TOWARDS the end of the recent war, the American government and people became greatly alarmed over the inadequacy of their future oil supply. Vigorous and startling measures were taken for the purpose of assuring full access to and development of foreign supplies--especially those in the Middle East. This was the stimulus for an earlier attempt of mine to formulate the main elements of a national oil policy.[i] Every element and aspect of the problem has changed in the interval, necessitating another close look at the problems of policy in front of us in this entangled field.

When the first essay was written, our experience was again proving how great a volume of oil was needed to fight a war, and how vital a factor it was in victory or defeat. We were worried over the chance that the oil reserves within the United States were about to dwindle while the demands upon them would increase. Important changes in the international situation were forecast. The balance of power between nations was about to become distinctly different than before the war. The spirit of nationalism and the wish for independence among many dependent countries and peoples were becoming stronger. The political control of parts of the world in which huge oil deposits were located (especially in the Middle East and Far East) was about to be freshly decided. Along with these impending changes there was a high expectation that the future relations between the large victorious Powers would be amiable and that they would be jointly directing a system for the maintenance of peace.

The situation concerning oil and oil reserves has since become easier. But in contrast the political and military prospects that must be taken into account when formulating and directing official policies having to do with oil now appear more grim. The United States, along with many other nations, is engaged in a harsh and crucial struggle against the group of countries with Communist attachments, led by the Soviet Union and Communist China. Whether this will gradually subside or eventuate in a vast war no one can foretell with certainty. Meanwhile, we and our associates are compelled to maintain military organizations and arrangements of great scope; and to be perpetually on the alert, ready to meet any crisis, anywhere, swiftly. The possible speed and range of military action have increased; the destructive power of available weapons has grown almost beyond computation; and an adequate supply of oil, properly located, has become even more vital both for effective defense and attack.

II

In this last ten-year interval we have continued to use oil with prodigality. It was large in 1945 when we used about 1.7 billions of barrels, over 12 barrels per person; but by 1953 our consumption had grown to 2.7 billion barrels, almost 17 per person. There is every reason to think that the rate of use will continue to increase, perhaps a little more slowly if we remain at peace, unpredictably if we go to war. A total domestic demand for between 3.5 and 4 billions of barrels ten years hence can be foreseen.

Production within the United States has responded more abundantly to the ascending need and demand than was expected. Domestic crude oil production rose from about 1.7 billions of barrels in 1945 to almost 2.4 billions in 1953. This was supplemented by a growing amount of oil produced from natural gas; and the utilized production of natural gas, a complementary fuel, also grew and even more rapidly. It is expected to continue to do so.

American oil production could and would have been still greater had more been required. Our production is being restrained by a combination of measures, public and private. Except for these, current outflow from drilled wells would, it is estimated, be some 10 or 15 percent greater than it is--with little additional effort. Stocks are at record high despite these restraints on production. This increase of quickly available oil supplies has been in accord with, and partly in response to, the urgent wish and request of the government. The margin is certainly not too large for national safety; it could wisely be further enlarged. But the maintenance of such a substantial margin both of shut-in oil and of stocks creates problems for all branches of the oil industry and is a complicating consideration in the determination of our policy towards imported oil.

The well-sustained American production was due to a combination of causes which were more effective than had been foreseen. Three in particular brought about the growth: the intensified effort and expenditure; improvement in the methods of finding oil and of extracting it from the ground; the discovery of new fields.

Year by year the number of new wells drilled increased, from about 31,000 in 1940 to over half again as many by 1953. The number of flowing wells has similarly increased. However, it is to be observed that the percentage of failures--of dry holes among those drilled--has tended to grow. But it is too soon to know whether or not this means that the search for new resources is about to become harder and costlier.

Anyhow, there is general agreement that the known and proven remaining oil reserves in the United States are now, contrary to former fears, substantially greater than ten years ago. In this interval they have expanded about as fast as current consumption. Statistically they are estimated to have increased from about 20 billions of barrels in 1945 to about 28 billions of barrels at the end of 1952. Relative to the rate of current consumption, this known reserve has risen from about eleven and one-half years' supply to an estimated twelve and one-half years' supply. It is pertinent to note that during this same period proven domestic reserves of natural gas have been similarly increased. The use of this product for purposes in which oil would otherwise be consumed is extending, thereby easing the situation both currently and prospectively.

Then, too, the technical and manufacturing knowledge for producing oil products from oil shale deposits has become adequate and tested. These deposits in the United States are immense. They could be converted into oil products at a cost not very much higher comparatively than production from natural crude or natural gas. But the investment and diversion of labor and materials required would be huge. It is best to regard this resource, as the industry and government does, as an ultimate reserve.

In the near prospect, more active interest attaches to two comparatively unexplored possible reserve areas on which large-scale operations are under way: 1, the oil-containing areas of Canada; 2, the off-shore and open-sea deposits. These may be very great if economical ways and means can be devised to draw forth the oil.

In sum, the American oil situation is more secure and dependable than it was thought to be ten years ago. But no less clearly there is still an imperative need to make sure that the drain on domestic reserves does not exceed our experience in discovering and maintaining new domestic sources of supply.

III

The demands upon our own reserves and production have been moderated by imports. These, as expected, have been increasing in greater ratio than consumption.

The course of imports of crude oil--one of the two main components of the import movement--is shown by the fact that while in 1945 they were only 4.2 percent of the total domestic supply, by 1953 they had increased to 9.1 percent of the greatly enlarged total. Various factors and conditions, some basic and permanent, some transient or variable, have operated to stimulate this rise in crude oil imports. Two basic ones are the fast growth of low-cost production in foreign lands--particularly Venezuela and the Middle East; and the lower transport costs, brought about by pipeline construction, the use of larger and more economical tankers and more efficient marine terminals. These have been supplemented by the need of various European countries to save dollars. This has impelled them to rely more on imports from the Middle East and less on imports from the Caribbean, thereby increasing the volume of Venezuelan oil for which there is no satisfactory market except in the United States. It has been sustained by various curbs and regulations within the United States which check the well-flow and transport of domestic crude but allow the American refiners to operate freely. The firmness of the price of domestic crude, sustained by official action, has induced import; if it were more flexible, there might be less stimulus to import.

But it is the other large component in our imports of oil which has risen more rapidly, the imports of heavy fuel oil (a residual refined product) coming almost entirely from the Caribbean. The inward movement of this fuel oil has increased from 6.6 percent of American production in 1945 to almost 30 percent recently. Still the impact on the domestic oil production and refining industry is comparatively small, for the imported production is complementary to American oil production rather than competitive. It is more cheaply produced from low-gravity crude, little of which is available east of the Rockies, while the chief demand for it is on our Eastern seaboard. Since this heavy fuel oil brings a smaller financial return from the crude used in other products--since, in fact, it usually sells at a lower price than crude--American refiners by and large prefer to make other products. Its main uses are in industrial, electrical generating and heating plants and in ships. Were the imported supply not available, it is probable that other fuels--coal and natural gas-- would be mainly used instead; their cost would be higher. The American coal industry is at present protesting against the increase of this type of imported oil. However, among the conditions which are adversely affecting the domestic coal industry this is, I believe, secondary; and to reduce imports severely by quota would bring it only small and transient relief.

IV

We are still important in the world oil situation but no longer supreme. Though our production and reserves have, as stated, continued to grow, their advance has been slower than the expansion in foreign sources of supply. Under the impetus of American and British oil companies and the incentive of maintained prices other countries have been catching up with us. The comparative change during the past ten years may be grasped at a glance:

 

PRODUCTION OF CRUDE OIL
(Billions of Barrels)
        Approximate
  United Foreign Total U. S. Percent
  States Countries World of Total World
        Production
1945 1.7 0.9 2.6 66
1947 1.9 1.2 3.0 63
1949 1.8 1.6 3.4 53
1950 2.0 1.8 3.8 54
1952 2.3 2.0 4.3 54
1953 (est.) 2.4 2.1 4.5 53

The rising portion of foreign oil in the total of world production reflects with a strong lag the rate of discovery of foreign resources--particularly those of Venezuela and the Middle East. Ten years ago the immensity of the underground deposits in these two areas was being grasped by expert minds; today it is established by exploration and development; and future experience is likely to lead to still more upward revision of the quantities available.

 

ESTIMATE OF PROVEN RESERVES, U. S. AND FOREIGN,
AS PREVIOUSLY AND AT PRESENT
(Billions of Barrels)
  U.S. Foreign Total World Approximate
  Reserves Reserves Reserves World Total
        World Total
1945 20.5 30.7 51.2 40
1950 24.6 51.8 76.4 31
1952 27.5 76.2 103.7 26
1953 28.0 90.7 118.7 24

This record of foreign production and proven foreign reserves is firm enough to justify the dismissal of all fears of a serious and prolonged oil shortage in the world as a whole. The job on which the American oil industry and government vigorously launched out some 30 years ago--to assure a great enough world oil supply to take care of the growing needs of the United States and the rest of the world--has been accomplished. There will long, if not always, be enough for all at all times.

But this promised amplitude of resources underground somewhere in the world is not in itself a guarantee that the United States will always get all the oil it needs even in peacetime. That will be assured only if production is not seriously interrupted, if we have adequate means of payment, if world trade is not greatly confined by political influences. And if in the event of war we have the power and the means to retain access to the needed sources of supply.

V

A few main facts will suffice to indicate the spectacular rate of development in the Venezuelan and Middle Eastern oil fields.

Venezuelan production has increased to almost 15 percent of the world total even though the Venezuelan Government has not for years opened any new areas for exploration and development. The portion of its exports in the total international movement of oil is much greater.

In the Middle East the course of discovery and development has aroused awe, almost consternation. The 120,000,000 barrels produced in that area in 1939 are to be compared with 800,000,000 barrels or more produced in 1953; and this despite the fact that since 1951 there has been no production in one of the large sources, Iran. The outflow of all the main Middle Eastern centers could be substantially enlarged by drilling a very small number of new wells, and of several merely by turning valves. The production in Sa'udi Arabia and the Kuwait-Sa'udi Arabia Neutral Zone is nowhere near its potential easy flow.

The known proven reserves are now quite large enough to meet any future call. Estimates current in 1940 of 6 billion barrels and in 1950 of 32 billion are now in excess of 65 billion. This is half again as great as those believed to exist in the Western Hemisphere, and substantially more than half of those known to exist in the world. The abundance is matched by the cheapness of the physical cost of production. The initial costs of locating the oil, drilling for it, transporting it, and refining it--i.e. of getting a large development going--have been high; but once going, the oil is had at an extremely low cost. While each live well in the United States has, on the average, been yielding between 11 and 13 barrels a day, in Venezuela the yield is about 200, and in the Middle East about 5,200.

To summarize: the resources of the Middle East are large enough, good enough and expansible enough to provide the whole world outside the Western Hemisphere and the Soviet Union with all it may want--and with enough left over to meet any demands of the Western Hemisphere and the Soviet Union. The pertinent and hard problems are ones of human behavior, and they are turning out to be manifold. Among them are the settlement of terms for production and sale; the division of the yield among producers, local governments and consumers; the achievement of satisfactory and stable political conditions throughout the area; protection of the oil properties against conspiracy within and enemies without.

VI

Ten years ago the fear that American oil interests would be refused favorable share of participation in Middle Eastern resources was still lively. But now it is past. The American companies own a very large share of the right to produce and of the production in the area. This extension of American control is economically important. But in ordinary times almost all of the oil produced, irrespective of the nationality of the company which controls it, is available on roughly equal or similar terms to buyers of all countries; and in times of war or emergency, political circumstances and military power are apt to determine who gets access to the production.

Except for one recent entrant (in the Kuwait-Sa'udi Arabia Neutral Zone) all oil operations in the Middle East are divided among seven great international oil companies (and their subsidiaries and combinations). The Royal Dutch Shell and Anglo-Iranian are under British control, the Standard Oil of New Jersey, Socony Vacuum, Standard Oil of California, the Texas Company and the Gulf Oil Company are American. In practice one company or combine is dominant in the production of each of the separate Arab realms.

This group of companies, American and British, are in some ways associates, in others competitors. For business reasons they show regard for each other and usually avoid extreme competition. But even those which are joined together in the ownership and control of an enterprise may have divergent interests in regard to it--bearing on such matters as the amount of new capital to be provided, dividends, the amount of oil to be produced, markets to be sought. Often there is an uneasy truce in the sharing of markets, and in some of them active competition and rivalry. The governments of many importing countries also in one way or another influence, regulate or enforce their competition.

Each of the individual national states of the Middle East tends to press the company which operates in its territory to expand production, irrespective of the effect on other producing companies. This is one of several courses, geological, political and financial, which will continue actively to stimulate expansion of the production and export of Middle Eastern oil. They will be strong enough to prevail over the restraints resulting from company understandings and mutual company respect for each other's interests. There are no arrangements in the Middle East, such as the American State Regulating Commissions and the Interstate Oil Compact, to adjust current production to anticipated demand. What protection there is against extreme periods and phases of competition, periods that might bring great distress to some areas of production and perhaps upset governments, can be only of a private kind.

The local governments have by now become deeply associated with and dependent on this oil activity. They have demanded and secured a larger financial return from the oil produced within their territories, a larger share of income gained. In ways complex and various, the financial basis of relationship between the companies producing oil in the Middle East and the local government has become roughly this: that the government is entitled to or secures approximately one-half of the net income of the company. The same, it might be noted, is true of Venezuela.

The increase in production, and increased levies upon production, have together most steeply increased the income which these local governments secure from oil. In 1940 it was about $26,000,000, by 1950 it had risen to $188,000,000 and in 1952 it was about $500,000,000. In the six main Middle Eastern sources of supply--Sa'udi Arabia, Bahrein, Iran, Iraq, Kuwait and Gatar --this income has become essential to the maintenance of government operations. Perhaps even more crucially, the foreign exchange provided by oil exports has become essential for the maintenance of the economy of the country. This means in effect that any and all would suffer severely, as Iran has, from any substantial decline in oil production and exports. The consequences might extend far and disturb our political relations and military arrangements in both the Middle East and the Caribbean. Recognition of this fact must not, however, lead to the easy opposite deduction--that a thriving oil industry in these areas would guarantee their friendship and eliminate all chances of internal disorder. That would ensue only if their income from oil is well used to improve the condition of their people, if the local governments do their jobs honestly and in a progressive way, and if the spirit of nationalism keeps within reasonable bounds.

We have faced and are facing many troubles in this region. The spirit of nationalism is forceful and rampant, expressing itself in a wish to gain control over the oil companies. Hostile advocates are hard at work to derange the American and British oil enterprises, seeking to deprive the NATO countries of oil, and in the resultant quarrels to clear the way for Communism. The sorry experience of Iran, which in 1951 expropriated and nationalized the Anglo-Iranian enterprise, may stand as a warning example.

But perhaps not. It may be that we cannot, will not or should not pay the price that one or another of these local régimes may place upon its friendship and coöperation. We ought not to allow ourselves to be vulnerable to unjust actions or threats, either because of the need for oil, friends or allies in the political sphere, or for military bases. We ought not to expose our security to the possible mismanagement, missteps, or ill will of the régimes in these various Moslem countries.

But of course we should show just regard for their interests and wishes. We should continue to strive to be helpful--generous and patient--without seeming or being timorous. This means that we ought not to hinder the development of their oil resources except for clear reasons of broad national welfare or security. The transient distress of a few oil and coal-producing localities in the United States should not hurry us into restrictive actions which these poorer countries may properly resent, and the effect of which would be greatly exaggerated and exploited by our enemies. These comments on our conduct in and towards foreign oil producing areas are as applicable, it would seem, to the American oil companies and their employees as to the American Government.

VII

At the end of my earlier article I wrote out in neat and numbered paragraphs the elements of a national oil policy. On present re-reading I find there is not much reason to be proud of the effort. Still I shall be bold enough to try again--taking into account the changed facts of today and the present look of tomorrow.

(1) We ought to continue our efforts to enlarge our knowledge of our domestic fuel resources and of the best ways of using them.

(2) Similarly we ought to continue to encourage the application of the knowledge gained in all fields of use, e.g. by hastening the introduction of more efficient internal combustion engines.

(3) It remains essential to stimulate search for and discovery of new domestic supplies of oil. Some of the incentives to be used as necessary are: (a) to assure the availability of capital funds needed at low cost; (b) tax allowances of various possible sorts: the depletion allowance which allows the oil companies to pay for their efforts to find and develop oil with funds that would otherwise have to be paid as taxes, and special schedules of tax write-off for approved purposes or projects; (c) requirements in laws and contracts for exploration of leased areas.

(4) Domestic production, refining and transport capacity should at all times be substantially greater than ordinarily needed. This excess capacity would be a margin of reserve for peace or war emergency, and as such ought to be kept in ready order. To encourage and enable the private oil industry to maintain this excess capacity, aid and incentive of the same sort as those stimulations just mentioned might be used as necessary.

(5) The reasons why it might be prudent for the American Government to acquire proven domestic underground reserves of its own--in addition to those of the oil companies--have gained force. Should we get engaged in a major war, all branches of our domestic industry would be more subject to and more vulnerable to attack and destruction. So would all foreign sources of supply. In contrast, we might be compelled to supply oil from our own resources to a larger and more widely scattered and battered group of dependent allies.

Any government reserves set aside for such an emergency should be kept at the point of quick production. A stock of all needed machines and supplies should be kept in place. It may be that the government should recruit as well a special corps of trained workers who could be available at once in time of emergency to bring these reserves into use--without depriving private industry of needed workers.

(6) The United States should continue to encourage the development of foreign oil resources both because of the growing foreign demand for oil and to keep the demands upon our own resources within satisfactory limits.

Foreign countries are increasing their use of oil even more rapidly than we. Each year it has been becoming a more and more important element in their economic activity, in their way of living, and in their military operations. They must have an adequate supply at comparatively low cost. This can best be provided by others. Further than that, the great foreign reserves should be drawn upon for our own peacetime needs to the extent that they can be, without preventing our domestic industry from thriving and expanding.

This connected treatment of American and foreign oil might be translated into policy as follows:

(a) Within the United States we ought to continue the present methods for regulating production, particularly the state measures and the Interstate Oil Compact. But these should be managed with a view to seeing that while the prices of domestic oil do not become so depressed as to retard the search for and development of new sources of supply, they are not kept so inflexibly high that a disturbing large volume of imports is attracted. Perhaps companies engaged in oil production abroad will exercise prudent restraint over imports into the United States (or selling for import into the United States) if the profit temptation is not too great. Otherwise it may become necessary to limit imports by increased duties, taxes or quotas.

(b) But such action should be avoided until or unless it should become clearly necessary; by which is meant that the imported volume becomes so great as to cause a marked lag in domestic production and development. Even if such a situation should develop before resorting to official restrictions, it might be advisable to seek a solution by joint consultation with domestic and foreign oil producers with a view to arranging a voluntary regulation of imports.

(c) The American Government should continue to encourage American oil enterprises to develop foreign resources. Therefore it should continue to advocate the doctrine of the Open Door. Also, if necessary for a primary political or military purpose, it might even resort to the same kind of financial incentives as those used to stimulate domestic development.

Further, in the event of oppression or dispossession it should give protective aid to responsible and fairly-acting American private oil interests. Against both desire and inclination the need for such official support may become greater rather than less. Whether any crisis of this sort may be of grave enough prospective military or political consequence to warrant the use of retaliatory measures or even of our armed force cannot be foretold; it is not wholly out of the question. The American Government has accepted the principle that foreign governments have the right to nationalize enterprises within their domain; thus it has not disputed their right to use their sovereign power to expropriate American oil companies as, for example, in Mexico and Bolivia. Its formal position has been that the owners ought to be given satisfactory compensation--described as adequate, prompt and effective compensation. Unless this is paid there will be a temptation even for unqualified governments to think they can make a quick gain.

This principle may work out all right with countries which have substantial protective capabilities and responsible financial management. But the results are bad and unfair in the case of countries that lack both the capacity to pay for the properties they have taken and the ability to manage them. In such cases the right to fair compensation will be thwarted and the enterprise hurt if not ruined. The American Government should make clearer than it has that it thinks it both regrettable and harmful that American properties should be expropriated without special cause by governments unable to pay fair compensation or to manage the properties well. The counterpart of this protection lies in the duty of the American oil companies to share the benefit of their operations generously with the people and governments of the countries in which they operate.

(d) For reasons given in earlier pages, it will probably not be advisable to apply to the activities of the American oil companies in the Middle East the full force of American law in order to compel them to compete rigorously with one another. Or, stated more positively, they ought to be allowed to work in combination with each other more freely than they would be in the United States.

(e) The American Government should, through continuous consultation, exercise guiding watchfulness over the policies and activities of American oil companies abroad. Agreements other than those of an ordinary business character between the American companies and foreign companies and all new concessions should be disclosed to the government in advance.

VIII

The problem of trying to assure ample supplies of oil for the United States and its allies in the event of war, wherever and whenever needed, has become more important, more complex and more uncertain. Almost all the measures and policies that have been proposed in this statement may be regarded as protection against weakness in diplomacy or war--due to lack of oil. These, along with ordinary military precautions, would be sufficient for any limited or local war. But in the event of a worldwide, all-sweeping and all-demanding struggle between ourselves and the Communist world, they might turn out to be inadequate or poorly conceived. In such a war presumably the new weapons --atomic and thermo-nuclear, the guided missiles and the great fast planes--would all be employed by the enemy and by ourselves. Almost certainly the first main actions would all be very fast, very destructive and aimed at many places.

Should this happen, the determining factor might not be the quantity of available underground reserves or even the quantity of total production in existence before the battle began. The refineries, marine terminals, storage depots, transport centers, all would be vulnerable; and it might be quite impossible to maintain anything like the ordinary methods of oil distribution and transport. Therefore, what might count most is having enough oil (entirely ready for use) in storage at enough places. This would seem to require storage of oil at some points chosen primarily because they were deemed to be relatively safe from attack; the storage of oil at far more points than are likely to be directly involved in action; and many kinds of special preparations for getting the oil to wherever the chief centers of American attack and defense may be. On these matters it would be foolish in this paper to enter into detail.

But it may be suggested further that defense reasons may justify somewhat different attitudes towards foreign oil developments in different geographical locations. Thorough study may lead to the conclusion that there is relatively less need as well as relatively greater military reason for supporting the oil ventures in the Caribbean and the Far East than those in the Middle East. For the chances that the resources of the Caribbean would remain available to us and our allies at least in some measure is the greatest, while the water haul to the Far East, where important military actions would surely occur, would be very long and exposed, and the possession of nearby resources would be crucial.

These comments on the military aspects of our oil policy leave unanswered, I recognize, some of the most vital points in the problem. The vulnerability of many sections of the oil industry both in the United States and the Caribbean should be borne in mind. Could it be expected, for example, that the refineries on our Eastern seaboard, in the Gulf of Mexico, and in the Netherlands West Indies would be able to continue to operate? What can we do to improve the chances that they would be? Or--to take another segment of the question--is it expected that we shall be able to transport any large amount of oil to the British Isles or Western Europe? Query pursues query.

Broad as the map of policy here given may seem to the patient reader, in reality it is a greatly condensed and curtailed sketch. It may perhaps be useful for compass direction, but it is subject to the variable events of politics and the shocks of scientific change.

[i] "Order in Oil," by Herbert Feis, Foreign Affairs, July 1944.

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  • HERBERT FEIS, former Economic Adviser in the Department of State; former Chairman of the Interdepartmental Committee on Foreign Oil Policy; author of "The Road to Pearl Harbor," "The China Tangle" and other works
  • More By Herbert Feis