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WHATEVER may have been the causes for friction in the past between the American and British Governments growing out of competition for control of petroleum supplies -- and I shall endeavor to trace and illustrate some of the factors involved -- these have been temporarily swept away by the realization that the world resources of petroleum are really very large. Even the most skeptical have been forced to take account of the fact that at the present time there is more petroleum being produced in the world than the oil companies know what to do with, and that the additional supply in sight and subject to quick production is so large that the problem of the moment is not "Where can we get petroleum?" but "How can we dispose of what we have at a profit?" Thus, instead of a competition for the control of oil supplies involving aims or actions productive of international friction, we are dealing at present with the more simple matter of competition for the disposal of a commodity of which for the time being there is an oversupply.
For many years there has been a popular belief in the United States that the petroleum resources of this country were being depleted to meet the world's needs for oil, and this led to the growth of a view that vital national interests (as distinct from national interests in normal business competition) required that foreign sources of supply be developed and controlled. But today both foreign and American petroleum deposits have been so extensively and successfully developed that there is a growing demand for a protective duty on foreign petroleum and petroleum products imported into the United States. This involves possibilities of international friction of a different character in which the issues are not primarily between the United States and Great Britain.
Another factor has reduced what a few years ago was considered in many quarters as an international question with grave possibilities to its present simpler aspect of mere business competition. This is the fact that Great Britain now controls important and widespread sources of petroleum. Great Britain has complete ownership, either directly or indirectly, of the very large developed and undeveloped oil resources of Southern Persia; she has control and majority ownership of the important Mesopotamia region; she has one-half of the production of Venezuela and one-third of the production of Mexico; and in our own country there is a British company, alleged to be controlled by the British Government, which since the beginning of the Great War has acquired rights and properties placing it among the first half-dozen oil producing companies in the United States.
It may be interesting in this connection to point out that the enormous concession in Persia, carrying with it entire control of that major oil region, was obtained by an Englishman in 1901. It was offered to the Standard Oil Company and refused by it before the British Government became interested in 1914. Under the arrangement which then materialized the British Government now has over £5,000,000 invested in the company, has voting control through common stock ownership, and has two Government-appointed directors on the board with absolute veto power. The British control of Mesopotamian oil represents a particularly noteworthy triumph of British diplomacy and business.
The British position in Venezuela comes through concessions obtained by an American company and sold by the American company to the Royal Dutch Shell.
The present British position in Mexico is a direct result of orders of the British Government. Lord Cowdray was one of the pioneers in Mexican oil development. The other was Mr. E. L. Doheny. Each was markedly successful, and there grew up the great British Pearson-owned Mexican Eagle Oil Company and the American Doheny-owned Huesteca. One about kept pace with the other. In 1916 negotiations between Lord Cowdray and the Standard Oil Company resulted in the establishment of a mutually satisfactory basis for the sale of the Mexican Eagle Oil Company to the Standard Oil. The British Government then intervened and prohibited the sale of the Mexican Eagle Oil Company to the Standard, invoking the all-powerful Defense of the Realm Act. But in 1919 it permitted the sale to the Royal Dutch Shell. It has been alleged, and many times officially denied, that the Royal Dutch Shell is controlled by the British Government. Whether this is true or not is known to only a few people, but considerable weight is lent to the allegation by the action of the British Government in the case of the sale of Mexican Eagle Oil.
Some twenty or more years ago there was made a very comprehensive estimate of the coal resources of the world, including the United States. Conditions with respect to coal were such that this estimate could be made in millions of tons with a reasonable degree of accuracy. An attempt was then made to do the same for oil. This was stepping from the known to the unknown. The conditions with respect to oil were so fundamentally different that no estimate in figures of the undeveloped oil resources of the United States, or of the world, could give any approximation of the truth. Estimates of undeveloped oil reserves were based on analogy, which could only give figures misleadingly low. Figures nevertheless were made up by one of our Government bureaus and, despite unavailing protests, were given wide publicity. It was a publicity stunt indulged in for the accomplishment of certain minor ends, without due consideration for the major ramifications and costs. The estimates were quickly divorced from the carefully qualifying statement which accompanied them, and became responsible for such scareheads as "Oil Supply of United States Will Last Only a Decade or Two" or "United States Faces Imminent Exhaustion of its Oil Supplies."
The result in other countries, including Great Britain, was to increase the number of the sincere but misguided patriots who believe that, since oil is a necessity of modern life, whatever oil there may be within the territory of their nation, or in territory controlled by it, must be conserved and developed by their own nationals. And there began to develop in Britain the policy of excluding all but absolutely British interests from working in British territory or colonies, such as Trinidad. The war developed this idea a step further, and we heard of the doctrine that "since oil is a prime necessity in case of war, we must keep all the oil which occurs within our own territories and get hold of everything we can outside." Thus at the close of the war we saw the British Government contributing £3,000,000 from the Government Treasury to the Government-controlled Anglo-Persian Oil Company, and authorizing the appeal to the public for a still larger amount, which was provided, for the purpose of securing oil properties and rights throughout the world. For this the British found their own form of government very useful, and they also found to their advantage the fact that under our form of government it is politically impossible for the American State Department to do for its nationals what the British Foreign Office does for British nationals. In fact, the Chairman of the Board of the Anglo-Persian said publicly, very frankly, in 1925: "The difficulties in which American interests find themselves arise from the uncertain diplomatic support they receive."
But let us return to the matter of estimates. It has long been my view that the undeveloped oil resources of the United States and the world were grossly underestimated, that in fact the oil resources of the world were large beyond any computation possible from the available data. In 1922 I suggested, when asked as a member of the Committee on Foreign and Domestic Mining Policy of the Mining and Metallurgical Society to report on petroleum, that I be permitted to name a sub-committee in which, among others, there would be included the senior geologist of the Geological Survey, who had been closely associated with the estimates given out by that Bureau, the Chief Petroleum Technologist of the Bureau of Mines, and in particular those with whom I had differed with regard to the published estimates. It was my desire to see if there was not some formula on which we could agree. The unanimous report of this Committee was made early in 1923, when for the preceding three years our exports of petroleum and petroleum products had been much less than our imports -- in fact, in 1922 our imports of petroleum had been approximately twice our exports. The report contained this statement:
The oil resources of the world are doubtless much larger than the recently published estimates, and improved methods of recovery should enormously increase the difference. It is now demonstrated that commercial petroleum can occur in sedimentary rocks from the Cambrian to the youngest, if the alteration has not gone too far, and in any structural position. The sedimentary rocks occupy the greater part of the earth's surface. Those found in the United States are but a small part of the sedimentary rocks of the world as a whole. It is only in the United States that these sedimentary rocks have been extensively developed for oil, and great as the development has been here the oil in the sedimentary rocks in the United States is by no means exhausted. The conclusion may be stated proportionally: As the ultimate production of the United States is to the area of sedimentary rocks of the United States so the ultimate total oil production of the world will be to the whole area of sedimentary rocks of the world.
I lay emphasis on the really large amount of undeveloped petroleum in the United States and the world, because if there are large quantities of it widely distributed there is less opportunity for narrow-minded nationalism to produce friction over oil than there is in the case of other minerals which are fundamentally connected with modern civilization and which are less widely and abundantly distributed. In the case of all minerals, including petroleum, the economic principle is that it would be to the advantage of all nations and of mankind in general if absolutely no restrictions were placed on the nationality of the individuals or companies concerned in their exploration and development.
Propagandists often utilize American idealism to further their own ends. To many Americans the word "concession" means, as it did to President Wilson, something that should not be. There are bad concessions and good concessions, just as is the case with other forms of contracts, but in the United States the word has come to have a meaning quite different from its real one. There have been quite a number of concessions in the United States enacted by our Congress and our State Legislatures, but they have been called by other names and many of them have been most helpful to the country. In Mexico, however, in President Wilson's mind and in the mind of Ambassador Walter Hines Page, as recorded in his "Life and Letters," terrible concessions were in some way responsible for all of Mexico's troubles. The fact was that President Diaz in his effort to secure and promote the development of his country was most sympathetic and helpful to all companies. In the case of Lord Cowdray, President Diaz granted concessions for petroleum covering large areas of public lands. This encouraged Lord Cowdray to spend a large amount of money in Mexico searching for oil. In fact he spent about £2,000,000 in development before he secured commercial oil, and then it was on private land, not on the concession, that he secured the oil. Nothing of any commercial importance was found on the concession areas, which merely served the purpose, useful to Mexico, of securing an extensive exploration, an investment of large sums in the country, and the development of its resources. All the oil of the great Mexican Eagle and Huesteca Companies was being produced from private lands when the period of order and prosperity under Diaz passed into the succeeding disorder and chaos.
On this matter of concessions the Petroleum Committee of the Mining and Metallurgical Society of America, which I have alluded to, reported:
There is both necessity and economic justification for the granting of an exclusive but properly safeguarded exploration concession to induce and warrant the expenditures required for adequate work in new regions. When such concessions contain a stipulation that within a limited period of say from three to five years the holder must select for retention a small percentage of the original exploration area, the result is development without exclusion.
Whether the large exploration concession for oil covers all the country or one-half, or one-third, or a smaller fraction, is largely a matter of the size of the country. In a country covering ten thousand or twenty thousand square miles conditions may often exist which make it economically sound to grant an exploration right to petroleum covering the whole of the country. Such an exploration right in a new region, if it provides that the concessionaire at the end of three to five years must select one thousand or two thousand square miles, cannot lead to any serious exclusion of other interests. If the area is an important oil-bearing region there is no possibility of the concessionaire selecting all the good oil lands, and in the part that is not selected there will be oil of equal or possibly greater importance than in the parts chosen. It is impossible for a country to create an effective petroleum production monopoly, except by granting all of its land to a single company for a long term of years.
Some have felt that large exploratory concessions, even with the selective factor, were a violation of the doctrine of equal opportunity and the open door, but this reduces itself to the ultimate absurdity that if this view is correct the disposal of any tract of land means that everyone cannot work on that tract and is therefore a violation of the principle mentioned. Such a false application of the doctrine means stagnation, not development, and is a more effective closing of the door of development than the restrictions on nationality of ownership which have been responsible for natural, though deplorable, international friction.
This matter of concessions has been productive of some of the friction between the United States and Great Britain over oil. It may be well, then, to mention briefly some of the oil concessions in which in one way or another both countries have been concerned.
The Darcy Concession in Southern Persia, granted in 1901 and which is the property of the Anglo-Persian Oil Company, is open to criticism in the respect that it contains no selective clause. It has resulted in the development of a most important oil region and the production of large revenue to the Persian State. If it had contained a provision for the reduction of area by selection at the end of an exploration period, many other companies would be working in the region today and the result would be development without exclusion.
The concessions in Venezuela obtained in 1910-1912 by the General Asphalt Company, and then transferred to the Royal Dutch, covered practically all of Venezuela, but provided for selection at the end of an exploration period. The result is that the Royal Dutch today has about half the production of Venezuela, but only a small fraction of the total oil resources of the country. Many other companies are engaged in operations in that country. The large General Asphalt concessions induced the expenditures necessary for proving the oil in that region, and the rest followed.
In Costa Rica there is an interesting illustration of the development of one of the official attitudes of our government regarding Latin-American affairs and concessions. In one of the changes in government which occur from time to time in those countries, Tinoco became President of Costa Rica. Had it been possible to hold an election in Costa Rica at that time with full safeguards for the free expression of opinion, Tinoco would have received an overwhelming majority of the popular vote. But to the Wilson Administration he was a revolutionary president, he could not be recognized, and the Administration publicly warned all Americans that no acts, contracts or concessions by the Tinoco government would be considered valid by the United States. Notwithstanding this, Amory and Son of New York secured a petroleum concession, which was sold to a Canadian company. Recognition of Tinoco would have continued the condition of Costa Rica as one of the most prosperous, peaceful, law-abiding countries in Latin America. The failure to recognize the Tinoco government led to a period of disorder, the overthrow of Tinoco, and to a series of events which put Costa Rica in a much worse condition than it had been in previously. The new government was promptly recognized by the Wilson Administration, and one of the first acts of the new Costa Rican Congress was to declare void all acts of the Tinoco government. Great Britain protested this cancellation of the Amory Concession and the State Department sustained Costa Rica, pointing out to the British Foreign Office that the concession had been granted initially to an American Company and that the State Department had warned all Americans that it would not recognize any acts of the Tinoco government. Finally an arbitration was arranged between Costa Rica and Great Britain, with Chief Justice Taft as arbitrator. In his decision of October 18, 1923, Chief Justice Taft held that the recognition or non-recognition of the Tinoco government was of no importance in determining the validity of the acts of that government. He added it was not for the arbitrator to discuss the merits of the policy of the United States "for the reason that in his consideration of this case he is necessarily controlled by the principles of international law."
A good deal of discussion went on after the war about the measures taken by Great Britain to exclude foreigners from prospecting for oil and developing oil within British territory. After some years, and in deference to this agitation, Sir John Cadman, who as chief petroleum executive had been among those primarily responsible for the adoption of this policy and who had in the meantime been made Chairman of the government-controlled Anglo-Persian Oil Company, was sent to the United States to explain the British attitude to the American oil interests. This he did in substance by saying that Britain had no exclusion policy. Privately Sir John explained that in the heat of the war misguided patriotism had caused Britain to adopt a policy which she now knew was economically unsound.
There is of course a vast difference between the viewpoint of the patriotic business man with special knowledge and experience and the equally patriotic politician or adviser to the government who lacks such knowledge and experience. In this connection I may mention that in 1918 I advised Lord Cowdray, in whose service I had then been for six years, that the plans being developed by the British Government would, if carried out, transform oil exploration and development from being a simple matter of competition between companies, which was perfectly good fun, into competition by one nation against another, particularly by Great Britain against the United States, and that under such conditions I felt I would have to be on the American side of the fence. Lord Cowdray's reply was that I certainly must be mistaken. He said that to exclude foreign capital from exploring for and developing petroleum in British territory would not be in the national interest, for the reason that it would take a great deal of time and money to develop the oil resources of the British Empire; that in carrying out such work it was inevitable that a great deal of money would be spent that would not be productive, perhaps in the aggregate more than would be returned, and that it was better for the nation to have the losses of development shared by foreign capital than to have the whole loss fall at home. He pointed out, too, that the strategic interests of Great Britain required that it encourage in every way the development of oil-fields in its territory, for the reason that in case of war only developed oil-fields had any practical value and that whenever there was a war any developed oil-fields would be immediately mobilized by the country concerned, irrespective of whether the development was due to domestic or foreign capital. In Lord Cowdray's very patriotic but practical mind there was no shadow of doubt that the most complete self-interest and self-advancement dictated that Great Britain should throw the doors wide open for petroleum development through the Empire. My reply was that I fully agreed with him that the policy adopted by the British Government was a foolish one, but that it nevertheless had been adopted. He said that he would make inquiries.
When the Treaty of Peace was finally signed I again brought up the matter with Lord Cowdray and was told that he had made careful inquiries and had been amazed to find that such a policy as I had described had in fact been adopted and that he was even more surprised that naval strategists and the politicians were absolutely set on carrying out the mad and foolish idea.
There is certainly some room for astonishment that international jealousies and misguided national feelings have at times led peoples and statesmen so far from the natural economic course. The most selfish considerations point to the desirability of encouraging mineral exploration and development in every region of the world, and to the importance of placing no obstacles in the way of the operation of natural economic laws which make for efficiency. There seems to be no real reason for friction between Great Britain and the United States regarding petroleum. However, there always will be some friction and this will vary in amount from time to time, because in both countries many things are necessarily determined by politicians rather than by business men and the temporary and local political aspect of any action is more controlling, particularly in our country, than its importance to national welfare.