NATIONAL INTELLIGENCE ESTIMATE, NUMBER 20/30-70; SECURITY OF OIL SUPPLY TO NATO

Created: 11/14/1970

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NATIONAL INTELLIGENCE ESTIMATE

0

Security of Oil Supply to NATO and Japan

SubmAfKi by

DIRECTOR OF CENTRALIn by;

UNITED STATES INTEU1GENCE BOARD As irtdicotod ovviaof0

ItPPIOVEOFOIRtUASfIIII

iwMliii in in

frits esfimofei

The Control Intelligence Agency and list Intelligence organiiolktm ol the Depart-menti of Slot* and Defense, and tha NSA.

Concurring,:

If. Gen. ft.hraan. fc. USMC. Depvty Director of Central Intelligence Dr. Say S, Ctine, Ihe Director of Intelligence and Research, Deportment of State Lt.he Director, Defense IrtreiligenceDr. louto W. Tofdalla, for lha Director, NaHona) Security Agency

Abstaining!

Dr. Charles M. Relchordt, foriant General Manager, Atomic Energy Com-

mliiion and Mr. WUliamgar. (or the Assistant to the Director, Federal bvteov of Investigation, the subject being ovnide of their |wrixl<tion.

WARNING

Thfi materlol eonlolni information affecting the Nononol Defense of the Untied State* within the meaning of the espionage laws.SC,, the trans-

revelation of which in any

an ersovtheeked person to proSWtod

tmano raiiiuui

DaTL;NOV?0IO

CONTENTS

Page

SCOPE

CONCLUSIONS

I. THE PRESENT SITUATION

II. THE TANKER

lor Reopening ihe Suez Canal

Tanker Capacity lo

ill. THE USSR AND MIDDLE EAST OIL

Growth in Soviet Political

Soviet Role in

IV. CHANCING PATTERNS OF OWNERSHIP AND

V. CIRCUMSTANCES IN WHICH THE FI-OW OF MIDDLE EAST

OIL MIGHT BE

Considerations

Cases .

Arab-Israeli Issue

Political

Sum

ANNEX

CPPFDl/Eil FOR RELEASEZDI0

s,

SECURITY OF OIL SUPPLY TO NATO AND JAPAN

SCOPE NOTE

This Estimate discusses oil supply to Western Europe and Japannd as far beyond that as possible. It also discusses the tanker situation, the role of the USSR and Eastern Europe in Middle Eastern oil matters, and prospective changes in the control ofand distribution ol oil. It examines the conditions, short of general war, under which the flow of Middleil to NATO and Japan might be interrupted and assesses the impact of anof oil flow from certain producing countries.

CONCLUSIONS

A. The Eiiropean NATO countries and Japan consume imported oil in enormous quantities--overillionillion barrels per day (bpd) respectively. Europe's reserve stocks are limited and unevenly distributed, and low sulfur (low pollution) industrial fuel oil is in short supply. The Syrian shutdown of TAPI.INE (which brought Saudi oil to the Mediterranean) and production cuts in Libya havetrain on the world's tanker fleet, which has had to haul more oil from the distant Persian Gulf, without benefit of the Suez Canal.

he antagonism between Egypt and Israel appears to preclude the Canal's opening in the foreseeable future. Even so, we estimate that there will be enough tanker capacity to move oil from thecountries to consumers during the next year, provided that there is no substantial decrease in the availability oltl BtlUSI

1 in thbi"' Ote li-nu MhWIt Eul It uwcl lo inclnde nil (he Arab mamK^mmWUf^ Ninth African win. and

terrancan oil. The present light ranker market, should ease sulntan-tially byecause of new deliveries, and the increase incarriers expected to be available by the end of that year wouldomfortable spare capacity.

C. The expansion of Soviet pohtical influence in Uie Middle East has not been accompanied by any significant Soviet role in oil matters. There are compelling practical considerations that will continue to limit such Soviet participation; these include nationalistic attitudes in the oil producing states and the shortcomings of the Soviet oilWhile (he USSR will be able to produce enough oil to cover its domestic demand upt would probably have to importillion bpd from the Middle East if it is to provide most of die oil required by Eastern Europe and to export to oilier markets at present levels. The Soviets are unlikely to try to deny Middle Eastern oil to NATO or japan, since the pohtical and economic costs to the USSR of any such efforts would be prohibitive. It is possible, however, that the Soviets will gain an increasingly significant position in the oil industry in the Arab states over the long run.

here will be growing pressures over the next five toears by the oil producing states to gain control over their oil production. By the end ofubstantial portion of production is likely to be under the control of the host governments. The traditional role of the international oil companies will probably lie diminished and direct dealings between consuming and producing countries are likely to account for an increasing amount of tbe oil moving between them.

several past interruptions of Middle East oilarisen in the Arab-Israeli context, others have been cuuseduntagonisms between Arab slates themselves. All in nil,producing countries, irrespective of their political ideology,motivated primarilyesire for more income. Theydependent on oil revenues to run their economics andnot likely to use denial of their oilolitical weaponEurope or Japan.

one or another major oil producing stateto risk its oil revenue for pohtical ends Seizure of all US (and/

or UK) oil operationsajor producing country would seriously disturb oil shipments for some months. NATO countries affected byove would act quickly to insure effectiveness of alternative arrangements for getting oil from producing countries. Syriantoward Iraq is likely to interrupt the flow of Iraqi oil at some time during the next five years.

the eventesumption of Arab-Israeli hostilities,of oil shipments seems almost certain. In suchmoreover, one or more of the Arab oil producingmove directly against US oil companies, and US financialcould be hurt badly. Sabotage attempts by Palestinianlikely lo occur in the foreseeable future. Although theirbe serious they are not likely toong lastingoil flow.

specific contingencies involving interruptions into Western Europe and Japan are discussed at Annex.

DISCUSSION

I. THE PRESENT SITUATION

oil is the principal source of energy for the non-Communi.ilof the mnjor consuming areas, Europe and Japan, have virtually nosupplies. At present, half of Western Europe's oil comes from eastercent from North Africa, and the rest Irom West Africa, thethe Caribbean. Japan getsercent of its oil Irom the Persianhalf from Iran and hall Irom Arab states then'. Uninterruptedadequate oil suppliesital matter lor the Europeans and thesituation ol dependence will prevail for the foreseeable future.oil has been discovered in the North Sea in commercial quantities,leserves are not large enough to supply moreinor share ofmarket during the period of this Estimate. Japan has no oilthere are indications that oil in commercial quantities may belive China Sea. New discoveries in Indonesia may contribute significantnearer at hand than the Persian Gulf.

he quantities of od consumed in the European NATO countries and in Japan are formidable and have lieen growing at spectacular rates. The former

'The. US. by contrast now produces abouthe oilest conies from nearby countries, only three percent ol IS consumptionMuittlc EastlrK-j. Tlieholly sfll-tuffii-trnt In nil.

consumed overillion barrels ofayheillion barrels per dayhe growth of od consumption for European NATO countries averaged aboutear inast five years, while that of Japan has4 percent over the same period This growth has presented and will conlitiue to present problems to lite oil industry. The quantities of oilare so largeingle percentage point in the European liguics alone amounts topd. to transport this quantity of oil from the Persian Gulf around Afrxa to Noathern Europe requires abouts.'

Over the past seveial months oil supplies in Europe have lightened markedly; Western Europe has already experienced shortages and rives in prices of some oil products, as European consumption has grown ineriod more than had been foreseen by the oil companies. For one thing, the shift from coal Europe's traditional source ol energy, to oil occurreduch faster rale than economic planners had anticipated. In addition, pollutiondesigned lo cut down emissions of sulfurremium on low-sulfur oils. Those crude oils which are low in sulfur, principally Irom North and West Africa, yield less fuel oil than the average Middle Eastern crude with higher sulfur content. The oil irvdiistry after7 had adiusted lo the closing of the Sm Canal by turning to ever br<rr and mofe efficient tankns lor tbe long haul around Africa. These have not proved adequate, however, in the (ace of reduced availability of short-haul oil in recent months and the world's tanker licet is now under considerable strain.

TAPL1NE had been curryingpd to the Mediterranean from SjL,di Aiahia It wai shut duwn In0 after what appearsave been an accidental break, and the Syrian Government has not agreed to term* lorand reopening it. Early in the summer, the Libyan regime imposed successive cuts in production on arvcral oil companies. Together, these two developments cut the availability of od al terminals on the Mcditrrr.irM-an coast byilboo bpd. at tlicir maximum impact To trartsport oil from the Persian Gulf tot long as Use Suez Canal is closed, requires Nvu to six limes the tanker capacity that is needed to move an equivalent amount of oil from the Mediterranean. The Libyan cutbacks and TAPLlNE's closingexhausted unused capacity in theanker fleet, causing sharp run in new charter (res.*

anter is ilor. <DWT> wmIpeed o( USnktr jvu liability and employment i* conunoitly cxpo-stedijtuvalerilsil. ii-lWrminoloBv ii rmpltsrd la Ihlianker svnuld cdirvrn-Is of oil (there sir aboutomb fcs thrheestei less uVf trail *od Mclwery. Itanysag eapacay-

pipeline brtsv-ren the GuU of A'|.ha and Uk- MnUtrrnncanfJJ FOR RELEASEJ. butuririitstmsatcd nt onlyTE-HOV10I0

Oil urodot-liin (flmpunKJ whichinterest! in Alub slatei are unwilling tu use the pipeline because: nl Arab rr-giiLiUAfli

he West European countries, aware of their vulnerability lo disni|>tiunhave for many years been concerned with maintaining adequatestocks of oiL These countries haveoal the achievementeserve fur Western Europehole, but few have achieved it.stocks are Incomplete and unreliable; reporting varies in quality,definitions, and different reporters employ different data bases. Anfor Economic Cooperation and Deselop-nint (OECD: report olestern Europe. Other sources consider 45

ure realisticore precise figure of European oil stocks is not presently available. European oil slocks fluctuate seasonally, going down aboutays in the winter months and being replenished duriiiK the summer. The TAPL1NE and labyanhave slowed restoration of reserve* during the past summer to some estent, although probably not by moreew days consumption. Moreover, oil stocks are not evenly distributed throughout the countries of Western Europe and already there liave been shortages of certain products in some countries. Japan in the putt has not kept oil stocks up0 day supply, ints stocks may have been arounday*.

Spare production ol nearly .'J million bpd ol oil is slill available in the Middle East, but Most of ithe Persian Gull. This spore capacityuch smaller fraction ofhan was the case in the crises which closed the Sue/ Canal in lWO and. In addition, the position of tho USelatively clow alternative source ol oil lor Western Europe has about vanished. Whereas0 the US had stand by production equal to aboutercent of European coruumption. today it has little stand by production which could lie made available quickly to Europe

7 Demand lor oil in the nun-Communist world has risen atannually in the pastears. Demand will continue to grow, but probablyomewhat lower rale Growth rates of oil consumption have already Ixfiun to decline in Westernhe rate ol consersion from coal tolowing. and natural gas continues to do bettor (hun hold lis own as an energy source. Oil industry sources talkercent average annual growth rate5 The oil industry, however, has usually been on the low side in foretastine, long-term growth. We think thai average annual growth5 is more likely to lieercent world-wide. Thisrowth ofercentesternercent in the US. andercent in Japan.hosvi the quantities of oili! be In demando rates and alsosrrccnt. allhough total uorld demand Ls unlikely tohat hiRh.

II. THE TANKER SITUATION

A. Prospects for Reopening the Sue*FOR RElEASf

asic reuson for the tight tanker situation is that the

mains closed. While many of the large tankers now in use or under

iioti are loo big lo pass Ihniugb theefore the June war, lankcis ofWT could transit loaded and ones ofWT in ballast i. ill opening would provide additional flexibility in tanker movements Shortcnttut the route from Europe to the Persian Gulf would increase tanker transport capacity by the equivalent of abouts,ercent to the world ranker fleet. How likely is it tlut die Sue/ Canal will be opened

prrysxal task of opening the Sue* Canal tootThere are someessels of varying size sunk in the Canal. Inlo removing these vessels, some dredging would be required,Ihe wash of moving ships, sedimentation probably hasool or so on the average. In the absencehoroughsince the7 war. estimates of tbe time and cost needed toCanal back in operation rangeonthsostear atmillion.

Ot the parties directly concerned with the Canal, Israel has little economic interest in having it open andery heavy political stake in ensuring lhat the Canal does not open unless Us flag vessels can use the waterway Tel Aviv regards its military position along the east bonk as Important for boiVhng its position in Sinai, and holding Sinairune means of eserting pressure on Egypt to corm- to terms on an overall settlement. As long asorces hold the east bunk, it can prevent the Canal irom being used, Israel would foieibly resist any effortpen the Canal without its consent.

Egypt's interest is more complex In the last fullj of lha- Suez Canal's orx-ration. Egypt earned0 million Intolls Tins sum has been more than compensated for by subsidies, ugrtid to at7 hh.mourn Arab Summit Coitfeience. from Saudi Arabia, Kuwait mid Libya. Egypt suffers certain economic disadvantageslosed. most of ib oil production is on the wrong (southern) end of the waterway Even if the Khartoum subsidies largely ot totally disappeared, we believe tliat Egypt would choose to forego income from the Canal (which, at least in the near term, svould be significantly less than it was beforeather than make money by opening it while Israel continued lo occupy its eastern hank. Egypt wants to regain control of Sinai. Egypt might agree to open the Canal on terms shortomprehensisef Israeli forcesfrom the eastern bank, but even this is unlikely

USSR has experienced some political, .strategic, and economicfrom the Canal's closure. Its military and economic aid toand to Vietnam have had either to make the long journey aroundgo overland- Its naval vessels similarly must make long voyages to show

flag in the Indian Ocean, and the USSR is unable to augnwnt its Indian OctC||geJ(JJ|eaction to short-term crises in the Red Sea and the Persian Gulf.

ii Canalease tin" slums on Sonet maritime activity, adding the

equivalent of five percent (in OUT) to the USSR's mcreh-nt fleet Yet, the Sovirl interest in ao opt*ot so greato induce tbe I'SSK tots position in Egypt The Soviets almost certainly hopeettlement which would allow the Canal to be opened, but in our judgment, Moscow wouid not put heuvy pressure on Cairo to mudily significantly its termsettlement prirnarily lo get the Canal back in operation Not do wc think that the I'SSH should asiru the bcoti.ti of an open Canal as worth the risk ol trying to open it by force.

lo. Other former users of the Canal have been hurt, but perforce haveto its being closed. While most countnes would welcome the Canal's reopening, none of tbe users regards an open Canal as vital to thru interests, not dors any of them have much leverage to cieit if it wauled to get the Canal open. For all the above reasons, we expect the Canal to remain closed until some sort of Egyptian-Israeli settlement is readied.ettlement appears remote, but if it ever does corn* about, it will be achieved for reasons which base relatively little to do with tbe Canaloute for ship passage- Theof future oil tanker requirements below assumes that the Canal rrrnains closed.

b. World Tanker Capacity5

here was an oil tanker DUCJt)s availablenon-Communist world. In ailditton. tin- combined earn itconsisteds of which about SO percent reportedly wereotal ots available lor transporting oil.market was tight: customary summer downturns in cliaiter ratesost observers of the oil industry agree that the tankeragefor charter was in tbe neighborhoodercent of the total floit.percent availability is legardcd by oil industry watchers ascomfortable"charter rates arc reasonable in anview and too low in an independentiew Highcharter rales through the third quarter oftbeand Libyanpidnmenu that the market remains

tight

that onlyercent ofleet wasspot charter,iercent increase in the fleet;providedercent "comfortable" spare capacity. Table II lakesthe base figure, representings needed to move oil inhe requirements for the15 at, and 8growth in total oil demand. These calculations assume that the gcaj^^kaanhjiof sources of supply, regions of comumpuon. and ill WflHIKlImportance of tanker-carried oil in world demand remain roughly as

they me today.'1 Table III gists estimates of tankers availableaking into account present tankeragc. scheduled delivenes of new tankers, likely slippage in cnitstruction schedules, and estimated losses due to scrapping and accident Firm figures onhence on the tanker fleetc not as.ulable Isryond the endost shipyard capacity, especially that suitable for tankersWT andore titanercent of the tanker tonnage now on order is ot thiss booked solidly2 ami fairly heavily3 Tbe total orders for4 andsomere already beingreflect the demand oil companies jikI diartsT operators expect ui the second half of this decade Although there is unused capacity in US shipyards, the lead time for tanker construction inds would pirclude any significant additionaln response to new orders before the endurther, the high costs would discourage customers unless they expected extraordinarily high tanker rates for several years ahead. (See Chart,

* Fnemii" iiiiIk-I'i] below.mrnltall-riotin law iininijUHji. ulmli hiiplivtil ilcmni'l tor tanaerl| uniw -j|iiw ruleFirst.eciuulnn tniiLci cj|sh>Iv fur ilvlisrryna|ui parieiHi-di-nund In the USmimw pait inh'rmn tint .nut the1 (he rite ul itt-iwth inurope wbrn .ill mbull y tinker earned <Ul. it fiikmr. lhat ihr

ih-mml fne tanker capacity willmora raptdlv than >nerall

Stiinl INK if Wn ihj- die rilt otA ie USml tngrowth rates enen hereaUe IIrar*ia at rime amd dial the dure al th* srmulib UsiKjl will iuir Sa Ib ontest Irsl probably imreair. Finally.r*ssr ratesanker iknssaacl tnr the rise year prnod wnikimlrraatr rhr .msval growth12 ll. a* evidence tu$gists.in ihe del landciiom metmoit. umerowlh rates wowlil Iw hidsrt tlun ihe asemrr* In Ihr lint hal!hat prnod and lower ia tha lot hail.IheNH tii;ree> that ileliseriei of new tnnkeis awl vf*iihii>eci iiirrlns fhmuuhre likely to be ailrmnii. In (ape with the jimwth in demand tar nil, although not by the niuri-irt oiimati-.'. tr. WMOVID FOR'.SIliw. jiu! th.it,irthet leitrlitiue. and Japan will |frt Ihe oil they need.

in the .upply of ,hnrl-hiiul oil, laWblOV/OlO

here will be enough tanker capacity to move oil from producing countries to consumers in tho next year or so, assuming no change in the availability of diort haul oil. Even recognizing likely delays in tanker production, deliveries1 appear lo be substantially in excess of the tonnage needed to cope with evenercent rale of growlh in demand (see Table III! Although tanker supply and demand will come into balance in the lirst halfssuming the continued asallalnhiy ofercent of combined earners,eriod of peak tanker employment, which will proluhly make for extended Oringency in the tanker market Deliveries of new tankershould substantially ease ihe tight market, with charter rates returning to more normal levels in the second hall of the year. By the endven .inercent growth in demand would requireins requirement would lie inci liyleeta and only< ol the combined carrier fleet

in oil service which wouldomfortable marketcrceni spare capacity available. By the endercent of the combined carrier fleet in oil service would be required to provide this Spare.

anker deliveries appeal likely to slay ahead of od demandhich Is about as far altcad as we can forecast on this point. There appears to be sufficient spare capacity to keep the market comfortable. Thus, even if TAPUNF. remains closed and Libyan production remainsrope and Japan will get the od they need.V below discuss the factors bearing on an interruption,he bkellhood, and Ihe Annex the mcic-quences of certain specific interruptions.

III. THE USSR AND MIDDLE EAST OIL A. The Growth in Soviet Political Influence

IS. The Soviet Union has (irmly established itselfajor power in the Middle East. Although this area is not one where its most vital nationairfWatBftJR RELEASE areand Central Europe and Communist China tttt WKWIllviews its expanded preserve in the Arab worldartial

fulfillmentong-sought goal lo replace Western influence in contiguous countries and in the Mediterranean. The Arab-Israeli conflict, accompanied by increasing radicalism in the Arab states, lias furthered Soviet leverage, and the USSR has had considerable success in exploiting other opportunities In the area.

Soviets are probably optimistic about their ability to maintaintheir Influence in the Middle East over Ihe long term. Radicalismto grow in the Arab states whether there be an accommodationArabs and Israelis or another round ofradicalism has (endedthe Soviets at the expense of Iradirional Western interests. Middletypically blends strident anti-Western sentiment, nationalism,for social and economic reform inlo importunities for change inquo. It Is likely in the years ahead to offer Moscow additionalexpanding the Soviet role In various aspects of Middle Eastern life.whose policy Is aimed at increasing its influence In Algeria, Egypt,Iraq, has established closer reUtlonshipi with and has supplied armsnew regimes in the Sudan and Southern Yemen, and more recendy toprestige is abo growing to some extent in such moderate countriesJordan. Tunisia, and Kuwait, largelyy-product of Sovietthe Arabs against Israel and the US.

B. The- Soviet Role In Oil

The. continued expansion of Soviet influence in the Middle East has not been accompanied by an equivalent expansion of the limited role which the Soviets now play in the Middle Eastern oil mutters. Moscow would almostlike toreater role for both economic and political reasons, hut there are compelling practical considerations in ihe way. These include tlie essentially nationalistic attitudes of most Middle Eastern countries toward their mineral wealth, ihe dilficulfy of marketing vast quantities of oil. inadequacies to Sovietand eo/rnpmenf. and especially small tanker capacity. We indicate below certain constraints on Soviet activiiies user tbe next five years.with developments which we consider fairly likely and which could alfetf the Soviet role.

The USSR Is self-Sufficient in oil and will remain so at least5 and probablyoreover, it will continue to export increasing quantities of oil front Us own resources in Eastern Europe and wilt remain the major source of oil for this area. The level of Soviet exports both to Eastern Europe and to non-Communist countries will dependrowing degree, how-ever, on Soviet ability lo procure supplemental supplies of oil from the Middle East for re-export. This will be especiallv true

present the USSR supplies tbe Communist countries of Eastern Europe

withpd. aboutercent of the od requiredj[of Romania which iset exporter oftl

products. The USSR abo exportspd to other countries, nearly

f this lo Western Europe. For many years Soviet exports of oil have helped to tie the economies of Eastern Europe to the USSR and exports to Western Europe have provided the Soviet Union with its most important source of convertible currency.

The USSR's rapidly growing domestic und export requirements for oil are becoming more costly and technically inure difficult to satisfy. Soviet oil fields are being depleted more rapidly than expected, in part because poorpractices have made large quantities of reserves impossible to recover, More and more Soviet oil is coming from recently discovered deposits in Central Asia and Western Siberia, far from centers of consumption in the western part of the USSR. Extremes of climate, difficult terrain, reluctance of skilled specialists to work under such conditions, and shortage of Suitable technology andmake exploitation of these reserves difficult and costly, and the rate of increase in total production of oil is slowing down.8

The USSR plans to produceillion bpd5 and will probably achieve this goal. This amount would be adequate to provide for all domestic needs, to satisfy most East European demand for oil. and to permit export of substantial quantities of oil to other Communist countries and elsewhere in the world. To facilitate deliveries to Eastern Europe, the Friendship Crude OilSystem from the Urals-Volga to Eastern Europe is being paralleled and when completed in thehuuld be capable of transportingil lion bpd. IfSSI! wishes to maintain exports lo other areas at about present levels, modest quantities of oil,pd. may have to be procured from external sources. The USSR has already entered into agreements with several Middle EasternSyria. Egypt, andcould provide approximately ihis quantity of od5 in return fur Soviet assistance in developing petroleum resources. Moreover, the USSR has also encouraged East European countries to seek supplemental supplies elsewhere in exchange for lechnical equipment and manufactured goods.5 Eastern Europewill be importing small quantities of oil.pd. in addition to thai from Russia. About one-third of this nil will be imported by Romania,

oviet production of oil probably will amount to aboutillion bpd aslanned targetillion bpd. Although the USSR is capable of achieving the lower end of this target, we do not believe it will make the costly investment in technology, equipment, anil oil exploration needed to do so. Its probable output ofillion bpd would be more than adequate to cover domestic demand, but the amount available for export would be sharply reduced.f the USSR wishes to provide most of the od required by Eastern Europe and to maintain exports to other Communist countries and to the rest of its markets at or near present levels, it would have lo procure sizable

< Drilling hnsignificant obstacle to oil and gas development in the USSK. Soviet drilling equipment Is ill-oiltrd to Ihe requirements of the Siberian firRf rBOlftufDn RELEASE USSR is not iloinit tufficnat drilling annually to sustain .inrullo of priMTEjtHHftffllB

to pruductMiri.

amounts ofillion bpd, from orhcrrobably from Middle East nations. Combined Soviet and East European procurement of oil from the Middle East and North Africa0 could totalillion bpd. Although thisignificant amount of oil it would representmall share of Middle East and North African production.

It is by no means certain that the USSR could In fact procure this amount of oil from the Middle East. The od producing countries have traditionally wanted hard currency for thoir oil. Some of them might find it necessary to provide od to the USSR in-or civilian goods or to pay for military equipment-Such arraneements would improve Soviet export capabilities, but it is hard to Msualize the bulkillion bpd being subject to barter arrangements. The major oil producinc, countries are not so tied to thebecause they have not needed Soviet equipment onto (eel compelled to participate iu such deals. The Soviets could act as brokers for sales of Middle East oil. This arrangement would be profitable, but their hard currency earnings would be much less than from exporting their own oil, and the Arabs probably would see but slight economic advantage in having Soviet middlemen in place of Americans or Europeans.

Nonetheless, the USSR will lie increasingly interested over the next decade in participating, through assistance to the national oil companies, in theof petroleum in lhe Middle East. Such participation could provide the USSRarket for noods and services not othetwbe readily eirwrtabk'. However, oil plays tooole in the Soviet .xxsnomy and militaryfor the Kremlin to contemplate ettemivr drrMidence on externali! acquired from the Near East willligiMc for Sovietlthough, on the most liberal assumptions, it could amount to aboutercent of export availability

We would not expect the Soviets to initiate any moves to deny Middle Eastern oil to NATO or Japan even were theyosidon to ilo so. Denialmall scale would serve as little more than an annoyance to the NATO allies, would not disnipt essential industry'- and would movenwr be costly to Moscow in terms of international good will. All NATO countries would view even limited denial elforts as an act of economic warfare and the price to the Soviets would be high in many respi-cts. Such economic belheerrncy would he viewed with dismay by all raw material producing stales in the underdeveloped worldotential source ol extreme disruption of the market! (or their commodities. Finally. SovietInterests probably coincide with those ol the Arabs and of the oil consumers In dictating ctabdity in international oil markets. Soviet as well as Arab exporters benefit from open markets and high price*.

Denialarge scale seems even more remote. Even In the unlikely event that the Sovietsajor roleroker lor Middle Eastern od. Moscow would be forced to sellor hard currency rather than hold it offarket. The amounts Involved are so huge, both in terms of the USSR's golj^ and convertible currency reserves and its ability to provide wanted goods to

the ml producers, lhat Ihe Soviet Union would not be able Ioajor portion uf Near East oil lor its ownikewise, Ihe Soviet Union would be hard put to persuade most of Europe's Middle East suppliers to withhold their oil for any length of lime since od revenues are so important to their economies and national tomb Middle Eastern oil becomes valuable only when it is procesaed, transpoited. and marketed

It has not been Moscow's practice, so far as we can ascertain, to urge any ol the Middle Eastern oil producing slates Io nationalize foreign-owned oil concessions or to cut ofl exports. What the Soviets hase made clear is their willingness to assist stateowned oil companies. For example. Moscow hascontracts with the tmn Syrian. Algerian, and Iraqi national oilalthough il has become only peripherally involved In production or marketing. Should unc or another of the producing states seize lureign-owned oil properties in the future, there ls little doubt that, if asked, Moscow would provide- some aid. But lor many years the heavy Soviet commitment to the development of its domestic oil resource probably svould limit tbe scope of such aid.

The actual Soviet role in the Middle Eastern oil Industry over Ihe next five years may lake several forms. The USSR will probably continuenvolved in exploration Inr oil and in production, as it. in Iiaq al present Moscow could become involved as swell in the coustriiiltun ofSoviet* arc building part uf tire Iranian-Soviet natural gas line and may build an oil pipeline in Syria. Thus,ouible in the Ion* run for the San-sett to gain .in iinre-js'nely ^gmtieaut [lostrion in ihe oil industry in the .Arab state*.

IV. CHANGING PATTERNS OF OWNERSHIP AND PRODUCTION

Irrespective ol Suviel nil policies, thu next live toears are going to see growng pressures lor change in the relationship between the Westerncompanies and Ihe oil states. The host countries will grow more deter-mined to control the production of their own oiL Middle East govs?rnrncnti will insist on some lorm of partidpaliOn in all new concessions granted, with the private oil companies oflen relegated lo the role of minority partners with, or service contractors producing oil for. these national companies. In some cases, presently operating companies may be forced into alteration of their con-cev'inn.iiv status or iti.is he replaced hs- other companies operating i< OH tractors Or parts of their facilitiesipelines and terminab) may be national! acd.

One type of participation in production .ind marketing is the joint ven ture. wherein Ihe country with the oil resourcesartnership with one or more foreign oilo exploit some part of the country's oil resouries.

'Sowirt geld holding, aretU-m. palpably nulfklrn.hills acooa. Thek keldmgi ef tcemsilble euus-ao' arr nrd'naUr i'-smei.ltn-.' ol ostnpansriu> FasKrnoulleilillitm

One of ihe partnerstate agency, usually the national oil company, which hold) an equity interest in the coocession, the other it Ihe foreign oil company, which owns the remaining interest, provides technical expertise, and oftenmost of the oil produced. Algeria's national oil company, SONATRACH. for example, participatesumber ol such joint ventures.

National oil companies are also increasingly mining to exclusivefor and production of oil on their own. The expertise they may lack is provided by expatriate technicians, drilling companies, end the like, hired on contract. Lying somewhere between this "self-sufficient" national oil company and the joint venture Is ihe service contract, underoreign oil company is hired to lake complete charge of oil operationsaiticular areaost country. The foreign company explores for and produces od for the account of the isjnsoral company and in return is usually given the right lo buy part of the produced oil at an attractive price. The foreign company abo usually undertakes, if and when requested, to find buyers (or at least part of the national company's share of the oil.

A new practice, still in the early stages of development, is that of direct bilateral marketing contracts between national oil companies and eonsunierver the next five years this type of arrangement will probablymarkedly, in large port because national oil companies are growing in the producing countries, such arrangements will representmall part of world oil liade, however. Several national oil companies in the; Arab states ami Iran deal directly with >tate>Owncd oil corporation* Examples of such Iwlateral contract an an cements base been those between Iran and Romania. Saudi Arabsa and Romania. Libya and Austria, Kuwait and Spain, and Ejrvpt andChina- Iraq has alsoimilar arrangement with the Soviet Union, in return for assistance In producing oil,

By the end of, aportion of Middle East oilcould be under the control of hostjoint ventures, service contracts, usderiviklcnt operations, and. possibly, partial or cornidc-tc nationalisation of present eixiecssions. While nationalization of Middle Eastern oil docs not necessarily Imply denial of oil lo Europe, Japan, or even the US, il could bring about substantial changes in ihe role of the international oil companies. Ihe basic raison d'etre lor these companies lies in their ability to assure tomooth, continuinn. and reliable flow of Oil They can replace fiom another concession (or by* purchase from other companies) the production from any one country which might have been interrupted foror political reasons They also own or have under charter most of the Free World tanker capacity, and theyarge proportion of thtr refining, transportation, storage, and distribution facilities of Western Europe. For these reasons (and tbe cost of anyuropean countries have relied on the companies for tlie bulk of their mushroomingequirements. We be-

BPPPDVIfll FOR RELEASE

virtually all cases, the government of the tonsuioer country Is involved inI0 meni to mbiw degree.

Id

Ileve tlul (hey will continue to do so unless the international companies uie unable to meet tbe nerd.

nationalization should occur oncale that the companiesobtain sufficient oil from alternate sources and if the companies thendeal with the holdout of their former concessions, consumer countrywould feel compelled to step in, for example to arrange the terms ofThe companies would almost certainly retain their roles asrefiners, ami distributers of oil- Moreover, the desire to protectinterests would impel consumers to seek multiple sources of supply topotential harardi ol relyingingle source. Producing countriesfor multiple markets for analogous reasons.

V. CIRCUMSTANCES IN WHICH THE FLOW OF MIDDLE EAST OIL MIGHT BE INTERRUPTED

A. General Considerations

For tlie most pail, oil bas flowed freely from the Middle East to markets abroad5 There was one instance of complete long-term shutdowna tor oil producer.. the Anglo-Iranian concessionary company boycotted the nationalized Iranian oil Industry so successfully that no Middle Eastern host etiuntiy has tried outright nationalization of an oil concession since. Theie have been other interruptions, however. During8 war Mssvcn Egypt and Britain. France, and Israel, tbe former blocked the Sum. Canal and the Syrians blew up the Iraq Petroleum Company (IPC) pipeline which extends from Iraq to the Mediterranean. Both were out of use for about six months. Syria closed the IPC line for three months in6 and7 Arab-Israeli war caused the closure of the Canal, and certain producing countriesemporary selective embargo ol oil shipments. TAPLINE has bom cutby sabotage and once bythe past two years Libya imposed production cutbacks

Of these interruptions, several took place in the cootf ihe Arab-Israeli dispute. But even6he Egyptians blocked the Sue* Canal not so much to interrupt oil flow as to pies rot the forces invading their country from using it. So alto the Syrians closed the pipeline6iew to harming Iraq as well as to hurting UK oil interests. Several other interruptions of oil by Arabs were not connected with the Israeliyria's doting of pipelines70 andbyan production cutbacks.

his iccord suggests that the host countries, irropectivr of their political ideology, have been motivated primarilyesire for increased icvenue and, hence, increased oil production. Of the radical regimes which have appeared in the Arab world sinceone has chosen to risk the loss of major oil icvomic by using mlpolitical purposes iu disputes with Western nunitries. ftftttlflHIMUM seizure of the non-producing portions of the concession area of0 may have been an exception. This action did not interrupt production or

revenue, but it effectively retained the growth of Iraqi oil exports and revenues for several years. By and large, the record shows clearly that it is circunistanccs of rapid change and highexample,67 Arab-Israeliare likely to produce impetuous action by host countries against Western oil interests.

il producing countries have been willing to collaborate, forhe Organization of Petroleum Exporting Gentriesn bringingto raise per barrel oil revenues generally. Consistently, however, individual countries have been willing, in fact anxious, to take advantage of one another's difficulty in order to gain more total revenue by expanding output. (Kuwaiti and Saudi Arabian production grew rapidly while Iranian production was shot down. Iran and other Culf states have been eager to make up Libvan cutbacks) Among the Arab states, the rhetoric of Arab solidarity masks the same low level ol real cooperation in the oil sphere as it docs inOr political matters. Finally, the record shows that the quest for revenues has often led the host countries and the producing companies to the vergeotal rupture in relations over financial negotiations; in the end. however, mutual dependence and financial self-interest have consistentlyomplete break.

any of these trends continue; tbeor revenue and profits is the principal one. Each producing country has been aware that each of the large oil companies could replace its Oil by expanding production elsewhere. This actsonstraint on even radical regimes. States with conservative political regimes and with close political lies lo Europe or theIran and Saudieven more reluctant to interrupt oil supplies than arc the radical

he Middle Eastern countries could hold Europe hostage if they could asrev to suspend all oil shipments until their demands were met.theory they could get enormously increased prices for their oil by so doing, hut in practice they simply do not trust each other sufficiently to be able to formolid front. Indeed, we see little likelihood that cooperation among theountries wouldto the pom: where even two or three major ml producing countries collaborated in this fashion, although more limited cooperation seems likely to continue.

B. Special Cases

t is possible, however,ajor oil producing state could come to be ruledegime which was willing to cutoff oil production in order to gain its own ends. The case of Libya has illustrated this pointibya's strongly nationalistic leadership forced the oil companies operating in the country to agreeharp increase in posted prices and tax rates, and hence in payments to the government. This was brought aboul by unilateral cuts in the companies' production of crude oil and threat* to seize theircessions unless the government's demands were met.trong

reserve position adequate Iu lastengthy period, even if Libyan oil revenues wore restricted or slopped, the Libyans wereery fa.vora.hie position to curry out this pressure lactic, since Libyan oil is close to European consumers and is highly desirable because of its losv sulfur content. These factors, combinedight tanker situation, gave Ihe companies little choice other than to agree to Libyan terms.

he Libyan situation could be repeated elsewhere, although it would seem that few- oil producing stales, radkal or corners ative. could findinortuitous combination of iiicsimvlances as the Libyans Inbeing located close to the market,remium type of oil, havinit very large foreign rxeliange reserves, and being able to curtail or suspend productionime when transportation problems pul the international oil industryelicate situation. Similar action in the distant Persian Culf area, for instance, probably would have less impact.ombination of circumstances might bring another nich act by some other hiiihly nationalisticeven bybyans again or by the Algerians.

C. The Arab-Israeli Issue

hree years of violent peace since Israel defeated its Arab neighbors7 have left their mark on the oil vitiation in the Arab countries The clove association of the US with Israel, the existence of numerous armed guerrilland Ihe stiadily increasing dependence of Europe on Middle Eastern oil have provided greater incentive In tile Arabs lo interrupt nil supply lors i" motives Welie nest few paragraphs the types olin the Arab-Israeli situation which, in tin* light of these1 chanties, could impede die flow of oil to NATO countries and/or Japan.

s long as Israel and its Arabmain at military losUCerha-ads. there is coroaderablo potential for interruption of oil (low by Arabhe likrLhood of interruption would lncreave sharply in the eventiiildenin iheew outbreak of major fighting. Theand duration of any interruption would he influenced by the scale and nature of the lighting and by the degree of Involvement {real or imagined) of Ihe US and of particular NATO countries. The US and the UK an- Ihe most likely targets.

ome of tin- moves which Arab oil producing countries are likely to make in such circumstances would be more symbolic than real. Few Arab regimes would be willing, or indeed able, to go to the lengthsotal embargo of oil Most of "hem need oil levsrrtue* to run the day-to-day operations of their sovern-ments. Saudi Arabia, lor example, has already budgeted virtually all itsannual oil income. The Algerians badly need large quantities of money lo finance an ambitious development plan; oil revenues would not even cover three-lourths of (heir needs. Other Arab guvenuneiils have similar desires.otrin (qr HflfASf whose special case is discussed above, vnn most easily afford to letide-rations rule over economic ones.

Arab oil producing countries would probably try tn prevent their oil from reaching certaiii Western countries.elective embargo of oil is hard to enforce and would be ineffective. Once oil leaves the terminalroducing country, the country has virtually no control over it. It can goistribution point and tlience reach an embargoed country. An embargo on shipments to the US would be easier to inlorce. Since most Arab oil reaching the US is shipped directly to East Coast ports, non-compliance with anmbwould be harder to conceal. Because Ihe US now getsercent uf -is nilom Arab states, an embargo in tliesc circumstances would Unpuac few mains on USconsumption. Huvvever. liftings of oil for US military forces could be affected and, although the quantities involved are relatively small, replacing them would involve some logistic cumpbeations.

Circumstances could develop, moreover, in which one or more Arab oil producing countries might move against US-owned oil pioducing companies. Participation of US military units with Israel in fighting with the Arabs, for example, would probably occasion <eizurc of most producinu companies. Such devices as partial ortion,rohibition aitolmtof prolits could hurt the USS oil operations in the Middle East broughtillion net inflow to the US balance of payments) Similar moves arc possible against British companies (whose ismtributions to the UK's balance ol payments is considerably greater lhan in the case of thend are eonceivabk1 against other European cotintnes. but most of (he latter are unlikely targets In the context of Arab-Israeli hrnfiliiiev

hould one or more .Arab states seize all US (and/or UKj ml opv-rations. there would be serious divruptaons in od -Jupnu-nts. which could bit for month* However, consumers must have the odfor la trypeisducing countries must sell it fairly promptly in order to hrunes-ononiies. We believe that, in thoountryompany or companies winchsubstantial quantities of oil not replaceable from other sources, affected NATO countries would find themselves compelled fairly speedily to makerrangements to obtain the oil they need. We believe that, in most cases ofa near normal flow ol oil would be restored heluie many months had

he Aiah-Israeli situation has potential for yet another means ofoil. sabotage by the Pali-slinian guerrillas There have Ix-tii .1

lew minor instances of thivalready, and US and UK an*

likely to be targets of sabotage in the yean ahead. Od fields, storage tanks. load iug facilities, tankers, and the like are vulnerable iu varying dkeatj-asjj Itsimple to blowipelineellhead, but these are alsoively easy to repair. Although repeated .sets could be costly toompany involved,ype of sabotageot likelv to interfere more tiian marginally with oila (or shutdownompany's operations would require Rll/JaSI demolition of keyarge partank hum. oading pier unusable for an extended period, or knocking1 electric

power pUnl. The oil companies and ihe host countries would, of course, guard against such actions, but they would be unable to protect against all contingencies

S3 In the sabotage operations they have tned so far within Iirael and Israeli-occupied territory', the Palestinian guerrillas have struck at targets of opportunity rather than at targets of Importance. We believe that, generally speaking, they would do tbe same if they turned more of their attentions to oil installationv especially as oil companies and local governments are taking steps to guard critical installations. To Inflict clamage heavy enough tonifkant portion of od flow wouldrl of competence in sabotageWe cannot judge the actual cornpetence the fedayeen have or are likely to acquire. It should be noted, however, that many Palestinians work in Middle East oil companies, and theyotential source of technical information for tho fedayeen and of access to oil installation' Finally, while we judge ilthat any Arab country would destroy ils own oil industiy or sabotage another's, tbe fedayeen do not have this inmbibon

Political Rivalry

he desire to put pressure on Iraq for political reasons has figured In Syria's two closures of tho IPC pipelineW. This desire could cause Syria to close this lino again. The two countries are ruled today by mutually antagonistic Baalh Parties, and antipathy betsveen Baghdad and Damascus has coutinmdariety of regimes Should the Syrians come to brhove that, for jilt Iraq was trying to oscitlirow their (rovemmcnt. Damascus would probably retaliate. Since itrong Syrian-Iraqi antagonism is likely to endure, we rate closing of the ll'CatH-iiod oflikely sometime in the next five years.

Sum

e believe that, on the whole, oil prodiicing countries will continue to put their own financial needs ahead of ideology and politics and that they will not attempt to deny, for morehort period, significant quantities of nil to Europe or Japan on political grounds. There are other forces in the area, however, not under the constraints that affect tbe oil producing countries. The possibilities for interruption are so many, the political emotions so prominent, and the irs*otmentSitrong and deep in many Arablikely to grow over the years ahead, that partial interruptions of oil flow to NATO and to the US will probably occur during the mil live years. Short ol major Arab-Israeli fighting, such interruptions are likely to be temporary and to involve relatively small fractions of European supply; they might be varied in cause, as well as effect. Among the possibilitiesyrian closure ofei;ne and fedayeen sabotage of ml facilities. Id tberab-Israeli fighting, some interruption of oil shipments seems J'M"nTtTiSV7lll and we would not rule out seizure of US oil interests.

CONSEQUENCES OF CERTAIN INTERRUPTIONS IN OIL FLOW

I. We discuss In ibis annex the consequenceshe disruption of oil flow in the followingj Iraq Petroleum Company (IPC1 pipeline shuti Libyan and Iraqi production stopped completely, le) production from all Arab states stopped. The discussioneven percent average annual growth in aggregate world demand; it assumes that die Suez Canal remains closed and that TAPLI.NE does not reopen, it also assume*ubstantial part of the combined carrier Beet would be available for oil service The specific details are those as of the second halfut we have tried to give as much pieeision as we could to the consequences of interruptions over the periodenerally speaking, the consequences of the interruptions posited innd ii would be most severe if they occurred within the comingonths. DegmiUne. in the second hallhere will be more spore tanker capacity. In the event of an interruption in oil flow from some producers. However, the magnitudes of oil involved would bo progressively greater as the years pass, and the dependence of certain European countries on particular oil producing countries might varyew percentage points; Iraqi odand perhaps Libyan as well, is likely to grow below tbe averagethe overall patterns will remain.

h The Iraq Petroleum Company Pipeline Closed

he IPC pipeline system currently delivers about one millionpd) of oil to teroiiiuls at the eastern Mediterranean.* nuve this volume of od to southern Europe. There is sufficient oil availablethei sources to make up for this loss. However, il the loss wiw to lie made up from Persian Cull sources,would lie required for this movement. If tbe event should occur in tbe next few month* there would be iimdficienl transport capacity to meet the additional tankervenercent ol the combined carrier fleet were put in od service, liy the end1 the contingency could he mel, if the tanker fleet were augmentycieem of the combined carrier fleet.

Ih Interruption of All Libyan and Iraqi Oil

imultaneous interruption ol all Libyan and Iraqi oil flosv wouldillion bpd off the market. All butillion of tills is short haul crude available at Mediterranean termtnab-s presently suffice to haul tlus ml from Mtdtlorraoean terminals to Europe, but* vvotdd be needed to haul replacement oil from the Persian Cidf. Tbe differences is fur beyond the, limited spaie lankerage forecast for any rime in tlic next five years. In (act. hoss-cvei. spare capacity in the Culf is onlyillion bpd. and even this would requireddition tos released from short-haul service. Although some replacement olJMWU) Ml nlUASt probably come from sources closer to Europe,ld i.han would be available Hence, there ssould he oil shortages. On an average.

the non-Communist world would lkv nhort of its needsercent for the first few mouths, until the takers released from Libyan and Iraqi service could be rerouted to oilier longer haul sources. Western Europe would Israr the brunt, since it is the destination of most Libyan and Iraqi oil

The overall iJsortagc of oil supply would persist well beyond three months Theotildeduction in oil consuinptiot. of about fiveworld wide Iloweser. if cut lacks were not made so as to provide an equitable share of available supplies to all consumer countries, and Western Europe and Japan were compelled to bear the total effects of the loss of Libyan and Iraqi oil. reduction in coasumption in these ureas might have to go as high asercent for several months.

After six months uf continued denial ol Libyan and Iraqiupplies from other producing sources could be increased sufficiently lo bring wsirld wide supply and demand essentially into balance. There would, however, continue tohortage of tankers to liaul the oil The reduction in deliveries of od would force Western Europe to rrdme consiimption by about seven percent (or to draw down stocks by the samessuming thai the US did not reduce its own consumption and continued to use od at presently estimated rates.

C. Cat* llli Total Deniol of All Arab Oil

denialillion bpd fur more than several weeks would beTlie oil shortage would amount to alvoulercenthicttim Ini .ii'iiu.ivt world. Europe and Japan would base Iu ration oilThetr respective Industrie* would suffer severely, and lha.'con-urnoftputassive scale beggar the irtugmatiun.short term, little if any improvementthe situation could liesut months or so, lorced draft production itKreases In rm non Araband reduction of consumption in tbe L'S could ease the situationTotal oil production in the non-Communist world would probablyatherercent Drastic nil shortages, rangingconsumption in Europe tyercent of consumption in Japan, would persist

APPHOVtD FOR RELEASE DATE: MOVrOlO

TABLE I

OIL CONSUMPTION IN THE NON-COMMUNIST WOULD: FORECAST0

Thousand Bampels Per Day

Annual Growth Rate

Free World Total Western Europe NATO

Other

Japan US

Other

0

0

i0 0

0

percent

90

rnnpom'iits may not add lit the titali shown.

'Thew ariiwth rates liefor IdolrtMimp|li>ii; ttniwth utr*lor individualnd the volumesunderlorvuist reflect the share*th jreii ui rsptvled ti> mirs-H'Tittotaln

I

TANKER DEMAND IN THE NON-COMMUNIST WORLD. ASSUMING AN AVERAGE GROWTH AND"quivalents)

Asxtlsgt. AjOHML (Growth Bate *

percent

percent

percent

0

0

.

.

All data are rounded to th'Tanlrr demand based on amsuw annual raw* of growth in inl demand inI0

TABLE III

ESTIMATEDWORLD TANKER'quivalents;

Tankers

ofecember

une

"

ofune

ecember

*

ofecember

.

ofecember

u

*

ofecember

"

ofecember

on data mien UWfrf Tanker Ftwt Bevien. .JO0 Includes tanker*0 DWT and out. Doet nute'iciil ol Ok- Ititul wnilil.onttol <if ComoHmut couiitrius. Figure* after0 jre niuiiilrd to the0

after TO0 ,ue estimate* of ptoUihie deliveries, reflecting tlie cumulative effect* of ili posse oferoral in deliveiyesselsdipciaoe in one period were added tu icfleduled deliveries in the fnllowim; period .ind the total wj. rcdmed byercent to derive probable ilelivenes for the later period.

'jndarbitrary, belnu soioewhnl lower than fur theDonths ending

' The lower deliveries Hitcd3, ii canipuredre accounted fur hy ohllfcitton* of shipyards for other typci of vessel*.

ArPROWO FOR RLLtASE DATE:

:

J|S 3 IliiijllilJilJ;:

Si

Hi

Is

fSS1 JjJ

aa

J

jijij

m

WORLD CRUDE OIL9

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