Foreign Relations of the United States, 1961–1963, Volume IX, Foreign Economic Policy

355. Memorandum of Conversation⁰

Washington, July 20, 1962.

SUBJECT

• OPEC Resolutions; U.S. Oil Imports

PARTICIPANTS

• Mr. Leroy D. Stinebower, Treasurer, Standard Oil of New Jersey
• Mr. George Pearcy, Exec. Asst. to the Pres., SONJ
• Department of State:
• E—Mr. G. Griffith Johnson
• E—Mr. Nichols
• E/ES—Mr. Jospeh Coppock
• FSE—Mr. Kannenberg

Following general remarks on the world oil situation, in particular worldwide surplus productive capacity, the conversation was steered to the recent OPEC resolutions.¹ At Mr. Johnson’s request the visitors gave what they asked be clearly understood as preliminary impressions.

Mr. Stinebower said two things occurred to him: first, it was understandable that the OPEC member countries should be seriously preoccupied with their own “take” and their related concern with the price question; second, that the companies obviously have no objection to higher prices but this is unrealistic in view of the world oil surplus.

Mr. Pearcy said it was obvious that the August 1960 reduction in posted prices, in which his company took the lead, was the critical action leading to OPEC. Looking back, it was a questionable step politically, but seemed fully warranted at the time if posted prices were to bear any close relationship to the market. He added that the price cut was only a step in the direction of reality and reflected only a part of the discounts then prevailing. He then alluded to the inequities resulting from the present freeze in posted prices. Kuwait, with low gravity (low value) crude enjoys a better relative price as compared with Saudi Arabian higher gravity (higher value) crude which finds itself at a price disadvantage. On the restoration of prices to the pre-August 1960 level (the cut averages 8# per barrel throughout the OPEC countries), he said this was patently impossible from a commercial viewpoint; also the companies cannot talk price with OPEC because it is: 1) bad business, and 2) prohibited by anti-trust restraints. He cited the dissatisfaction of Western European governments that most of the oil profit is taken in the producing countries and leaves a narrow margin of profit (in some cases no margin) as a tax base for European refining and marketing operations.

Between them, Messrs. Stinebower and Pearcy made the point that the OPEC resolutions on royalty are so vague that they preclude any judgment now. Perhaps preliminary talks between OPEC and company spokesmen will better define their real objectives. Mr. Pearcy thought the resolution on elimination of marketing expenses presents “no great problem”.

In response to Mr. Johnson’s question as to whether OPEC “had teeth in it”, Mr. Pearcy replied that it will certainly have to be taken seriously and speaking for himself (not for his directors) he felt some accommodation could be reached but it would take a lot of time, a lot of talking and a great deal of patience on the part of the companies and the OPEC negotiators. Hopefully, he said, these talks might lead to a durable, mutually tolerable regime. He added that we should not overlook the fact that Venezuela would stand to gain a great deal in relative competitiveness should either of the major resolutions be implemented. He suggested that this may be clearer to the Venezuelans than to the Persian Gulf countries.

Mr. Johnson asked if the visitors thought we (the U.S. Government) should have plans to counter the OPEC thrust. Mr. Stinebower said he did not personally feel that the Middle East agreements were so sacrosanct that the companies should not be willing to discuss them. He revised the history of the Iranian nationalization and the extent of U.S. Government involvement which had led to a solution. He felt that any U.S. Government initiative, if it should in time prove necessary, would have to first await the developments resulting from company-OPEC talks. (As a historical footnote he referred to the December 1958 increase in the Venezuelan income tax, adding that while this step was unassailable legally and technically, it was now evident that this made Venezuelan oil less competitive and made Venezuela much less attractive for large scale investment. He hoped this point would not be lost on the OPEC members.) Mr. Pearcy, in speculating on what the companies might settle for, said it was his own view that the companies in general would like to reach a “peaceful plateau” if this were a durable and financially tolerable solution. The present system is so bound up in rigidities that something has to give in some direction. In response to Mr. Johnson’s question as to the negotiating strength of the companies, Mr. Stinebower replied that it was great. The greatest danger, to the companies and to the Western world, in his mind was a suicidal wave of expropriation to which there is no rational counterforce.

On the question of an international oil agreement, Mr. Nichols said this presented a dilemma. On the one hand, it is clear that we lack an overall coordinating mechanism; but on the other hand, could this be done by governments in a workable and generally beneficial form. He was inclined to think it probably could not. Mr. Stinebower said that the history of international commodity agreements was pretty sad; even those that had worked, had done so very lamely. Mr. Johnson added that where they had worked one important producer had had to be willing to accept a residual market position.

The conversation turned to U.S. oil imports. Mr. Kannenberg mentioned that the issue of more or less imports (or perhaps the same level) was likely to be up for decision soon. Mr. Pearcy said Jersey of course thought residual fuel oil should be decontrolled. The crude oil question was more difficult because of Humble’s leading position in the domestic market, but that Jersey would not publicly support any more restrictive program than now exists.

At the conclusion of the meeting Mr. Johnson said the talks had been most helpful to him and he hoped we could continue them. He said we should follow the OPEC developments with much care. Mr. Stinebower agreed and said he (or his associates who are following this very closely) were available on a moment’s notice and would keep the Department informed.

0. Source: Department of State, Central Files, 800.2553/7-2062. Confidential. Drafted by M. Hollis Kannenberg (E/OR/FSE).
1. See footnote 2, Document 354.