886A.2553/8–553
No. 305
Memorandum of Conversations, by the
Deputy Assistant Secretary of State for Near Eastern, South Asian,
and African Affairs (Jernegan)
Subject:
- New Attitude of Arab States Toward Foreign Oil Companies
Participants:
- Mr. R.G. Follis, Chairman of the Board of Standard Oil Company of California
- NEA: Mr. Jernegan
Mr. Follis said that his Company was deeply concerned about recent trends in the attitudes of the Arab States, specifically Saudi Arabia, toward the foreign oil companies operating in the region. He believed the action of the United States Government in bringing an anti-trust suit against the companies had caused the Arabs to look at the companies in a new light. Whereas formerly they had treated them as more or less ordinary commercial enterprises, they now tended to think of the companies as a powerful cartel which conspired to rig all petroleum matters in its own interest and threatened the sovereignty of the producing states. The Arabs took the line that if the United States Government itself made charges against the American companies, these charges must be true and the Arabs were therefore fully justified in taking any action, even including nationalization, necessary to protect their interests against this nefarious combine of economic imperialists.
[Page 702]Aramco, Mr. Follis said, was accustomed to being criticized by one group in Saudi Arabia which had always been hostile, but it was greatly worried by the fact that those who had in the past been its friends were now turning away and saying that they could no longer support the company in the face of the statements and actions of the American Government. He referred particularly to the Federal Trade Commission report and the anti-trust suit. He pointed out that the Arabs did not distinguish in their minds between a criminal suit and a civil suit and in any case were not interested in the punishment or lack of punishment of offenders against the laws of the United States but rather in the evidence produced by the United States to show that its own companies had been conducting themselves improperly.
To correct this situation, Mr. Follis thought the ideal would be a cancellation of the anti-trust suit. He recognized, however, that this was probably politically impossible for the Administration. It was, nevertheless, essential that the United States Government do something, he could not suggest what, to reestablish the credit of the companies in Arab eyes and minimize, if not eliminate, the impression that a cartel in fact existed.
In addition to the new critical attitude of the Arabs toward the companies, Mr. Follis emphasized the danger presented by the new Arab tactic of consulting together to form a united front against the companies. Whereas in the past each Arab state was probably deterred from pushing matters too far because the companies could, as in the case of Iran, make up production losses in one country by increasing production in another, they were now beginning to realize, he feared, that if they all acted together they could exert tremendous pressure. The West simply could not afford to lose the whole of Near Eastern production.
Aramco was about to embark on a new series of negotiations with the Saudi Arabian Government with regard to prices and, for the first time in the history of the concession, the Company was not confident of its ability to reach a reasonably satisfactory agreement. Even if agreement were reached, it was not confident that this would settle anything. It was quite likely that the Saudis would soon come forward with further demands.
This general picture led Mr. Follis to believe that in the future it was going to be necessary for the American Government to take a very active role in the Near Eastern oil situation and give more direct support to the oil companies operating in that region. I observed that I was sorry to hear him say that, not because the American Government would hesitate to defend the interests of American enterprises but because at the present time it was extremely difficult to give effective support in this kind of a problem.
[Page 703]With regard to the problem of restoring the credit of the oil companies in the minds of the Arabs, I said I appreciated the problem and that we would continue to give it attention but I did not see clearly what we could do.
Regarding the danger of a united Arab front and nationalization of oil holdings, I said we knew that the Arabs were in fact consulting together more closely than in the past but I had seen little or no indication of an immediate danger of nationalization in any of the Arab States.
Mr. Follis brought up the Iranian case and observed that he thought it was probably fortunate that no settlement had yet been made. If a settlement had been achieved on the basis of proposals previously put forward, he feared it would have wide-spread repercussions in the other producing countries. This was not because of the competitive effects of a reintroduction of Iranian oil into the world market but rather because the Arab States would see that Iran had successfully nationalized and still been able to make a profit from its oil resources. I suggested that the safeguard against this type of danger might be for the companies to so conduct themselves that the Arabs would see that they were getting greater benefits from the present type of arrangement than Iran could attain from taking over its own industry. I pointed out that it was most improbable that any sort of Iranian settlement would enable Iran to get profits equal to those now being received by the Arabs. Mr. Follis agreed this was the case so long as each country was acting by itself, but if they joined together in a common front against the supposed oil cartel they would then consider themselves able to exact whatever terms they liked and make it impossible for any one of them to be shut out of the world market. The Iranian example would serve as a deterrent only so long as the Arabs considered the companies might be able to make up a deficit in one country by increasing production elsewhere. As he had pointed out previously, this would not be the case if all Near Eastern producers were banded together.
In a conversation later today with the Acting Secretary, Mr. Waugh and Mr. Jernegan, Mr. Follis took the same line. General Smith expressed his complete understanding of the situation and his regret that the Federal Trade Commission report and anti-trust suit had produced the present state of affairs. He said that the Department of State, and he himself when he was head of CIA had foreseen these dangers and pointed them out at the time the decision was made to release the FTC report and institute the suit. He was afraid that the effect had been even worse than anticipated. The problem, however, was what to do about it. It would be almost, if not entirely, impossible for the President to call off the suit since [Page 704] that would involve over-riding the judgment of competent lawyers in the Department of Justice that there had in fact been violations of the anti-trust laws. Mr. Follis said he fully understood this. He wondered, however, if it would not be possible to conduct the case with a view to producing a minimum of unfortunate repercussions. Both General Smith and Mr. Waugh expressed great doubt that adverse publicity could be avoided once the case came to trial.
In the course of the conversation reference was made to the suggestion advanced last year that a governmental commission be set up to study the whole international oil picture with a view to substituting some form of continuing governmental control for the present anti-trust proceedings with regard to operations in the foreign field. General Smith said he would be glad to consider this suggestion. He would be willing to talk with Attorney General Brownell about this or any other procedure which would be politically possible and would get us out of our present dilemma. However, he would have to have some sort of definite proposal to make and he asked Mr. Waugh and Mr. Jernegan to make a study with this end in view.