OVER the past decade, the economic growth of the industrialized West has been based in large measure upon a prodigious expansion in sources of energy. Oil has made the largest single contribution to that expansion; and the stepped-up consumption of oil has been especially marked among basic industries engaged in production and transport. In consequence, Western industry has become increasingly dependent upon an uninterrupted flow of oil. Since the end of World War II, Europe has been drawing more and more heavily upon Middle East oil to meet its requirements. But mounting tensions in the Middle East, arising from aggressive nationalism, the deterioration of British political authority and Soviet expansionist tendencies, put Europe's access to these critical supplies in jeopardy. The Suez crisis has driven these points home as no argument or previous circumstance could.

I. THE SUEZ CRISIS AND EUROPE'S OIL

Just a few figures will highlight the proportions of the current crisis for Western Europe. Europe's oil requirements last year were running at about 3,000,000 barrels daily. Imports from the Middle East amounted to 2,100,000 barrels per day, or 70 percent of European requirements. In contrast, crude oil production in Western Europe itself came to a bare 200,000 barrels. The balance of its needs was largely met by crude and product imports from the Western Hemisphere.

These oil supplies accounted for almost 20 percent of the total energy utilized by Europe. The relative importance of oil as a source of energy varies, of course, from country to country. The United Kingdom, for example, with relatively high coal production, relies on oil for only 13 percent of its energy needs. Sweden, on the other hand, depends on oil for about 45 percent of its energy needs. For Europe as a whole, each 5 percent shortfall in its oil supplies is the equivalent of a 1 percent decline in total energy availability.

When the Suez Canal was blocked following the British-French military operations against Egypt, the normal flow for 1,350,000 barrels daily of Middle East oil was cut off. When Syria blew up the pumping stations of the Iraq Petroleum Company, delivery of 550,000 barrels of Iraq oil came to a halt. Thus, 1,900,000 barrels, out of total shipments of 2,100,000 barrels per day, were lost. All that remained of Europe's normal receipts from the Middle East were 200,000 barrels per day moving from Saudi Arabia via Tapline.

Tanker tonnage, which was already fully engaged in mid-1956, was obviously inadequate to long-haul the same volume of Middle East oil to Europe around the Cape. Europe was obliged, therefore, to turn to the Western Hemisphere for a maximum contribution of both crude and essential black oils. Tanker priorities were given to the movement of supplies from Gulf and Caribbean ports; remaining tonnage could be assigned for liftings from the Persian Gulf around the Cape.

As a result of the U.S. supply effort and its own stock withdrawals, Western Europe was able to maintain over-all oil consumption at about 80 percent of normal. In terms of total energy, the 20 percent oil deficiency amounted to an over-all energy shortage of about 4 percent. All countries, of course, made every effort to meet their more urgent industrial requirements. In general, the minimum needs of railways and basic industries were maintained. Distillate and fuel oil supplies for other industries ranged from about 80 to 90 percent of normal. Gas and diesel oils for heating were more severely restricted; and gasoline consumption was reduced by rationing devices.

The economic impact of the Suez crisis extended, of course, beyond the direct effects of these oil shortages. In two broad areas, that of dollar exchange and of investment potential, the economic consequences of recent months set Western Europe back considerably. European balances of trade--especially those of the United Kingdom and France--were seriously disturbed. Britain's currency position deteriorated badly, and France's was equally precarious.

II. THE PROBLEMS AHEAD

When Europe emerges from the present crisis, it will still have to face up squarely to two stern realities. First and foremost, there is its continuing and even increasing dependence upon Middle East oil. And set against this dependency is the seriously compromised position of the Western Powers--and of the international oil companies--throughout the Middle East.

Since 1948, oil's contribution to the energy requirements of Western Europe has increased from 10 percent to almost 20 percent. Europe's continued economic growth is predicated upon a vast expansion in energy; and oil is counted on to provide for more than half of that expansion. By 1965, oil is expected to account for over 25 percent of the total energy supply. The only known reserves capable of supplying Europe's rapidly mounting oil needs are in the Middle East, where 70 percent of the "free world's" oil resources is concentrated. Looking ahead to 1965, the probable oil balance shapes up, therefore, about as follows:

Europe's requirements are projected at 4,700,000 barrels daily. European production is not expected to yield more than 400,000 barrels, leaving import requirements of 4,300,000 barrels which would have to come from the Middle East. U.S. requirements are projected at 13,000,000 barrels daily. With expected production of, say, 10,000,000 barrels, U.S. imports would run to 3,000,000 barrels daily. Export surpluses in the Western Hemisphere will probably be able to meet 2,200,000 barrels of U.S. import needs; the remaining 800,000 barrels would also have to come from the Middle East. The Middle East, therefore, would be required to provide more than 5,000,000 barrels daily toward the West's probable oil deficiency--as well as to provide the bulk of oil supplies for the rest of the Eastern Hemisphere. This is the measure of Western dependency upon Middle East oil over the years ahead.[i] Moreover, despite enormous efforts to increase the output of alternative sources of energy, it is doubtful that in the foreseeable future increased coal production or nuclear energy can do more than just keep up with the rise in demand for energy. An intensive effort to push nuclear power development in Britain and in the Euratom countries might result in electrical generating capacity which by the mid-1960s would save the equivalent of 500-600,000 barrels of oil daily. We cannot expect, however, any significant reduction in Europe's dependence upon Middle Eastern oil.

That dependency is, of course, only one of many and often diverse interests involved in the international oil trade. This has always been the case. Consider these competing objectives:

1. An importing country wants assured access to oil reserves. It would like its oil deliveries at the lowest possible prices, with minimum payments in hard currencies. It would prefer crude oil that it could refine, to finished products.

2. Each producing country would like the maximum production and sale of its oil, and the most rapid development of its resources. It wants high prices for its products. Above all, it wants the largest possible revenues that accelerated development, maximum production and high prices might assure.

3. A transit country looks for the highest possible income payments in return for passage. It also expects its own oil requirements to be met on the most favorable terms.

4. An international oil company must cope with competing demands among producing countries, and with the conflicting demands of producing and consuming countries. Withal, it must accurately forecast probable demand around the world; it must plan its long-run investment commitments and short-run production schedules. From these precarious operations, it must expect the earnings that are at once a return on past investment and an incentive to continued exploration, development and market expansion.

In the past, these opposing considerations have, on the whole, been successfully accommodated. Three important factors contributed to the stability of arrangements under which international oil trade was carried on. Each of these has been progressively weakened in recent years.

In the first place, the interdependence of the various parties helped to reconcile their diverse interests. If consuming nations were dependent upon the oil reserves of producing nations, the latter were equally dependent on the former for markets. If international oil companies depended upon access to potentially prolific areas in order to meet growing oil requirements throughout the world, the undeveloped areas depended on the companies for the capital and technological facilities to develop their resources. In the Middle East, however, that interdependence is now of decidedly unequal urgency.

Before the war, Europe drew less than a fourth of its oil imports from the Middle East. Both Latin America and the United States shipped larger quantities to Europe. After the war, Europe began to expand its refining facilities at a rapid rate, and its crude requirements increased accordingly. By 1949, the Middle East contributed 60 percent of Europe's oil imports. Today, the Middle East provides nearly 80 percent of Europe's oil imports--and no other area is in a position to replace Middle East crude.

This increasing dependency provides Middle East nationalism with its most effective weapon. The dynamics of that nationalism make existing oil arrangements an inevitable target for attack. Nor can the West rely on the importance of uninterrupted oil operations and oil revenues to Middle East governments as a deterrent to hostile actions. Economic considerations, important as they are to the relatively impoverished countries of the area, become insignificant when confronted with political necessities or political pretensions. Syria provides a striking example. Last October, the Iraq Petroleum Company dropped its plan to construct a new pipeline through Lebanon to Tripoli (which would have meant a considerable gain in revenues) because of its dispute with the Lebanese Government over taxes. The new line was instead scheduled for Syria. Yet Syria, the impending beneficiary from the dispute between Lebanon and I.P.C. over transit revenues, wantonly destroyed I.P.C. pumping facilities. Under the circumstances, there is little chance that Syria will be regarded as a better risk than Lebanon.

Meanwhile, British political authority, which had contributed so much to the stability of institutional arrangements in the Middle East, has been on the decline and has now practically disappeared except perhaps in the Persian Gulf sheikdoms. In 1951, Mossadegh nationalized the properties of the Anglo-Iranian Oil Company. Europe weathered the crisis by virtue of expanded crude production in other areas of the Persian Gulf and product exports from the United States. But American and other non-British participation in the operating consortium represented an obvious derogation of British status in Persia. In 1954, Britain acceded to the evacuation of the Suez territory, with only pro forma recognition of its vital interests in the Canal itself. More recently, Jordan evicted British military advisers and then voided the long-standing treaty with Britain. Cyprus is in revolt. Yemen now stirs up trouble over Aden. Even in Kuwait and Bahrein, Britain has been faced by local disturbances.

Under the pressure of increasingly aggressive Middle East nationalism, local forces have frequently concentrated their attacks to disrupt existing oil arrangements. At the same time, the Soviet Union is in a position to exploit every tension in the area. It can conspire with rulers, or conspire to subvert them. It can make political capital out of the explosive Israeli situation. It can support one power bloc against the regional grouping that the West relies on for support in the cold war. In this situation, no institutional arrangement into which Western governments or oil companies enter may long be secure.

Finally, the commercial dominion of the international oil companies has been increasingly impaired. Development of the area's oil resources had been initiated under the umbrella of British political authority. The countries themselves were underdeveloped, often with no prior contact with the Western world; their political and social institutions had scarcely been exposed to modern Western influence at the time when international oil companies started their operations. Concessions were secured by large international oil companies--three of them European and five American--mostly in the inter-war period. These concessions were usually framed on a broad basis, giving the companies development and export rights.

In the ten years following World War II, international oil companies invested $2.5 billion in Middle East development. These investments were undertaken under concessions and contractual arrangements that seemed to offer a substantial measure of security, and the oil companies could pursue commercial operations relatively freely. Production, pricing and sales all fell within the province of company operations and could be worked out in the context of world resources and requirements.

In recent years, however, oil companies operating in the Middle East have found themselves increasingly circumscribed by political considerations. The threat of expropriation is ever present; and the precedents of Iran and Suez can hardly be reassuring. Under that threat, terms of concessions are constantly revised in favor of the Arab governments; and one revision is scarcely completed before new demands are presented. What appear to be minor impositions gradually add up to pretty basic changes in the circumstances under which companies operate. Local government representatives gain participation in management of company affairs; headquarters have been transferred to the producing countries; 50-50 profit-sharing arrangements are used by the local government to obtain a voice in commercial decisions. Control is exercised over destination of exports and attempts are made to control tanker shipping. In the end, the international company is being required to behave as though it were solely a national organization.

The companies are also confronted by attacks from quite the opposite direction. While Middle East governments may argue that prices should be higher, the Secretariat of the U.N. Economic Commission for Europe suggests that those prices might well be lower. In the United States, oil companies are under indictment for violation of anti-trust laws by virtue of their foreign operations; they are, on the one hand, asked by our Government to limit imports, and, at the same time, charged with manipulating prices by not importing more.

In sum, the commercial operations of companies are exposed to conflicting political pressures. The companies are no longer able in all circumstances to assure supplies from the producing countries to various consuming nations. Frequently they cannot balance and reconcile their interests in various producing and consuming countries effectively. Also, they may no longer always be able to implement effectively the policy decisions of their home governments.

In view of the deterioration of the arrangements under which a large part of the international oil trade is carried on, we must define the broad goals of our oil policy and find effective ways to implement it.

First, our international oil policy must assure access to foreign oil resources for ourselves, our Allies and other non-hostile nations, no less during troubled times than during peacetime.

Second, it must provide for access to foreign oil on an equitable basis.

Third, it should so far as possible provide that the flow of oil from the various producing countries where our corporations and those of our Allies operate will be in accordance with our basic policy aims and strategic necessities.

Fourth, our international oil policy should offer encouragement to the foreign oil operations of American companies. It should protect the concessionary arrangements and operations of our companies against undue and illegal interference by the governments of foreign producing countries; and it should assure non-discriminatory treatment of our corporations engaged in refining and marketing operations in consuming countries.

Fifth, it should include friendly collaboration with other Western nations whose companies are also engaged in foreign oil producing operations.

III. LIMITATIONS OF INTERNATIONAL AGREEMENTS

We are now facing a challenge to every single aim and aspect of our international oil policy. The range of alternatives through which we might seek effectively to implement our major goals is broad. They narrow down considerably, however, when we measure them against the unpleasant realities that we have just reviewed. For example, to secure uninterrupted Western access to Middle East oil, several proposals have been made involving new international agreements, providing either guarantees of access or guarantees for private foreign investments, or both. While such agreements may well represent a step forward in the evolution of international law, it is nevertheless important to recognize their inherent implications and limitations.

To be effective, the principle of assured international access would have to involve also agreement on the terms under which oil would be made available. But the interests of consuming countries in access to supplies on "equitable" terms would be countered by the interests of producing countries for guaranteed access to markets at "reasonable" prices. This would seem to suggest the need for an international oil authority. But such a development would probably put our companies and those of our Allies into the position of being subject to regulation as international public utilities, and it is unlikely that it would either provide effective protection for the terms under which our companies presently operate or assure their management control. In the Suez Canal case, Egypt has actually taken over the management and control of the Canal, and it is noteworthy that during all of the negotiations no effective consideration was given to the reëstablishment of the old Suez Canal Company.

Nor is it clear what effective sanctions could be invoked if free access to oil resources or markets was refused by a producing or consuming or transit country. The most prominent and perhaps the only example of an international treaty assuring free access to an international facility is the Constantinople Convention of 1888. This Convention worked reasonably well so long as it was not subjected to intense conflict of national interests. However, it broke down during the two world wars. It also was ineffective when Egypt believed that overwhelming political or strategic considerations warranted closing the Canal to Israeli shipping.

If effective sanctions cannot be established, it follows that an agreement on free access will break down whenever any participating country becomes engaged in overt dispute with another signatory country. In the midst of cold war, and while the world is disturbed by Soviet machinations and subversive activities, the effectiveness of such an agreement must remain in doubt.

It has also been suggested that an international agreement be concluded which would assure respect for private foreign investment. Such an investment treaty might imply that an international body would also have the right to adjudicate disputes arising out of various agreements under which foreign investment is undertaken. It might also imply that there would be machinery for adjustment of contractual terms, particularly where contracts had been concluded for periods of 60 to 90 years.

While such a charter might cover the case of expropriation and provide arbitration machinery for disputes over compensation, it should be noted that the way international law has been interpreted during the last 20 years, expropriation with adequate, prompt and effective compensation has not been successfully contested. No effective test has ever been made of the case where expropriation actually involved unilateral cancellation of foreign concessions and breaches of contractual commitments by a sovereign. The sovereign, by refusing to permit an international tribunal to pass upon his conduct, closes the door against any international legal recourse.

Equally unresolved is the question of how such a charter could deal with a progressive erosion of concession rights. Changes in concessionary terms undermining the position of the foreign investor may be as harmful as expropriation. Without in fact openly nationalizing the property, governments may infringe on management rights, establish local political control over operations, impose increased taxation, and enact troublesome labor laws. Similarly, the establishment of production and export controls under what countries may claim are their sovereign rights, the submission of the operations to their own foreign policy considerations, and a host of other devices would effectively limit and might even destroy the value of foreign investments.

In the final analysis, neither an international agreement providing for free access to oil nor an international charter guaranteeing the security of foreign investments can by itself meet the basic needs of an international oil policy. Both would probably lead to the establishment of new and complicated international machinery which would interfere with the functions and flexibility of private operations. They would fail to provide ultimate security against interferences with oil supplies or violations of investment rights precisely because the West would still have no practicable recourse against such moves when they are spawned by nationalistic determination or Soviet machinations.

There is also some reason to doubt whether the West could at this time rely on the United Nations for the establishment of a policy that would effectively protect its interests in Middle East oil. The United Nations is not an impartial judiciary body; its power often depends on the support of voting blocs with sectional interests; it would have no practical means of enforcement when either the United States or the Soviet Union opposes its decisions. We could expect the U.S.S.R. to support any move against the West which would interfere with Western political, economic and strategic interests. The Soviets would naturally frame all oil and Middle East political issues in terms of "Western imperialism and oil monopolies," and try to unite the voting strength of their own satellites with that of members of the Bandung group and of other underdeveloped countries.

Considerable thought has been given to the possibilities of a European Oil Community, designed to improve Europe's bargaining position vis-à-vis the Middle East oil producing countries, on a commercial as well as political level. The Community could, in the view of its advocates, more easily integrate Europe's oil supply within the framework of Europe's over-all energy economy. In case Middle East oil were unavailable or obtainable only on the basis of unreasonable terms, the Community could take joint steps either to regain access to the oil or to make alternative provisions and divide the burden of any shortfall equitably among its members.

In evaluating the potential effectiveness of an oil community, however, it is essential to keep in mind that in contrast to the resources of the Coal and Steel Community oil reserves are located outside Europe, in an area of political unrest and subject to constant Soviet interference. A combination of European consuming countries that tried to enter into negotiation with any oil producing country would most likely provoke the creation of a bloc of Middle East producing countries. There are, of course, distinct trends toward a unified oil policy by the Middle East producing countries. But political problems and economic rivalries have up to now prevented its effective establishment. Nothing would give it greater impetus than a combination of European consuming countries. It is to Europe's interest, however, to avoid as long as possible the establishment of such a Middle East bloc; and certainly to do nothing that would provoke its early creation. Once consuming bloc and producing bloc confront each other, each separate grievance of individual countries is likely to be embraced by all. Each oil problem would then tend to become an intergovernmental and political problem and the great flexibility inherent in private oil operations would be lost. Accordingly, under present conditions the oil problem is more apt to be aggravated than eased by an open combination of European consuming countries. This of course does not imply that the countervailing power of consuming countries does not provide an essential contribution to the implementation of international oil policy.

IV. IMPLEMENTATION OF INTERNATIONAL OIL POLICY

While international agreements may fall short of guaranteeing Europe secure oil supplies, they may in certain instances help toward the evolution of principles of international behavior and procedures for the international settlement of disputes. And in spite of its limitations, the U.N. within certain areas may determine at least a minimum basis of common interest and exercise a moderating influence.

However, it would be dangerous to rest our national security on the expectation that international agreements will insure international performance. To be successful in protecting our essential interests and those of our Allies in the Middle East, an oil policy for the United States must proceed simultaneously along three lines:

(1) Emphasize the community of interest between Middle East states and the West, and minimize thereby the opportunities for Soviet intrigue.

(2) Minimize Western vulnerability to the interruption of the flow of Middle East oil, and increase thereby the bargaining position of the West.

(3) Support effectively the rights of private companies which are prerequisites to continued investment and development.

No one of these goals by itself will result in absolute Western oil security; together they hold out the promise of restoring stability to the international oil trade.

As to the first, we must try to establish with as many of the major producing and transit countries as possible a continued relationship that would tie them more firmly and more securely to the Western side so that they will be immune to Soviet interference and Soviet temptations which are likely to persist as long as the East-West struggle lasts. This will require an effort to accommodate at least the major political and economic aims of the Arab countries.

Such a policy would inevitably involve some identification of the Western world with at least the most essential aims of Arab national aspirations--the development of their economies and improvement of standard of living. The major emphasis of such a policy must be on the enlightened self-interest of all the parties concerned and on awareness that a breakdown of their relations with the West would be catastrophic, perhaps even more so to them than to the West. The prerequisite for Western coöperation must be some basic commitment by Middle Eastern countries of their own national resources and efforts to their national purposes.

Arrangements with the governments of Middle East countries would not necessarily be all that is required to assure the security of our oil operations. A great deal would depend on the popular support which these governments command. To achieve a measure of popular support is the more important as Soviet attacks on our position in the Middle East are clearly designed to appeal to popular prejudices against our oil companies. Their propaganda repeats monotonously that the companies are out to "plunder" the Middle East's natural resources and export their oil without adequate compensation to them, and that "oil monopolies" in the United States dictate U.S. foreign policy to assure the most "colossal superprofit" to these monopolies.

We cannot, therefore, ignore this issue, and must try to see to it that the benefits from our oil operations and our economic aid as well are spread reasonably fairly throughout the economy. This is easier said than done; but it would be helped along if Western governments were to provide greater encouragement to those countries whose governments act responsibly.

We should also try to encourage a spirit of competition among the various producing countries for attracting investments and securing outlets. The development of their oil industry should, to the extent possible, be a measure of their own coöperation. We should further do our utmost to dissuade producing countries from the notion that because the international oil companies control production in other areas and have refining and marketing affiliates all over the world they can always be assured of a market outlet by applying pressure against the companies.

The problem of the degree to which the United States and the West can accommodate themselves to Arab policies and national aspirations is of course a most serious one. We cannot give up vital principles, policies or economic interests. We must not be blackmailed into taking a position contrary to basic equities because Arab countries threaten to cut off our access to the oil, or take over our companies, or join the Soviet bloc. Such policies would be self-defeating in the long run.

There are plainly certain political issues on which we simply cannot satisfy the Arabs. In the first place, the Middle East is so lacking in intra-regional unity that certain of our decisions might be acceptable to some countries and completely unacceptable to others. In particular we cannot afford to refuse support to the friendly nations of the Baghdad Pact and yield to pressures or threats of other Middle East countries hostile to us.

Secondly, we cannot ignore certain vital interests of Britain and France which have run counter to Arab national ambitions and have led to friction between our Allies and the Middle East. The maintenance of the NATO alliance imposes upon us the obligation to protect their vital interest as well as ours. Moreover, in our oil operations throughout this area our companies are nearly everywhere closely associated with European companies. We cannot (and in general must not even try to) escape the concomitant responsibilities of our Western alliances. Popularity in the Middle East may be quickly acquired and even faster lost; it provides no reliable basis for Western policy.

Finally, we cannot agree to the continued corrosion of essential rights of our own and allied corporations, not only because unilateral and arbitrary breaches of commitments are contrary to basic Western principles, but also because they would increasingly jeopardize Western access to the oil. Behind our willingness to accommodate ourselves to Arab national aspirations there must also be the willingness and ability to resist unjustified requests and threats. Our Middle East policy must thus be based on friendship backed by strength. For on the realities of power at any given moment rests the effectiveness of diplomacy.

Let us now turn to the question of how we might minimize the West's vulnerability to interruptions in the flow of oil from the Middle East. Since our strength to resist undue pressures in that area will rest in large measure upon our success in minimizing our dependency upon its oil, we must put ourselves in a position in which we are at least able to cope with a temporary interruption of supplies. If that can be done, it will be apparent to the Middle East that Europe could survive a temporary cut in its oil supplies without too much danger. At present, continued availability of Middle Eastern oil is so urgent that no interruption can be borne. In contrast, the dependence of some Middle East countries on the income they obtain from the sale of oil is of a different order of urgency. Many of them could absorb a reduction of their royalty and tax income for some period of time by drawing on accumulated funds or by reducing less essential expenditures. By redressing this balance it might be possible to drive home to the Middle East its dependence on income from sales of oil.

Wherever allied companies are in a position to do so, it would seem essential to encourage the development of excess productive capacity. This would include the oil-producing countries of the Middle East, for it is possible that in an emergency our access to production in some of them might be maintained. Excess productive capacity in the Western Hemisphere and in the Eastern Hemisphere outside the Middle East would, of course, be particularly desirable. In addition, the development of other sources of energy should be pursued as rapidly as economic considerations permit.

There should also be a greater flexibility in the provision of transport and refining facilities. We need a maximum build-up of tanker capacity and should avoid wherever possible the construction of pipelines from oil supply sources through third countries, especially if tankers can be made to do the job. Further, we should encourage the building of refining facilities in consuming rather than in producing countries or other areas which are likely to be subject to political disturbances.

Finally, provisions must be made to accumulate substantial strategic reserves in the United States as well as in Europe. During periods of ample availability, arrangements might perhaps be made to produce and ship crude oil from the Middle East to suitable consuming countries for storage for an emergency. The target for such a program might well be on the order of nine to twelve months of European crude oil requirements.

If such a broad program were carried out, our Allies could do without Middle East oil for a limited time, particularly if we were prepared not only to make excess production and stocks available to them, but also to share in the shortage, if necessary. Our bargaining leverage with the Arab world on all vital issues would be enhanced and the security of Europe's oil supplies greatly increased. It would provide us with alternatives either to yielding to completely unreasonable requests of the Middle East countries or to using more drastic and probably less effective means such as economic sanctions or even force to impose our will. Even a temporary ability of Europe to support its economy with alternative oil supplies might be of decisive value in the play of forces with which we are confronted. With wholehearted coöperation between the United States and Europe, this program can be realized at a total cost of less than our present peacetime military expenditures for a few weeks.

We have already dealt at length with the increasing disabilities to which our oil companies have been subjected. It is becoming imperative that we insist more energetically that the rights of our corporations be respected and that disputes be arbitrated rather than unilaterally resolved in favor of Middle East governments under the threat of expropriation. In particular, we should not leave our corporations without advice and protection against arbitrary decisions of Middle East governments. Our corporations, with their world-wide interests and responsibilities, must not be coerced into becoming in fact instruments of the foreign or strategic policy of Middle East producing or transit countries. The framework of international oil operations and international investment would be torn apart if we are not able to put a halt to such local pressures.

In lending support to the companies in their foreign operations, Western governments must be prepared to recognize (as must the companies themselves) the legitimate interests of producing and transit countries. But Middle East governments must in turn recognize that their oil as a resource has been developed through international participation; and its value hinges on international trade which brings producing and consuming countries together; and that oil's rôle in future economic expansion depends on continued capital investment on a massive scale in production, transport, refining and marketing facilities. International oil companies have undertaken the costs and responsibilities in each of these areas--but the flow of private capital and the effectiveness of commercial operations can continue only if the security of investment against political depredations is assured.

Our policy requires, of course, the closest coöperation between the oil companies and their own national governments. This involves special responsibilities on either side. It also creates new problems of communication and of chain of command between government and the companies. The demands and responsibilities which have devolved on our international oil companies go far beyond the normal concerns of commercial operations. Public and private responsibilities become increasingly intertwined. Our existing arrangements for government-industry relationships in this new unchartered area appear to be inadequate to cope with the broad range of new problems. At present neither party knows quite how to proceed, who should act and who must take responsibility for decisions; serious misunderstandings have thus been inevitable. The problem deserves the most urgent and careful study if our governments as well as our companies are to play their proper rôles.

Within the framework of our international oil policy we must unequivocally state our intention to assure Western access to Middle East oil and our readiness to protect the equitable rights and basic position of our companies. If our interests can in due course be fortified by treaties so much the better; if not, we must nevertheless undertake to support them with all the power at our command. They involve basic issues of international comity and behavior and our prosperity and security depend on the respect they command.

[i] The U.S. might itself be able to achieve substantial independence from Middle East supplies, but this would require vastly accelerated exploration and capital outlays. In the United States the capital cost of finding and developing crude oil has more than doubled since the war, according to the Chase Manhattan Bank, from $0.78 per barrel in 1946 to $1.65 in 1955. (These figures exclude expenditures for geological and geophysical work and for lease rentals.) And while the picture may look better in Canada and Latin America, there is no doubt that any attempt to speed up the development of Western Hemisphere reserves would require very special incentives, and would have to be covered by sharply rising prices.

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  • WALTER J. LEVY, economic consultant, New York; specialist in petroleum in the Department of State and E.C.A., 1942-49; frequently government consultant on petroleum problems
  • More By Walter J. Levy