Order in Oil

ONLY a short time ago the atmosphere in which international petroleum affairs were being discussed was highly charged. The violent thunderstorm which centered about the proposed trans-Arabian pipeline cast an eerie darkness over the whole panorama of our foreign relations. Now, happily, the weather has improved to a gentle drizzle, and a ruminative walk among the issues will not be unpleasant.

The pipeline project itself appears to be in suspense. While the military branches of the Government still favor a line from the Arabian peninsula to the Mediterranean as of use in case the war in Europe should be prolonged, they do not appear to be insisting that it is immediately essential. The fact that we would have to establish a new refinery on the Mediterranean if we were to use the crude oil products of Saudi Arabia and Kuwait in battle has set farther forward the date at which the pipeline could make a military contribution. The companies which have agreed in principle to construct it have promised a Senate Committee not to proceed with the undertaking until the Committee has had the chance to pronounce its views. The conversations between the Petroleum Reserves Corporation and the companies looking toward the signature of a formal agreement are at a halt.

The mission sent here by the British Government has come and gone without having changed a comma in the commercial or diplomatic arrangements that obstruct the undertaking. The conferees unrolled a larger map, on which the Middle East was but a single point of interest at which their attention did not pause for long. The only press release thus far issued reports merely that the two groups reviewed specific matters of mutual interest, including "the proposed trans-Arabian pipeline," and that "the group shared the view that the peacetime intergovernmental aspects of such matters should be resolved as between the two Governments, and within the framework of the broad principles which had been discussed." Still, it would be an error to believe that the pipeline project has been sent to the archives on the fourth floor of the State Department from which only heroes ever rescue documents. In London, it is my surmise, those agreements that stand in the way of the development of American oil enterprise in the Middle East are now being fingered by reflective officials. In Washington the president of the Petroleum Reserves Corporation is not given easily to relinquishing a cause that has once gained his support.

Though the conversations did not dispose of the pipeline project, they have improved the atmosphere and enlarged the field of understanding and agreements so that a mutually satisfactory disposition of the matter can be attained eventually. They brought into the open the fears of certain American oil interests regarding British designs on their properties, and evoked a joint examination of recent actions that had been interpreted as evidence of evil intention. A sense of common business was born and the right of future question and answer established -- which should help to prevent the resurgence of suspicion. Reciprocally, the British were able to test for themselves the intentions and purposes which had sped up the current of American interest in the Middle East, and in turn gained reassurance that they carried no threat to the British political position.

The danger that the two Governments might enter upon a protracted struggle over the respective advantages acquired by their nationals in oil and other commodities in the Middle East is much diminished. There is in the making an understanding which will prevent differences of opinions regarding oil from becoming the object of rough-and-tumble diplomacy. If the two Governments must continue to argue about their respective rights and opportunities, they at least will keep their tempers and their reason. Their behavior will be subject to agreed rules and principles; and they are to settle their difficulties in the conference room and not in the arena, where surprise punches are approved and hoarse shouts pass for judgment.

Further, the discussions have produced a calmer and more complete understanding of the petroleum supply position of the United States, of the place of Middle Eastern oil in the whole world petroleum supply position, and of the economic and political complexities which arise in connection with the development of the resources of the area. The education which has been acquired, both by the public and by officials, will greatly aid toward a mutually satisfactory fulfillment of both American and British aims.

Finally, the discussions have produced a heightened recognition on the part of all American and British interests concerned that their control over so great a part of all the world's petroleum resources carries an international responsibility. They soon came to recognize that the policies adopted to govern the development of these resources must represent more than an adjustment between contending American and British interests. It was seen that the task lying ahead requires that the peoples in the producing areas be assured of receiving equitable, nay generous, consideration of their interests; and that all nations dependent on sources of supply outside their own boundaries be assured that they would be available in ample quantity, at low cost, and on substantially equal terms. The conferees were compelled, and the Governments in the future will be compelled, to take this responsibility seriously.

An attempt was made to formulate the basic principles which simultaneously might reconcile the interests of the participants and satisfy their responsibility toward other countries. It thus becomes of interest to follow the traces of reasoning and policy that have been revealed. These should have significance not only in the petroleum field but in other raw material fields that seem likely to require international attention.

II

The text of the agreement reached at the conference has been withheld from publication pending approval by the two Governments. The discussion of the matters that claimed, or should have claimed, attention must therefore be somewhat conjectural. However, the well-established character of the matters at issue, the statements to the press and the circumambient reports that come to an interested observer lend confidence to surmise.

One of the first questions discussed was the belief of each party that the other at times tried to hinder or exclude its oil enterprises from obtaining new concessions or extending those already acquired. At the end of the last war, the American Government rather flatly charged the British Government and British oil combinations with seeking exclusive opportunity in certain Middle Eastern regions and in the Netherlands East Indies. The British interests have felt that the United States sometimes attempted to do the same in Latin America. More recently the dissatisfaction has centered upon the restrictions accepted by the American oil companies as a necessary condition of obtaining a share in certain oil-bearing territories of the Middle East, and the doubt whether they will be admitted for exploratory work in the colonies and dependent parts of the British and French empires.

The conferees agreed to support a policy of "equal opportunity." All the oil interests represented were drawn together by a common anxiety: the spreading disposition of foreign governments to exclude all foreign enterprise and to transform all branches of the native oil industry into government monopolies. The oft-repeated denials of any monopolistic intention by both the British and American Governments translated itself into support for what in the United States has become known as the Open Door policy. This would presumably mean the application of some rule of equality of opportunity.

If the two Governments would jointly sponsor this rule before the other governments of the world, general benefit would result. It would lessen envy and recrimination. It would bring supporting credence to the idea that colonies and dependent areas were not administered to the exclusive advantage of the controlling country. It would improve the prospect of obtaining a place in the world market for every country possessing oil resources. Since American enterprise and British enterprise, by virtue of their technical competence and financial strength, have a commanding lead in petroleum exploitation and development, the realm of their joint interest would expand.

Anyone who expects universal acceptance of the doctrine of equal opportunity is doomed to disappointment. The record clearly indicates, for example, that the U.S.S.R. feels no need of, and sees no benefit in, permitting foreign private oil enterprise to share in the development of its oil resources. Those Latin American countries that have committed their resources or prospects into the hands of a national government monopoly are not likely to change their course until or unless their experience proves disappointing and their trust and liking for foreign enterprise is renewed. To what extent, if any, the authorities of the French, Belgian and Portuguese empires will accept the conception of equality of opportunity there is no present indication. The immediate area of application would appear to be in the territories ruled by the United States, the lands of the British Commonwealth and Empire, the territories of the Kingdom of the Netherlands, the small but most important Arab states of the Middle East, and those Latin American countries which remain agreeable to sharing their economic destinies with outside enterprise. These areas include most of the important proven sources of oil supply.

In application, the rule would have to be shaped to the requirements of security, local order and social economic welfare. Each country will be justifiably reluctant to admit the enterprise of any country suspected of unfriendly intentions. In uncertain situations where political strain exists between the governed and the governors the presence of important foreign interests might not be tolerable. There will be instances where the development of oil is so integral a part of some broader program of local development that it cannot be shared between diverse groups. All these and many other varieties of circumstance will require recognition. Even when the door is open callers will be expected to come well introduced and at convenient hours, to behave themselves properly, to abstain from causing trouble in the family, and to leave when no longer welcome.

But it will not be these limitations of circumstance that will chiefly delay fulfillment of the conception of equality of opportunity. The greatest deterrent will be fears lest it create unmanageable disturbances in established currents of the petroleum trade and result at times in a marked excess of supply over effective demand, thus depressing prices, bankrupting weaker producers, causing the shutdown of poorer fields not yet fully utilized, and resulting in widespread loss to the whole oil industry. These fears have an important place in the minds of oil-producing interests when faced with any proposal that the restraints upon opportunities for exploration and production be rudely lifted. They explain why proposals for ending certain existing restraints inevitably become linked -- as they did in the recent American-British discussions -- with suggestions for a program of orderly adjustment of production to demand.

It may be surmised that suggestions looking to that end occupied more than a minor place in the recent discussions. Proposals for further substantially increasing Middle Eastern production -- whether by construction of the trans-Arabian pipeline or through removal of present restrictive accords -- immediately met the question as to how they would fit into the future world supply and demand situation. To the Petroleum Reserves Corporation and other branches of the American Government with which the proposal originated, the primary consideration was the advisability of expanding foreign sources of supply in order better to safeguard future American reserves. To other governments concerned, and to many of the oil interests, the problem is whether this should be achieved at their expense. All who have a stake in other oil-producing properties, whether in Iran or Texas, in Venezuela or Borneo, seek to visualize how the increased flow of Middle Eastern oil will affect their present and their future. Their view is that the development of Middle Eastern oil production must be accommodated to all other elements in the oil production situation, and that the solution must be found in some world-wide program of coördinated production.

Thus the question of what form a world-wide scheme of production regulation should take arose out of the mists of discussion, was granted existence and was put aside for further consideration. The press release conveys only the meager information that "in a spirit of understanding and consideration, the two groups explored the full range of both countries' interests in petroleum and the basis of broad principles looking to the orderly longrange development of abundant oil supplies." Even granted that the exploration remained primarily in the realm of the "spirit," we probably are safe in concluding that some attempts were made to materialize the spirit and we are justified in reviewing the main methods of materialization with which students of the economic occult have grown familiar.

There are influential advocates of an international petroleum agreement like the agreements that have operated in other commodity fields such as rubber, sugar and coffee. All such suggestions contemplate the allocation, in one way or another, of total demand among the producing sources. Usually they also provide that the total supply allotted for export shall be regulated primarily with a view to maintaining price within an agreed range. There is clear recognition by most of the proponents of such allocation schemes that their program would be acceptable (if at all) only subject to genuine international control and administration. An adequate examination of the application of any such program in the petroleum field would require many pages; and in addition might suggest that it received more serious consideration in the recent conferences than anyone would consider likely. My summary opinion is that there is virtually no chance that an allocation scheme could be negotiated. Among the many difficulties that negotiators would face is the strong wish of almost all producing areas to proceed unhindered with development; the uneven impact of an agreement upon the financial interests engaged in oil production; the inadequacies of knowledge regarding reserves; unexpected tides in the flow of different fields; and the recurrence of important new discoveries. In short, it would be too formal and too confining a dress for so acrobatic a branch of production as the oil industry. Besides, the only possible basis of negotiation would almost inevitably be one that enabled the poorer fields to survive and thereby burden the consumer and unwisely restrict development.

One type of allocation proposal has won influential support within the American petroleum industry -- namely, that countries combine in a program of production control based on the principle of conservation. The formula is attractive because of the desirability of avoiding waste of a vital resource which may prove scarce and because of the possibility that it might furnish a simple basis for setting the level of production for each producing area. The conservation purpose is sound and deserves consideration both in the individual and combined policies of nations. But it would not provide a satisfactory basis for international arrangements for the coördination or regulation of petroleum production. The rate at which supplies should be withdrawn from under the ground in order to be most highly useful would certainly differ greatly as between different oil-bearing structures; no identical fractional formula would fit them all. Incentive for conservation would also differ greatly as between countries. For example, a small country interested only in revenue from exports would almost necessarily take a different view of the question than a large Power which might find possession of adequate domestic supplies a deciding factor in its military position in time of crisis. Again, the volume of production that might be set by estimates of conservation requirements might at any given time accord badly with the market position. For these and other reasons a world accord of the character suggested would be too rigid, would be inadequate and would likely become a disguise for the fulfilment of other purposes.

The Interstate Oil Compact under which American states set quotas for producing properties within their jurisdiction is suggested as the model and criterion. This Compact has been administered partly with a view to making better use of American oil resources than was the case in earlier periods of great waste; and it has helped greatly to reduce the loss of oil in the ground. Furthermore, its economic consequences have proven acceptable to both producers and public. But experience does not establish that it could serve as a model for an international agreement. Chance has favored its operations. The restrictions on production that were imposed in the years after its introduction in order to end wasteful practices coincided with an oversupply; and when the restrictions began to pinch, the expanding demands of war brought relief. The subject merits further examination. During the period when the Compact was in operation great changes have been made in the permissible rate of withdrawal within states. Whether these reflect true conservation requirements, and only such requirements, and whether their general correspondence to variations in the market situation and the price of oil are just coincidental, are subjects that might well attract some curious master of the slide rule and the technique of statistical correlation.

The summary conclusion may be ventured that any kind of hard-and-fast international agreement for the regulation of supply should be avoided. A modest and guarded approach will be well advised. The subject may now await the creation of some international board, as visualized in the recent discussions. Such a board might begin by making thorough studies of the prospective supply and requirements outlook, from which producers and governments would be asked to draw their own conclusions. Perhaps the board could also help to bring common sense and a feeling of equity and a talent for bargaining into fuller use, the better to guide producers during an emergency of over or undersupply. Then, perhaps, where the task is to satisfy some powerful wish for a new development (such as the American wish for development in the Middle East), it might undertake to effect an understanding between the interests most directly concerned. In short, the method that recommends itself for the international coördination of production is continuous consultation, guided by agreed principles and carried into effect by the informal acceptance of those who control the main sources of supply, under the gaze of governments combined in council.

Any attempt at the international coördination of production will win approval only if it satisfies, as far as practicable, the wish of all nations for "equality of access" to produced supply. This was recognized in the recent conversations. The beam of desire that expresses itself in the conception of equality of access is really two intermingled beams -- first, that there should be ample and inexpensive supplies and, second, that the terms on which they are available shall be as favorable as those enjoyed by any other country. Both are natural and just; and it is incumbent upon all oil-producing countries and interests to heed them. But risk of misunderstanding will be lessened if it is recognized that there are limitations on the possibility of this. Countries will almost certainly wish to reserve a prior right to supplies produced in their own territories. This is a right which must be granted, but which wise nations will not use except when essential to national security; if the total world supply is ample, few are likely to be tempted to do so. A country will likewise reserve the right to control exports of petroleum for reasons of political policy. Certainly there was no ground for reproach against the United States, for example, when finally it checked shipments to Japan; and its control of exports in order to compel Spain to reduce her assistance to the Axis needs no justification. In brief, application of the idea of equality of access will necessarily be limited by considerations of security and political policy until such time as the organization of international peace has advanced far enough for nations to be able to trust its efficacy.

These reflections apply to the production of oil within national territories. The problem of access to oil supplies controlled by the interests of one country in the territories of another country raises additional queries. Would producing interests be bound to sell to all applicants at the well or at the end of the pipeline rather than to reserve the available supply for their own distributing facilities? For example, would the rule require that the tankers of all nations have an equal claim to the oil of Saudi Arabia delivered by pipeline to the Mediterranean? Or could the producing companies reserve it for their own transport and distribution systems? Or again, would the rule require that an oil company engaged in production in a foreign land refuse to obey the orders of the local government in regard to the sales of its product if those orders would result in discrimination? These queries are propounded in order to indicate the patient reasoning that will be required in order to establish the rule of equality of access in its proper place in the living body of international economic practice and agreement -- whether in the petroleum or in other commodity fields. Discovery of the right answers will take much longer than the formulation of the questions. The international organization visualized in the American-British recommendations will afford the chance for a vigorous beginning.

Confronted with the three questions just noted -- how to secure equality of opportunity, the satisfactory adjustment of oil supply and needs, and equality of access to produced oil supplies -- governments and oil producers will find that they are called upon to deal with every difference of interest that exists in international life. If they solve them successfully they will have registered a great triumph in international economic living.

III

The making of a vow is pleasant. But to take decisions in execution of the vow when they bring powerful interests into rough friction is uncomfortable. There has now been created a basis of understanding for the resolution of those differences regarding petroleum matters which threatened to infect all American-British relations and to spread disturbance throughout the Middle East. But the task of actually finding a satisfactory settlement of the questions that gave birth to the pipeline project remains. By what steps and on what terms can the production of oil in the Middle East be most vigorously carried forward? More particularly, how and on what terms will American enterprises in the Middle East be enabled to proceed with the task of developing their production, less hindered by restrictive engagements and inadequate distribution arrangements?

These questions are rendered more troublesome by the fact that in the immediate postwar period the supplies available from fields already developed in the Middle East may be sufficient for, if not in excess of, the natural market demand. Measures which have been taken are expected to double the prewar daily production -- raising it from about 300,000 to 600,000 barrels. Most of the refinery capacity of Europe will be smashed. The U.S.S.R. will probably desire to proceed with the rapid development of its own supply for its own needs rather than to draw on the Middle East (though this is an uncertain element in the future prospect). The amount of equipment for making synthetic oil that will remain in use is also uncertain. In the period of poverty immediately after the war the total demand of Europe, including Great Britain, may well be below the prewar schedule. The oil producers that now supply the bulk of the production naturally ask where a greatly enlarged flow would be sold. Will the producers of the Caribbean be ready to withdraw from the European and Mediterranean markets? Will the producers in the southwest Pacific be ready to moderate their development plans in order to permit Middle Eastern oil to enjoy a greater share of the Far East market?

For the short term, before the development of an increased demand, the only alternative to bitter competition will be a compromise somewhat painful to all. In order to permit the American enterprises installed in Saudi Arabia and Kuwait to commence the growth that the character of their opportunity impels, the other established resources of supply in the Middle East will have to, if necessary, yield a share of their market. Producers outside of the Middle East will have to curtail their shipments into the markets that Middle Eastern oil serves (the quantities involved, however, are very small compared to the size of the petroleum traffic in this hemisphere). The American companies controlling production, and the local governments that look to them for increased revenues from royalties, will have to be content with modest immediate returns.

The whole record of the petroleum industry warrants the belief that the period of adjustment and general scrimping need not be long. Unless the economic and social life of both Europe and the Far East is destined for prolonged stagnation or decay there will be a call for greatly enlarged oil production in the Middle East within a very few years after the end of the war. On this side of the Atlantic, an increase in demand and a wise regard for the preservation of underground reserves will combine to persuade producing interests to accept a diminishing share of distant markets. The American Government and the oil interests concerned are entitled to feel that their wish to proceed with the development of their concessions in Saudi Arabia and Kuwait should be dealt with in a spirit of bold confidence in the long-term prospects of the oil industry as a whole.

The public discussion has made clear certain valid reasons for the United States to seek, by whatever measures are found most economical and least disturbing, an increase in the production of American-controlled oil properties in the Middle East. The first reason is found in the prospect that before long increased production from those properties will be needed to meet the world demand. The second is that those properties should be drawn upon more amply than in the past in order to reduce the prospective drain on the reserves of this hemisphere; for these reserves would be essential to the security of the United States in the event of a future crisis. The third is the necessity of satisfying the reasonable expectations of the sovereigns of the territories in whose lands the oil resources are situated. The American participants in the international consultative organization now in the course of creation may justly ask for the sympathetic appraisal and effective recognition of these reasons. A solution by consent will be by all odds the best.