THE SOVIET PETROLEUM POSITION AND INTEREST IN MIDDLE EAST OIL

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001600010018-1
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 22
• Document Creation Date: December 22, 2016
• Document Release Date: October 1, 2009
• Sequence Number: 18
• Publication Date: June 1, 1968
• Content Type: IM

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Secret
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
The SouietPetroleum Position
and Interest in Middle East Oil
Secret
ER IM 68-68
JUNE 1968
COPY NO? 71
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
GROUP I
QCLODSO -ROH AUTOMATIC
OOWNOIIADINO AND
D[CLABBII ICATION
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
June 1968
INTELLIGENCE MEMORANDUM
The Soviet Petroleum Position
and Interest in Middle East Oil
Summary
Soviet activities in the Middle East have not
led to any control over petroleum supplies, and
there are no indications that such control is a
near-term prospect. In general, Soviet objectives
in the Middle East include the reduction of Western
influence and, through Communist trade and aid
promotion, the growth of Soviet influence. The
USSR does not now need to establish control over
Middle East oil to satisfy its own current or fore-
seeable requirements. The USSR is the second largest
producer of crude oil in the world, and its output
has been growing at an average rate of about 20 mil-
lion tons* per year since 1960. This level of pro-
duction enabled it to satisfy domestic consumption
as well as to export substantial quantities to the
Free World and, to a lesser but important extent,
to other Communist countries.
Soviet proved reserves of crude oil were esti-
mated at about 4.7 billion tons at the end of 1967,
more than adequate for attainment of the planned
production of 470 million tons per year by 1975. In
addition to its large proved reserves, the USSR
* All tonnages are given in metric tons.
Note: This memorandum was produced solely by CIA.
It was prepared by the Office of Economic Research
and coordinated with the Office of Current Intelligence
and the Office of National Estimates.
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has huge potential reserves of oil and of natural
gas. The latter, for many uses, can be substituted
for oil.
The USSR now supplies about 85 percent of the
oil required by the Communist countries of Eastern
Europe other than Rumania, which is a net exporter
of petroleum. Expansion of pipeline facilities
now in progress indicates that it intends to con-
tinue to be the major supplier of this market for
the indefinite future. The Communist countries of
Eastern Europe are arranging to import small quan-
tities of Middle East oil. Although such diversi-
fication will give these countries some economic
independence from the USSR, particularly as the
ratio of Free World oil imports increases, they will
continue to be heavily dependent on the Soviet
Union.
Soviet oil exported to the Free World in 1967
was equal to about 7 percent of the demand of Free
World countries, not including the United States.
The USSR has emphasized exports to the industrialized
West to earn foreign exchange for import of Western
technology and equipment. Exports to less developed
countries have dropped during the past two years
and now constitute only about 15 percent of total
Soviet exports to the Free World, compared with 22
percent in 1965. The rate of growth now anticipated
for Free World demand is higher than that in avail-
ability of Soviet oil for export to the Free World,
and the USSR will experience difficulty in main-
taining its present share of the Free World market
through 1975. The intrenched position of Free
World oil companies in the principal markets also
constitutes a formidable obstacle to rapid Soviet
penetration in the Industrial West.
Recently, the USSR has shown increased willing-
ness to cooperate with Western governments and oil
companies. To minimize transport costs that have
been driven up by closure of the Suez Canal, the
USSR has agreed to provide oil to British Petroleum,
Shell Oil, and Compagnie Francaise des Petroles at
the Black Sea for delivery to markets in Europe in
exchange for Persian Gulf oil to supply the small
Soviet markets east of Suez. It also has entered
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into formation of a joint Soviet-Belgian oil com-
pany, Nafta (B), which has leased land in the Antwerp
harbor area and plans construction of an oil import
and distribution facility. This is the first time
that the USSR is known to have invested in such an
oil facility abroad, and in doing so it has indi-
cated its willingness to adapt to foreign government
restrictions and to Western commercial procedures.
Access to Middle East oil would be a valuable
economic and political asset which the USSR no
doubt finds attractive. There is no evidence, how-
ever, that the USSR is exerting pressure to gain
such access. Thus far, it has limited its oil
activities in the area to assisting certain Middle
East countries with petroleum exploration and
development. It has concluded a mutually benefi-
cial economic agreement with Iran to exchange
military and industrial equipment for natural gas.
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Soviet Petroleum Supply and Demand
1. The Soviet Union is the second largest
producer of crude oil in the world, being surpassed
only by the United States. In 1967, Soviet produc-
tion was 288 million tons, about 16 percent of total
:-.Ld output. US production was about 440 million
tins, or 25 percent of world output. Since 1960,
the average annual increase in Soviet production
has been about 20 million tons. It is estimated
tha-. the average annual increment through 1975 will
be about 23 million tons.
2. Production in the USSR is based on large
proved reserves estimated at about 4.7 billion tons
at the end of 1967, approximately 8 percent of the
world's proved reserves of crude oil. About 60 per-
cent of the world's proved reserves of crude oil are
located in the Middle East and about 9 percent in
the United States. The Soviet reserves are adequate
to sup-port achievement of announced goals for produc-
tion of 350 million tons in 1970 and 470 million
tons in 1975. The discovery and development of new
reserves of crude oil in the USSR has not been
keeping pace with the increase in production, and
the ratio of reserves to production which was 20
to 1 in 1958 had fallen to 16 to 1 by 1967. The
USSR has, however, huge potential reserves, and
the development of West Siberian deposits may lead
to considerable improvement in the reserve to pro-
duction ratio by 1975.
3. The USSR also ranks second in the world in
petroleum refining capacity. At the beginning of
1968, it had a total primary distillation capacity
of about 255 million tons, not enough to process
all of the crude oil produced domestically. Accord-
ing to the original seven-year plan for the years
1959-65, primary distillation capacity was to reach
250 million to 260 million tons in 1965, which
would have been adequate to process the 243 million
tons of crude oil produced in that year. During
the seven-year period, however, refinery construc-
tion lagged, particularly construction of the
secondary refining facilities necessary for improve-
ment of product quality and for greater flexibility
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in the product mix. Exports of crude oil increased
significantly, and refinery construction goals were
lowered so that excess primary refining capacity
would not be built. During the present five-year
plan period, 1966-70, emphasis is being placed on
construction of secondary refining units, and pri-
mary distillation capacity probably will increase
to about 300 million tons per year.
4. The supply of petroleum products in the
USSR has in general been adequate to satisfy the
steadily growing domestic demand. There has been
an excess supply of gasoline, although in recent
years steps have been taken to improve quality.
The supply of diesel fuel, the basic fuel of the
Soviet economy, has been tight, partially as a
result of the fact that 10 to 15 percent of the
diesel fuel produced is exported to earn foreign
exchange. Consumption of diesel fuel has risen
rapidly with the widespread use of diesel equipment
in agriculture and transport. Apparent consumption
rose from about 18 million tons in 1958 to 45 mil-
lion tons in 1966, while production rose from 21
million tons to 53 million tons, an increase of
150 percent in both cases. Sporadic local shortages
have occurred., usually as a result of transport
difficulties during periods of peak demand, such
as at the time of the grain harvest. Consumption
of petroleum products increased in the USSR at an
average annual rate of about 9 percent during
1959-65. It is estimated that the average annual
increase will be about 7 percent during the present
five-year plan period, 1966-70, and about 6 percent
during 1971-75. Estimates of the total supply and
demand for petroleum products in the USSR are com-
pared for various years in the following tabula-
tion:
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Supply
Yield from refining
Imports
Natural gas liquids
and synthetics
Total
Demand
Domestic consumption
Exports
Total
1958
1960
1965
1967
1970
1975
93
116
177
207
248
326
3
3
2
1
1
1
1
1
3
3
5
10
97
120
182
211
254
337
88
105
161
186
227
305
9
15
21
25
27
32
97
120
182
211
254
337
5. In addition to its huge resources of oil,
the USSR has between one-third and one-half of the
world's potential resources of natural gas, which
for many uses can be substituted for oil. The
proved natural gas reserves of the USSR at the
beginning of 1966 were estimated at 2 trillion
cubic meters (cu. m.), about 18 percent of the
proved reserves in the world. Production in 1967
was 159 billion cu. m., equivalent to about 190
million tons of oil. By 1970, gas production is
scheduled to reach 215 billion cu. m., and by 1975
about 350 billion cu. m. Attainment of these goals
appears doubtful. Soviet goals for production of
natural gas have frequently been underfulfilled,
and achievement of the targets for 1970 and 1975
would require average annual increments in produc-
tion nearly twice the increase of 14 billion cu. m.
recorded in 1967. Nevertheless, production of
natural gas can be expected to increase signifi-
cantly and by 1970 it may be equivalent to between
230 million and 240 million tons of oil. Consump-
tion of gas in the USSR has nearly equalled produc-
tion. Small quantities have been exported, primarily
to Poland and Czechoslovakia, and agreements signed
in 1966 and 1967 provide for the first imports of
gas from Afghanistan and Iran.
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6. Deliveries from Afghanistan began with 0.7
billion cu. m. during the last half of 1967 and
are to increase gradually to 2 billion cu. m. in
1970, 3.5 billion in 1973, and 4 billion annually
during 1976-84. Deliveries from Iran will commence
at the rate of 6 billion cu. m. in 1970, will in-
crease to 10 billion by 1974, and will remain at
that level until 1985. The USSR probably will be
a net importer of gas during 1970-74. However, by
satisfying part of the domestic need by importing
low-cost gas from Afghanistan and Iran, the USSR
may be able to make available some domestic gas
for profitable export to markets in the Free World.
Proposals for exporting 2 billion cu. m. to Japan
and 6 billion to 8 billion cu. m. to markets in
Western Europe by 1975 have been under discussion.
If these proposals are implemented, Soviet trade
in natural gas will be approximately in balance in
1975. The USSR probably will then export abcut
5 billion cu. m. annually to the Communist countries
of Eastern Europe* and will import about 14 billion
cu. m. annually from Afghanistan and Iran.
7. In recent months, Austria has agreed to
import Soviet natural gas through a proposed exten-
sion of the existing 28-inch gas line from the USSR
to Czechoslovakia. About 500 million cu. m. per
year are to be supplied to Austria, probably begin-
ning in 1969, in exchange for 40-inch and 48-inch
pipe for use in the USSR. Soviet negotiations with
Italy have been under way for more than 18 months.
The Italians are reluctant to extend credits for
pipe and equipment at the low rate of interest pro-
posed by the USSR. Italy also is unwilling to accept
the Soviet request that part of the gas be paid for
with hard currency. Italy may be attempting to gain
time in which to negotiate for gas from the Nether-
lands at more favorable prices.
The USSR as an Exporter of Oil
8. The USSR has been a net exporter of oil
since 1955. Exports have risen from 8 million tons
in that year to an estimated 79 million tons in
1967, an average annual increase of about 21 per-
cent. In 1967, exports of petroleum were equivalent
The Communist countries of Eastern Europe include
Bulgaria, Czechoslovakia, East Germany, Hungary,
Poland, and Rumania.
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to 27 percent of total Soviet production of crude
oil. A shift in the composition of exports has
occurred over the years. In 1955, crude oil repre-
sented only 36 percent of total petroleum exports.
The share of crude oil has been more than 50 per-
cent of the total, however, since 1960 and reached
69 percent in 1967. Estimated Soviet exports of
crude oil and petroleum products for selected years
are compared below.
Million Tons
1955
1960
1965
1966
1967
1970
1975
Crude oil
2.9
17.8
43.4
50.3
54.0
73
103
Petroleum
products
5.1
15.4
21.0
23.3
24.7
27
32
Total
8.0
33.2
64.4
73.6
18.7
100
135
9. The USSR has been the major source of petro-
leum for other Communist countries except Rumania
and Communist China. Rumania has been self-
sufficient in petroleum, and Communist China has
been essentially self-sufficient in recent years.
Exports to other Communist countries have increased
from about 4 million tons in 1955 to about 35 mil-
lion tons in 1967. However, the share of other
Communist countries in total Soviet exports of
petroleum declined during this period from 52 per-
cent to 44 percent. Approximately 80 percent of
the petroleum exported by the USSR to other Communist
countries goes to Eastern Europe. Oil from the
USSR satisfies approximately 85 percent of Eastern
Europe's demand, excluding that of Rumania. In
1967, when the USSR produced 288 million tons of
crude oil, it exported 79 million tons of petroleum.
Of this amount 35 million tons were shipped to other
Communist countries, including 28 million to Eastern
Europe. The level of exports to other Communist
countries in 1966 and 1967 is indicated below:
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Million Tons
1966
1967
Importing Area
Crude
Oil
Petro-
leum
Prod-
ucts
Total
Crude
Oil
Petro-
leum
Prod-
ucts
Total
Eastern Europe
21.0
4.3
25.3
22.7
5.0
27.7
Cuba
3.8
1.2
5.0
3.8
1.4
5.2
Yugoslavia
0.7
0.5
1.2
0.6
0.5
1.1
Communist China
0
Negl.
Negl.
0
Negl.
Negl.
North Vietnam
0
0.2
0.2
0
0.2
0.2
North Korea
0
0.4
0.4
0
0.4
0.4
Mongolia
Negl.
0.2
0.2
0
0.2
0.2
25.5
6.8
32.3
27.1
7.7
34.8
10. The USSR has emphasized exports of oil to
the Free World, especially to the industrialized
Free World countries, to earn foreign exchange for
the purchase of equipment and technology. In 1967,
Soviet exports to the Free World were valued at
about $510 million, of which approximately $340 mil-
lion was in hard currency. During 1966-67, Soviet
sales of oil to Western Europe accounted for more
than three-fourths of its oil exports to the Free
World and about 43 percent of all petroleum ex-
ported from the USSR. Imports by Italy, West
Germany, and Finland represented more than half
of all the oil sold by the USSR Co the Free World
in 1967. Soviet exports to Western Europe cur-
rently representea little less than 8 percent of
this area's rising demand. The largest importer of
Soviet oil outside of Western Europe is Japan
which in 1967 imported 3.9 million tons of petro-
leum from the USSR, thereby satisfying nearly 4 per-
cent of its demand for oil. The estimated division
of Soviet petroleum exports between Communist and
Free World countries is shown in the following
tabulation. r
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Other
Communist
Countries
Free World
Total
Million tons
4.2
3.8
8.0
Percent
52.5
4i.5
100.0
Million tons
15.2
18.0
33.2
Percent
45.8
54.2
100.0
Million tons
28.9
35.5
64.4
Percent
44.9
55.1
100.0
Million tons
32.3
41.3
73.6
Percent
43.9
56.1
100.0
Million tons
34.8
43.9
78.7
Percent
44.2
55.8
100.0
Million tons
47
53
100
Percent
47
53
100
Million tons
65
70
135
Percent
48
52
100
11. Soviet sales of petroleum to the less
developed countries accounted for only 15 percent
of total Soviet exports to the Free World in 1967,
compared with 22 percent in 1965. The 6.6 million
tons of petroleum sold to the less developed coun-
tries by the USSR in 1967 represented only about
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6 percent of their collective demand for oil. In
some countries, however, such as Somalia, Ghana,
Ceylon, and Yemen, the small quantities of Soviet
oil represented a significant portion of their
supply. The less developed countries are not
attractive markets for Soviet oil for a nu+.tber of
reasons. Their demand is uneven; the small quanti-
ties involve uneconomical shipments; they lack hard
currency; and the goods that they offer in exchange
for oil are not essential to the Soviet economy.
Future Patterns of Soviet Oil Exports
12. Thn ability of the USSR to increase exports
of oil to the Free World will be limited by the
So,;.-',et level of production; by the growing demand
within the USSR; by Soviet commitments to supply
larger quantities of oil to other Communist coun-
tries, especially those of Eastern Europe; and by
the lack of Soviet marketing and distribution
facilities in he industrialized Free World countries.
The Soviet plan for production of crude oil in 1970
is about 350 million tons. In that year the USSR
may export about 100 million tons of crude oil and
petroleum products -- about 47 million to other
Communist countries and 53 million to the Free
World. It is anticipated that by 1970, Soviet
exports to Communist countries outside Eastern
Europe will be around 9 million tons, 2 million
tons above the level of 1966-67. Plans and agree-
ments already exist whereby the Communist countries
of Eastern Europe will import between 33 million
and 34 million tons of crude oil from the USSR in
1970. It is estimated that in that year these
countries will also produce about 18 million tons
of crude oil, import 4 million to 5 million tons
of petroleum products from the USSR, and procure
perhaps 5 million to 7 million tons of crude oil
from Free World sources. Rumania, which until
the present has always met its own needs for crude
oil and has Leen a net exporter of petroleum prod-
ucts, probably will import about half of this Free
World oil.
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13. The plans and estimates of imports by the
Eastern European Communist countries are compatible
with plans for expansion of pipeline and refining
facilities. The capacity of the Friendship crude
oil pipeline system, which links Eastern Europe
to the oilfields of the Urals-Volga region in the
USSR, is being expanded. This system is now
operating near capacity, about 8 million to 9 mil-
lion tons through the northern branch to Poland
and East Germany and 9 mi llic,n tons through the
southern branch 'Co Czechoslovakia and Hungary.
A second line, parallel to the first, is to be
laid throughout the entire system which eventually
will have an annual capacity of about 47 million
-tons. This capacity probably will not be fully
attained until the mid-1970's. The laying of the
second line has been completed within Czechoslovakia,
and work is in progress in the USSR. The combined
capacity of the southern branch probably will be
about 22 million to 23 million tons per year when
all pumping stations are installed. On the basis
of plans for expansion of refining capacity in
Czechoslovakia and Hungary, it does not appear
that the new portion of the southern line will be
fully utilized or needed until about 1975. By
1970, however, the capacities of refineries served
by the southern line are to be expanded by about
7 million tons and the capacities of refineries
in Poland and East Germany served by the northern
branch by 7 million to 8 million tons. Czecho-
slovakia and Poland have agreed to provide equip-
ment for Soviet industry in return for increased
deliveries of Soviet oil after 1970.
14. The USSR may export about 135 million tons
of petroleum in 1975 -- 65 million tons to other
Communist countries and 70 million tons to the
Free World. Of the 65 million tons exported to
other Communist countries, nearly 55 million tons
probably will be delivered to Eastern Europe. In
addition, the Communist countries of Eastern
Europe may produce about 24 million tons domes-
tically and import 16 million to 20 million tons
from the Free World. Estimated East European sup-
plies of crude oil for selected years during
1962-75 are shown in the following taulation:
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Mil].ion Tons
Imports
Year
Total
Supply
Indigenous
Production
From the
USSR
From the
Free World
1962
22.9
14.1
8.7
0.1
1966
37.4
15.6
21.0
0.8
1967
39.9
16.2
22.7
1?0
1970
56 to 59
18
33 to 34
5 to 7
1975
93 to 98
24
53 to 54
16 to 20
15. In an apparent effort to diversify sources
of supply, the East European Communist countries
have made or are seeking to make arrangements to
import crude oil, on a barter basis, from various
Middle East countries -- Iran, Saudi Arabia, and
Kuwait. Thus far, however, no East European
country has taken delivery of any Middle East oil,
probably because of the prohibitive transport
costs caused by the closing of the Suez Canal.
The quantity of non-Soviet oil that Eastern Europe
can obtain may also be limited, in part, by the
willingness of Free World countries to accept
Eastern European goods in exchange. Rumania has
concluded agreements whereby it will import 3.5
million tons of crude oil from Iran during 1968-70
and 9 million tons of crude oil from Saudi Arabia
during 1968-71. Czechoslovakia is negotiating
with Iran to obtain 15 million to 20 million tons
of crude oil during 1970-80 in exchange for Czecho-
slovak capital goods valued at $200 million, and it
is possible that for political reasons Czechoslovakia
may also seek to obtain oil from other Free World
sources. If existing agreements are honored, however,
the USSR will continue to supply 80 to 85 percent of
the oil required by Czechoslovakia through 1975.
Although obtaining an alternative source of supply
might give the Czechs a feeling of independence,
they will, in any case still remain heavily dependent
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on the USSR. Any oil that Czechoslovakia obtained
from Iran would be expensive because of the high
cost of transporting it to this land-locked country.
Moreover, a requirement for hard currency might
restrict Czechoslovakia's ability to import oil
it needed.
16. The USSR now supplies about 7 percent of
the oil required by Free World countries other
than the United States. The Soviet commitment to
supply the major part of the increasing quantities
of oil required by Eastern Europe and the in-
trenched position of Free World oil companies make
it unlikely that the USSR will increase its share
in the Free World market, at least through the
mid-1970's. In fact, if as is expected the demand
for petroleum in the Free World, excluding the
United States, increases at a rate of about 8 per-
cent per year and the availability of Soviet oil
for export to the Free World increases at about
6 percent per year through 1975, the Soviet Union
will not even be able to maintain its present share
in the Free World market.
17. The USSR recently has begun a new policy
of cooperating with Western oil operators and of
investing in oil activities abroad. The continued
closure of the Suez Canal has increased the cost
to the USSR of transporting Soviet oil. to markets
east of Suez and the cost to Western oil companies
of supplying Middle East oil to markets west of
Suez. The USSR has agreed to provide oil to British
Petroleum, Shell Oil, and Compagnie Francaise des
Petroles at the Black Sea for markets in Europe in
exchange for oil in the Persian Gulf to supply
Soviet markets east of Suez. Although the quan-
tities involved in these accommodations are small
(only 2 million tons are involved thus far) and
are limited by the small size of Soviet markets
east of Suez, the arrangement is economically
beneficial to all parties. Having established its
willingness to cooperate, the USSR may continue
the arrangements even after the Canal reopens.
18. Recently, the USSR participated in the
formation of a joint Soviet-Belgian oil company --
Nafta (B) -- in which the USSR owns a majority
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interest. This company has leased land in the
Antwerp harbor area and plans construction of an
oil import and distribution facility. In addi-
tion, Nafta (B) attempted to purchase a small
refinery from an established independent Belgian
oil company. The USSR has not previously invested
in such oil facilities abroad. The ussr, also has
announced plans to expand the retail sales of
Nafta (GB) in the United Kingdom. This company
is the successor to a Soviet company that has sold
locally procured petroleum products through its
retail outlets since before World War II. The
immediate effect will be to enhance the Soviet
image as a reasonable, cooperative oil supplier
capable of adapting to Western comiercial
practices and of competing in a foreign country
with established Free World oil companies.
Soviet Activities in the Middle Last
19. In the Middle East, overt Soviet invo.ve-
ment in oil has been limited essentially to ex-
ploratory activities in Egypt, in the Iranian
territorial waters of the Caspian Sea, and in
Syria. (Soviet technicians also have engaged in
exploratory activities in Algeria.) None of these
activities appears designed to achieve control
of Middle East oil. The USSR has assisted in
oil exploration in Egypt, but Egypt relies prin-
cipally on Western oil companies for expansion of
its oil industry. Acting as a contractor for Iran,
the USSR has explored the Iranian offshore areas
of the Caspian Sea. Although the findings re-
portedly are promising, neither the USSR nor Iran
now is willing to risk capital in exploiting the
area. The Soviet aid to Syria's oil industry has
contributed to a level of production that exceeds
Syria's needs, and the USSR may have to assist in
the disposal of some of the surplus.
20. The Soviet-Iranian agreements involving
the exchange of Soviet capital and military goods
for Iranian natural gas are economically advan-
tageous to both parties and may be a factor for
stability in the area. The Iranian gas that would
otherwise be burned as waste (flared) can be used
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to supplement, at low cost, declining supplies in
the contiguous areas of the USSR. The successful
fulfillment of the contract to supply gas to the
USSR depends on the uninterrupted production and
marketing of oil as the gas occurs in association
with oil controlled by a combination of Free World
oil companies, the Consortium.
21. The USSR dlso has offered to assist Iraq
in expanding its oil industry.
Iraq has invited bids from Western
contractors for help in developing its rich deposits
in North Rumaila. This suggests that Iraq may pre-
fer Western assistance.
Importance of Middle East oil
22. Annual oil revenues for the Middle East
oil-producing states currently are approaching
$3 billion. These revenues comprise about 90
percent of total export income and, on the average,
represent about two-thirds of total government
income. Revenues to these oil producing states
will grow as Free World demand for oil increases.
Moreover, individual states continue to press for
increased oil sales and for a greater share in the
revenues from oil sales. It is unlikely that this
dependence on oil income will decrease significantly
in the foreseeable future.
23. About one-third of the oil produced in the
Free World now comes from the Middle East. This
region supplies about one-half of the Free World
oil produced outside of the United States. These
shares may decrease slightly in the mid-1970's, as
production of oil is expected to increase somewhat
more rapidly in North Africa than in the Middle
East. The United States consumes a negligible
amount of oil from the Middle East and has access
to oil at home and elsewhere in the Western Hemi-
sphere adequate to meet its estimated requirements
through about 1980. Western Europe and Japan,
however, will continue to be heavily dependent on
Middle East oil for the foreseeable future. In
1966, Western Europe received slightly more than
one-half of its oil imports from the Midd?.e East.
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By the mid-1970's, when Western Europe's demand
will have increased by about 80 percent, it is
expected that the Middle East will supply slightly
less than one-half of the oil imported into Western
Europe. Imports of oil from North Africa will have
increased substantially. Japan now depends on the
Middle East for more than 80 percent of its oil sup-
plies, and it is expected that this same degree of
dependence will exist in the mid-1970's, by which
time Japan's demand for oil will have more than
doubled. The distances involved would make it dif-
ficult for Japan to reduce its dependence on Middle
Eastern oil by shifting to oil from the Western
Hemisphere or North Africa. The demand for petro-
leum in Western Europe and Japan and the sources
of supply in 1966 are compared with forecasts for
1975 in the following tabulation.
Million Tons
Western Europe
Japan
1966
1975
1966
1975
Demand
445
810
101
250
Supply
Domestic production
20
50
1
1
Imports
425
760
100
249
Total
Origin of imports
Middle East 53
North Africa 29
Communist countries 8
Latin America 10
United States Negl.
Far East Negl.
46 83 83
42 Negl. Negl.
9 5 5
3 2 2
Negl. 2 2
Negl. 8 8
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Middle East Governments' Position on Exploitation
of Oil by Foreigners
24. The Middle East governments now tend to
avoid granting exclusive concessions to foreigners
to exploit their oil resources. Most Middle East
governments, through national oil companies, now
retain ownership and also control the development
of areas, both onshore and offshore, where foreign
oil companies do not now hold concessions. Moreover,
they regain control of any areas relinquished by the
companies. The Middle East governments now explore
and develop oil resources under their control through
service contracts with foreigners, through joint
ventures or partnerships with foreigners, and to a
negligible degree through their own resources. Under
the provisions of the former two arrangements, the
Middle East governments provide no risk capital, and
the foreigners recover investment only if oil is
found. Neither the USSR nor other Communist countries
have provided risk capital for the development of oil
resources abroad. Unless there is a change in
this traditional policy, it is unlikely that Com-
munist countries would be party to any partnership
or service contract with the national oil companies
in the Middle East. No Communist country would be
eligible for a partnership in Iran unless an Iranian
organization was permitted to conduct similar opera-
tions in the Communist country.
Control of Middle East Oil Production vs. Control
of Middle East Oil Movements
25. Control of the production of Middle East
oil does not necessarily imply control of its ulti-
mate disposition. Crude oil is of value to the
extent that it can be transported, refined into
suitable products for use by the consumers, and
marketed. US agencies alone own or control about
25 percent of the world tanker fleet, and Free
World oil companies also control a large share of
the charter fleet; the USSR owns less than 5 per-
cent; and the Middle East governments a negligible
share. US and UK oil companies own, in whole or
in part, about two-thirds of the refining capacity
in Western Europe and Japan, the principal markets
for Middle East oil. These same oil companies also
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control most of the oil storage and retail distri-
bution facilities. These oil companies could be
expected to oppose the transfer of control of Middle
East oil to a hostile nation which would be able
to introduce a new potential vulnerability into
the normal flow of Middle East oil to Free World
consumers. There is a limit, however, to the extent
that these oil companies could deny their "down-
stream" facilities in consuming countries to Middle
East oil. It is unlikely that any European country
or Japan would permit US or UK oil companies to refuse
to store, refine, and distribute Middle East oil if
refusal meant a national oil shortage, particularly
if Middle East oil continued to be available at
reasonable prices.
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