As recently as 1950, the Soviet Union was a net importer of petroleum. By 1955, however, the tide had turned, and production within the U.S.S.R., and within the bloc, had increased to a point where the Communists could export more than eight million tons per year—the equivalent of 160,000 barrels per day. The petroleum industry, dealing as it does primarily in liquids, traditionally favors statistics which relate to oil field production or refinery through-put in terms of barrels—a barrel holds 42 U. S. gallons—per day. As a basis for comparison, U. S. domestic consumption of petroleum averages roughly ten million barrels per day, of which we import approximately two million barrels per day.
From 1955 to 1961, the Soviet exports increased an average 31 per cent per year to a figure of 40 million tons or 800,000 barrels per day. In 1955, exports were divided evenly between the Free World and the Soviet bloc— not so now. In 1961, 65 per cent of the total exports (520,000 barrels per day) went to the Free World, and this percentage is increasing. The 1960 oil exports were equivalent to 657 million dollars. That portion going to the Free World represented 20 per cent of the total exports by value. Without question, oil is the largest single item in Soviet export trade to the Free World, and it is growing more rapidly than any other.
In an address before the 1961 meeting of the American Petroleum Institute in Chicago, U. S. Senator, A. S. “Mike” Monroney gave the following description of Soviet tactics in this oil trade war:
“The first is to seek maximum sales to Japan and the industrial countries of Western Europe in return for machinery, steel, and hard currencies. These countries are looking for markets and bargains. The Soviets take advantage of their need to expand exports and offer them a cut rate price.
“Japan is offered Soviet crude oil at $1 per barrel delivered at the Black Sea, or $2 delivered in Japan. The Western price is $1.80 at the Persian Gulf, or $2.30 delivered in Japan.
“Finland is sold Soviet crude oil delivered at $2.39 per barrel, Iranian crude oil at $3.33. Sweden paid the Soviets $3.68 for kerosene which cost $4.51 from the Netherlands. West Germany paid the Soviets $3.49 for light fuel oil which cost $4.50 from Great Britain.
“After maximum sales in hard currency markets, the Soviets resort to barter of oil for food, fiber, and raw materials from underdeveloped countries. This is perhaps the most insidious and dangerous aspect of the Soviet offensive. Frequently dependent on sales of one or a few commodities for their whole economy, chronically short of hard currencies with which to buy on the world market, these countries are least able to resist Soviet techniques. And a world-wide pattern emerges:
Oil for tobacco from Greece.
Oil for coffee from Brazil.
Oil for fish from Iceland.
Oil for cotton from Egypt.
Oil for jute from India.
Oil for sugar from Cuba.
Oil for rubber from Ceylon.
This is happening today. Next year and for years to come, they hope to make this list grow.
“Even from these few examples, the Soviet strategy will begin to be apparent. It is development, disruption, and dependence.”
I recently examined one of the barter- type contracts between “Sejuznefre-export” (Soviet Union Oil Export ministry) and one of the countries just listed. It is intriguing in that it shows: (1) f.o.b. Soviet-port prices per metric ton of Soviet petroleum products were tied to Platt's OILGRAM (a Free World oil trade daily) low quotations (U. S. dollars) for the product as of the date of completion of loading; (2) demurrage rates were stated in U. S. dollars; (3) various specifications used in product inspections were those used by our U. S. oil industry; and (4) freight costs were stated in U. S. dollars. Letters of credit in the importing country’s currency were to be opened with the Bank for Foreign Trade of the U.S.S.R., Moscow, which would then provide the funds for the Soviets to purchase the object of barter from the oil-importing country at a price made the subject of a separate Agreement for Trade and Payment.
Let us further examine the three elements contained in the previous abstract from Senator Monroney’s address: “development, disruption and dependence.”
Development: The Soviets need Western goods and materials which contribute substantially to their bloc’s industrial and military potential and which strengthen their ability to wage a politico-economic offensive in the less-developed areas of the world. The bulk of exports from the highly industrialized nations of Western Europe consists of items such as the following: complete petrochemical and synthetic plants, electronic equipment for communications and control, precision and highly automatic machine tools, industrial handling equipment, cold-rolling mills for sheet and strip steel, precision bearings, electric power generator and transmission equipment, rail and ocean transport equipment, and large-diameter pipe and other items required for the production and transportation of oil. One might well ask, “What happened to our Free World embargo controls on exports of strategic materials to the U.S.S.R. and bloc countries?” The controls apparently have been relaxed greatly in recent years to the point where items related in a more general sense to the industrial base are not controlled, and only a limited number of items of advanced technology having a direct impact on the bloc’s military production and preparations are included. The United States under the “Battle Act” unilaterally maintains export controls on a much larger list of items than do its Free World partners under COCOM (the 15-nation Consultative /Co-ordinating Committee) trade control agreements. Currently, much attention is being given in Free World circles to a program which will continue an embargo on supplying large diameter—40-inch and larger—steel pipe to the Soviet bloc. Such pipe is vital to its success in achieving its pipleine expansion plans according to schedule.
Since the Soviet bloc is limited in the variety of desirable goods and materials which it can offer to importers in the Free World, exports of oil, a commonly needed product, assume even greater importance as a vital medium for generating the necessary foreign exchange and barter credits the Soviets need for their import program.
Of greater military interest is the Soviet Union’s program to improve its oil transportation facilities. In particular, the Soviets’ actions to extend their pipeline systems and enlarge their tanker fleet are significant.
The current seven-year plan includes construction of 6,550 miles of petroleum pipeline and approximately 10,000 miles of gas line. Of greatest significance from our point of view are the Urals-Volga-Leningrad pipeline and and the COMECON (so called “Pipeline of Friendship”) crude oil line, designed to transport Urals-Volga crude oil to Poland, East Germany, Czechoslovakia, and Hungary, as well as to the Baltic ports of Ventspils and Klaipeda. Another important line directly relating to Soviet export trade is the Stalingrad (Volgograd) line to Tuapse and Novorossisk on the Black Sea. The high capacity flow being built into all of these lines will be of great strategic value in improving the mobility of the Soviet and Soviet bloc armies and navies. The relief of dependence on grossly inadequate rail and truck transport is recognized as being of major importance.
Accompanying the expansion of Soviet pipelines is an expansion of the tanker fleet. In 1950, the Soviet deep-sea tanker fleet totalled only 174,000 deadweight tons, with the largest vessel 10,900. As of September 1962, only 12 years later, the Soviet bloc fleet totalled almost 2 million d.w.t. (109.7 T-2 tanker equivalents) of which about 40 per cent were built in Free World countries. As of that date, orders for new construction in Soviet bloc yards totalled 23 ships (42.3 T-2 equivalents). More important, 51 ships (82.4 T-2s) had been ordered during the same period from Free World yards.
On completion of this program, the Soviet bloc will have enough tankers to move about 85 per cent of their predicted 1,020,000 barrels-per-day export volume at that time. The success of this program obviously depends primarily on the Free World contributions past and future to the Soviet’s ocean transport capabilities.
Disruption: By exporting oil, the Soviet bloc reduces the volume of oil exports from Free World producing countries. Venezuela and the Middle East are the principal sufferers. The National Petroleum Council estimates direct income lost in 1961 to the Middle East and Venezuela because of Free World imports of Soviet bloc oil to be 145 million dollars in value. For the period 1954 to 1961, the total loss is estimated as 490 million dollars.
One of the most troubling of the aspects of Soviet bloc price cutting of oil exports in international trade is its possible effect on f.o.b. selling prices. While not admitted openly by the international oil companies, it is felt that the cut-price Soviet exports brought about the significant reduction in Middle East posted prices which took place in February 1959 and August 1960. This, of course, has an immediate effect on the size of direct payments to governments of Free World exporting countries. Carried to a more serious degree, such a posted price war could lead only to chaos and disruption of good working relations between our international oil companies and the exporting countries by its effect on profits and income.
Ironically, at the same time that the Soviets have been making crude oil and petroleum products available at very attractive prices to the Free World customers, they have been charging their Satellite neighbors substantially higher prices—in several cases over 90 per cent higher. Thus the Satellite countries are seen as subsidizing the Soviet costs, a situation which is reported to exist also for many other materials sold by the Soviets in international commerce.
Dependence: Chairman Khrushchev has warned that capitalism will be destroyed through an ideological and economic struggle. The National Petroleum Council, composed of blue ribbon representatives of the U. S. oil industry, in its 1962 report on the Impact of Oil Exportsfrom the Soviet Bloc has stated: “Clearly, Soviet Bloc trade, which is backed by the monolithic power of the State, cannot be considered on the same terms as the trade of individual private companies motivated by commercial objectives. The foreign trade of the Soviet bloc is but one element in the Soviet Union’s plan to consolidate its own power and to extend communistic influence over countries that deal with it.”
The development of barter trade with less- developed countries is leading to the increasing dependence of such countries for an export market for their agricultural-commodities and raw materials as well as to dependence on Soviet oil supplies. Once having become dependent on the Soviets, the security, political independence and economic health of such countries could easily be undermined and directly influenced by abrupt and arbitrary political decisions made by the Soviet bloc.
Thus, the Soviet economic trade war, using oil as its principal weapon, has been and continues to be the subject of many studies and much serious consideration. A special study mission composed of five congressmen from the House Committee on Foreign Affairs reported in February 1963 on the Soviet Economic Offensive in Western Europe (H. R. Report No. 32, 88th Congress); their report contained the following nine recommendations:
“1. Differences of opinion and areas of agreement currently existing within the North Atlantic alliance should be thoroughly examined. This task should aim at the adoption of policies necessary to produce creative harmony between the United States and Europe for economic, political, and military purposes.
“2. The U. S. foreign aid program must be subjected to closer scrutiny. Its goals should be redefined and clearly spelled out. The method of implementing these goals should be closely correlated with the efforts of our allies. And the burden of foreign aid should be more equitably allocated among the partners of the alliance.
“3. The framework, the missions, and the capabilities of the North Atlantic Treaty Organization should be reviewed and possibly revised to conform with recent and prospective developments within the alliance. Special attention should be given to the adequacy of existing communication channels within NATO.
“4. Fuller consideration should be given to the potential impact of Western European integration on the Free World’s strategy and tactics in the cold war, and on U. S. relations with other areas of the world.
“5. The executive branch should press actively for the formulation of a unified, multilateral policy (a) to further restrict the flow to the Soviet bloc of Western goods and materials which strengthen the bloc’s industrial and military potential, and (b) to marshal the economic resources of the West for economic defense and initiative in the cold war. In the study mission’s opinion, NATO may prove to be the best vehicle for the implementation of such a policy.
“6. The Committee on Foreign Affairs should investigate the Soviet economic offensive with a view to recommending legislative measures necessary to enable the executive branch to cope with it more effectively.
“7. The Committee on Foreign Affairs should also review the scope, the techniques, and the progress of the Soviet oil offensive in the developing nations of the Free World, and recommend remedial measures.
“8. The Department of State should instruct the appropriate American diplomatic officials in Western Europe to pay more attention to problems raised by Soviet oil and by the worldwide Soviet economic offensive, and to provide much closer policy co-ordination in this field between Washington and our diplomatic missions abroad.
“9. American oil companies, and their foreign subsidiaries, should take the initiative in devising, in cooperation with other Western industrial concerns and governmental authorities, measures necessary to blunt the impact of the Soviet oil offensive in the Free World.”
It will be apparent to the reader that an appropriate descriptive phrase summarizing the above recommendations would be: “search for answers.”
The Rand Corporation in a report (RM- 2812-PR, Dec. 1961) on The Soviet Oil Offensive and Inter-Bloc Economic Competition says: “There are several ways the West can react to the Soviet oil export dnve. Oil producers can cut prices; major oil consuming regions, such as Western Europe, can protect their markets against Soviet oil just as the United States now protects its market against all foreign oil; an international oil cartel might be set up with Russian participation. But each of these steps would be rendered difficult by conflicts of interest within the non- Soviet world. If the West chooses to accept the benefits of cheaper oil and lower-cost energy, whatever the geographical source, it would be wise to provide for continuity of supply by making sure that alternative and more reliable sources are readily available. Surplus capacity should be maintained outside the Soviet bloc, and a reserve tanker fleet kept afloat large enough to transport the oil to market.”
Eliot Janeway, an oil economist, advisor and official of numerous companies, in an interview published in World Oil (November 1962), had this to offer on the problem:
“Q. What, currently, is being done to counter the Soviet oil offensive?
“A. Nothing more effective than efforts to talk it away.
“Q. What can be done?
“A. Remove the conditions which have made its success possible. I am confident we can do this. These conditions are easily identified. As a matter of fact, the Soviets, by their very success, have diagnosed the problem for us. The oil-importing countries, harassed by deficiencies in exchange reserves or in liquidity or in hard currency income, live under constant pressure to use up their cash to buy this basic but non-durable product—this wasting and consumed asset—which the oil-exporting countries earn their living by selling. If we can devise a substitute for cash with which to finance the movement of oil from the surplus-ridden exporting countries into the importing countries, we will solve the balance of payments and the budget problem of every shaky regime in the Free World; we will help the countries that need help, and the Free World economy, more than the Soviets can hurt.
“Once we solve the liquidity problem of the oil-importing nations, we will solve the marketing problems of the exporting nations, too. We could do this by switching a portion of our Foreign Aid from a dollar-giving to an oil-sending operation.
“Q. Wouldn’t it take years to change our Foreign Aid policies?
“A. This would be simpler to do than it may sound at first. All we would have to do, to make Aid really effective (and incidentally controllable) to any beneficiary country which is a net oil importer (and most beneficiary countries are), would be to issue oil drafts to them in lieu of cash we now give to them. Such oil drafts would be good in any oil-exporting country on an approved list, and it would entitle the beneficiary country to receive the allotted amount from the source or sources which that country deems it advantageous to favor.
The effect of any such transfer of Aid from a cash to a commodity basis would ease the pressure on the dollar now caused by our balance of payments deficit. Also, the effect would be to guarantee that oil traffic would again begin to flow free from price pressure, for drafts would be paid for given quantities of barrelage at given shipping points. Commodity Aid would work as an international defense against the Soviet price offensive in the very markets where the Soviets are now putting greatest deflationary pressure on the price structure and greatest inflationary pressure on the currency.”
The National Petroleum Council, in the “Concluding Remarks” of their excellent two-volume study: Impact of Oil Exports from the Soviet Bloc, concluded: “The seriousness of the Soviet economic offensive requires a concerted effort by the leading countries of the Free World to restrict further imports of Communist oil and the export of strategic materials to the Soviets. Individual action is insufficient. For example, the “Black Sea” chartering policy of a single company (the refusal to charter ships from owners supplying tonnage to the Bloc) did not stem the flow of Soviet oil to Cuba.
“The political alliances which Free World countries have formed to combat Soviet aggressions must now be extended fully to the equally important economic field. It is unrealistic to leave the Free World’s economic flanks unprotected, particularly as the Soviets have clearly indicated that their trade is conducted mostly for political purposes.”
In March 1963, George F. Getty, II, President of Tidewater Oil Company, said, “The major problems facing the petroleum industry today are not technical but political and are the most ominous in the industry’s history. The two major political threats are the cutthroat competition of the government- controlled Soviet oil industry, and the equally formidable menace of governmental control on the domestic scene. [The possible reduction of percentage depletion tax provisions to U. S. oil producers.] These two threats have one thing-in-common. They are political— not technical nor operational . . . and can only be solved in the political arena.”
Any break in the storm clouds? The reader after studying the foregoing is entitled to ask: Is it necessary to have so much emphasis on the gloomy side of the situation? Is there not a brighter side? There are responsible government authorities who do not agree with the existence of a problem in this area of an emergency nature. “There is no such emergency, yet, involving economic penetration of the Western world by Russian oil,” is the Oil Daily's (28 November 1962) summary of the main point of a letter from Deputy Attorney General Nicholas deB. Katzenbach to Chairman A. Willis Robertson of the Senate Banking and Currency Committee in commenting upon the idea expressed by Senator Jacob Javits that joint industry action to combat the Russian oil offensive might be desirable but might be illegal under the anti-trust laws.
Here are some other items which seem to indicate that the picture is not completely gloomy:
(1) Inadequate Soviet port tanker facilities: The 10 June 1963 Oil and Gas Journal reports that tanker facilities at Russia’s five Black Sea terminals are inadequate for growing oil shipments. Tanker jam-ups are proving expensive to the Soviets. Not only are their own ships sitting idle too much of the time, but extra expenses are being incurred for foreign-flag tankers under charter, with heavy penalties payable in foreign currency. Correction of this deficiency is undoubtedly a matter of urgent priority for the Soviets.
(2) ENI contract with Jersey: In March of 1963, Standard Oil Company of New Jersey signed new crude oil supply contracts with Ente Nazionale Idrocarburi, Italy’s state- owned oil company. While no volume figures were announced, the event which should promise a “substantial increase over Esso’s previous sales to ENI,” has been hailed as a heartening development—a victory—in international oil markets for the Free World. Prior to this development ENI each year had been buying increasing supplies of Soviet oil.
(3) OPEC statement on price squeeze: The general secretary of the Organization of Petroleum Exporting Countries (consisting of Iran, Indonesia, Iraq, Saudi Arabia, Venezuela, Qatar, Kuwait, and Libya) said in March 1963 that “—there were some indications that the Soviet Union might be easing up on its policy of undercutting the world oil prices,” but he also said it was too early to tell whether this was a long-term trend or merely a comparatively isolated instance.
(4) Soviet denial of oil threat to Western markets: That the Free World has really nothing to fear in the Soviet Export trade in oil is assured us by a press release in February 1963, by the Soviet Embassy in Washington which quoted Yevgeni Gurov, chairman of the U.S.S.R. oil export organization as follows: “Spokesmen for the international oil companies often claim that the Soviet Union is out to flood Western markets with its oil, and as proof cite data about long-range plans for the development of the Soviet oil industry, about expansion of the network of oil pipelines in the U.S.S.R. It is asserted, for instance, that the Friendship pipeline will serve as an instrument of the Soviet oil assault on Western Europe. These assertions have no ground whatsoever. Whereas in the Middle East, North Africa, and Venezuela the development of oil extraction facilities has been chiefly stimulated by the demand on the external market, in the U.S.S.R. it is due to the growing demands of the national economy of the U.S.S.R. and other countries of the Socialist community. The Soviet Union is one of the world’s largest consumers of oil, and the rate of growth of oil consumption in our country today is higher than in any other large country. As for the Friendship pipeline, it is being built in order to meet most fully the oil requirements of the Socialist countries of Eastern Europe.”
Americans are known for their love of the clear-cut, black-and-white description of problem situations and for quickly drawn alternatives for correction of such problems. If you have not found these in the what-can- be-done part of this article, you have only the comfort that your frustration is widely shared. Our Secretary of Defense, Robert McNamara, has recently been quoted as stating that “the United States is approaching an era of mutual nuclear deterrence.” Be this as it may, nowhere do we read of any significant deterrence to the threat of Chairman Khrushchev’s oil war.
There are two pertinent questions which must be asked:
(1) At what point of success (for the Soviets) shall we recognize and dignify this problem with the term “emergency” and
(2) When will the U. S. government recognize the necessity of joining forces with our U. S. and other Free World international oil companies to permit and to support an organized, continuing, economic rebuff to the Soviet oil attack?