Foreign Relations of the United States, 1969–1976, Volume XXXVI, Energy Crisis, 1969–1974

347. Memorandum of Conversation¹

Washington, April 10, 1974, 2–4 p.m.

• PARTICIPANTS
  • Peter M. Flanigan, CIEP
  • William E. Simon, FEO
  • Charles A. Cooper, NSC
  • William E. Hale, CIEP
  • William P. Tavoulareas, Mobil
  • H. J. Haynes, Socal

Messrs Flanigan, Simon, Cooper, Tavoulareas, and Haynes discussed current and future developments relating to the international oil market and the role of major international oil firms within it. The discussion and comments may be summarized, by subject, as follows:

The International Oil Market—General

Mr. Tavoulareas stated that high prices were a serious problem for the world economy, as well as for maintaining a good public image for the oil companies, and that prices therefore need to be reduced. The necessary condition for a price reduction must be a surplus of production, and to get a surplus will require extensive exploration in all areas of the world and adequate incentives for production. Mr. Haynes added that another indispensable ingredient in expanded production is a favorable political climate in producing countries, as the U.S. has begun to reestablish, for example, in Saudi Arabia.

The International Oil Market—Near Term

Mr. Haynes disagreed with the other participants regarding the speed with which a potential surplus of oil might emerge. There was agreement that a two million barrel per day excess of supply over demand would generate great pressure on oil nations to reduce the general level of oil prices. For such a surplus to exist, however, would require: 1) continuation of the reduction in demand for oil; 2) excess capacity in place; and, 3) the ability of oil companies to use the excess capacity. The last condition appears to be the most critical, since significant unutilized capacity already exists, particularly in Saudi Arabia.

Mr. Cooper inquired as to the effects of inventory buildups in “artificially” increasing demand. Mr. Tavoulareas stated that inventory acquisition had been a major component of demand in the recent past, but that current inventories in Europe were already enormous and could not physically be increased very much. Moreover, there were significant inventories at sea, particularly since tankers are now travelling at slower speeds. Mr. Haynes said that there was spare inventory capacity in Japan and the U.S., but that people were reluctant to buy for inventory now because they expected prices to fall in the future.

Role of International Oil Companies in Producing Nations

The consensus of the discussion was that oil concessions per se are increasingly meaningless from the standpoint of company operations. Rather, the companies are more concerned with the economics of their position, in particular regarding offtake agreements and profits. Increasing national control over concessions is meaningful in a political sense to the producing country, but it need not affect the profitability of company operations. For example, service contracting has worked well for Socal in Indonesia, as have the offtake rights the companies possess in Iran. Increasing nationalization of companies is a concern only to the extent that it affects economics, leads to competition for better conditions among producing states, and entails inadequate compensation for expropriated property.²

The ability of companies to secure satisfactory economic terms depends upon the value of the services they provide to the producing countries. One of the most valuable services, and one that is difficult to provide in other ways, is exploration. Both Libya and Algeria, for example, have been most concerned about maintaining exploration by using the majors. The international oil companies have proven indispensable in exploration not only because of their technical skill, but also because they remain willing to take large risks in exploration. In fact, exploration by the majors remains strong in high risk areas outside OPEC, as well as within it.

Other international company services that cannot easily be duplicated by national oil companies are distribution, refining, and marketing. In all these areas, international companies have proven essential. Production of reserves already developed, and transportation, are two areas of the oil business where producing country nationals can be expected to become more active in management.

Role of International Oil Companies in Consuming Nations

In consuming nations the major oil firms serve valuable roles as sources of crude, refiners, distributors, and guarantors of supply in times of crisis. In certain consuming nations (e.g., UK and Norway) the majors are also indispensable in exploration. The most explosive political issues recently have involved alleged diversion of crude, and conspiracy in raising prices and reducing competition. Despite these criticisms, the operations of the majors are in relatively little danger of becoming uneconomic. The possibility of marketing takeovers is remote or non-existent; moreover, national oil companies are not making significant inroads into market shares, even in Italy or France. Finally, government-to-government bilateral arrangements are becoming much less attractive to consumer governments due to the high prices such deals entail and the lack of adequate assurances that bilateral oil purchases are any more secure than ordinary oil purchases.

Mr. Tavoulareas and Mr. Haynes indicated that they appreciated the opportunity to express their views, and they urged that the U.S. Government assist them in explaining their roles and functions to the public here and abroad.

1. Source: National Archives, RG 429, Records of the Council on International Economic Policy, 1971–77, Central File 1972–77, Box 54, File 53508, Memcon major oil firms. No classification marking. Drafted by Hale on April 17.
2. Both Tavoulareas and Haynes received a copy of the memorandum of conversation. On April 24, Tavoulareas responded to Flanigan that nationalization “is a most serious detriment” to the “stability in contractual arrangements” necessary for growth in world trade. He added that unilateral nationalization should be discouraged and that “a history of nationalization creates an unfavorable climate for further investment.” (Ibid.) In an April 22 letter, Haynes wrote Flanigan that he took “strong exception” to the statement that nationalization was only of limited concern. (Ibid.)