Foreign Relations of the United States, 1964–1968, Volume XXI, Near East Region; Arabian Peninsula

19. Paper Prepared in the Department of State¹

Washington, February 8, 1967.

NEAR EAST OIL: HOW IMPORTANT IS IT?

Current Assessment

The demand for Middle East petroleum will continue to increase for the next several years. The annual percentage rate of growth will gradually decline by 1970, however. The essential aspect seems to be that we and our allies must continue to have reasonable access to area oil supplies at reasonable cost in the decade ahead.

Simple statistics on Middle Eastern oil can only be defined as staggering. Some of them:

• —The area contains 2/3 of the Free World’s oil reserves, and provides over 1/3 of its current production.
• —Production costs are roughly 1/10 those in the U.S.
• —The area supplies over half of Western Europe’s oil.
• —Over 85% of Japan’s oil comes from the Persian Gulf.
• —Area oil production has increased from 1.3 million barrels per day in 1948 to over 9.5 million b/d at present, for an annual growth rate of 12%. The significance of the Middle East as a petroleum supplier was comprehended relatively slowly, since world demand for petroleum has increased more rapidly and to a higher level than was predicted. The area’s productivity was also underestimated. Development of sources of energy other than petroleum—such as atomic energy—has proceeded more slowly than was expected, and development of sources of petroleum other than the Middle East has so far failed to diminish significantly the Middle East’s primacy.

Nevertheless, the absolute dominance of the pattern of supply by the Middle East to Western Europe is decreasing, as newer oil sources are factored into markets by the producing companies. This is a trend favorable to European security, since the lessons of 1956 disruptions were not lost on Western Europe. Production in Libya, for example, in late 1966 reached the level of a major Persian Gulf producer and actually surpassed Iraq’s output, owing to the cut-back in Iraqi production because of Syrian blocking of the pipelines. Algeria and Nigeria have also become major suppliers to Europe, and Nigeria has the potential to become a Middle East scale producer. Intensive exploration of the Northwest European-North Sea gas fields is being pressed forward. Soviet oil is being bought in increasing quantities by several European countries. On the other hand, the Middle East producing countries are exhibiting signs of becoming more responsible and even more conservative in their relations with petroleum operators so as not to interrupt the flow of royalties and taxes from their oil production. The blow of the Mossadegh Madness to the Iranian treasury in 1951-54 was not lost on the other producing states, nor is Iraq’s current loss of $630,000 per day because of Syria’s closing of IPC pipelines unnoticed by other area oil suppliers.

The USG’s world-wide military commitments—including those in NATO, Viet-Nam, and general patrol operations by the Sixth and Seventh Fleets—require heavy reliance on Mid-East petroleum for both ourselves and our allies. No amount of effort could replace Arab-Persian oil in the Western European market within a reasonable length of time and for a reasonable cost. More than 60 per cent of our POL requirements in Viet-Nam are being met from the Persian Gulf. More than half of the Sixth and Seventh Fleet fuel supplies come from the area. Without Persian Gulf oil, production facilities of the US would be strained to the utmost to supply our military forces, and the cost would be upped about 150 per cent. (US oil reserves are being consumed rapidly. About one-fifth of our consumption is being imported now, and the percentage is increasing. Recovery of oil from shale and tar sands is technically feasible, but costs will be high and large investments will be required at a time when cheap petroleum could be brought from the Middle East in great quantities. Thus, the Persian Gulf area is a prolific potential future reserve for the US itself.)

Strategic significance of Mid-East oil aside, the financial aspects are of prime importance. US companies have invested $2.75 billion in the area, and from this investment $750 million in profits flows back to the US annually. About 93 per cent of the US investment in the Middle East is in the oil industry. In addition, US companies have enormous investments in downstream operations—tankers, terminals, refineries, bulk plants—that would have to be re-programmed, modified, or abandoned if access to Gulf oil were denied.

The Soviet view of Mid-East oil is difficult to assess as a whole. However, the commercial sales of Soviet oil, at costs in the West well below those charged East European states, suggest that the USSR expects to be competitive in the oil market place. It has been presumed that the Soviets would exploit difficulties that companies and host countries might encounter in mutual negotiations and operations, yet the evidence of significant Soviet activity in this connection is limited. The long-feared drive of the Russians for Mid-East oil is a restrained one if it is, indeed, an actual, sustained one. On balance, it appears that the oil producing states will continue for the foreseeable future to be greatly dependent on the West for marketing their oil. Nevertheless, we have attempted to inhibit the significant political penetration of the USSR into the Persian Gulf area.

Some Alternatives

1. Our continuing and mounting problems in the area may be leading us into situations that can be so costly in money and strategic risks that the USG and its allies should embark on virtually a crash program to obtain fuel energy from other petroleum areas and from other sources of energy (atomic power, coal, oil shale, tar sands). We could then loosen political relations with the Mid-East producers and permit US companies to coast along for the life of their concessions, meanwhile expanding their production elsewhere.

2. Perhaps a more feasible course would be to strengthen our political ties with Iran and the Arab Middle East countries, play down our relations with Israel, and protect our fortunate access to the prolific oil resources of the area. We would hope that the countries themselves would continue to grow more responsible, interdependent among themselves, and interdependent with the West—which is, after all, the market for Mid-East oil.

3. We could focus on two or three of the most prolific producers and more friendly states—perhaps Saudi Arabia, Kuwait, and Iran—and maintain minimum contacts with the other producers. Studies have shown that the West can stand loss of output from one or two major Mid-East producers but not three or four.

1. Source: Department of State, NEA/ARP Files: Lot 69 D 350, POL 2a, Briefing Book Materials, Middle East, 1967, Meeting of NEA Advisers. Confidential. Prepared in the Office of Saudi Arabia, Kuwait, Yemen, and Aden Affairs, Bureau of Near Eastern and South Asian Affairs. No date appears on the memorandum; the date used is the drafting date. This paper was one of ten staff studies prepared for a panel of outside academic advisers scheduled to meet with NEA officers for a Near East Policy Review, February 10-11.