of ooordii
nation and a willingness to try to anticipate events. Such maturity an
wisdan have notalways characterized even the Department of State. In a
case, we have no evidence of such deliberate maneuverings by the indust

and have assured coraplete frankness and honesty on the part of those wi
whom we have spoken.

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. W
s
> of the Cangaies and the Government

A t the s t a r t of the study, there were those in the industry who said
hat the interests and the objectives of the U. S. Government and those of

lie o i l companies were not identical; indeed they might even be said to be

roadly divergent. If this were true, cooperation of the industry and

he governrent would therefore be d i f f i c u l t -- perhaps impossible. The

cnpanies, they said, were interested primarily in their continued exis-

ence as o i l producers abroad; the government was interested only in

teeping o i l flowing and it was a matter of l i t t l e concern who owned the

11. They q-mted statements made by government o f f i c i a l s to the effect

tiat it was irrelevent whether Y.S. companies or the Russians controlled

\cab o i l . The Arabs had no market hut the West; they could not drink o i l

he o i l would continue flowing and there could, therefore, be no threat

n real U.S. interests or security.

Â¥Hi f i r s t objective of the consultations with the industry was to

try t o define our goals. We hope that, i n the course of the st@, the
imerns of the industry have been answered, and industry new sees that

i t s interests are fully consistent with those of the U. S. Government.

~f the fate of the o i l industry were a matter of indifference to the

pivemmsnt, there would be no need for such a study, or for any proposals

1 action by the companies or the government. We would, w i t h equanimity,

6 . t the conpanies move toward their inevitable confrontations with OPEC

 SECRET 5

and the OBCD; we would be nothing more than mildly interested observers.
Such, of course, is not the case. The control of the world's main sourc

of petrolem is a matter of great concern to the United States. The U.5

Government does indeed wish to see the uninterrupted flow of o i l , but

so cb the coipanies.
The prospect of forces hostile to the United States controlling the

o i l of OPEC, or even of the Middle East, may not be disturbing to saw.

But no one in the Department of State could look on such a development

with anything but alarm. Mb know the great currency reserves of many
of the OPEC countries, which would enable them to survive long productic
cut-offs; we knew how small are their populations and how f a r many are

from the money ewnary; we knew ? 5 i r tendency to react out of emtion

rather than self-interest (as defined by'Anglo-Saxons) . We remenber

what action was taken i n Iran in 1950, and i n the Middle East i n 1956
and 1967. And we know how small Europe's and Japan's o i l reserves are;
hew quickly their econcroies could be brought to a h a l t i f o i l supplies

were cut off, and how powerless we in the United States would be to make
g c d these losses.

One of the traditional and most important functions of the Foreign

Service has been to protect American investment. This has not changed.
The contribution of the international o i l industry to our balance of

payments i s about as great as that of a l l other investments abroad oom-

bined and, hence, is another reason for our concern that our o i l compani
I
rwein healthy and productive. The United States Government is as

Interested in the continuing discovery and production of new o i l as are

the c a p n i e s themselves; and we are highly skeptical of the chances of

o i l being found o r developed i f the international industry is removed

from the production of o i l o r even i f its role were severely curtailed.

In short, the industry and the government both wish to see a wn-
liming major role for the U. S. industry in foreign o i l production, as

well as i n transport, refjning and narketing. The qoverraient and the

Industry are equally concerned about the need to have a stable atmosphere
In which the companies can find and develop new o i l reserves, and both
believe that a considerable e f f o r t w i l l have to be made by both govern-
rent and industry to achieve t h i goals of s t a b i l i t y and growth in world
o i l supplies.

This having been said there is a wide divergence of opinion on how

best the goals a u l d be achieved. The 200 o i l company officials and

others with whan we spoke could be broadly divided into five groups:

1. Those who say that the present concessionary system is

good --
that any change w i l l be for the worse, and that
the only thing the companies should do is r e s i s t change
with a l l the forces a t their amand. The only function
of govemroents -- the consuninq governments of Europe and
Japan as well as the United States -- would be t o back
the carpanies in their confrontation with the producing
governments of OPEC.

2. "H-iose who say that change is probably inevitable, but

must be resisted a t every step. Anything which is given
too soon mans profits which are foregone. This group
believes that they can most successfully prolong their
 SECRET

concessions in o i l production by yielding only when

absolutely forced to do so.

3. Those who believe change is inevitable, and who are

willing to go gracefully into a new era -
but may not
themselves volunteer any nodifications in agreements.

4. Those who are convinced that since changes w i l l be forced

on the industry, it would be preferable to anticipate
t h e i r demands and to make new offers of new relationships
to a t l e a s t sane of the OPEC countries. This would create
a friendlier atmosphere for talk. and might enable them
to reach better arrangements than i f forced to yield i n
a t o s t i l e confrontation.
5. Those who believe that conplete nationalization is
inevitable and w i l l probably be soon. The coipanies
should therefore start planning now t h e i r new role as
purchasers of crude from national o i l oonpanies.

All five positions can be defended. Why yield something which i s

not imnediately required? And yet wst recognized t h a t intransigence

could provoke hostile action - even complete nationalization -- which

could not be resisted. I f the future could be seen perfectly, a l l five
groups would meld into one: just before change would be inpsed, the
ocnpanies wauld yield just enough to keep the producing governments
satisfied. Unfortunately, none i n government o r industry is c l a i m y a n
and the cost of yielding too soon must be set against the danger of

holding out tc? long. Waighing these alternatives and making reccinnenE
tions for action is the second objective of this paper. The reoaiinenda-

tions w i l l be based on facts as f a r as we can knew them, but the inter-

pretation of these facts w i l l inevitably be subjective.
I
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,teserves, Production and Demand

A. Primary Reserves
Between two-thirds and three-fourths of the non-conmunist world's
known reserves of o i l are i n the Arab countries of North Africa and the

Middle East. The figures i n the table below are generally accepted by

the industry a s reasonably accurate.

Reserves in billions of barrels:

U. S. 40
Canada 10
Venezuela 15
Other Latin America 15
m t a l Western Hemisphere 80
Arab World * 350
Iran 55
Indonesia 10
Non-Arab Africa 10
Other 5
Total Eastern Hemisphere 4 30

Total Nnn-Cumnmist Hbrld 510

More than half of the Arab t o t a l i s in the Arabian Peninsula (Saudi Arabia,
Kiwait, the Trucial States and Qnan). Seme geoloqists mintain that the
'Kiolyer and McNaughton e s t h t e for Saudi Arabia of 130 billion barrels
I K underestimated; that the known reserves are considerably higher and
that the probable recoverable reserves of that country are a t least twice
and possibly thrice t h i s figure. The estimate used for Iraq of less than
10 billion barrels i s also low; and the probable recoverable reserves are
at least 100 billion barrels. There is a f a i r l y widespread belief i n the
industry that by 1985 the production of a l l countries of OPEC except
'.iudi Arabia and Iraq w i l l have "peaked-out" and will have started t o
decline, unless they have converted t o secondary recovery methods.

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The table above is a matter of considerable concern to the wnsuner

of o i l and to the o i l companies which are devotinq almost a l l of their

exploration expenditures to areas outside the Middle East and North A f n

They are looking for o i l in Southeast Asia, in the Canadian and Alaskan

Arctic, in the North Sea, in South m i c a , indeed, wherever there cure

a t t r a c t i v e sedimentary basins. But the f a c t remains t h a t the great bulk

of the world's conventional o i l is in an area which is highly insecure
and in many cases, is actually hostile to the United States.

B. Supply and Demand

The United States currently produces around 12 million barrels a dq

of the 15.5 million b/d of o i l it oonsunes. By 1980, i f there is no

strong government action to reverse these trends, +heUnited States w i l l

be wnsuning around 24 million barrels a day of o i l , * but w i l l be pro-

ducing very little i f anything more than a t present. This includes the
assurption t h a t 3 million barrels a day w i l l be produced in Alaska. Of

the renaininq 12 million barrels a day, very little more than one milliol
could be inported from Canada, unless the United States and Canada are
able to reach an energy agreement, which would encourage Canadian o i l

Estimates vary from 22 million barrels/day (Department of the Interior

to 26 million barrels/day (Chase Manhattan) and depend on a large numb
of assumptions --m s t inportant of which i s the state of the economy
during t h i s decade.

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 -
SECRET

production, and perhaps 2 million fran other Western Hemisphere sources.

U l i q leaves a total o f 9 million to be imported fran the Eastern Hemis-

phere, largely from the Middle East and N3rth Africa.

Â¥Ol probable world production and consoiption figures in 1980, a s

ocnpared with 1971, are stown in the following table. They are based
I
cm the a s s w p t i m that there w i l l he an essentially laissez faire policy
by mst producer and amsaner countries, no major disruption in the

producing areas, and no major eoononic recession.

 Figures i n Millions/Barrels/Dq
(Non-Cannunist Countries Only)

Production
-
1971 -
1980

Western Europe 13.4 27 Ibtal Arab

Japan 4.8 13 (Arab-North Africa)

(Arab-Middle East)
Others 10.2 16
Iran
Total 44.01) 80
Venez~la

Others

1 ) The difference between total consuption and production figures i s

covered by 1 million b/d imports from Cannunist countries.
2) Assures Soviet Union productiodconswption i n balance; L e . ,
essentially none w i l l be exported and none imported, o r imports
w i l l balance against esqports. British and NATO studies indicate 1
t h a t the Soviet Union w i l l continue to export around 800,000 barrel?
a day to the non-Conmunist world i n 1980, a s it does today. A CIA
study has projected n e t Soviet mrts of mughly the s e amnmt.
These figures a r e compatible and well within the range of error in
predictions f o r 1980. In any case, it seems unlikely t h a t either
Soviet need for o i l o r Soviet competition with the OPEC producers ,
of o i l w i l l soon be important considerations. The Ccmnuni' s t countri
of Eastern Europe, however, may, by 1980, import as much o i l from
the OPEC countries a s they do £ra t h e Soviet Union. But given the
very small base a t hhich they begin, they a r e rait l i k e l y by t h a t
time to be major factors in the world o i l scene.
1
3) Includes 1.6 million b/d i n Canada, 1.9 i n other Latin m i c a , 1
1.9 in Western Africa, and 1.5 in S. E. Asia.
1
4) I n c l d e s 3 million b/d i n Canada, 2.5 in other Latin Amrica,
4.5 in West Africa, and 3 in S. E. Asia. 1
 SECRET 12

Petroleum seem to be remarkably price-inelastic. This, however,

ià been true only of f a i r l y snail changes in petroleum prices. When

toolme prices i n the United States have gone up by 2 cents a gallon,

w e has been no noticeable decrease i n gasoline consumption. Essentially

n same is true in Europe. I f , 'however, we were to see very substantial

I-~igesin prices for exanple, i f there were to be an increase in gaso-

inc tax in the United States of 20 o r 30 cents a gallon, there would

iroly be some drop i n consumption, and there would certainly be some

-Itch co smaller o r more e f f i c i e n t engines. If ex-tax prices i n Europe

4 Japan increase t o something close to the American domestic pricej

at is, i f the delivered price of crude o i l in Europe and Japan were to

icrease frcm the current S2.5? tn (say) $3.50 a barrel, then consuption

l o i l wodd probably be decreased there, too. The question is hew much

+ u l d it be decreased? * An OECD study of the e l a s t i c i t y of demand f o r

i l , with substantial increases in prices, might be a worthy project.

. Conventional O i l from Nbn-Arab Sources

I
The picture could be quite different a s f a r a s the United States is

bincemed i f action were taken now to ensure f o r ourselves new sources of

w-roy and more e f f i c i e n t use of available o i l . For exanple, the United

rn in Europe there is very l i t t l e empirical data on t h i s subject.

t i s h gasoline taxes were raised by an equivalent of 10 U.S. cents/
! gallon shortly a f t e r the Middle East W ar of 1967. Consumption
'upped somewhat but rose quite rapidly and within s i x mnths was ainost
,.ictly a t the point which had been projected before the taxes had been
1.used.

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 {
--
r\,m 1

S t a t e s could import much more from Latin America i f the p o l i t i c a l and

eooncmic climate in those oo-antries, notably i n Venezuela, were such

t h e investments could be made t o find and develop new reserves. Simila

an energy agreement with Canada could r e s u l t i n substantially greater

production and exports t o t h e United States.
The discoveries of hydrocarbonsin the North Sea have been extrer '
hpxtmt and production from t h a t source may have been underestimate
It might reach 2 million b a r r e l s a day i n 1980, (one source estimate- 1

could be a s high as 3 million) but a s t o t a l W s t e m European consunptio

w i l l be around 26 million barrels a day a t t h a t time, North Sea product

would still be small conpared with inprts. There has been a g r e a t dea
of exploration f o r o i l in Indonesia, but the f i r s t high hopes there had
i
not materialized. This does not augur well f o r t h e prospects of t h e

r e s t of the East Asian offshore areas.

All companies agreed t h a t there is almost c e r t a i n l y a large quanti

of o i l on the Outer Continental Shelf of t h e United States. It w i l l ,

by definition, be impossible to develop it u n t i l l e a s e s a r e given

the 200-meter isobath.The present U.S. Government policy of giving

beyond t h a t depth may i n h i b i t the development of the technology which

be required. t o recover this o i l . However, i n order f o r the granting o

leases beyond the 200-mster depth t o be consistent with t h e President's

Oceans Policy Statement of May 23, 1970, such l e a s e s must be g r a n t e d s k

to t h e international regime to be established by t h e United Nations Law

1
the Sea Conference which i s presently scheduled f o r 1973i'tonetheless sev
conpanies are now working on means to f i n i s h o i l d r i l l i n g on,<-heocean f
--
Whenever t h i s research is successfully completed, t h e depth r e s t r i c t i o n

now s e t by the l i m i t s on the length of the legs o f d r i l l i n g platforms, I

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I
11 be removed and it may be possible to go to 2,000 meters o r even

*-per, in other words, onto the Continental Rise. In any case, a policy
leasing in the deep sea would encourage development of t h i s technology.

All t h i s i s relatively comforting for the United States -- but it

I 11 do relatively little for Europe o r Japan, and their dependence on

U! Arabs and Iran has every likelihood of remaining almost a s conplete

i it is today. Two-thirds of t h e i r present consumption and one-third

f the n o n - c d s t world production now oaves f m these countries;

I t i 1980, three-quarters of Europe's and Japan's supplies and almost

'IC
percent of the non-ccrnnunist world's supplies w i l l cone f m them.
absolute increases are even m r e striking a s consumption w i l l almost

kuble during t h a t period.

It should be pointed out that, ip to this point, we have referred
o l y to production from what shall be called here, "primary reserves."
:Tiat is, o i l that flows out of the ground under its own pressure, and
4mse cost of production is extremely low. A good deal more o i l , perhaps

lwo o r three tunes a s much, could be recovered by more expensive secondary

and t e r t i a r y recovery means i n the Middle East.

I
D. Non-Conventional O i l

There are other major sources of hydrocarbons outside the Middle

fast. For the purposes of this report, they s h a l l be called "secondary

.
I
eserves" (this should not be confused with "secondary recovery")
 I
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These are the heavy o i l s of Venezuela and the tar sands of Canada and

the United States; and the reserves are enormous. Venezuela certain11

has a t r i l l i o n barrels in its heavy o i l b e l t , and possibly as much a s

3 trillion. There may be a t r i l l i o n barrels o r more of o i l in t h e tai
sands of Canada. Although only a small proportion o f this can be proc

with present technology, 10 percent recovery (a conpletely reasonable

figure) of a t r i l l i o n b a r r e l s i s a hundred b i l l i o n barrels, o r two anc

a half tines present U.S. reserves. The c o s t of recovery of this o i l

is considerably higher than from "primary o i l reserves." The Venezuel

heavy o i l s , f o r example, couldnotbe recovered econcinically with today

taxes i n Venezuela and sold on the world market. Neither could the oi

from the Athabasca tar sands Li Canada. The Venezuelan o i l , however,

could be produced economically i f it had f r e e e n t r y i n t o tile United St

a t the United States protected prices. This would be feasible i f an

agreement with Venezuela could be concluded which wsuld protect our

investments, and which would enable our e e s to develop the h e a ~

oils. Should this be done, in-ports from Venezuela i n 1980 could be at

l e a s t twice the figure quoted above. It w i l l probably take a s l i g h t

r i s e in U.S. prices, along w i t h f r e e entry into the U.S., t o make the

Athabasca o i l profitable.

Finally, there a r e the "tertiary reserves" represented by shale a n

by coal. It i s here where the United States is most blessed. I h e rose:

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 i mates of quantities vary, but most agree there are the equivalent

well over a t r i l l i o n barrels of o i l i n place. Our coal reserves are

mst as big as those of the r e s t of &heworld combined. O i l produced

TO shale or from coal is even more expensive than that of the "secondary

nerves", but there i s a wide variance of opinion on what the costs

ild be. Some believe o i l from shale o r coal could be produced profit-

ly a t prices only slightly above today's crude o i l prices, say $4.00/

nil. Others believe the figure would be much closer to $5.50/barrel.

aspect of shale o i l which does not always figure into cost estimates

the fact that production of small quantities of o i l from shale, with

' t i e o r no overburden and with adequate water available, nay actually

-- less costly than wuld be pt.drction of large quantities of o i l from

ale. A large-scale operation would require deep mining or the removal

m o m u s quantities of overburden, and enormous quantities of water.

there i s also a considerable difference of opinion on whether o i l

I il be produced in large quantities f i r s t from shale or from coal.

i d o n seems to be divided almost evenly on lines of interest; those
' 8 have large shale holdings believe shale w i l l cone f i r s t ; those with

tuificant positions in coal reserves i n s i s t t h a t the problems of coal

version are much simpler and the ultimate costs w i l l be lower than

b o i l from shale.

In any case, there can be very l i t t l e doubt t h a t the hydrocarbon

+ .Is of the United States w i l l ultimately be a t l e a s t partially covered

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 SECRET

by o i l produced from these two sources, o r t h a t these are the major

reserves of the world. They are also the most costly of the reserves
we are presently considering.

E. Mbrld Price of O i l Set by Cost of Production of Synthetic O i l

Mien o i l is produced i n large quantities frcm synthetic sources a
prices there can be l i t t l e domestic argument for keeping conventional
o i l prices low. Even i f this were done, and it could be i f o i l prices

were controlled a s are gas prices by the FPC today, there i s no reason
to believe t h a t the prices OPEC countries would connand could be as 1

easily controlled. We wuld put high inport duties on imported o i l ,

but it i s impossible to believe t h a t the najor producers of o i l , assun)

o i l is in short supply, would oe easily reconciled t o l e t t i n g the U.S.
Government cream off the difference between the "real" value of the o i
a s expressed by the exist of shale or coal conversion, and the cost of

inported o i l . O P E has noted repeatedly the income European g o v m

g e t from excise taxes on petroleum products. They say t h a t the cons

governments take f a r more revenue frcxn the "OPEC barrel" of o i l than

the producing governments, even a f t e r the recent negotiated price ir

The consuming governments' ar<y-mentt h a t they are f r e e to s e t taxes
any levels they wish, and t h a t d c m s t i c taxes are irrelevant to pric
charged by producers, is not entirely convincing t o the producing gc
mts. The producers' position is t h a t the true value of the o i l an

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 t
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products is expressed by the r e t a i l value of the product i n the

~rkets, including taxes and duties. The consumer, by definition, is

11ing to pay these prices and m e f o r e he has already s e t the value

r the o i l . The only other pertinent factor is the cost of alternative

u c e s of energy.

While the cost of shale and coal conversion may be a major factor

influencing producing governments to raise o i l prices, it very likely

11 also place an upper limit on the price of conventional o i l . With

f t quantities of shale and coal available, it can be presumed that,

ti the long run, consumers would switch to o i l from these sources i f

o i l prices were to rise above the cost of synthetic o i l
*Â¥wentiona

duction. 'This is not to i q l v that the entire world could or should

a supplied by the coal and shale and tar sands of the North American

ntinent -- a t least not in the next few decades -- but a reasonable

.i~e can be made for producing the marginal barrel of o i l from these
=mrces by 1980 o r 1990 i f world prices r i s e above the cost of producing
ynthetic o i l .
The source o r type of o i l is today largely a question of economics.

Â¥chnoloq has already advanced to the point where o i l can be produced

I
'ran the Athabasca tar sands (indeed it i s already being produced in

a l l quantities), f m the heavy o i l s of Venezue1.a or f m the coal or

diale in the United States; it is primarily the cost of this o i l which

inhibits its production. If the decision were to be taken to produce

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 SECRET

o i l from these nan-conventional sources, then dependence of North Amerii

1
on Eastern Hemisphere o i l could be reduced. theoretically, o i l c o u l c ,

be exported today. The Japanese reportedly have been looking into the ,

prospects of producing o i l from the Athabasca tar sands, but t h i s i:

of questionable economics and we are not certain i f the Japanese are
serious.

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 SECRET

' The Conventional Concessions

The present concessionary system h a s worked very w e l l . It is a

a d and predictable system. It has permitted the efficient develop-

it of o i l fields in large blocks. It has given a great deal of opera-

not f l e x i b i l i t y , and has assured the w n s m s of long-run s t a b i l i t y

their supplies. It has enabled the producing governrents to open up

**)c areas t o development and has been responsible for t h e i r economic

flopmnt, which in many cases has been dramatic. The system has
vided a floor f o r the revenues of producing governments and has made

unnecessary for them to become involved i n the marketing of petroleum.

The ccanpanies provide t h e necessary capital and the technology to
duce the o i l . The producing governnients have nothing to supply

Â¥op the land and the resources. This is looked on by some in the
1 qxanies as a g i f t they have bestowed on the producing areas. The

1 * i t d e , ummn GO o r even 20 years ago, was that the o i l &es

b the resource; without their e f f o r t s , science and capital, the o i l

I d stay in the ground. The natives, therefore, should be grateful

whatever the companies gave them -- and this should not be very much.

ore are sane who s t i l l cherish t h i s view, but most have adopted much

m enlightened stances. In fact, the concessions have in no way been

i lid documents but have been amended frequently over the course of the
i t 30 years, aluost invariably t o the benefit of the producing government.
 Unfortmately, there are still many in the govemnm* and d v e r -
h producing countries who have not seen that the o i l ampanie!
s i t i e s of t
have changed. They seem to believe that the anpanies are inberested
only in as rapid q l o i t a t i o n of the resource as t h y can manager w i t h 1
as l i t t l e as possible given to the governmnt and the -1e of the 1
-try. no m t t s how farsighted the ampany magementr the
h e s a p a b l e fact is thatr excepting the newer joint venturesr the
I
I
anpanies w h i t i n g the concessions i n OPFZ +day are alien to the
!
producing amas. They got their concessions sam tim ago and they
set t h e k establishnmts, frequently very laxge ones8 which have had

many of the aspects of an extra-territorial o r w W z i n g settlmt.

the Arabic w r d for tx.,u=%ion ( M y a a z ) is the s e as the
traditional Ottanan mrd for ''capitulaticms" and many8 pa~35cularly
i n the Arab w r l d r amsider the concessionary c a p n i e s as vexy l i t t l e
different £ra those foreign cunmmities established in the Ottanan

Ehph a years ago.

l k r e is no disputhq the facts: the foreigrmzm cune; they pmdue
o i l ; they give the governments mney -- laxye quantities of it. But
b t e a d of expressing gratitude to the o i l &es for their generosity1
4
and their i n i t i a t i v e r the new nationalists say with increasing freqwmcy
t h a t the concessionary s y s t m is degrading. That the govemnmt must

haw the f i n a l say over its am eozmank destiny is the new nationalist
 -
mm3r 22

d d m r d f and the nationalists telieve tbt the d y way this can ke

. h i e d is by amtrolling the o i l cqynhs whi& -rate within

& ilomdarbq.

-1y without a single acception, the producing gavmmmts also

-we the idea that the profits mde by the exploietion of o i l in theix
mtries axe exorbitant; even with the new profit s p l i t s of 60-40 i n

wr of the p d u c i n g govammts (or 80-20 when based on realized

8 Lces) the g o v e m t s lcok on m y profits and on the total

f tle invesment i n their m t r i e s and cupare then w i t h " n o d U

mmrcial returns of 10 o r 15 p r c e n t . conclude that the anpanies'
are entirely out of line with usual business p r a c t i e s .
<tits SUE

the fault of thisl of cow^+^ lies with the a q m i e s or with tax

-plations in the United States and elsewherer which rake it to the

hmntage of the ampnies to pxh a l l o r a large part of their profits
the pmduct.h end and to s l w ~relatively little profit on the down-
man w a t i o n s . l l m fact that industty returns on total investmnt

an production wells to gasoline p w p is less than general returns i n

0 mufactwing W t r y is rmt recqnized in the prodwing countries.
Asf i n factr e m i g n o d in many of the muning areas.
&I the tholel the amcession system i n the Middle Fast and elsewhere

4 pzwen of great -fit to the prcducing c o u n t r i a as ell as to the

qmies. The cmpany profits have not k e n larye when the chnstream
eations are also taken into ccmsideratim; and, i f the pruduchg
 countries were ta l m k m i y a t the econmic h m f i t s +Aey a u l d receive

f r m the i.ndustry, it is c p i t e l i k e l y t h a t the present concession s y s t m

muld CO~'&IGS wit!! only ~rcdestm d i f i c a t i o n s t o t h e end of the c o n e s -

sio- t e r n in the !xginnir~qo r the middle of t h e next c e n t w .

Rmever, ewnmuc consickrations tcday seem mmh l e s s i m p r t a n k

than m t i o n o r nationalism and it seens highly l i k e l y -- i n f a c t it

seems to us certain -- that t h e a 3 m t r i e s of Lhe Organization of P e m l w !

B p r t i n g Countries (OPE) in Lhe next decade w i l l d m d , and very lilcel)

w i l l g e t l in addition to greater revenue p r b a r r e l of t h e i r o i l l sate

i
d q r w of m n t r o i ( p s s i b l y c a p l e t e c o n t r o l ) , over the o i l c o r p n i e s /
w a t i n g in their lxundaries.

The 'Jkhran agreemats s i ~ 2 with

d the o i l cmpanies i n February

1971 provided f o r gradually increasing p s t e d p r i c e s l and hence increased,

tax and royalty paywnts, throwh 1975. The OPEâ countries have agreed
to abide by the tenm of these a q r e a n t s f o r t h e i r f u l l tern. The
current d m d s they a r e imkinq f o r "participation", they say, must be

considered outside the T e h r a n a g r e m t s and in rn way a r e a contraventior

of than.
It is d i f f i c u l t t o see how t h e O P E governments can make this

assextion, e i t h e r f r m a s t r i c t l y l e g a l i s t i c reading of the texts of

the a g r e m t o r f m the sense of the a g r e m t 1 and the ampanies a r e I

strongly d i s p s e d ta r e s i s t these dennnds f o r participationl especially

i f it i s to be without adequate m q x n s a t i o n as current OPEC studies

and s t a t m t s indicate it w i l l be.

 In the F&?xary 1971 Tehran Agreerent bebleen the o i l cmpanies
4 the Persian Gdf States, it was agreed h t e r a l i a that:

1) "the existing a r r a n g ~ t sktween each of the G u l f States

and each of thz companies to vi>ich t h i s a q r e m t is an
ovexall -.&rent, w i l l mnLtinw to k valid i n accor-

I 2)
dance with their term; "
"the follming provisions constitute a s e t t l a n t of the
tenns relatinq t o the governrent take and other financial
obligations of the cmpanies o p r a t i n q in the G u l f States,
a s to the subject m i t t a s referred to i n O?EC zesolut~ons
apd as rwards o i l e x p r t e d f m the Gulf for a pried
f m the 15th of F e b m r y 1971 through 31st C e c e r 1375."

1
I
I
In shortr these agreerents revalidated the -aniesl h s i c con-
"t;sion agreerents with the g o ~ t s they
; Stated that the provisions

f the a g r e m t s settled the g o v ~ t s tax,

' royalties, and oL&er

1I *nmcial obligations for the perid to the end of 1975.

It i s also d i f f i c u l t t o see iwd the Gnited States C b e m t can

f a i n uninmlved i n this issue. Kinder Secretary of State Irwin, i n

inuary 1971, m t w i t h the rulers of Iranr Saudi Arabia and Kwait,

d was assured by a l l three that any a g r m t they entered into w i t h

te o i l a n p r i e s w u l d be honored for the  £ dtexm. If the three mke

tmng demands for participation, it may be necessary to M e diplamtic
#I-presentationa t the h i g k s t level.
I
W i l e mst ampanies are r e a s d l y optimistic a b u t &h
pssibility

'f mintdining the tax and royalty payn-ents aqr& i n the Tehran/Tripli/
Agreemntsr there i s general a g r e m t that a f t e r 1976, prices
~w~hdad
w i l l go up, v e q likely by a s&stantial amnmt. The m r l d w i l l before
then Pave entered a p-narient s e l l e r s market for o i l ; and the m s t and

a d l a b i l i t y of alternative sources of en- w i l l k the main l i m i t i x q

factor for o i l prices. O i l prices by t h a t tint= m y have gone up also

in the United Swtes to perhaps $4.50 a barrel (the present price is

amund $3.50/barrel ; delivered wst of Persian Gulf o i l m our East

I
-st is about $2.5O/barrel a t the current lw tanker r a t e ) . Although
world prices in '76 m y not have reached U.S. dcmstic pricesl the
difference w i l l probably ke wnsiderably smller than it is today.
Subtracting f m a $4.50 price in Texasl the 25 cent transprt £ra Lie
f i e l d s ts the Gulf of Mexicu and 75 cent t r a n s ~ ~fr tm the G u l f of
the Persian Gulf w u l d indicate a p s s i b l e selling price i n the Persiaii
Gulf of $3.50. While p r i m s rzj not be quite that highl it is a defen-
s i b l e calculation. In other wordsl the north wast of the Gulf of
Mxiw m y again s e t m r l d prices for o i l a s it did u n t i l 1950.
hs stated in the previous section, the q p r l i m i t cn prices in

y the cost of
x s e t ultimately l
the United States i t s e l f w i l l pmbably l
conversion of wal o r sl-sle o i l . lhere is wnsiderable d i f f m of

opinion on what this p r i c e w i l l be: $ 4 . O O / ? ~ ~ r r(in

e l m y ' s &llars)
as s a &es
~ maintainl o r $5.50 as others do. thatever it isl

it w i l l also set the upper litnit for the price of a m m t i o n a l o i l in

h I h i t d States.
t At $5.50 a karrell mre amventbnal o i l wuld,
of -.?el he p d & e d ; but here tco there are considerable differences
of opinion on how m w h mre o i l m u l d am out. Sunz capanies main&
 -
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that the $5.50 o i l would bring forth vast new quantities of domestic
Oil through discoveries made by drilling in marginal areas, by deeper
drilling, and by tertiary recovery means. In fact, sane maintain that

1 (Us price could double o r even treble our recoverable reserves. Oti-

tintain quite the opposite, that $5.50 o i l would bring forth very l i t t l e
Â¥dditiona o i l production in the United States. In any case, i f the

coot of shale o i l is to be $5.50, we assune that conventional o i l prices

will be the same and that ultimately world o i l prices will probably
Â¥pproac the sane level. In t h i s case, we could expect $4 .SO o i l in

I the Persian Gulf.

' The situation beyond January 1976, when the agreements expire,

will be quite different f m n tl-A of today. It is likely that the only

m y it w i l l be possible to avert participation now w i l l be to assure

the OPEC countries, and particularly Kuwait, Saudi Arabia and Iran,
that while we (the companies and the government) expect the current
q r e m m t s to be honored for t h e i r f u l l term, some new relationship to
go into effect a f t e r their conclusion can be considered. This approach
I
will have a chance of success only i f the conpanis are w i l l i n g to start
discussions now - o r a t least quite soon -- on what these new relation-
Â¥hip will be. Participation, of course, is not the only type of
relationship which should be considered. There aXM, for example, be

relinquishroent of parts of the concession areas, and service contracts

 SECRET

or joint ventures on them. Possibly if this were done, the existing

concessions could continue on their reduced areas. In any case, the won

"concession"mist be eliminated; it has too imny unfortunate connotatii

"Contracts" are acceptable and bply agreement between two equals; there
is an Islamic tradition to honor them and a government which would be
tempted to rescind a concession might hesitate before breaking a contract
In short, it seems likely to us that the best way of preservinq a (
healthy international oil industry would be, in the short run, to follow
the lead of those in groups 1 and 2 described i
n Section I1 above:
that is, to insist vigorously on the maintenance of the Tehran agreement
through 1976. Then, for the long run, to follow those in groups 3 and 4;
that is, to offer to discuss r:w with the OPEC countries a new relation-
ship starting in January 1976. The reasons for this essentially pessi-
mistic conclusion will be outlined in Sections VII, VIII and XIX below.
Group 5 , the most pessimistic of the lot, may of course be correct;
nationalization may be inevitable. We would not wish, however, to
indicate openly at any time that nationalization of oil and converting
I
capanies into purchasing contractors would be in any way acceptable to
us. It would not be. Vte doubt that it vrould be in the interest of the
oil pmducers. Vte cannot see tow the OPEC cartel and high oil prices 1
a n d d be maintained in sud-~
a dramstance, and while a price w a r mild
 SECRET

#omeral. We cannot see how, i n such a case, necessary investment

would be made in the new production and export f a c i l i t i e s which the

xurld w i l l need over the next decade, i f the national o i l companies are
wrating for thai~selvesand in conpetition with each other.
V. Ttie Issues of Participation and Dollar Devaluation

The prime reason for the demand for participation i n the o i l can-

panies is nationalism. 3he governments wish to be involved, perhaps t

have the governing voice, in the main industry operating inside their
bw.-ders. the Minister of Finance of Kuwait has said recently t h a t
"control" is the major issue and this need not necessarily mean much

higher payments by the o i l conpanies operating there. Other countrii."

which are imre short of cash than Kuwait, notably Iran and Iraq, arc
probably as much concerned with the increased payments as they would t
with a voice in management.
the ccnpanies might not ly particularly disturbed by the current
demand for 20 percent participation i n the Gulf countries, i f they t h e
it could be limited to t h i s amount. Ihey are very d i s t ~ ~ however,
d ,
by the clear prospect -- stated openly by many OPEC manters - that thi

is only a beginning and t h a t the governments intend to end by taking

51 percent o r even a l l of the production f a c i l i t i e s . It might appear

t h a t this need not be particularly bothersome to many of the large i n t

grated o i l ccnpanies with shipping, refining and marketing o u t f i t s

downstream. ! h y could enter i n t o purchasing agreements with the govc

r e n t s and their profits could indeed be as large as they are a t preser
o r even larger. The smaller ccnpanies, however, with few i f any markc
outlets overseas and with limited access into the United States, uoulri
very likely be ruined.

SECRET
 SECRET 30

1 Major companies would r e s i s t such a transformation for two reasons.

Ihe f i r s t is that, for tax purposes, they now show almost all of their
t m f i t s on the production end. They count their payments to the host

flovemments as "income tax", and subtract them as tax credit from income
uxes they pay i n the consuming countries. The result is that many of the

i
m .intearated canoanies have 1ow.effective income tax rates i n the Unitei
!btes and elsewhere. I f they were forced to show their profits down-
mtream, the profits could be the same as they are today, but half would
.p i n income tax. Given the &es' need f o r capital, this would have
to be offset by higher product prices, perhaps substantially higher than
those of today, and there would be severe consumer resistance. The
~
Â¥Moon reason is that the v - n i e s doubt (as do we) that the producing

ipverranents, which would have many other claims on their funds, wsuld
-nke the necessary investments in o i l to bring forth the new o i l prod-JC-

Uon required over the next decade o r two.

In the absence of any concrete information fron OPEC on exactly

utiat the OPBC governnients want o r what they would s e t t l e for and when,
it is d i f f i c u l t to make an accurate judgement on how much the participa-
t i o n demands would cost the corpanies. It is probably roughly accurate,
1 wever, to say t h a t each percentage increase in participation could mean
a l i t t l e less than an additional cent per barrel of o i l produced, assuminq
Â¥Otinaccnpany profits per barrel (based on posted prices) as be+%-
Ç and $1.00. Foraxaiple, i f a country asked for 20 percent partici-
,ation, i n Saudi Arabia t h i s could mean an additional payment of 16C a

SECRET
cipation could mean an additional 50'; payment to Libya. 'Bus, of if!

varies f m country to country and depends i.a. on costs of produc . mi

It would be much less if realized prices r a t h e r than posted prices T-,cb

used as the basis f o r calculating oonpany p r o f i t s . *
According to recent information frcm O m , a m p m a t i o n to th< 4

am@anies is to be made f o r the book value of the a s s e t s -- which in

many cases is small. ** Payments are then to be made out of the p?-^"1
o f whatever share o f the oanpany is taken over (to ensure no decrease

in government revenue) and are to be ample- in a period not to 6 ,n

f i v e years..
Â¥Bi ocnpany incone therefore muld remain e s s e n t i a l l y unaffected'
1
during the period of "compensation", o r it could be reduced by whatev)

amount the government took f o r its own use. In any case, whatever

the B r i t i s h believe that t h e basis f o r calculating t h e additional cost

i
would be the realized prices. In this case, a demand f o r 20%part-icj
pation in t h e Persian Gulf would r e s u l t i n a n e t increase in cost to
the companies of only about 6 cents a barrel. The governments would
then give the companies a "marketing allowance" to s e l l t h e i r share oi
the o i l f o r them, and t h i s 6 cents would be further reduced. The
demand f o r 20%participation could therefore mean a s l i t t l e a s 2 o r 3
cents a barrel. In f a c t , it could msan no additional costs what so eve^
We doubt t h a t the OPEC countries w i l l start negotiations on the basis
of r e a l i z e d prices, although it i s possible that t h e f i n a l oanprcmise
w i l l be somewhat on t h a t order. In this case, there would be very
l i t t l e consumer resistance (as distinct from company resistance) to
such an OPEC demand f o r participation. i
The OPEC countries w i l l probably use figures released annually by the
U.S. Departmsnt of Oamierce on the value of U.S. investments abroad
as the basis f o r t h e i r calculations.

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 SECRET

a t i o n a l costs wuld be levied on the companies would have to be

<çe on to the consumers, as it is quite unlikely that any of the

w i e s could absorb substantial increases any more than they could

the increases of January, 1971. As stated above, the U. S. Covem-

it will also have no choice but to protest OPEC demands for participa-
m before the end of the Tehran agreements.
The OPEC demands for readjusting their payments as a result of

i effective dollar valuation is more complex. OPEC can argue with

1 -m reason that this is a case of force majeure which autamtically

t~tnedthe agreements. The c a t p r i e s argue that the Tehran agreorent

alation clause for inflation also takes care of devaluation matters.

.any case, the United States, nmuld be hard-pressed to request the OPEC
I d r i e s not t o push for increased income. The current world currency

?dons were caused by action taken by the Uruted States and it muld

I be accepted kindly by the OPEC countries i f we were to ask them not

I take measures to protect themselves. This is particularly true as

reason for the N.E.P. was t o increase the costs of foreign materials

ncrms of dollars. If we were t o say that we wished this to apply

: to manufactured goods or only to goods from certain countries,

that we would l i k e to see o i l prices remain the same i n terms of

b iiu-s, we would stand small chance of success i n the OPEC countries.

Ife have informed our o i l cornpa-nies that we would not be able to
them active diplamtic support on this issue. They have said that
 SHCTET

they did not wish it, but have asked for permission to work together
themselves in facing the OPBC demands. Department of Justice Business
Review Letters have been issued to the cunpanies to enable than to do so,

We raised the matter with Europeans and suggested that if they are dis-

turbed by the O P E action on this issue, they a d d well make their

protest to the CEBC governments. Few, if any, seem willing to do so.

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1 =ti-
ve Income for OPEC Governments and Balance of Payments

I
w
the attached table gives conservative estimates of o i l revenues
in the Middle East and North Africa in 1975. The aggre-
rate of growth in production estimated is mier 10 percent, well

current growth r a t e and rates in the past few years.

Should Middle East and North African OPBC governments succeed in
*Â¥rein up the world price to the 0.6. price by 1975, their estimated
ues would nearly double, frun about $14.6 billion to $27 billion.
higher estimate was derived by taking the current U.S. wellhead

^ km of about $3.30 t o $3.60 per burrel, addkg a factor for inflation

transportation to a U.S. coastal refining and export area and

ting this 1975 price a t $4.50 per barrel. Government revenues in
Persian Gulf were estimated by deducting from $4.50 transport costs
- in the U.S. to the Persian Gulf, exists of production in the Persian
t , plus some profit o r fee to producing corpanies and ending up with

f Lgure of about $2.80 per barrel. The sane calculation was made for

revenues in North Africa; because transportation costs to the

g. are less from North Africa than from the Gulf, government revenue
North Africa based on U. S. prices acmes to about $3.35 per barrel.

These figures must be regarded as only order of magnitude estimates.

 SECRET r

are not) and high horldscale 100). Lower transportation costs would
increase somewhat the estimate of government revenues.

Figures for Nigeria, Venezuela, Indonesia and other producers are

not included i n the table. Although it has been d i f f i c u l t to g e t ace

estimates for production there, it might be reasonable t o assume that

production and income figures f o r this group would be about one-third

of the totals shown in the table. Production, therefore, of the OPEC

group w u l d be about 34 million barrels per Say, and incote about (

prices rise to the U.S. levels by 1975.

SECRET
 . --*s - - - ,-- -"&

Government Revenues ( i n b i l l i o n s of dollars annuallv) -.

1970 1975
Revenue if
Revenue under Wbrld Prices
Middle East Production R s m ~ Prcdwtion 1971 Agrements based on U.S. p r i c e s
Iran
Saudi Arabia

Kuwait
Iraq
Abu Dhabi

Qatar
Qnan

Dubai

Bahrain
%b1- Middle Fast
N x t h Africa

Algeria
Ttatal North Africa

Itotal North Africa

* andMialeEast
 -
&aCREl' 37

Producing governments' incorre i n 1980 would be substantially higher

With world prices probably rising to U.S. dcniestic prices and those In
turn s e t by the cost of shale o r coal conversion, the net payments to

governments could be as much as $3.00 per barrel and producing govern-

ments' inccroe could be as high as $80 billion per year. This would be
about ten tims their 1970 in- arid over four fims what would be
expected i n 1975 i f the Tehran agreements are f u l l y honored.
these projections have been discussed with the director of the

new energy division of the IMF, who generally agrees with our assimptions
on both future prices and volumes of o i l i n world trade. The Fund w i l l

scon start a study on the proportion of the OFEC income which could be

expected to be returned to trade, the amounts which w i l l be accumulated

as reserves and what this w i l l mean to international capital stability.

B. Balance of Payments Considerations

I f the United States inports 12 million barrels a day of o i l in 1980,

and even i f world prices were t o remain the same as they are today, and

i f ccrnpany remittances were not affected, the net cost to the U. S.

balance of payments would be about $1.50 a barrel, o r $6.5 b i l l i o n a yes
I f , as seems much mre likely, world prices rise to U.S. prices, and

particularly those set by shale prices (as assumed above), the net pay-
ments to governnents per barrel could be over $3.00 and the net import

cost to the United States could be $3.50 per barrel. l h e balance of

payments drain on the United States would then be $25 b i l l i o n a year.

the oil conpanies could continue in some profitable form of operation,
their profits will be included in the currency drain and the cost per
hm-rel to the European and Japanese consuncrs would therefore be somewhat

higher than for the United States. In the case of dramatically higher
mrld oil prices, the net cost to most of Europe (except the UK and the

Mrtherlands) could be close to $4.00 a barrel. If Europe is consuming

26 million barrels per day in 1980, the total cost to Europe would be
in the order of $38 billion a year. If Japan's consmption is 12 million
barrels a day, as seems likely (perhaps conservative), the cost to Japan
could be $17 billion a year.
The great manufacturing countries could win a large portion of this
tack from the producing governrents in increased trade, although it seems
mlikely that each country's expenditures would be balanced equally with
Â¥dditiona sales. And any such increases would be disastrous for under-
&veloped nations.

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 SECRET

VII. The Strengths of the Producing Governments i.n Dealing

with the Ccmpanies

In 1951 at the time of the nationalization of the

Anglo-Iranian Company in Iran, world oil consumption was
only a quarter of that of today. Iranian production 1
stopped,but in a very short time, was made up from the
Arab countries across the Gulf, Iraq, Saudi Arabia, and
particularly, Kuwait. For the next 15 years, there was
i
considerable surplus production capacity in the world. {
The United States was largely self-sufficient and had 1
i
perhaps 2 million barrels a day of shut-in capacity.
ft
There was also substantial shut-in capacity in most of th
major producing countries of the world. This surplus
i
gave the oil companies a great deal of security and a gre
deal of flexibility. With the violent overthrow of the
1
monarchy in Iraq in 1958 and the subsequent moves against
the oil companies, the companies' expansion plans for Ira1
were largely abandoned, but production itself was not cut
back by the Iraqi Government. The radical regime of
Abdal-Karim Qasim and the subsequent Arab Nationalist an
Baathi regimes have all threatened to nationalize the Ird
Petroleum Company (IPC). They have not done so because

-
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 SECRET

~uldbe able to make up Iraqi production easily outside

t Iraq and, failing the cooperation of the other
foducers -- something they were never able to achieve --
raq would be left holding its own oil but with no place

a market it, and therefore no income. The Iraqi Govern-

m t was perennially short of cash and could not easily
xego even one quarter's income from the oil production.
At the time of the Mid-East War in 1967 and the
losing of the Suez Canal, there was still a considerable
B u n t of shut-in production capacity in the Persian Gulf.
"it with the much longer tanker hauls there was no way
his oil could be brought to market. Libya then ::arformed
ho function of Kuwait in 1951; its production grew at
"i extremely rapid rate and world dependence on Libyan oil
¥¥ca acute. Shortly after the Libyan Monarchy was
vorthrown in September 1969, the new radical Libyan
overnment realized that it was in its power to force
Â¥o terms on the oil companies and it threatened to stop
8 1 1 production unless its demands were met. These threats
Èç far more credible than would have been those of any
~thercountry. The population of Libya was small and the
.tbyan Government had over $2 billion in foreign exchange
o tide it over a protracted shutdown of production. It

SECRET
 SECRLT
P

was not at all certain, moreover, that Europe could

tolerate the loss of Libyan oil. The Trans-Arabian
Pipeline had been cut, and there was some evidence that
the Iraqis would take advantage of any Libyan move
against the companies to nationalize the IPC. This was
a new situation for the consumers of oil and the companies.
Never before had one country been willing or able to take
on itself the burden of supply cutbacks in order to win
economic gains from the companies operating there. Libya
did so and the other countries of OPEC were quick to follow
its lead and demand similar although usually not equal gains
from the oil companies.
The situation has eased in recent months. Tanker
rates have dropped and as the OPEC settlements in the
Mediterranean were based on a continued high premium for
1
short-haul oil, the Mediterranean, West African and
Venezuelan oils are now overpriced, and production has
I
dropped in all three areas. It has been made up out of
the Persian Gulf. We can look with considerably more
equanimity on the prospects of a confrontation with Libya ,i
I
than we could a year ago. Its production is now (November )
1971) less than 2.5 million barrels/day while in early 1
1970 it had been as high as 3.8 million. If it moves I

i
SECRET
 SLCRZT

@ g a i n s t t h e companies, and s h o u l d p r o d u c t i o n i n L i b y a b e
c l o s e d down, it s h o u l d n o t b e i m p o s s i b l e t o make u p t h e

e n t i r e amount by i n c r e a s i n g p r o d u c t i o n t h r o u g h t h e I r a q i
p i p e l i n e , t h r o u g h T a p l i n e (which i s c u r r e n t l y o p e r a t i n g

near SO % o f c a p a c i t y ) , and from Nigeria and Venezuela. The

remainder c o u l d b e made u p from t h e P e r s i a n G u l f .
This is n o t e n t i r e l y comforting. I f any "short-haul"
country were t o back Libya e.g., i f I r a q were t o n a t i o n a l i z e
the IPC and i f t h e T a p l i n e w e r e c u t , we would a g a i n f a c e
a crisis - a l t h o u g h n o t a s s e v e r e a s would h a v e been t h e

c a s e l a s t y e a r w i t h t h e same l o s s o f o i l .
One d a n g e r i s t h a t t h e a p p a r e n t e a s e w i t h which
Libyan p r o d u c t i o n c o u l d b e made u p w i l l c r e a t e a s p i r i t

of complacency. I t i s most a d v a n t a g e o u s f o r t h e consumers

i f o i l and f o r t h e companies t o b e i n a " b u y e r ' s m a r k e t "

and we d o i n d e e d a p p e a r t o b e i n o n e now. I t must b e

recognized, t h a t t h i s w i l l b e s h o r t - l i v e d and almost c e r t a i n l y

w i l l b e t h e l a s t o n e we w i l l e v e r s e e . *

*In c o n v e r s a t i o n s w i t h t h e B r i t i s h Government t h e end o f

t e t o b e r and t h e b e g i n n i n g o f November, t h e B r i t i s h s a i d
hey w e r e somewhat more p e s s i m s t l c t h a n w e r e t h e Americans
in t h e i r c h a r a c t e r i z a t i o n o f t h e p r e s e n t o i l m a r k e t . Where
r c a l l e d it t h e " l a s t g a s p i n t h e b u y e r s m a r k e t " , t h e
- n t i s h s a i d t h e y t h o u g h t it was m e r e l y a " t e m p o r a r y
s o f t e n i n g o f t h e permanent s e l l e r s m a r k e t t h e w o r l d e n t e r e d
into i n 1 9 6 7 . "

-
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 SECRET

By 1975 world consumption will have risen so far

and world production will be so concentrated in the
Middle East'and North Africa that two things are likely
to have happened:
There will be so little surplus production
capacity and so little storage in the world
that a supply cutoff from any one of the
major suppliers: Venezuela, Libya, Iran,
Kuwait, or Saudi Arabia --
would provoke
a supply crisis in Europe and Japan; that
is five countries will find themselves in
the same position as Libya did in 1970,
although two of these five, Venezuela and
Iran, will not have the currency reserves
to withstand easily any loss of income, and
Most of the OPEC countries who have counted
on continually increasing production -- and
frequently at high rates of growth -- wi11
be able to see, at some not too distant
time, the leveling out of production and its
eventual decline. OPEC as a group can there-
fore be expected to concentrate even more
heavily than it has until now on increased
payments per barrel; quite possibly there will
be the first serious moves in OPEC to restrict
production in order to conserve the oil for
the future. The argument that the present
value of oil produced in the year 1990 is
nearly zero, is not impressive to many in
OPEC. Whatever the theoretical merits are
of such an argument, they are valid only if
the income from this oil is put into productive
uses, not if it is spent on luxuries or armaments.
1980 or 1985 at the latest, it seems likely that I

Venezuela, Nigeria, Algeria, Libya and Kuwait and Indonesia

dill all have "peaked out" or at least their primary

-SECRET
 SECRET 44

duction will have reached maximum sustainable levels.

1980, unless there are dramatic, new and unexpected
ocoveries elsewhere in the world, only Saudi Arabia
Iraq, for a certainty, and Iran possibly will still
able to look forward to considerable increases in
ir production.
Production at these peaks could probably continue
several decades to come and possibly well into the
t century by converting to secondary and tertiary
overy methods. This would be costly, however, and
order to make such a conversion, the governments
uld have to take lower revenues per barrel for their
1. This, of course, is not to say that the revenue
d be lower than it is today, it would merely be lower
n it would be at the time of adopting secondary
i-overymethods. At that time, assuming coal, shale
tar sand conversion would have set the world oil
ce, the producing governments could still be receiving
wmes vastly greater than they are today -- even higher
ome per barrel of production.
With minimal cooperation inside OPEC (and the
peration in the last year has been considerable) the
countries should be able to force prices considerably

-
SECRET
 sxcmlr

higher in 1976 at the conclusion of the Tehran agreement

and at the same time will be able to force the companies I

accept "participation" on OPEC terms -- in fact they coult

do this much earlier if they can work together. 4
In short, the high trumps are all in the hands of t h r
producing countries and will be for the next twenty years,
The companies and the consuming governments, including o u i
own, still have a few good cards which will be described
in the next section, but they will have to be played vei
carefully to avoid a crushing defeat.

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 SECRET

:trengths of the Companies

In the past, the major oil companies, in dealing

4 t h the producing governments frequently acted as if
*hey were sovereign nations. In many cases, their
ochnology, their income, their size, made them more
'ormidable than many governments. The companies were
able to deal with a government where they had concessions
ry threatening to close down production or pull out and
nave to more attractive fields. This sometimes cavalier
'ashion in dealing with governments accounts for at
.east part of the hostility felt toward the companies
soday. But even though some company officials, ap3
'robably some consumer government officials as well,
'my yearn for the good old days, their strength in dealing
eith governments has been largely dissipated. In a very
ntiort time, this will be evident to every OPEC producer,
. f indeed it has not already become so.
The companies, however, are not yet entirely deprived
~t power. They have three very important functions to
Ñrfonn
1. The most important is as a supply and guarantor
4 capital.

SECRET
The capital requirements of the industry
outside the Communist world in the next
ten years have been estimated by Chase
Manhattan Bank at over $500 billion. Of
this, $180 billion will be for working
capital and other general requirements,
including dividends, and $360 billion will
be for capital expenditures. (This subject
will be discussed in another context later
in the paper). Of the capital expenditures,
a third, or $120 billion will be in the
upstream facilities, (i.e. discovery, develop-
ment and production). Some of the OPEC
countries may accumulate large quantities of
capital, but most, very likely will not. In
any case, the local demands for capital can
be expected to take precedence over the demands
for increased investment in oil. If the
governments were to nationalize the companies
or take over control of them, it is at least
possible that the existing solidarity in OPEC
would vanish; and if each producer were competing
against every other producer rather than the
present situation where the producing go--^..-"<ç^.nt
as a whole face the industry, it is quite
possible that inter-government competition would
drive prices down. This would benefit the
consumer and even the companies might benefit
in the short run by buying the oil and then
handling its transport, refining and marketing.
(There is considerable evidence that the OPEC
countries recognize this danger and for this
reason, if no other, will permit the companies
to continue in some role in production). In
this case, it seems even more certain that the
necessary funds would not be invested in pro-
duction and the world in a very short time would
face a supply crisis from which there would be
no escape other than forcible reduction of
consumption.
It of course coula be argued that the producing
governments would be mature enough to devote a
sufficient portion of their 'income to production
facilities, and it is just possible that this

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 -
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----
could be done in individual countries. It
is less likely in fact it is almost
inconceivable that any OPEC country would
invest its money and production in another
country, particularly if it risked losing its
? investment in the same manner the oil companies
lost theirs.
There is also the possibility that the consuming
countries could provide the capital necessary
for the development of new supplies, but it is
difficult to see how this could be accomplished
without using the oil companies who alone have
extensive experience in this field. The
experiences of EN1 and CFP and ERAP in production
abroad cannot comfort those who hope government
oil companies would provide the solution to the
oil supply problem.
2. The second major strength of the industry is in
he technology it masters and in the extreme complexity of
)i* distribution and marketing of oil.
Most,if not all of the OPEC countries v e y ?ikely
could continue operating the oil fields in their
countries today. The oil has been found and it
would be relatively easy to ensure that oil would
continue to be produced from existing wells. The
drilling of new development wells, however,
introduces new difficulties, and the discovery
and development of new fields is very likely
beyond the competence of most of the technicians
in OPEC countries --
even in Venezuela, which is
probably the most sophisticated and most advanced
in technology of any OPEC country. As complex
as would be the difficulties of developing new
fields, these difficulties would be overshadowed
by the problems of marketing the oil. There
seems little doubt that this too is already
recognized by the OPEC countries. The OPEC
proposals for "participation" contain explicit
demands that the companies themselves will continue
to market the oil for them, presumably in the normal
market patterns of the companies as neither the

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 governments or the companies could conceivably
find new markets for 20 percent of the oil
produced in the OPEC countries.
i
3. The third point is the functioning of the compani!-,
as a buffer between producer and consumer governments.
This is of great utility to both. Producer
governments can threaten and bully companies.
If they wereto deal with other national oil
companies or with consuming governments
directly, national honor would be engaged on both
sides and compromise would almost certainly be
even more difficult. This need not always be
the case, but there is little doubt that the
Tehran/Tripoli/Baghdad negotiations of the first
half of 1971 were carried out with as little
involvement of national honor as possible. Had
governments, rather than companies, been at Tehr.
in January, 1971, it is difficult to envisage
as happy an outcome to the negotiations as was
in fact achieved.
The actions of the United States Governrr-,I+
through the Irwin Mission to the Persian Uult,
were limited a) to a warning that any country
which cut off oil supplies to us or our allies
would find that its rel.ations with the United
States severely and adversely affected, b) to
a request for more negotiating tine for the
companies and c) to a request to an end to the
constant leap-frogging of prices in OPEC. The
other countries of the OECD limited themselves
to backing the companies and endorsing the
efforts of the United States.
There is another point which should not be
overemphasized but it is at least worth
mentioning. We frequently characterize the
producing countries of OPEC as unconscionable
= bandits with no regard for international
propriety and with no sense of morality. If
this attitude is adopted uncritically by the
companies and by the consuming governments,
including our own, we will very likely have

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created a selffulfilling prophesy. We must
recognize that there are men in OPEC-- King
Faisal, certainly, and the Emir of Kuwait
and perhaps others -- who are men of honor and
Integrity. Without stretching reality they
could be expected to act in a spirit of
enlightened self-interest and with a sense of
fair play. Some OPEC governments notably Iraq
have behaved irrationally at times, but most
of them look carefully at their own economic
well-being. It should not be beyond the
capability of the companies or of the consuming
governments through diplomatic missions or
special envoys to convince the producers that
contracts signed in good faith and based on
mutual confidence should be honored and are
essential if new supplies of oil are to be
found and if adequate facilities are to be
built for its production, refining, transporta-
tion and distribution. And it should be
equally evident that producers as well as
consumers would benefit from stability in the
world oil market.

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IX. Weakness of Consuming Countries vis-a-vis OPEC*

The overwhelming dependence of OECD countries,

especially Western Europe and Japan, on OPEC oil severely
limits the possibility of effective action by them.
Anything they would do would have to be almost immediate!)
effective and, short of direct military action (which is
not o n t p l a t e d here), most policies demand time to be (
implemented. Moreover, the critical economic and ideologi
division of the world could mean that OECD action could
be negated by actions of a coalition of less-developed
nations outside of the OECD and of the countries of Eastox
1
Europe and perhaps of China.
In the face of OPEC demands to raise oil prices
indefinitely or to cut off oil supplies unless higher
prices are paid, the consuming countries could take less
oil, but this is scarcely a credible threat as they have
no alternatives for this oil either from non-OPEC sources
or from other types of energy.

*This chapter may be considered a corollary of the one on

i
Strengths of the Producers. It is handled separately in
order to discuss more fully various proposals which have
been made in the last few years on possible consumer
retaliatory action against the oil producers.

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on moves the consuming countries could take against the
OPEC countries in retaliation for the price increases on

petroleum: trade embargo, the blockage of OPEC funds

held in consuming nations, and elimination of aid to
OPEC. None seems encouraging or even practical:
1. Trade Embargo
Many of the OPEC countries have relatively
primitive social and economic systems. The
majority of their population is engaged in
agriculture and is outside the money economy.
They would, in short, be less vulnerable to
import denial than would more developed
societies. Their development programs would
undoubtedly be harmed and their growth rate
would decline substantially. They might
have to give up some luxury goods, b ~ t
critical imports of foodstuffs and capital
imports required for continuation of economy
activity at a minimal level could almost
certainly be obtained from other countries
of Africa or Asia, or from the Soviet Bloc.
Furthermore, trade embargos rarely work.
The embargo on Rhodesia supported by most
of the countries of the world has proven
largely ineffective. An embargo of the OPEC
countries would certainly not have the
same unanimous backing.
The international reserve position of five
major OPEC countries at the end of 1970 was
as follows:
Iraq $ 390,000,000
Saudi Arabia 946,000,000
Kuwait 223,000,000
Iran 315,000,000
Libya 2,331,000,000

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Comparing total imports to total reserves,

Iran is the most vulnerable, with enough
reserves to cover'only approximately a
three-months import bill. Libya, at the
other extreme, could hold out for approximately
41 months. Actually, the import bill during
an embargo would be reduced due to the
elimination of petroleum-related non-essential
imports. At the same time, the import bill
would not be as small as "critical" import
figures would indicate, because higher-priced
substitutes might be needed. However, on
balance, even the weak link, Iran, could
probably hold out for longer than three months,
and certainly could hold out if Saudi Arabia
and Libya gave financial assistance.
2. Blockage of Funds
Consuming countries, either in combination
with the trade embargo or as an independent
policy, could freeze the assets of the OPEC
countries. Most of the OPEC funds seem to be
in Switzerland and in Britain. The pote:.LJzl
effectiveness of a freezing of the OPEC runds
would be limited by the difficulty of imple-
menting such a policy and the availability of
short-term credit from the Communist countries.
It is possible, thought highly unlikely, that
Britain, in spite of its concern to maintain
its position as an international financial
and banking center, would agree to block
those OPEC funds held in London. The willing-
ness of Switzerland to implement a similar
policy is even more doubtful. Even the United
States would be unlikely to do so; there is
considerable question as to whether we have
the legal ability to do so in cases short of
national emergency. Blockage of funds, in
short, does not appear to be a realistic
possibility, and even if it were, would very
likely prove ineffective.
3. Cut-Off of Aid

--
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Only I r a n h a s been t h e r e c i p i e n t o f s i g n i f i c a n t
amounts o f f o r e i g n c r e d i t , and even it c o u l d be
t i d e d over f o r an extended p e r i o d by Saudi A r a b i a ,
Libya o r E a s t e r n Bloc a i d .

<Hy o f t h e s e a c t i o n s would, of c o u r s e , e n s u r e t h a t t h e
à ‘ v i e Union and p o s s i b l y China would b e g r e a t l y s t r e n g t h e n e d

bn the OPEC a r e a , and t h e p o s i t i o n o f t h e consumers a t t h e

Â¥fl of t h e c o n f r o n t a t i o n would probably be weaker t h a n a t

4 hr- beginning.

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X. Alternative Sources of Energy before 1980

The estimates for production of oil from shale in
the United States in 1980 vary from 100,000 to a million
barrels a day, with 300,000 being generally the most
optimistic estimate. One company heavily involved in
shale oil has told us that with a combined governrnent-
industry effort and with controls on production similar
to those in wartime, 3 million barrels a day might be
produced by that time. No others thought this was
achievable.
Coal conversion seems no more promising in the
short run. Prospects for increasing hydroelectric power

1
in the OECD area are negligible. Atomic energy, even
with a crash program, cannot significantly reduce the
dependence on oil we have calculated in this time frame.
More exotic forms of energy - solar conversion or hydrogen
fusion - might also be important sources of energy, but
neither is likely before the end of this century. The
more efficient use of energy, through the MHD or other,
as yet undiscovered, methods, might also give some surceaa
sometime, but not yet.

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4

It takes only a modest amount of faith to count on

'me dramatic new discovery or invention solving our
' +orgy problems in the 21st century. It would not be
e*ponsible to assume that a deus ex machina will inter-
me on our behalf before 1980. In fact, we must work
bth the proposition, a momento mori, that despite best
'forts, Western Europe and Japan and possibly the United
ates, will not be able to overcome, in the foreseeable
lure (that is before 1980) their almost complete
- llance on OPEC oil.

Ã
c

1..
4
f

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- -

T h i s paper c o n c e r n s i t s e l f p r i m a r i l y w i t h o i l , b u t
a few words should be s a i d a b o u t n a t u r a l g a s . I t h a s been

called the "ideal fuel". I t b u r n s c l e a n l y and i t s product

a r e carbon d i o x i d e and w a t e r . T h e i ~ i sno d i r t , no s u l p h u
it i s e a s i l y h a n d l e d , it can be used e q u a l l y i n k i t c h e n

s t o v e s and massive power g e n e r a t o r s . I t has a l s o been

v e r y cheap i n t h e United S t a t e s , a s i t s p r i c e h a s been

k e p t low by t h e F e d e r a l Power Commission. Existing gas
s e l l s f o r l e s s t h a n 20 c e n t s a thousand c u b i c f e e t (MCF),
and t h e newly d i s c o v e r e d g a s i n some c a s e s can ncvÃbe s o l d

f o r somewhat more t h a n 25 c e n t s a thousand c u b i c f e e t .

T h i s p r i c e i s s t i l l much lower t h a n o i l . Even a t t h e
h i g h e r p r i c e of 25 c e n t s an MCF, w i t h 5,800 c u b i c f e e t of

g a s e q u a l i n t h e r m a l c o n t e n t t o one b a r r e l of o i l , t h e
e q u i v a l e n t p r i c e of o i l would be o n l y $1.45 c e n t s a b a r r e l .
The p r e s e n t p r i c e o f o i l i n t h e United S t a t e s i s $3.50 -
$3.75 a b a r r e l ; even t h e s p o t r a t e s i n t h e P e r s i a n Gulf now

a v e r a g e c l o s e t o $2.00 a b a r r e l , and t h e low s u l p h u r crud1

o f N i g e r i a and Libya, w i t h which g a s could most e a s i l y be
compared, s e l l s a t c l o s e t o $3.00 a b a r r e l , f . 0 . b .

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a t an alarming rate. At present the United States consumes

gas at the rate of 22 trillion cubic feet a year; and our
finds of new gas are running at only half that level. In
other words, our reserves are going down at the rate of 10
to 12 trillion cubic feet a year, and when total reserves
ere only slightly above 200 trillion cubic feet, it is
mcarcely exaggerated to call the situation desperate. In
fact, it is agreed by the industry as a whole that supply
8hortages will limit consumption by 1975. As oil will be
the only practicable equivalent for gas in 1980, i/ie

figures used elsewhere for oil consumption may be too low.

The gas industry maintains that the drop in new finds
i m in direct relationship to the artificially low price of
gas in the United States, i.e., a case of post hoc ergo
propter hoc. Others are not sure that this is true; they
believe that a substantial increase in wellhead prices of
gas would bring forth only marginally increased supplies
Of gas. It is absolutely essential that the industry and
government determine with as great a degree of accuracy as
possible what an increase in wellhead prices of gas in the

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United S t a t e s would d o t o o u r g a s s u p p l i e s . This has
a l r e a d y been proposed by t h e S t a t e Department t o t h e g a s
i n d u s t r y , t h e o i l i n d u s t r y and t h e F e d e r a l Power Commission.
A major t r a d e j o u r n a l w i l l s t a r t a campaign on t h i s soon.

Gas h a s been f l a r e d i n t h e o i l producing a r e a s i n t h e

P e r s i a n Gulf f o r a s l o n g a s o i l h a s been found t h e r e . Some

n a t u r a l g a s i s now s o l d by I r a n t o t h e S o v i e t Union and

some i s r e i n j e c t e d , b u t s t i l l t h r e e - q u a r t e r s o f a l l t h e
g a s produced i n t h e P e r s i a n Gulf i s b e i n g f l a r e d . The o i l

companies have m a i n t a i n e d t h a t t h i s g a s i s n o t a r e s o u r c e ;
it i s produced i n c o n n e c t i o n w i t h t h e p r o d u c t i o n -1 o i l and
c a n n o t b e used. A t l e a s t t e n b i l l i o n c u b i c f e e t of g a s a r e

f l a r e d d a i l y , and w h i l e it has been t r u e t h a t t h e r e was no

market f o r t h e g a s , t h i s w i l l change soon. C o u n t r i e s of

North A f r i c a , n o t a b l y Libya and A l g e r i a , which a r e f a i r l y

c l o s e t o t h e European m a r k e t s , a r e now s e l l i n g l i q u e f i e d
n a t u r a l g a s (LNG) t h e r e . A l g e r i a is banking on a large p q e c t

t o s e l l g a s t o t h e United S t a t e s . The c o s t o f t h i s g a s i s
q u i t e h i g h , compared w i t h g a s p r i c e s i n t h e United S t a t e s .

Many o f t h e p r o s p e c t i v e b u y e r s o f LNG have been s c a n d a l i z e d

a t t h e p r o p o s a l s t o s e l l A l g e r i a n g a s i n t h e United S t a t e s

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 s
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IT 80 c e n t s a thousand cubic f e e t . This i s indeed high

d f n compared with d e l i v e r e d U . S . gas a t 40 c e n t s a

Housand cubic f e e t . It i s not a t a l l high when converted
nlo o i l p r i c e s . Eighty c e n t s a thousand cubic f e e t ,
btter a l l , i s only e q u i v a l e n t t o $4.64 a b a r r e l f o r o i l ,
4 low-sulphur r e s i d u a l f u e l o i l , which i s f a r l e s s
a t t r a c t i v e and u s e f u l a f u e l than gas, i s now posted i n

w York a t $ 4 . 4 0 a b a r r e l .
Gas can be made from naphtha, but t h e process depends
n a low p r i c e f o r naphtha. P r i c e s a r e low today, but i f

~aphthawere g a s i f i e d , t h e p r i c e would be d r i v e n up; t h e

price w i l l be driven up i n any case a s t h e petrochemical

n d u s t r y gradually switches t o naphtha a s a feedstock.

<ore reasonable, perhaps, a r e t h e p r o j e c t s t o convert c o a l

*r crude o i l i n t o gas. Here, however, t h e p r i c e f o r t h e

' qngas a t p r e s e n t i s $1.20 a thousand cubic f e e t . This i s

equivalent t o a p r i c e of $7.00 a b a r r e l f o r o i l . While

, (he advantages of gas a r e considerable, it i s doubtful t h a t

, a n y u s e r s (except perhaps p r i v a t e homes) would be a b l e t o
(my such a p r i c e .
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Although the capital costs for production and exporl

of liquefied natural gas are extremely high, the wellhe
price of the gas is quite small. In Algeria, it appare
is somewhat under ten cents a thousand cubic feet. Thi
could be raised somewhat, but it is unlikely that gas fl
most countries will be a source of income comparable to
their income from oil.
Shipping costs are so high a proportion of total cor'
that gas imports from the Persian Gulf are not yet
practical. In the future, with higher prices - and,
particularly if the Suez Canal opens - the Persian Gilf
will probably be the main source of gas as well as of oil.

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, New Relationship between Consumer and Producing Governments

Some consuming governments have noted that the

dfecurity of their oil supplies appears to spring largely
t n m Arab hostility to the United States, which many Arabs

i~lieveactively opposes their interests to the benefit

evt Israel. There are those in some consuming countries
I Ã ˆ . ~Italy, France and Spain) who believe that the only
uay their security can be preserved is to develop a new I

4lrect relationship with the producing countries which 1

wuld bypass the "Anglo-Saxon" oil companies, and therefore
@void the consequences of any action the Arabs might take
Â¥gains the United States. This plan, which has
dvanced by the EEC officials in Brussels, would favor the
close integration of the economies of producing and consuming
countries, and would guarantee that an oil embargo by the
producer would do at least as much damage to its own economy
a* it would to that of the consumer. This increasing
mtual dependence would thereby provide adequate guarantee
of stability of supply.
It seems unlikely that all of the OECD or even a major
p r t of it would face the domestic political consequences of
total repudiation of the United States position in the
 I
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Middle East. This would be a reversal of many of their 4

own traditional policies. Germany, the Netherlands,
Denmark, Norway, and Great Britain all have close ties to
Israel. In spite of the French Government's position
since 1967, a policy of total reliance on the Arabs would
very likely be highly unpopular with the French people.
Italy and Japan might wish to consider such action and
would face fewer political repercussions at home, but
the consequences of such a move could go well beyond the
narrow problem of the Arab-Israel conflict into their
relations with us, with the British, and with others.
The OPEC countries are heavily dependent on capital
goods imports but in almost every case they could live
without them, at least for a protracted period of time --
certainly longer than the Europeans couldlive without the
, oil. The tying of any highly developed European economy
exclusively to the essentially primitive economy of (say)
Libya, would give the Libyans such total control over the
actions of its customer that it is difficult to see how
such a proposal could be defended even by the most
anti-American or ardent Arabist in the consuming state's
government. As the OPEC countries develop, however, this
reliance on foreign goods and foreign technical assistance

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* I l l grow and it is certainly to the interest of the

m ~ u m i n gcountries to assist the development of the OPEC
-tries. The creation of large middle classes throughout
ilM OPEC area and the bringing of the entire population
-nto the money economy will indeed increase these

ountries' reliance on the oil consuming countries, which

**ply goods in return. But this will be a long process,
in the interim any bilateral relationships would
i b s t certainly be more hazardous to the consuming countries '
tan is the present system of relying on a large number of
*I1 companies to act as intermediaries in supplying their
w r g y supplies for them.
The OECD countries might temporarily improve their
4ations with the producing governments by offers of aid,
~llitaryassistance, or special bilateral trade advantages,
, ¥<t this does not appear to be particularly promising or
1 ~accssarilydesirable.
All this having been said, it cannot be denied that the
mition of the consumer countries would be improved if their
ditical relations with the producing governments were
*roved. It is self-evident that the position of the United
"&test the Anglo-Saxon oil companies and the consumers would
ç enhanced if the political animosity of the Arabs to us

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were removed o r decreased.

1
And if it e v e r appears p o s s i b l e to t i e any of t h e

major producers f i r m l y t o the western consumers, considercil Ã

effort should be expended i n doing i t . t

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\-
, New Relationships &tween Cbnsunsr Coverrntxmts and the -
2
--
Ttie ocinnercial freedom of the o i l companies i n the various countries

* UM OECD varies from almost no restraints (beyond those on a l l industry)

U. S., the UK, Germany and Benelux, to rigid controls i n France o r

requirement in Japan that foreign companies be i n partnership with

¥xiÑ firms.
A view was advanced sane t h ago by some in the EEC Secretariat,

11Â¥topte by sane but f a r f m n all Italian government officials, that

ç too bnprtant to be l e f t in the hands of the private companies; ,

4 t h e economies of every country i n the CECD (except the U. S. and

depended on large quantities of i n p r t e d o i l . All those who

<Heed this proposition admitted that the companies had p_i.-.ot~iLd
Wably i n the past but, as one Italian put it, "their vaunted flexi-
4 y was l o s t in the f a l l of 1970" when one country (Libya) threatened
mrld with a supply c r i s i s and the ocnpanies were powerless to avoid

s arqunent is that the &es should be reduced to the status

'ftguLated public u t i l i t i e s . " The governnsnts muld contract for the
dan the producing states, and wuld s e t the prices. Hie ootpanies

4 transport the o i l , refine it and market it but the governments wuld

mutt prices, allowing the cmpmies a "fair" return on their

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The charge t h a t the companies had l o s t t h e i r f l e x i b i l i t y is son

unfair. The conpanies had scarcely been affected by the major t r a m

the closing of the Suez Canal; they had absorbed the loss of Tapline'

s b r t - h a u l o i l and even the c u t b c k i n Libyan production by three-qu

of a million barrels/day did not create a supply shortage. The flex1

b i l i t y , however, was not i n f i n i t e , and the breaking point appeared w'

Libya threatened to cut off a l l o i l deliveries. This w a s not a bad I

The situation today i s much easier. The Tripoli and Baghdad s d

ments put a heavy premium on short-haul o i l . This was justifiable a

long a s tanker rates were high, but they have dropped recently -- th
to a slower gmrth in consunption than had been anticipated and the 4
mini-recession in Japan which has freed many of the oil-bulk-ore car1

£ra ore i n t o the o i l tanker market. With the lower tanker rates, 1
Persian Gulf production has increased a t the expense of production i n

Iraq, Libya, Nigeria and Venezuela; and Tapline is o p r a t i n g a t half

4
capacity. If Libya were to stop production today, it would be b t h c
but there would be no supply crisis -- provided, of course, that no

major short-haul producer also closed down. The "vaunted f l e x i b i l i t

has been restored.

The European demands f o r novas toward control of the companies 1

probably be muted for a s long a s t h i s f l e x i b i l i t y is maintained. It

won't, unfortunately, be maintained forever, o r even f o r very long.

Almost certainly before 1975, it w i l l be gone o r severely reduced.
 T

f%X!RET 68

a t i o n i s then, can the consuming countries restore it w i t h their own

Wonal o i l conpanies or by regulating the international majors? The
Â¥Mwe here seems to be clearly that they cannot. A t least they have

ofhad notably successful records until now. The national ampaies,

e.q., ENI, have not been efficient i n finding o i l or producing it. ENI,
b spite of government assistance, can barely ocnpete with the major
International o i l ocunpanies yet it makes almost no profit. Nonetheless,
U a new supply crisis locros, o r i f the companies cannot r e s i s t moving
toward higher posted prices or the higher prices which would be inherent

&I "participation" without ccnpensation, the Europeans will certainly

Wise the issue again. The chances of pressure by the Ccnniunity will
probably be i n direct proportion to the size of the increase in the

(rice of o i l .
Bone of the Amrican o i l conpany executives we have tallied with

(fve said that they could live with a new "regulated" status in Europe.

1 fcing allwed a "fair" return on their iwestmant nould be fine; they

I
thought they could compete with European national companies and it would

Â¥av them a l o t of headaches in production as well as marketing.

This attitude was surprising and was strenuously opposed by more
<Witwesane company officials. It should also be strongly opposedby

the USunless it can be demonstrated that such an arrangement would

1 ¥nhanc security and would bring forth the new capital for the finding

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and development of new o i l reserves. Most European governments would

share the same cmcems, and would have the added concern of higher cosf
Before the Camiunity or the OECD moves in this direction, it should also
be sure that it would not cost, in the end, substantially mre than all'

ing the companies to make their own arrangements with producers.

OECD negotiations with OPEC are not as farfetched as they sounded
a few years ago, but we should be quite sure of what we want to accoirpli*,

by such action, how we would plan to cany it out, what our strengths
are in dealing with OPBC and what pressures we can and w i l l put on the
producers. QECT is not yet a t that point.
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litical Relations with the Middle East Producer States

a s They Affect Security of Oil Supplies

4 Business is easier conducted among friends,

prticularly in the Middle East. Demonstrably, preser-
mtion of a friendly U.S. political relationship with the
(u-uducinggovernments provides an environment facilitating
rulings between host governments and American oil companies,
Including negotiation of the changing relationships which
my come in the 70's. The most striking negative examples
ern the adverse changes in the environment in which American
/
e l l companies have operated in Iraq and Libya since the
favolutions there. A happier, but related, example is
Under Secretary Irwin's mission to Iran, Saudi Arabia
a d Kuwait during the oil crisis preceding the 1971 "Tehran
aattlement." Drawing on the amicable political relationships
hiween the United States and these producer states, he
euccessfully urged that these governments not permit the
threatened confrontation with the companies to disrupt the
flow of Gulf crude and that they promptly enter into price
amgotiations with the companies on a commercial rather
dm a political basis. Libya at the same time was urging
the contrary. Its premier told the oil companies negotiating
Èlmr that his government intended to increase its demands
¥à the companies, forcing them to raise their prices to the
pint where the consumers of the oil, America's allies,

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would force the United States to change its pro-Israeli

Middle Eastern policy.
These experiences suggest the importance of
considering carefully U.S. interests in Middle East
oil in developing our foreign policy toward the area.
Insofar as the Arab producer-states are concerned, we
cannot ignore their growing capability, briefly and
imperfectly demonstrated in 1967, to use oil as a
'political weapon" against the West. Traditionally, we
have stressed our strategic interest in preserving the
flow of Middle East oil to our NATO allies, implying some
positive American ability to assure this flow. I;. reality,
what we may be dealing with is a negative restraint on our
Middle East policy -- to avoid provoking Arab producers in1
applying pressure on European consumers to break with
U.S. Middle East policy and by-pass the American oil con-
cessionaires in order to preserve their essential crude oil
supplies.
To maintain strong bilateral ties with the Middle East
oil producers, beyond seeking an Arab/Israel policy which
they can tolerate, we should continue the basic approach
we are now pursuing. The official U.S. position in Saudi
Arabia is buttressed by growing Saudi desire for American

--
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military equipment and technical assistance, manifested

fcy the Corps of Engineers' consultant role, Raytheon's
lawk Missile Program, and the growing American official
ond private roles in modernizing the Saudi Air Force,
army logistics, National Guard, Coast Guard and Navy.
In

^
Iran, our influence rests on a history of support
Â¥gains Soviet pressure and, today, on supplying an
linancing military equipment and advisors. In Kuwait,
o are in the process of increasing the American portion
of the primary Anglo/American role in both security and
wonomic development, and this process is likely to
extend to the lower Gulf oil shaykhdons as the for-.a1
British protective role there ends. These U.S. activities
Â¥oreover generally fulfill a technological need which
Would make them still desirable even if, say in Saudi
Arabia, a nationalist revolutionary regime should come
Into power.
This American cooperation with producing states
provides a general psychological atmosphere for friendly
Oil relations; it does not however constitute specific
affective U.S. official leverage on these states on oil
questions. Thus it is essential that we recognize the
limitations on the capability of our political relations

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with the producer stateis to secure our oil interests.

The producer states have long been motivated by economic
self interest, dictating maximizing financial benefits
from oil. In early 1967, Saudi Oil Minister Yamani
described ARAMCO to Arab students in Beirut as a "milk cov
not to be abused, so that the Saudi fanner can exploit
it for all it is worth." The Irwin mission channeled the
1970-71 oil crisis back into commercial channels; it did
not directly seek to determine the bill resulting from
the ensuing bargaining. In the final analysis, we hope
the mutuality of economic interests between producer
states and American oil companies, particularly in the
Arab producing states, will be given more emphasis than
their political relations with the U.S.
Unfortunately, the producer states are increasingly
motivated by an economic nationalism which moves in the
OPEC forum along paths where political emotion tends to
overcome economic nationalism. Whenever there has been
a freely elected National Assembly in Kuwait it has
(in 1964-6,6 and again this year) blocked government-company
arrangements clearly in the financial interests of Kuwait
by insisting on the principle of reviewing the validity
 SECRET

Â¥ the basic oil concession agreement. Iran, bulwark of

9.8. political influence in the Middle East, spearheaded
0 assault on U.S. company interests there in 1970-71.
this suggests that in the producing countries the politics
@f"participationn will not be significantly checker by
friendly Anglo/American diplomatic relations with tke
toat governments, even though such relations may improve
0 tone of negotiations.
It should be noted here that many of the moderates
4Ã not consider "participation" to be a radical step.
(unani hastrepeatedly over the last few years,told Aramco
*at it must give the Saudi Government some say in running
l h o oil industry in Saudi Arabia. He has always said
speaks as a moderate and as a friend of the companies.
U the companies do not show flexibility on this issue,
Ir maintainsthey will provoke a move by the radicals
w a r d nationalization. In a meeting at the end of November,
hmani told Aramco that participation is now not a question
U "if" but of "when and how". He has advised the company
)e accept the principle and come forward with suggestions
implementation.
 SECRET

XV. Capital Requirements of the Next Decade

As stated above. Chase Manhattan Bank has estimated

that the international oil industry will require $360
billion for capital expenditures and $180 billion for
working capital and other requirements in the next decade.
This is considerably more than the entire industry has
spent in its entire history, but the consumption of oil
in the coming decade will also be more than has been
consumed up to now - and the cost of finding and developino
new oil will go up sharply as the industry turns to deeper
and smaller fields and deeper waters off shore.
The present proven reserves in the world are about
500 billion barrels; which represents a fairly comfortable
30 years supply. (Statements to this effect are frequently
misused. This is a comfortable position only from an
engineering or technical point of view; our concern has
been that most of these reserves are in the Middle East.)
At the end of this decade, let us assume that we can
tolerate a reserve - production ratio of only 20 years.
Consumption at that time will be well over 30 billion
barrels a year and the reserves should therefore be

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@ billion barrels -- 100 billion above present reserves.

250 billion barrels will have been consumed in the
1 bade, which means that a total of 350 billion barrels
1 have to be discovered in this period . put these
*ill

t i e s in perspective, Prudhoe Bay has 10 billion)

frrels of oil; even Kuwait has only 70 billion. We have
Çà been finding three Prudhoe Bays ever year recently;
k* fact the prospects for finding substantial new oil outside
Middle East are miserable.
Consumption will rise in the next decade by an average
4 4 million barrels/day each year. To put this in
1 Wpective, the consumption of France today is 2 million
Â¥Orel/day of Germany 2.7 million and of the United Kingdom,
I, 1 million.

Where will the capital come from? Traditionally the

dustry has generated the capital itself. In 1960 it
wrowed only $900 million or 16 percent of its capital
çquirement of $5.5 billion. In 1970 borrowings had risen
4
à $3.1 billion 27.2 percent of the $11.4 billion required. Thf
1 m g term debt of Standard Oil of New Jersey in 1961 was

@OO million; by 1970 it had risen to $2.44 billion.

The profits of the industry are not large relative

à Investment. The Chase Manhattan Bank's "group" of oil

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companies, comprised of all international majors and the

large independents which control roost of the worlds oil
production outside the United States, showed a return
on its capital of only 10.3 percent in 1970 - a full
percentage point below manufacturing industry in the
United States.
In fact, it will be impossible for the industry to
generate the amount of capital needed for this expansion
in the 1970's if profits are kept at current levels.
David Barran, head of Shell Oil Company, has said that
oil company profits should be allowed to increase to
?0.40/barrel (they are currently $0.33/barrel in the
Eastern Hemisphere and somewhat higher in the Western
Hemisphere). Even if this is achieved and if 250 billion
barrels are consumed in the next decade, total profits
will be only $100 billion. Of the remainder perhaps
as much as $200 billion could be covered by depreciation
of assets but this would still leave at least $200 billici
or an average of $20 billion to be borrowed or raised
through sale of equity for each of the next ten years.
This would be almost seven times the $3 billion borrowed
in 1970. Will it be possible to find these sums either
through borrowing or sale of stocks? It will be high

-
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çla and the banks and investors may well find more useful
ççtle for their funds. If the projections published by
a a e Manhattan are correct; if the City Bank figures can
f accepted, then it would hardly seem that Mr. Barran's
piration for a profit of only $0.40/barrel is modest.
)
ftl8 is still less than one U.S. cent per gallon - a
I l l enough figure when compared with excise taxes of
ti cents or more a gallon in the United States and four
<ha8 that in many European countries.
One intriguing prospect is that the oil producing
funtries could use some of their capital accumulations
ha the next decade to buy up new stock offerings, or even
à § buy up company stock during periods when the stock market
be depressed. In a relatively short time the oil producers
Â¥wil find themselves in a very strong position in the

utternational oil industry, and, if they wished, could even

mtrol several of the major companies.
 SECRET

XVI. Conclusions
The consuming governments are in a better position
today than they were last year. Stocks are high, tanker
rates are down, short haul production is down, and there a

is considerable spare capacity in Libya, Nigeria and

Venezuela. It is therefore somewhat easier to face OPEC
now than it was last year.
OPEC will make two demands on the companies in
negotiations which have already begun. The first is for
a readjustment of payments to the producers as a result
of the dollar devaluation. The companies have tried to
resist this as a contraventionof the Tehran agreements
but we do not believe they will succeed. They apparently
do not either, as they are currently making plans for new
offers to the producing governments. It is unlikely that
the agreement will mean an increase in payments to the ho:.~
governments equivalent to the full effective devaluation
of the dollar in terms of (say) the German mark; it seems
more likely that a formula will be reached based on
increased trade costs and that it will mean about a three

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or four percent increase in payments to the host governments

In terms of dollars.
The demand for participation is much more serious,
wticularly as it is not likely to end with the 20
porcent currently asked in the Persian Gulf, but would
ultimately be raised to 51% or perhaps even ld0%. We
flieve that this is clearly in contravention of the
f^hran agreement. As such, the companies have no choice
ft to protest it, and we have no choice but to support
nc- vigorously in their negotiations with the OPEC
countries. We believe there is a substantial chance of
+access in averting a clash now provided the companies are
ellling to talk about new relationships with producing
fvernments at the conclusion of the Tehran agreements in
It76. Should the OPEC governments, however, push through
I
aiinir demand for participation at present, then the United
notes position will have to be that the companies should
1 -e given "full, prompt and adequate compensation". There
be very little that we could do in most OPEC countries,
ucept Iran, in case they did not accede to our demands.

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(We assume that Indonesia will not follow the general OPEC
line on this matter; Venezuela is well on the way to the
'
conclusion of the contracts tn 1983; Iran, too, has alreac
stated that it will not extend the consortium agreement
after 1979 and SO it may not demand 20% participation at
present.) Most oil producing countries get no aid from
us and the world needs the oil. If the demand for
participation is legislated, then we see very little
opportunity for the companies but to accede. They could,
of course, also insist that the realized prices rather
than the posted prices be used as a basis for calwlating
company profits and that they be given a substantial
marketing allowance for handling the oil for the national

I
company. In this case the actual financial burden to the
company could be small.
In the long run, given the strength of the producing
governments and given the demands of nationalism, the mov
toward participation will almost certainly be irresistibl
If the companies try toresist now, they could well provoke
a move toward total nationalization which wouldhaveunfor*
- Ã

consequences not only for company profits but for world en

 SECRET

lies. We believe that the companies therefore would

Vise to offer the producers now some new relationship
r 1976. This could be a 50-50 arrangement similar
the new concessions now being given, with adequate
nsation for the company's surrendered share and with
government putting up 50% of capital requirements in
future. It could include downstream participation
1
companies have long resisted this, but they show their
it almost entirely on the producing end, and if OPEC
rnments are willing to put up capital for new refining
marketing outlets, then this perhaps should be given
careful study than it has to date. They will
t certainly have capital to spare.
The new relationship could alternatively consist of
companies voluntarily relinquishing large sections of
present concessionary areas (as was done by force in
in 1960); the companies could then enter into new
tionships with the producing governments and perhaps
other companies from other consuming countries, in
t government-company ventures in the relinquished areas.
overnments could be in from the beginning on development
 SECRET

of oil production above current levels. Ã

The situation described by this paper is not
encouraging. It is not new, however, The international
situation has been studied by OECD and by NATO. The
domestic situation and the dangers of reliance on imported
oil have been studied repeatedly by the Department of
Interior and the Department of Defense, by the National
Petroleum Council, by the Science Advisor to the President,
by the Domestic Council, and the Oil Policy Committee. ?

The conclusions reached by all are remarkably uniform

and remarkably dreary. Indeed they are so unpleaoamt we
have shown a tendency to ignore them, and to handle the
problem by commissioning yet additional studies. The
Senate Interior Committee under Senator Jackson recently
started a comprehensive study which we !!ad understood wasn,
joint House and Senate investigation with the full partial
pation of the Executive Branch of the Government.We had h'
that the recommendations of this study would be accepted
and acted upon, although there was some concern that the
study might drag on for several years. This study has h . ~ d
difficulty in getting started and it has not won the full
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'.icking of the Senate or the House. Senator Proxmire is

8 onducting his own study and Congressman Aspinall, who
IS alleged that the Jackson study is to serve only as a
ipport for Senator Jackson's presidential aspirations,
!..is set up a Task Force on Energy and Resources.

We believe that the time has come to end the studies.

tlnless someone can demonstrate accurately the inaccuracy
I
I â the conclusions of previous studies, and do it very
apidly, the time has come for action both at home and
1
I
hroad. We propose the specific State Department
notions outlined in the following section:
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I
XVII. Proposed Actions

A. Action to be Taken by Companies

1)
a f t e r 1976
The coiipanies should recognize t h a t 1976 w i l l be the l a t e s t
t h a t they can hope to maintain t h e i r existing concessions without essent f b

change. The end of the Tehran Agreement w i l l almost certainly see a

quantum leap i n o i l prices and t h e governments of OPEC w i l l demand new

wmpany/government relationships i f they have not already done so.

P r o M l y the only way of r e s i s t i n g d m d s f o r price increases a t pres

o r participation this year o r next w i l l be t o agree t o work out a new

relationship with t h e producing countries a f t e r 1976. This need not

necessarily man a reduction on cmpany p r o f i t s . It \&man qiving

t h e producing governments a voice i n t h e management of the companies

operating inside their borders.

2) Enlarge t h e c a t p s i t i o n of o i l producing companies

Most of o i l production i s i n t h e hands of t h e seven major o i l

conpanies, f i v e of which a r e ftmarican, one British, and one British/Dut

Itie French have sore stake i n Eastern Hemisphere o i l production, but
4
barely enough to cover t h e i r own needs. The major o i l consumers, notab1

Japan, Germany and I t a l y , have long aspired t o control some of t h e i r m.

production. The o i l companies should seriously consider opening up

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(Kisting concessions to companies from a t l e a s t these three nations.

fee example, there could be an enlargement of the oonsortiun in Iran,

ABAMCO in Saudi Arabia. More acceptable to the oorpanies would be
joint -ventures in new areas. A good example of this is the new

il/Japanese operation in Iran.

.
, ...Specific Action (1) by the Department
The Secretary and the Under Secretary should c a l l the Chief
Executive Officers of the major o i l companies and of a sub-
stantial nuntoer of the independents, outline our views on the
probable developments in world o i l in the next decade, outline
the action we plan to take on their behalf (as described
below), urge them to take the actions described above, and
tell them we believe our chances of success i n our diplomatic
d&narches w i l l be minimal i f they cannot inform the O P E
countries they w i l l now consider changes for a new regime
a f t e r 1976.

Action Taken by the U S in the United States on Behalf of the

ccqmies

1) Form an international petroleum advisory group

this could be similar to the National PetroleWCounci~,which
&lvises the Secretary of the Interior. It would advise the Secretary of

&ate on international o i l natters and could meet periodically o r on an

@ h s basis. D q e d i r g on its furction, ccch a xni~htrequire a

Business Review Letter o r other form of approval by the Department of

Justice.

4
.....Specific Action (2) by the Department

When the ccmpany executives are called to Washington for the

discussion on the future of the industry, the Secretary or the
Under Secretary should raise this matter. I t has already been
discussed with a number of o f f i c i a l s who are enthusiastic.
An ad hcc amnittee mnld be selected a t that meting.
SECROT-
 2) Allw capanies to w r k tcgether to a t t a i n certain restrict(
92e
The United States Government should permit the companies to

operate together abroad to face a unified OPEC challenge without fear , '
anti-trust prosecution i n the United States. European and Japanese

conpanies operate with the f u l l backing of t h e i r governments and it ia

essential t h a t the American companies are shown to be supported by the

United States. This has not always been the case; i n fact, some prodi.
governments seem t o have the idea t h a t the United States is willing to

use the conpanies as pawns in a wider foreign policy gate.

Action on behalf of the companies was taken in January 1971, and

again on October 22, 1971, when the companies were given Business Revi<-.

Letters by the Department of .JWuuc allowing them to present a cannon

front to OPEC.

.... .Specific Action (3) by the Department

A t the request of the Department of State, the Department of

Justice gave the mrpanies Business Review Letters in January
1971, and again on October 22, 1971, which permitted them to
present a cornon front to the OPEC. The Department should
keep i n constant contact with the Departirent of Justice and
with key Congressmen and Senators on this matter t o ensure
t h a t there i s a sound understanding of the reasons for the
action and the benefits we expect both the conpanies and the
conswers to gain from it. This is currently being done.

C. Diplamtic Approaches on Behalf of the Companies

1) In the Persian Gulf - a s a result of the Irwin Mission

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 Q,

SBCECT sa

If the OPEC countries persist in demands for participation

the Wted S t a t e s Government should give the cmpdes appropriate

(ttilcmatic support.

. . .Specific Action (4) by the Department

The Department should deliver notes to Tehran, Jidda and Kuwait,

reminding the rulers t h a t they had assured our President's envoy
that they would honor t h e i r agreements with the o i l companies
for the f u l l term of the agreements. The Department should
point out the d i f f i c u l t i e s and the dangers t o us, the other
consumers and ultimately to the producer governments caused
by demands for "participation" now, when the world had assumed
'1
that five years of s t a b i l i t y i n the o i l market had been achieved
in the Tehran agreanent of February 1971. Finally, the Depart-
merit could point out to the rulers that the United States, as
a result of the assurances given Mr. Irwin, had counted on
these agreements being honored and had so informed its a l l i e s .
If necessary, t h i s could be followed by l e t t e r s from the
President o r another v i s L by a presidential envoy.

2) Review in the CECD the capital requirements of the industry

in the next decade

1 ..Specific Action (5) by the Departrtnmt

I
the Department should ask a l l OECD countries t h e i r views and
try to reach an understanding' on the definition of "reasonable
profits" which the companies could be allowed to generate i n
the next decade. I

I1 .
3) Discuss the need for s t a b i l i t y i n be world o i l market

.Specific Action (6) by the DepartKient

The Department should be prepared to discuss, but not neces-

sarily support, the idea of a joint OECD approach, o r an approach
of selected OECD countries to some OPEC countries, for a new
prcducer/consumer relationship such as has been raised by the
KBC and the Italians.

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4) Invesbwnt i n wmnventional o i l

The Etepartn-ent could raise again, this time more formally

than in the past, the p s s i b i l i t y of m a n o r Japanese investm?nt 3

U.S. shale, Canadian tar sands o r Venezuelan heavy o i l s . Ihis would,

Â
of course, require the concurrence of the Canadian and Venezuelan govrr

mts and of our Congress. The EEC and Japan might be more willing to
consider paying more for t h e i r o i l , i f they can have near-absolute
guarantees of its security, than they were a year ago.

.....Specific Action (7) by the Department

The Departinent, a f t e r informing the NSC, should raise t h i s
possibility with the Venezuelan and Canadian governments, and
with the Senate and House Interior ~~ttees. Assuming there
are positive responses, tL.= nutter should then be put on the
OECD O i l Comiittce Agenda.

5) Increase Stocks

After the Mid-East c r i s i s of 1967, the U.S. delegate to the

OECD O i l Coromittee urged that QECD stocks be raised to 180 days. They
were theoretically 60 days a t that time, but most countries f e l l f a r

, short of that level. Many in the OECD now ruefully admit that the U.:

was right; that i f Europe and Japan had had 180 days of stocks l a s t yi ,
it might have h e n p s s i b l e to have withstcud the Libyan blackmil.
CBCD recoimanded stock level has now been increased to 90 days.

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....Specific Action (8) by the Department
The U.S. delegate to the O i l Conmittee should raise again this
matter. He should propose a storage figure of 180 days but
would be prepared t o s e t t l e for 120 days, and i f t h i s is
impossible, then the current 90 days -- but based on forward
consmption and effective stocks, i.e., tank bottoms and o i l
i n pipelines should not be counted as stocks.

6) Accelerate the development of nuclear energy with Europe and

Bz!E
Seme moves are being made on t h i s point new. But not enough.
^
<hc security, financial and other obstacles which the Joint Ccumittee on
Atonic Energy have established for permitting multi-national cooperation

Â¥ uranim enrichment and related natters make meaningful cooperation

Anubtful. Failure to cane to an early understanding concerning coopera-

t i o n is likely to result in delayed action on the part of our a l l i e s in
f u l l y exploiting atomic power to meet their energy needs. In the longer
tam, it also could result in the U.S. being shut out of a large market
(or enriched uranium and capital equipment related to the nuclear power
Industry. A major e f f o r t should be made to accelerate joint US/European/
Japanese development of nuclear energy perhaps through the establishment,
U.S. i n i t i a t i v e , of an INTELSAT-type consortium with significant U.S.
@t

@ p i t y for the production of enriched uranium a t various locations

the world.
 SECRET

.....~pecificAction (9) by the Department

This vn11 require strong State Department leadership and,
subsequently, Congressional approval. It need not be in-
patible with the current U.S. policy concerning the early
transfer of enrictltent capability to the private sector.
The Department shodd raise the matter hdiately with the
NSC and the AEC, and then with the Joint Congressional Com-
mittee on Atonic Energy. I*

7) Maintain friendly relations with prcducing goverments

.....Specific Action (10) by the Department 4

Maintain the programs with Saudi Arabia and Iran described

in Section XIV above. Continue the present U.S. Government
policy of trying to keep a balance in our relations with all
states of the Middle East. A return to an overtly, exclusively
pro-Israel position would negate most and probably all of the
other steps the United S t u ~ e ccould take to secure oil supplies.

D. Action Taken by the U S 2 to Increase Its Own Stability and Flexibi 1 I

in Dealing with Producing Countries

1) Increase domestic supplies of oil

This auld be done inter alia by:

(a)
#
Giving inmsdiate leases on the outer Continental Shelf.
In order for these leases beyond the 200-meter depth to be
consistent with the President's Oceans Policy Statement, they
must be made subject to whatever international regime is
y
established by the UNM Nations Law of the Sea Conference. t

Connected with this should be a new form of bidding based not

exclusively on initial bonus payments, which enable only a few
canpanies to participate. Offers of new tax arrangements or
offers to maintain spare capacity (this nay be a requisite for
bidding) could be considered.

--SECTET
 SECRET

e i f i c Action (11) by the Department

thn Secretary should write to the Secretary of the Interior
4 ~ inform
1 him that, while we still hoped to reach an inter-
7' ~onalagreerent on the Continental Shelf, we no longer
Id object to Interior's granting of petroleum leases
nd the 200 meter isobath. In order to be consistent
et t 11 the President's @ems Policy Statement, the leases
~t be made specifically subject to the international regime
&) lie established by the Law of the Sea Conference.

(b) Giving leases on Naval Petrolem Reserve No. 4 in

Alaska, with perhaps some requirement on maintaining spare
capacity.
(c) Proceeding as rapidly as passible with the exploitation of
shale oil and with coal conversion. this would mean giving
leases tnmsdiately on the shale areas. It would also probably
be necessary to give synthetic oil the same depletion allowances
as are new given conventional oil.

(d) Encouraging the production of conventional oil and gas

through new tax allowances for newly discovered oil, or for
oil produced by tertiary recovery methods.
(el Determine as accurately as possible howmuch more gas could
be produced in the United States by raising the wellhead price
increments
of newly discovered gas by lo<:, up to delivered
UC prices. If the E X , the Department of the Interior and
the industry could demonstrate that significant quantities of
gas wuld be produced ih the United States by these higher prices,
 -S
-ECRET I

then prices should be raised. We w i l l be forced to pay tL

higher prices f o r imported ItC and, f o r both security and 4

balance of payments considerations, should produce the gab

in the United States to the degree we can.

.....Specific Action (12) by the Departanent

Â¥ThDepartmznt Representative on the Domestic Council S u b d i '

on Enerqy and the O i l Policy Coinnittee should review our concel
a t the projected energy shortages for 1980, and raise points (1
(c), (d) and (e) above. He should point out t h a t the Departrnei
is, as yet, the only Department t o have come out squarely for t
Alaska pipeline, and should urge other Departments to make stai
merits similar t o that included in the OEP l e t t e r (qixitinq the
Departmsnt) t o the Secretary of the Interior. Department offit '
should discuss these same matters w i t h the Foreign Affairs and
Interior Connittees of the Senate and House.

2) Encourage developntelx of new forms of energy

1
1
Implicit in the President's Energy Message of June 4, 1971,

was the conclusion t h a t the United States Government would ensure tl

research on energy matters would receive the highest priority. Thi:

however, appears not to have been completely clear to a l l readers 0 1

message.

.....Specific Action (13) by the Department

The Secretary, in a l e t t e r to the President, should review our
concern about supplies of energy, s h a l l refer to the President'
June energy message, and should ask him o r his Science Advisor
to state publicly t h a t the administration had taken a policy
decision to accelerate development of new forms of energy;

SECRET
and that from new on, whenever science can demonstrate ade-
quately that it needs more funds for research and development,
these funds w i l l be mde available; i n other words, that money
w i l l no longer be the limiting factor i n the deve1o-t of
new energy forms.

3) Take Treasures t o decrease rate of growth of consumption of

energy in the united States
\
This would inclt.de, i n t e r alia: \

(a) Raising taxes on gasoline and freeing gasoline taxes £ra

the Highway Fund; using these taxes then for subsidies for mass
transportation.

(b) Discouraging growth in consumption of electricity by

eliminating special rates for large users.

(c) Encouraging use of electricity during off-peak hours.

This could be done by lowering rates between 6:00 EM and
6:00 AM. New metering arrangements would have to be made.
This is already done i n Europe.

(d) Encouraging the recycling of alantnun o r the reduction i n

use of aluminum. Aluminum production requires 15 times as much
energy a s does the production of the same quantity of steel.
With higher rates on energy, aluninun production may, in any

case, decline.

(e) S t a r t i n g a national "save-a-watt" campaign to encourage

Americans to keep t h e i r houses 5 degrees wanner in sunnier and

SECRET
 5 degrees cooler i n winter. In connection with this, a l l
advertising campaigns to increase the use of energy
(particularly gas) should be stopped.

.....Specific Action (14) by the Department

The Departmsnt Representative should raise these natters i n
the Domestic Council and the O i l Policy Gonroittee. The Depart-
msnt should also encourage Senators o r Congressmen to introducr
legislation which will accomplish these objectives.

N.B.: Legislation t o rermve gasoline taxes fran the Highway

Fund w i l l be raised soon. We have discussed this with the
major o i l carnies who will no longer oppose it as they have
similar legislation in the past.

4) Coordinate energy policy

There is a growing ~ m e r s m d i n gof the energy c r i s i s the

United States is now entering. There is, however, no coordination 1,

the U. S. Government on energy natters. It seems to us to be essent I

that some one responsible group be in charge of all energy matters:

1
o i l , gas, coal, atomic energy, and non-conventional forms of energy.
The President has announced that energy natters are to be centered 1

the new Department of Natural Resources, a move we heartily endorse.

We believe, however, that we should not w a i t until this new departni

i s s e t up before energy matters are coordinated under one head. Th

logical candidate for such task seems the Secretary oi

the Interior.
 SECRET

,... .Specific Action (15) by the Department

Tne Secretary, i n h i s l e t t e r to the President i n connection
with proposed action (13) above, should urge him t o appoint
a high coirru-ssioner for energy, t o face the energy problems
of the seventies and propose solutions for them. This position
could, of course, be absorbed i n the new Department of Natural
Resources when it i s formed.

5) Conclude an energy agreement with Canada

\

this could be done on lines proposed to Canada a t various t i m e s

Airing the l a s t year. I f Canada is unwilling to enter into an agreement,

could unilaterally declare t h a t the reasons for inposing controls on
OBiadian o i l are no longer valid (this is indeed the case), t h a t Canadiar
dl w i l l be allowed freely into the United States, providing only t h a t
<il imported i n t o Canada not corns west of the Ottawa valley l i n e (this
H already Canadian policy) and t h a t the pipelines crossing the border
Into the United States maintain seme spare capacity for emergencies.
ftwould have to ass-, i n this case, t h a t oonrnercial pressures to
(Welop the Canadian o i l and gas would be sufficient to ensure t h e i r

hlopment. Vfe would have to assume, with perhaps l e s s justification,

Â¥ the Canadians would not impose export taxes on the o i l and gas sent
the United States. Ihe same arrangement might be made with Mexico.

... .Specific Action (16) by the Department

Continue present e f f o r t s t o conclude an agreement with Canada.
Raise the subject again with Mexico.

--
SECRET
 SECRET

6 ) Conclude an energy agreerent with Venezuela and other

Latin American producers
This would be i n two parts: (1) guarantee on investrosnts

made in the Venezuelan heavy o i l s , and (2) U.S. permission f o r this o i l

tn enter freely i n t o the United States. Such an a g r e m t , mutatis

niutzmdis, might a l s o k concluded with Colmbia and Ecuador.

.....Specific Action (17) by the Department

The Department should r a i s e with Venezuela, Colombia and Ecuador
the p o s s i b i l i t y of entering into such agreements and, i f so, t o
start necjotiations leading tmmrd t h e i r conclusion.

Postlude 4

I f actions suggested in this section are taken, the position of

the United States in 1980 could be q u i t e d i f f e r e n t from t h a t assumed

other parts of t h i s paper. Consumption could be only 22 million bcu tf

day (rather than 24 million). Denestic production could be as much
15 million barrels/day (rather than 12 million), and imports fron t],'

Western Hemisphere could be f i v e o r six million r a t h e r than three or

four million. This wauld leave quite manageable imports of only 1-2

Attachment:
Questionnaire

SECRET
f ~roducer/Compwty R e l a t i o n s h i p
a t are t h e a d v a n t a g e s and d i s a d v a n t a g e s o f t h e traditions.
a s i o n a r y system?
a t a r e t h e c h a n c e s th-is c o n c e s s i o n s y s t e m w i l l l a s t f o r
n e x t 1 0 y e a r s ? What t y p e o f new agreements w i l l be

r e any OPEC governments brought- i n t o t h e d e c i s i o n making

bses o f t h e o i l companies now? I f s o , how?
at a r e t h e most p r o b a b l e demands o f t h e p r o d u c i n g
ies f o r c o n c e s s i o n . c h a n g e s i n t h y n e x t 1 0 y e a r s ?
\
a t would be t h e a d v a n t a g e s and d i s a d v a n t a g e s t o u s ,
companies, t o t h e consumers and t o t h e p r o d u c i n g
nnwits of auch changes?
a t p o s s i b i l i t i e s a r e t h e r e f o r t h e USE t o i n f l u e n c e
vprnc'nts i n t h e p r o d u c i n g a r e a s ? 'for o t h e r consuming

k s u p p o r t s h o u l d ( c o u l d ) t h e United States Government

s s i b l y t h e B r i t i s h , Dutch and French governments) g i v e
i n t h e i r n e g o t i a t i o n s w i t h t h e producing qovern-

b
Â¥hn a r e t h e p o s s i b i l i t i e s o f forming a "consumers c a r t e l " ;
&re t h e e J v a n t a g e s and d i s a d v a n t a g e s of such an o r g a n i z a t i o n ?

hta r e t h e m e r i t s and d e f i c i e n c i e s i n t h e E N 1 s t a t e m e n t
r e g u l a r i t y of p e t r o l e u m s u p p l y m u s t become an
tlie?
j.;?. component -- not al.terable u n i l a t e r a l l y --
in a
x of an economic and p o l i t i c d r e l a t i o n s h i p which b o t h
an ( p r o d u c e r s and consumer's) have an i n t e r e s t i n main-
tnii and r e i n f o r c i n g on t h e b a s i s of r e c i p r o c a l a d v a n t a g e " ?

@W v a l i d i s ENI's c o n t e n t i o n t h a t t h e i n t e r n a t i o n a l o i l
M I P S c a n no l o n g e r c o n t r o l t h e i r r e 1 a t i o n s h i . p ~w i t h t h e

fem y c o u n t r i f - s and t h a t t h e r e f o r e t h e con sum in^ c o u n t r i e s

o n t i n u e t o r e l y on t h e s e companies t o s u p p l y o i l a t
olile p r i c e s ?

&~.~aimer/<:omznvl & l a t i o n s h i p s

( f t l i ~ might
t b e t h e demands of t h e consuming qovernments
W r o l o f t h e o i l industry i n t h e next decade?
1 2 . What would b e t h e a d v a n t a g e s a n d d i s a d v a n t a g e s t o t l i
g o v e r n m e n t s and t o t h e c o n s u m e r s o f s u c h m o d i f i c a t i o n s ?
13. What a r e t h e p o s s i b i l i t i e s o f t h e US Government
*
i n f l u e n c i n g consumer g o v e r n m e n t s ' a t t i t u d e s t o w a r d t h e OJ i
companies?
14. Does EN1 s p e a k f o r t h e I t a l i a n government? What a m
i t s c h a n c e s o f d o i n g s o i n t h e n e a r f u t u r e ? What s u p p o n
w i l l i t h a v e i n o t h e r EEC c o u n t r j c s ? .in t h e ESC S e c r e t a t
How f i r m i s EN1 i n i t s v i e w s ? M i g h t t h e s e b e a l t e r e d ? *#
1 5 . How much c o n t r o l . i s p r e s e n t l y h e l d o v e r company opc
e l s e w h e r e i n t h e EEC? i n J a p a n ? What i s t h e l i k e l i h o o c i
t h e EN1 v i e w w i l l s p r e a d t o o t h e r c o n s u m e r s ?
-1
4

II
1 6 . How-will U S c o m p a n i e s f a r e i f t h e . E E C a d o p t s a s y s t t.

o f f a v o r i n g "community c o m p a n i e s " ? W i l l U S companies be

a l l o w e d t o q u a l i f y t h r o u g h t h e i r European s u b s i d i a r i e s ? Ã

111. Consumer F l e x i b i l i t y ~ i n dA s s e t s i n D e a l i n g w i t h 0:'

17. i?i:dL i i i t i c i ~ i t a. 5 f rtriv. do r h p r w n < = t i i ~ nnrr

i r ~ n v r ' r n m ~ n tn
~:
t o use a g a i n s t unreasonable i n c r e a s e s i n p e t r o l e u m pric,
1 8 . What. c a n '-he US d o t o " s h a r e t h e b u r d e n " i n a new I
c r i s i s ? How much r a L - i o n i n o c a n t h e U S cicccpt? How mucli 11
c o u l d b e made a v a i l a b l e t o E u r o p e a n d J a p a n ?

1 9 . How much f l e x i b i l i t y w i l l we g e t t h r o u q h t h e develc ¥

o f s y n t h e t i c o i l s o r a l t e r n a t i v e sources of energy?

20. How much o i l w i l l b e p r o d u c e d by t h e p r e s e n t OPEC

i n 1 9 7 5 ? i n 1980? How much s p a r e c a p a c i t y w i l J t h e r e
i n e a c h o f t h e s e y e a r s ? Where will i t b e ?

21. How much o i l c a n b e e x p e c t e d t o b e p r o d u c e d o u t s i d t4k

p r e s e n t OPEC a r e a by 1 9 8 0 ?

22. Can p r o d u c t i o n b e e x p e c t e d t o p e a k o u t i n a n y o f 1
p r e s e n t OPEC c o u n t r i e s b e f o r e 1 9 8 0 ? 1 9 8 5 ? 1 9 9 0 ? I f #
what l e v e l s !

2 3 . What a r e t h e d i v i s i v e f o r c e s i n OPEC; s h o u l d t h e s f Â
e n c o u r a g e d a n d i f s o how? u
IV. C a p i t a l Requirements
4. Assuming d o u b l i n q o f w o r l d c o n s u m p t i o n of p e t r o l e u m by
990, w h e r e w i l l t h e n e c e s s a r y c a p i t a l come from f o r t h i s
~ v c l o p m e n t .u n d e r p r e s e n t c o n c e s s i o n s y s t e m s a n d u n d e r
i ~ l i . f i c a t i o n st h a t we s e e a r e most p r o b a b l e ?

1). What i n v e s t m e n t w i l l b e r e q u i r e d ( i n dollars/bbl/day of

W p r o d u c t i o n ) i n OPEC i n 1975? 1'980?

I&. What will be the i n v e s t m e n t c o s t s i n downstream

/ a c i l i t i e s i n W e s t e r n E u r o p e , J a p a n , the USA by 19807

17. How would i n v e s t m e n t b e made i n p r o d u c t i o n cind i n

kwnstream f a c i - l i t i e s u n d e r v a r i o u s c a s e s of government c o n t r o l
w l u d i n g t h e extreme case o f c o m p l e t e r e g u l a t i o n i n Europe
i ~ u lJapan- a n d n a t i o n a l i z a t i o n i n t h e p r o d u c t i o n a r e a s ?

L Conclusion
 two documents p r e s e n t e d i n t h e f o l l o w i n g
i n c l u d e American Embassy O i l A t t a c h e and Economic Couns-
e l l o r ' s comments, r e t u r n e d t o b o t h t h e above o f f i c i a l s
a f t e r t h e d r a f t document t i t l e d " I n t e r n a t i o n a l O i l Market
t h r o u g h 1980" was reviewed.
Before a n a l l - o u t d i s t r i b u t i o J of t h i s a n a l y s i s , Office
o f F u e l s and Energy of t h e U.S. Department o f S t a t e s e n t
c o p i e s t o a number of e m b a s s i e s and c i r c l e s i n c l u d i n g t h e
U.S. Embassy i n T e h r a n , t o g e t t h e i r comments. The n e x t
documents c o n t a i n comments made by two o f t h e U.S. embassy
officials.
I t i s t o b e n o t e d t h a t b o t h d o ~ u m e n t sh a v e r e f e r e n c e s
made t o c e r t a i n p a g e s o f t h e o r i g i n a l a n l y s i s , w h i l e t h o s e
a r e r e l a t e d t o t h e d r a f t copy and i n n o way c o i n c i d e w i t h
t h e p a g e s p r i n t e d i n t h i s book. To. f o l l o w up t h e i s s u e ,
a s u b j e c t - r e l a t e d s e a r c h s h o u l d be l a u n c h e d w i t h i n t h e co-
n t e x t o f t h e o r i g i n a l document.
 Tehran, Iru

November 29, 1991

SECRET
OFFICIAL-INFORMAL

Mr. James E. Akins

Office of Fuels & Energy
Department of State
Washington, D. C. 20520

Dear Jim :

Thank you very much for your letter of October 27 enclosing the draft of your
oil industry paper. Since the Charge has also received the NEA comments on
your draft, I thought i t would be best if our letter giving comments on your
draft came from Bill Lehfeldt since this would put the Embassy's authority he-
hind the comments and perhaps make them more useful to you in a bureaucralt*
sense.

I would like to make one comment here which is really mostly outside the scop*
of your draft, but which seems to me pertinent to It. I believe that well before
1980 we a r e going to find Iran, a t least, making a more vigorous drive for
downstream participation than the tone of par-ph two on pages 36 and 37 of
your draft would suggest. I have had a deeply troubling interview recently
with Mr. Ha$ Entekhabi, who is Head of the Special Overseas Projects Group
in the NIOC (this includes the Belgian refinery among other undertakings).
Entekhabi is disliked by his colleagues a s an incompetent and pompous jerk,
but they have to endure him because of his closeness to Eghbal, whose protefl
he is. Entekhabi spoke specifically and by name on behalf of Eghbal when ha
made it clear that NIOC was beaded downstream for nationalistic and emotion*!
reasons a s well a s for economic ones. and that the NIOC would use i t s incre8a
Ing control over aocesgability to Iran's oil to favor companies that are hospltah
to Iran downstrexm and to shut out companies which resist, o r compete with,
Iran's refining and marketing ventures inside consumer countries. Much of
the ornuncntatlon on this statement, particularly references to the d z e and
speed of Iran's Initial ventures downctream, was, of course, overstatement
ad bluff, but the theme vu clear and I accept it a* true. Accordtngly, I
1beyond the participation Issue, another and much more intractable
woblem of how to handle wealthy producing nations, increasingly sophisticated
the oil indu¥trywho are determined that their flag shall follow their oil.

Sincerely,

/'
John Wiahburn
Petroleum Attache
 Tehran, Iran

November 29. 1971

SECRET
OFFlCIAL-INFORMAL

Mr. James E. A k i ~
Office of Fuel8 6 Energy
Department of State
Washington, D. C. 20520

Dear Jim:

This ia in reply to your letter of October 27 to John Wanhburn enclosing

your draft naper on UK future of the i n f n u t i d petroleurn indu@ky.
John feels, a s I gather he has already written to p,that these comment*
may be a little m o m helpful to you burç*ucratic&U U I sign thom. I am
not sure I entirely agree, bat have l e t myself be persuaded aluce we both

-
want to help a8 much M we can la your very important effort.

We hare dso received 8 copy of HEA's commentt, ¥ that I w i l l be@ with

a couple of thoughts on these. We like the suggested new chapter on con-
Burner g o v e m m t - o o m p i i y relaUoiuhlp8. We strongly that the offer
of a new relationship with çom Gulf countries i s not likely to work out. ( h
the other hand, w 8gme with you and not with NEA on the question of whrtl4
or not we are in the last buyers* market. B aeems to ue that after the o v r
whelmlag proof you provide in the first section of your paper, the "almoit
certainly" on p8go 29. ond the use of "likely" on that page 8nd on page 30
constitute abundaat cautioo in nuking 8 forecast with which we entirely a y r ~ ~ ,

On the effect of the Tehran Agreement, we do 8grçwith NEA that its open
ing p à § r à § pw not Intended to preserve all aapeeta of existing conctani~W
ary contracts f o r the next 5 yeus. but rather to dfim and limit the
amendatory effect OB these contracts of the Teb- A w m e a t itself without
b i n s future chmges on subjects other than tbotfe specified in the Tehran
Agreement, Lo.. financial arrangements and government take. Our
on this point is supported by the explanations of the companies' repreaentu
tlves to us last February, and by the companies' own l@ argument which
 SECRET

2.

characterizes participation a s a specific.~olaMon of the particular ban in

the Tehran Agreement on revision of financial arrangements. Also in
this connection, therefore, we prefer to keep our options open a8 to what
US2 action in support of the companies should be, since the producing
governments* demand for participation may o r may not take a form which
would be a clear change in financial arrangements o r obviously result in
an increase in govrnment take.

Turning directly to your draft paper, we do not understand that the OPEC
demand i s for p u t i c i p a t f ~ nwithout any compensxtieE whatever a s you say
In the l a s t line of page 21. Your further d i s c u ~ ~ l oofn this on pages 32-33
mggesta that you mean that the book value compensation offered by OPEC
1s dartaory, o r that the proposed method of payment resuitt in almost no
real compenutory value to the companle~. If TO, you might wish to Include
this explicitly in your analysis of participation and compcn~atlon,and to
lnmert this complete, fuller analysis at the bottom of page 21. Incidentally,
we don't think that the companies would be embarrassed by OPEC's quotation
of Department of Commerce figures on the value of U.S. investment abroad,
à you indicate on puce 33. If participation comes to a head in the Gulf, the
oompanles w i l l almost certainly ask for a review of g.& the relevant data, a
review which would bà like the current Vienna talb on currency revaluation.

Conc*mtng your paragraph two on paces 36 and 37, Im, a t least, would
have no -1 britofale hiring and developing from Its own resources the
oecççaexpertise to mount an adequate discovery and development pro-
gram to replace that of the companies. Except for the tool-pushers, almost
Â¥I c r e w on drill rigs In Inn are now 100 per cent Iranian, and we see no
reason why Sedco, Raiding sad Bates, and others would refuse to work for
Iran If the c o m p a n i e ~left.

A minor note to your paragraph "A" (I) on page 56 i s that our impression
i s that the GO1 would probably l e t the Constorium hang on until the main
term of the 1964 Agreement expires In 1979. particularly If the Consortium
makes the expansion in export capacity during the next few years which the
GO1 is dernandlng. and l a wllltng now to d i i c u u how participation will be
brought about in 1979 and thereafter.

SECRET
 f
Than a r e our wmmentm. None of them should obscure our wholehearted
agreement with. and our support of, your ewential theais which cornea
through very well indeed in the draft paper. We believe, with you. that the
international oil industry is on the road to complete national control of
development and procassing of crude oil. Participation, joint ventures and
service contracts m steps along the way. The companies1 aces in ensuring
that this evolution, wnen completed, leaves them with a viable and profitable
international business a r e , as you point out, their refining and marketing
skills and their ability to find capital. The f i r s t essential task for us in
government i s to insure that the companies understand and accept what i s
happening. Your pÈper and your initiative of which i t i m a part, a r e clearly
go* to be emmontial in achieving this understanding.

With all good wimhes.

Sincerely,

William W.Lehfeldt
Counselor of Embassy for
Economic Affairs
 DEPARTMENT O F STATE
Washineton, D.C. 20520

J a n u a r y 26, 1972

John Washburn, Esq.

Petroleum A t t a c h e
American Embassy

Dear John:
Enclosed a r e s e v e n pages r e p r e s e n t i n g o u r f i n a l
c o r r e c t i o n s t o t h e r e p o r t r e c e n t l y s e n t t o you on the
" I n t e r n a t i o n a l O i l I n d u s t r y Through 1980." I t would
be a p p r e c i a t e d i f you c o u l d have them s u b s t i t u t e d f o r
t h e c o r r e s p o n d i n g pages i n o u r o r i g i n a l s t u d y .
We have had o u r f i n a l m e e t i n g s on t h e o i l p a p e r and
Under S e c r e t a r y I r w i n and I a r e now i n t h e p r o c e s s o f
s t a r t i n g implementation by c a l l s on L i n c o l n , Morton,
L a i r d , S c h l e s i n q e r , Haldeman, S t e i n and o t h e r s . Towards
t h e end o f t h e month, t h e S e c r e t a r y w i l l send a l e t t e r
t o t h e P r e s i d e n t t e l l i n g him what we have done and what
we t h i n k s h o u l d b e done. I n t h e meantime, we would
a p p r e c i a t e any comments o r o b s e r v a t i o n s you may wish t o
offer. Needless t o s a y , o u r r e p o r t s h o u l d n o t b e shown
t o the I r a n i a n Government.

k
S ncerely,

1/<V^
J es E. Akins
A i n g Deputy A s s i s t a n t S e c r e t a r y
f o r I n t e r n a t i o n a l Resources
and Food P o l i c y
Enclosures:
C o r r e c t e d c o p i e s of pages 2,3,28,
85,86,90 & 9 1 of t h e " I n t e r n a t i o n a l
O i l I n d u s t r y Through 1980.'

-
SECRET
 SECRET

We have also sent the list of questions and asked the views

L
of our posts in 0 capitals and in the main consuming centers.
Iheir reswnses have also been incorcorated in this nacer-

-
SECRET
 SECRET

ephemeral. We cannot see how, in such a case, necessary investment

would be made i n the new production and export f a c i l i t i e s which the
warld will need over the next decade, if the national o i l companies
operating for themselves and in competition with each other.
 I
SECRET 85

Propsed ? l C y s Ã

k t i o n which m a h t be taken by ccinpanies t o preserve t h e i r

positions i n international production.

1) Offer new production arrangemsnts t o OPEC, t o go i n t o e f f e c t

-1976

The conpanies should recognize that 1976 w i l l be the l a t e s t

they can hope to maintain their existing concessions without e s s e n t i a l

e. The end of t h e Tehran Agreement w i l l almost certainly see a

tun leap i n o i l prices and t h e governments of OPEC w i l l demand new

umy/gwemmsnt relationships i f they have not already done so.

l y the only way of r e s i s t i n g demands f o r p r i c e increases a t present
participation ffiis year o r next w i l l be to agree to work out a new

tionship with tile producing countries a f t e r 1976. This need not

s a r i l y mean a reduction i n company p r o f i t s o r a l o s s of control.

V s man giving the producing g w e m t s saw voice in the

-i~tqciiientof t h e o i l industry operating h i d e t h e i r borders.

2) Enlarge the composition of o i l producing companies

Most of t h e world's o i l production is in the hands of the seven

Â¥*$o
o i l conpanies, f i v e of which a r e American, one British, and
liritish/Dutch. The French have sane stake in Eastern Hemisphere

L"
I production, but barely enough t o cover t h e i r own needs. The

Â¥-ti o i l consumers, notably Japan, Germany and I t a l y , have long

q*tn_'d to control sane of t h e i r own productionl The companies

*mid seriously consider opening up existing c?ncessions t o
I

q n n i e s from a t l e a s t these three nations. For example, there

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could be an enlargemsnt of the consortium in Iran, o r KSP14CU in

Saudi Arabia. More acceptable to t h e conpanies would be new joint

ventures i n new areas. A qood example of this is t h e new Mobil/Japa~i

operation i n Iran.

. Specific Action (1) by t h e Department

The Secretary and the Under Secretary should c a l l the Chief

Executive Officers of t h e major o i l companies and of a sub-
s t a n t i a l nwber of t h e independents, outline our views on the
probable d e v e l o p n t s i n world o i l i n t h e next decade, outline
t h e action we plan t o take on t h e i r behalf (as described below)
and t e l l them we f e a r that our chance of success i n any
d i p l a m t i c demarches we make on t h e i r behal~fw i l l be srrall
i f they cannot soon inform t h e OPEC countries t h a t they w i l l
consider some new relationships a f t e r 1976. This of course
need not necessarily be participation i n t h e form currently
being discussed.
B. Action Taken by t h e U S in t h e United States on W a l f of the
Cornparues

1) Form an international petroleum advisory group

This could be similar to the National Petroleum Council, w l ~

advises the Secretary of the I n t e r i o r . It would advise the Secretary

State on international o i l matters and could meet periodically o r on

--
ad hoc basis. Depending on its function, such a group might require

Business Review Letter o r o t h e r form of approval by the Department of

Justice.
<',
.....~ p e c i f i cAction (2) by t h e Department

When t h e conpany executives are cal-led t o Washington f o r the

discussion on the f u t u r e of the industry, t h e Secretary o r the
Under Secretary should r a i s e t h i s matter. It has already been
discussed with a numbter of o f f i c i a l s who a r e enthusiastic.
An ad hoc amnittee A u l d be selected a t t h a t m e t i n g .
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, , e f j c Action & ) by the Depa~Wnt

ITic U . S . delegate t o the C i l C m t t e e should r a i s e again t h i s

nlt Lcr. He should propose a storage figure of 180 days but
prepc-red t o s e t t l e f o r 120 days, and i f t h i s is
W ~ i l dbe
bi[nssible, then the current 90 days --but based on forward
ajnwx?tion and effective stocks, i . e . , tank bottoms and o i l
In pirxilines s h o u l d n o t b e counted a s stocks.

6) A c c ~ l e r a t ethe develo&mnt of nuclear energy ~71thEuroipe

cind Japan

The U.S. should continue t o f a c i l i t a t e the development of

power on a broad f r o n t including t h e development of international

a#! and construction standards t o meet safety and environmental

brcn!ents and to simplify licensing and regulatory procedures. In

hcular, the U.S. should move forward with i t s international e f f o r t s

d c h m e n t cooperation a s well a s its dcmestic access program to

co t h a t i n s t a l l a t i o n of nuclear power plants e i t h e r domestically

dm~adi s not delayed by concern over an adequate supply of enriched

tun. The USG should take those actions necessary to put i t s e l f

w s i t i o n to construct new enrichment f a c i l i t i e s a s needed. This

require the resolytion within" the next two o r three years of

tnisnis f o r cooperation i n a multinational plant and/or pro-

nI3 f o r construction of additional plants i n the U.S. e i t h e r

r n government o r by private industry.

f r e c i f i c Action (9) by the Department

Hie Department should encourage t h e 'AdAinistration t o proceed

vigorously with actions to f a c i l i t a t e the construction of nuclear
iwer plants both donestically and abroad including resolution
i f licensing and regulatory procedures, environmental require-
mnts, design and construction standards and provisions f o r the
construction of additional enrichment f a c i l i t i e s domestically and
abroad to meet requirements f o r enriched uraniun.
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7) Maintain friendly r e l a t i o n s with producing governments

.....Specific Action (10) by t h e Department

Maintain the programs with Saudi Arabia and Iran described

i n Section X I V above. Continue the present U.S. Government
policy of trying to keep a balance in
our r e l a t i o n s with a l l
s t a t e s of the Middle East. A return t o an overtly, exclusivel
pro-Israel position vrould negate mast and probably a l l of the
other s t e p s the United States could take t o secure o i l supple

D. Action Taken by the U.% t o Increase Its Own S t a b i l i t y and Fie.

I n Dealing w i t h Producing Countries

1) Increase domestic supplies of o i l

This w u l d be done Jnter a l i a by:

(a) Giving titinediate leases on t h e outer Continental Shol'

In order f o r these leases beyond the 200-meter depth t o bo

consistent with the President's Oceans Policy Statemnt, 1 4

must be made subject to whatever international regime is

established by the United Nations Law of the Sea Conferen.

Connected with t h i s should be a new form of bidding based 4

exclusively on i n i t i a l bonus payments, which enable only w

companies to participate. Offers of new tax arrangements

o f f e r s to maintain spare capacity (this may be a requisiti 4f

bidding) could be considered.

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