Foreign Relations of the United States, 1964–1968, Volume XXXI, South and Central America; Mexico

533. Telegram From the Embassy in Venezuela to the Department of State¹

Caracas, January 12, 1966, 2131Z.

700. 1. All but last paragraph Deptel 554² read in translation to MinMines Perez Guerrero this morning.

2. Perez clearly not impressed by balance of payments argument, pointing out that Venezuela also has its own budgetary problems which created by steady decline prices petroleum and products. He was sympathetic, however, to the argument regarding internal price stability. While admitting that the new program would inevitably involve price increases, he repeated previous assurances of flexibility in application designed not only to meet problem of competition but also to avoid excessive consumer impact. He again expressed belief that this could be facilitated by elimination excessive and unnecessary intermediary discounts and profit margins.

3. Perez conceded that many American consumers, particularly in New York area, were considering changeover to alternate fuel sources and that present measure might accelerate this process, but felt that this disadvantage far from adequate to outweigh numerous other advantages to Venezuela of program. One important factor in decision was anticipation of price decline due to enhanced competition resulting from first easing and then elimination of fuel oil import quotas. Since companies themselves could not prevent such a decline due to

U.S. anti-trust laws, felt necessary for GOV to establish new discount procedure and thereby prevent price deterioration. Second and perhaps even more important, was the need to demonstrate to the Venezuelan people that the GOV had a clear policy to protect Venezuela’s interests and knew how to apply it. Failure to take this or similar “reasonable” measure would have inevitably given clear field to proponents of more radical solutions to the petroleum problem, such as currently proposed increased taxes on “excessive petroleum profits” and even limitation of fuel oil exports to the U.S. While the measure taken was emphatically not in retaliation for the failure of petroleum negotiations, it was considered the most reasonable manner of facing up to the problem created by failure of the negotiations. He repeated this political argument a number of times.

4. With respect to our complaint regarding lack of prior consultation, Perez pointed out that we had not been distinguished for our prior consultations with Venezuela and inquired what would have been our position if Venezuela had consulted. He answered this by saying that we would undoubtedly have opposed the projected measure and that Venezuela would have been forced to go forward in the face of such opposition. He conceded my point that we might have been able to work out a solution with which both parties could live, but emphasized the impracticability of such talks in view of the danger of leaks and the limited time available.

5. It was made quite clear by Perez, in view of the foregoing, that there was no chance of reconsideration of the new discount policy but he did give assurances that all possible, consistent with Venezuela’s “legitimate” aspirations to protect its own interests, would be done to ensure reasonable, intelligent and moderate application of variations from the 10 percent discount which was termed only as a point of departure, depending on conditions in the various consuming markets. In this regard, Perez argued that the Venezuelan aspiration for a price increase in fuel oil, with 1958 prices as the point of departure, was not unreasonable. Although the dols 2.00 price that year followed the Suez crisis, prices of manufactured products purchased by Venezuela have risen considerably since that date, whereas non-U.S. crude and fuel oil prices have steadily declined. Taking into consideration price inflation during the past seven years, it seemed to him that the Venezuelan program was quite reasonable and just. He emphasized that Venezuela has steadily been suffering from price increases arising from the increased prices of U.S. products attributable to wage increases as well as U.S. inflation, and did not see why the U.S. could not accept Venezuela’s attempt to protect its own position.

6. Perez said that he expected to be in New York City January 18 and 19, and in Washington January 20 and 21 on business involving the World Bank and the International Monetary Fund in connection with a study on Libya. He was instructing Perez de la Cova to suggest a luncheon or other meeting with USG officials at which time this problem could be discussed further.

Comment:

7. What Perez told me today was essentially similar to what he had told me January 4 and reported in this Embassy’s A–530³ of January 8 which was presumably received in Washington on January 10. I did not believe then and I do not believe now that it would be practical to expect any reconsideration of the GOV action. I do, however, feel that our talk today and talks to be held in Washington next week should make more likely implementation of the announced intention of the GOV to apply the program with minimum danger to the competitive position of fuel oil and to the price structure.

8. Having in mind the politically sensitive position of the GOV on petroleum, increased jockeying within and between the various political groups in anticipation of the ‘68 elections and gov preoccupation over the inadequacy of government revenues to finance its politically important social and economic programs, it does not seem realistic to expect any more. Our strongest cards today are the Venezuelan hope, however remote, of an eventual breakthrough on restrictions and the special position accorded Venezuela among petroleum producers on capital movements from the U.S. Our vulnerabilities are illustrated by the new policy on fuel oil prices, large U.S. investments and sizeable Venezuelan Central Bank dollar deposits.

9. Although Perez Guerrero intimated that his government’s action on residual fuel oil and claims for back taxes attributable to inadequate export prices would forestall more radical measures, I am not optimistic regarding the future. It seems to me and also to petroleum producers here that efforts toward increased taxation are most likely, if only because of the government’s budgetary problem, and that the petroleum industry will be one of the prime targets.⁴

Bernbaum

1. Source: National Archives and Records Administration, RG 59, Central Files 1964–66, FN 10 VEN. Secret; Priority.
2. In telegram 554 to Caracas, January 11, the Department instructed the Embassy to “convey at high level USG concern with recent action taken by GOV concerning residual fuel oil,” following the recommendations outlined in Document 532. (National Archives and Records Administration, RG 59, Central Files 1964–66, PET 17–1 VEN)
3. Not printed. (Ibid., FN 10 VEN)
4. In a January 14 letter to Hill, Bernbaum emphasized that “retaliation by US would aggravate the Venezuelans—certainly this would be the case with an open kind of retaliation. And, I am afraid that the political importance of this issue is so great in Venezuela as to make it more likely that irritation here will be accompanied by further retaliation than by back-tracking on positions already taken.” (Ibid., FN 11 VEN)