Big Oil Versus The Independents

By the late 1940s, the Middle East oilfields acquired by the Americans over the preceding two decades had at last begun to export significant amounts of oil, a growing portion of which started to enter the US market. Although Venezuela still remained the largest source of US oil imports, supplying 265,975 barrels per day in 1949, the second largest supplier was now Kuwait with 52,269 b/d, and with the Middle East oilfields as a whole supplying America with 99,642 b/d. As these Middle East supplies began to arrive at US refineries in growing quantities - but at half the cost of domestic oil - those government officials, oil industry leaders and military men who were attempting to formulate a national energy security policy at a time of growing cold-war confrontation faced a perplexing dilemma.

Since foreign oil was so much cheaper than domestic, US consumers would obviously prefer to buy the latter. But since foreign oil would then inevitably displace domestic oil, the eventual result would be external energy dependence. Of course, the fact that US oil reserves would still be there underground, would mean that 'long-run' energy security was assured since these oil reserves would be available for future exploitation; this was the essence of the so-called 'conservation theory'. In the short run, however, the country might become extremely vulnerable to a sudden geopolitical or military crisis with America being cut off from its foreign oil suppliers without having the domestic production capacity to immediately make up the shortfall. For some oil industry observers, with memories of the vulnerability of tankers to submarines during the Second World War, this meant that truly secure oil supplies could only be obtained from a domestic industry incentivised by a high price and protected from foreign competition.4

However this dilemma over 'cheap' versus 'secure' supplies was exacerbated by the fact that the US multinational oil companies which had obtained concessions in the Middle East, were at this time under severe pressure from their host countries to rapidly increase oil production and with it the royalty and tax payments upon which their rulers depended. But at this time there was really only one market large and dynamic enough to absorb all this additional oil production - the USA.

Faced with these conflicting positions, the US Government tried to find a compromise between the fiercely anti-import stance of the independent oil companies and the desire of the integrated oil majors to use as much cheap foreign oil as possible in their US refineries. The first attempt at reconciling what eventually proved to be the irreconcilable, was made by the Petroleum Industry War Council. In 1945, anticipating the growing problem of oil imports, it published a 'Petroleum Policy for the United States', in which an effort was made to satisfy all sides of the industry and which declared that 'it should be the policy of this nation to so restrict amounts of imported oil that such quantities will not depress the producing end of the domestic petroleum industry.' In other words, oil imports would not be prevented but would be limited to an amount 'absolutely necessary to augment our domestic production when it is produced under conditions consonant with good conservation practices'.5

Four years later, the National Petroleum Council, the peace-time successor to the Petroleum Industry War Council, came up with an equally opaque statement about the proper role of oil imports. 'The nation's economic welfare and security,' it declared, 'require a policy on petroleum imports which will encourage exploration and development efforts in the domestic industry.' 'The extent to which imports are desirable' was to be determined, at least in part, by 'the availability of petroleum from domestic fields, produced under sound conservation practices'.6

However, whatever practical consequences were meant to flow from these vague policy statements, the reality was that in 1949, for the first time, US oil imports exceeded exports. Between 1948 and the second half of 1950, imports of crude oil and petroleum products increased from 514,000 barrels per day to 831,572 b/d, of which 781,424 b/d were accounted for by 11 major US oil companies. Texaco, for example, increased its imports from 16,977 b/d to 66,000 b/d, an increase of 289 per cent. Since the total demand for oil, as determined by the US Government's Bureau of Mines, remained unchanged, the compensating industry-wide production cuts required by pro-rationing bit deeper into the livelihoods of the domestic oil producers.

Faced with this challenge the Independent Petroleum Association of America made known their own particular interpretation of'energy security', arguing that 'Middle East oil could not be defended in time of war and that these fields were only six hours bombing time from Russia.'7 In response, the major oil companies hit back with their own 'energy security' rhetoric, using the now familiar 'conservationist' argument. The exploitation of domestic oil reserves, they argued, was now so intense that, given the current rate of depletion, they would be rapidly exhausted, in which case, argued Texaco's chairman, 'our national security would certainly be put in jeopardy.' For this reason it was essential for America to have access to foreign sources of oil which couldn't function economically if they were to be 'turned on and off like a faucet'.8

Although the onset of the Korean War in 1950 stimulated both domestic and military demand for petroleum fuels and, for a time, reduced the pressure of oil imports upon the domestic producers, from 1953 onwards the problem returned with a vengeance. In 1954, imports of crude oil and refined products were running at 1,050 thousand barrels per day (13.6 per cent of total supply). By 1955, imports were 1,250 thousand b/d (14.8 per cent of supply) and in the following year 1,430 (16.3 per cent). Under severe pressure from the political representatives of the oil-producing states, Congress added a 'National Security Amendment' to the 1955 Trade Act which gave the President the power to control the level of oil imports where these were deemed to be threatening the nation's security or its economic well-being. Subsequently, in April 1957, the Director of Defense Mobilization reviewed the amounts which the importing companies planned to import during the remainder of that year and reported to the President that these volumes did indeed pose a threat to national security. President Eisenhower then appointed six members of his cabinet to serve as a Special Committee to Investigate Oil Imports. The recommendation of the committee was that crude oil imports should be restricted to 12.2 per cent of domestic production, but that this restriction should be achieved by voluntary means.

However, by 1958 it was becoming clear that there was little chance of any voluntary oil import control being achieved. Indeed, imports was still increasing and, exacerbated by a recession in the US economy, demand for domestic crude was running nearly one million barrels per day below that of the previous year. In Texas, allowable production was reduced to just eight days per month. Eventually something had to give. In February 1959, the Director of Defense Mobilization again advised the President that crude oil and petroleum products were now being imported in amounts sufficient 'to impair the national security'. Ten days later, Eisenhower imposed a system of mandatory oil import quotas, which was to remain in force for the next 14 years. The battle had been won by the independents.

However, because America's overall demand for oil was now rising steadily, the quotas imposed on the importers did not prove particularly troublesome.

Between 1960 and 1965, total petroleum demand in the USA rose from 9.8 million barrels per day to 11.5 million b/d. Domestic production rose from 7.96 million b/d to 9.01 million b/d, but oil imports also increased - from 1.81 million to 2.47 million b/d. In the same period, exports to the USA from Saudi Arabia increased by 88 per cent, from 84,000 to 158,000 b/d.

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