WESTERN PROBLEMS IN MARKETING PETROLEUM

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP80B01676R001200150040-1
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 7
• Document Creation Date: December 14, 2016
• Document Release Date: April 8, 2003
• Sequence Number: 40
• Publication Date: November 30, 1960
• Content Type: MF

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MEMORANDUM FOR:
Deputy Director/Intelligence
SUBJECT:
Western Problems in Marketing Petroleum
REFERENCES:
(a)
(b)
Memorandum for the DCI from Chief of Naval
Operations, dated 19 November 1960
Enclosure to Reference (a), entitled, "Growing
Crisis in the Distribution and Marketing of
Petroleum by Western Nations"
1. A critique of Reference (b) is enclosed for possible inclusion
in the Director's response to Admiral Burke's letter.
2. In Reference (a), Admiral Burke appears to look upon Soviet
oil sales in Western markets as little more than moves in the cold war
and as "economic warfare". He suggests that a study be undertaken by
interested agencies of the Government working in conjunction with the
petroleum industry. Although it is not clear what kind of a study he
has in mind, it would apparently cover a very broad range of problems
including US policy toward what is called Soviet economic warfare. We
feel strongly that if such a study is undertaken, it should be preceded
by an intelligence study of Bloc capabilities and intentions with respect
to the export of oil over the next five years or so. Before a prudent US
policy can be developed, it will surely be necessary to secure a common
understanding of Soviet capabilities for export, and even more important,
of what the Soviets are up to. An intelligence study would also support
the US representative to the NATO ad hoc study group on Soviet oil policy.
Finally, it would help to pin down the varied and often contradictory
figures which are quoted on Soviet oil sales abroad. We had concluded
even before receipt of the references that an intelligence study would
be desirable and are prepared to go ahead with it. Our present views
are very briefly stated in the draft of NIE 30-60, Middle East Oil, now
before the USIB representatives..
3. Referenced documents contain many of the ideas expressed by
M. J. Rathbone, President of the Standard Oil Company (New Jersey), at
a recent convention of the American Petroleum Institute. We understand
that Mr. Rathbone and others have expressed similar views to various
government officials. Mr. Rathbone is reported to have told the API
convention that Western governments should make representations that
oil deals with the USSR are not a good idea and to have added that
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SUBJECT: Western Problems in Marketing Petroleum
although other governments have recently protested through diplomatic
channels, the US has not.
4+. Many US oil companies are apparently greatly concerned about
the recent agreement between the Soviet Union and ENI of Italy. ENI has
for a number of years carried on a feud with the Western international
oil companies. It was Enrico Mattei, head of ENI, who first broke the
traditional pattern of 50-50 agreements with Middle Eastern countries,
when he negotiated a 40-60 deal with Iran in 1955. Among his other
grievances, fancied or real, Mr. Mattei blames the US oil companies
for keeping,ENI out of Libya. It is just possible that the US oil
companies consider Mattei to be as great a villain in the Italian
deal as the Soviets, if not a greater one.
Assistant Dir ctor
Research and Reports
25X1
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 CENTRAL INTELLIGENCE AGENCY
Admiral igh Burke
Chief of" Operations
Department of he Navy
Washington 25, C.
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Dear Arleigh:
Thank you for you letter of 19 November enclosing the study
"Growing Crisis in the Di tributiAn and Marketing of Petroleum by
have had some of my pnp a review the study carefully and
they prepared comments for die whi you may find of interest. I
am enclosing a copy for yC[i.
feel that an in lligence study f Bloc capabilities and
intentions with respe to the export o oil over the next five
years or so should ecede any over-all p icy study, and we are
prepared to undert a such a study in the n future.
25X1
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COMMENTS ON STUDY ENTITLED "GROWING CRISIS IN
THE DISTRIBUTION AND MARKETING OF PETROLEUM
BY WESTERN NATIONS", DATED 19 NOVEMBER 1960
The theme of this study concerns Soviet objectives in the
international oil market and the effect of Soviet actions on the
national security interests of the United States.
This study states that cost considerations are secondary to
political motivations when the USSR tries to penetrate Western oil
markets. It is believed that this interpretation oversimplifies the
present situation and wrongly states the probable Soviet motivation.
The fact is that the Soviets have become large producers of petroleum
and that they possess a surplus over their own requirements and the
import requirements of the other Communist countries. While economic
considerations may well be secondary to political considerations in
sales to underdeveloped countries, the reverse is almost certainly
true in the developed countries of Western Europe, which account for
the bulk of present day Western oil markets outside the United States.
It is believed that the principal objective of the Soviet Union in
Western Europe is to sell oil as a source of foreign exchange to pay
for increased imports of plant equipment needed to achieve the
production goals of the Seven Year Plan, and that the Soviet interest
is in maximizing earnings rather than in conducting an economic cold
war. Past Soviet policies in the tin and diamond markets tend to
support this interpretation, for when the Soviets had secured what
they considered a fair share of the market,- they were perfectly willing
and even eager to sell at going prices. At the present time, oil is
the largest single earner of foreign exchange for the USSR.
Present Soviet pricing policy is best understood in terms of the
economics of the international oil market, not in terms of economic
warfare. Oil is a homogeneous commodity usually purchased in relatively
large quantities by well informed buyers. Although buyers are interested
in such things as continuity of supply, product quality, and the like,
they are even more strongly interested in relative price. Western
purchasers would almost certainly not buy from the Soviet Union if
Soviet prices, quality and terms of trade were the same as those
offered by the Western oil companies. Therefore, and because the
quality of Soviet oil is in fact inferior, the Soviets are under
strong economic pressure, particularly when first entering a market,
to better Western offers by cutting prices, accepting local currencies,
bartering and the like. They certainly could not significantly enlarge
their share of the market without the use of such tactics, particularly
at the present time, when oil supplies are plentiful.
The study states that the problem from the point of view of United
States national security interests is not simply that the Western
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companies lose markets or that the United States balance of payments
suffers. It then cites two problems. The first is that the Soviets
can influence the price of oil by dumping or price cutting operations.
It has already been noted that in the important markets at least, the
Soviets are probably not interested in doing these things per se. In
the present context, it also is questionable whether Soviet price
cutting is necessarily contrary to the security interests of the
United States, as distinct from the commercial interests of the oil
companies. The second problem is said to be that the Communist states
create a picture of "bettering" Western private enterprise in competi-
tive markets, and that this will serve "as an example of the Soviet
system winning out over the American system". If hitherto friendly
or neutral nations reached such a conclusion, the national security
interests of the United States would indeed be affected. It remains
to be demonstrated, however, that the Soviet Union would always "better"
private enterprise in selling oil, or that other nations would, as a
result, reach the above conclusion. It also does not follow that
consumer nations will "turn a more attentive ear toward Communist over-
tures lest their vital oil supply line be tampered with by the Kremlin",
because alternative sources would be readily available in the West.
It is stated in the study that the recent Soviet-Italian agreement
indicates a price for Soviet oil of one dollar per barrel, which is said
to be below the actual cost of production of Middle East operators. The
study also refers to the "ridiculously low prices" set by the Soviet
Union for its oil. Although production costs for Middle East oil are
not available from authoritative sources, it would be surprising if
these costs were not substantially below one dollar per barrel, and
perhaps as little as fifty cents or less. Judgment on whether or not
the Italian deal was "commercial" should be based on an examination of
the details (including prices) on the products which the USSR is receiving
from Italy, including large diameter pipe, valves, rubber, etc.
30 November 1960
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15 tiyILL cHEE" CONFIDENTIAL
UTJCLASSIFIED
CENTRnL. INTELLIGENCE
ROUTING AGENCY
OFFICIAL
NAM ADDRESS
APPROVAL
CONCURRENCE
Remarks :
RE M ENS
-ad the attached with a
asked for your
The Director r and a proposed
great deal of intertstether vcrith
recommendations g drn.iral Burke.
reply for his signature to A
JSE
X7 clWXa-~
E DER
OLD HERE TO RETURN To
M: NAME. ADDRESS AND PHONE NO
F r
FORM No. 237 AePlacm yobremused.
1 APR 55 wb1 b may
 s {
_
UNCLASSIFIED CONFIDENTIAL SECRET
CENTRAL INTELLIGENCE AGENCY
OFFICIAL ROUTING SLIP
TO
NAME AND ADDRESS
INITIALS
DATE
1
DD/I - Mr. Amory
?9--6o6
2
3
4
5
6
L
ACTION
DIRECT REPLY
PREPARE REPLY
APPROVAL
DISPATCH
RECOMMENDATION
COMMENT
FILE
RETURN
CONCURRENCE
INFORMATION
SIGNATURE
Remarks :
Bob:
After signing the attached letter, the boss
had second thoughts and commented that the
enclosure would only tend to irritate Admiral
Burke. He has therefore asked that our letter
be rewritten along the lines of Gordon Gray's
reply (attached), advising what we are doing
and also offer to put our people in touch with
his experts on this matter.
JSE
FOLD HERE TO RETURN TO SENDER
FROM: NAME. ADDRESS AND PHONE NO. DATE
EO/DC 3 Dec 60
ove FON -
FORM NO. 237 Replaces Form 30-4
1 APR 55 which may be used. U. S. GOVERNMENT PRINTING OFFICE: I955-0 342531