SOVIET INFLUENCE IN THE MIDDLE EAST AND ITS IMPACT ON MIDDLE EAST OIL (S-3343)

Created: 8/21/1970

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CIA HISTORICAL REVIEW PROGRAM RELEASE IN8

0

Brig. Con. G. A. Lincoln (Ret.)

Director, Office of Emergency rrcparcdnesa

Executive1 Office Building Annex

Dear Abo,

Encloocd arc five copiesIA memorandum onnd Middle- Eastern Oil, prepared Jointly by the Office of National Estimate* ond tha Office of Economic Research, ln response to your request ofuly. This paper must bo consideredlrot cut at tho complicated subject. We plnn tn tho next two months to explore mora deeply certain of the points raised here, to treat all of the moro detailed questions you have now sane us, and to coordinate- the larger document with tho other intelligence agencies, in tho process, wo will be conferring with the appropriate specialists In tho Department of the Interior as well as .those at Stata.

We will Include ln the SNIE on estimate of tho likelihood of each of tbe three denial contingencies you specified. It would further help us In tailoring tho SNIE to your needs If you could let us know which of tho matters treated ln tho memorandum seem to you to require fuller coverage. Does this paper bring new questions to mlttdV

ABBOT SMITH Director

National Estimates

CENTRAL INTELLIGENCE AGENCY OFFICE OF NATIONAL ESTIMATES

lU0

MEMORANDUM IA Distribution OnlyDraft for Board Consideration)

SUBJECT: Soviet Influence in tbe Middle East and its impact on Middle Eaet Oil

1. Tbe Soviet Union has firmly established Itselfajor power factor In the Middle East. Although thia area is not one vhere Its Dost vital notional Interests are Involvedrelations with Eastern and Central Europe and Ccccaunist China ore considered more ioportentMoscow views Its increasing Influenceartial fulfllliEentong-sought goal to replace Western Influence in Mediterranean/and contiguous countries. The Arab-Israeli conflict, accompanied byradicalism in the Arab states, provides the Soviets with their greatest means ofin this area. It also facea them with increased risks. ost vivid example of. these risks is demonstrated by tbe recent confrontationSoviet olr defense forces stationed in Egypt and the Israeli Air Forcrcarrying out its bombing campaign west of the Suez Canal-

GROUP l/ Excluded from automatic downgrading and declassification

2. While some aspects of the Soviet position in the Middle East are susceptible to direct Soviethe USSR's naval squadron and the size and role of Moscow's military and economic assistance programs, many of tbe basic circumstances which shape Soviet policy here are determined ln the main by decisions made elsewbcrein Tel Aviv, Cairo, or Washington. Nonetheless, the Soviets have had considerable success with the opportuniotic tactics which have accompanied their forward policy in the area, and they are probably optimistic about their ability to maintain their influence in the Arab states and to increase it over the long-term. Badicallam is almost certain to grow in the Arab states whether there be peace between the Arabs and Israelis or another round of warand radicalism tends to favor the Sovlete, more than the West. Aside from increasing ita influence in the older radical Arab states (Algeria, Egypt. Syria, andoscow has established closer relationships with andilitary aupplier to the new radical regimes ln the Sudan, and Southern Yemen, and more recently with Libya. Soviet influence is also growing in such moderate countries as Lebanon, Jordan, Tunisia, and Kuwait, largelyy-product of Soviet support for the Arabs in the conflict with Israel.

3. The expansion of Soviet political Influence in tht Middle East doco not, however, imply an equivalent expansion of the limited role vhich the Soviets now play in Middle Eastern oil matters. Moscow would aliaost certainly like toreater role for both economic and politicalossibly even to displace all the Western oil companies operating in the areabut there are compelling practical considerations in the way. These range fron the essentially nationalistic attitudes governing tbe actions of cost Middle Eastern countries toward their mineral wealth, on the one hand, to the relatively snail numbers of tankers and drilling specialists which the Communist carop now commands, on the other. We indicate below certain constraints on Soviet activities over the next five years, along with developments which we consider fairly likely and which could affect both the Soviet role and the flow of oil to Western markets.

I*. The USSB is now self-sufficient in oil and will probably remain so at least Moreover, it will continue to export oil from its own resources to the Free World. Satisfying rapidly growing export requirements as well as its own mushrooming demands for energy has, however, caused

Increasingly rapid exploitation of the USSR's petroleua reserves. For many years exports of oil have servedeash to help tie the economies of Eastern Europe to the USSR and hove also provided the USSR with its most important source of convertible currency. Over the past few years as new oil fields have been opened beyond the Urals, Soviet production costs have increased both because of more difficult extraction conditions and greater distances of centers of supply from markets. Increasingly expensive supply conditions have induced the USSRnd countries of Eastern Europe as wello seek supplementary sources in the Near East, where because of geography and low production costs, marginal Soviet requirements can bemore efficiently than from distant higher cost Soviet sources.

5. We expect Soviet purchases of Near Eastern oil to grow gradually over the next five years but to remain of only marginal importance in the total of Soviet requirements. Oil plays tooole In the operation of the Soviet economy and military establishment for the Kremlin toreliance on external sources of supply for any but the least important uses. Thus we expect continued Soviet

acqulaitione of Hear Eastern oil for Soviet internal use or delivery to Eastern Europe on Soviet account, to remain small as compared vith the USSR's cwn production.

6. We would not expect the USSR to initiate any moves to deny Hear Eastern oil to NATO or Japan even if they could Except for conditions of glcbar war, tbe USSR could not afford the costs of preclusive acquisition which denialarge-scale would imply. Denialmall-scale would serve as little more than an annoyance to the NATO allies and would moreover be costly to Moscow in terms of international good will. Such denial resultingoviet initiative would be viewed by the US and NATO as an act of economic warfare which would at the least endanger current steps toward an East-Weet detente. Such economic imperialism, moreover, would be viewed with dismay by the entire underdeveloped world asotential source of extreme disruption to their own commodity markets. Soviet commercial interests, finally,

a

probably coincide with those of the Arabs and the oilin dictating stability In international oil markets.

rTl

7. The prospectoviet denial of Middle East oil to Western Europe, Japan or the United States seems remote. Even in the unlikely event that the Sovietsajor roleistributor of Middle Eastern oil, Moscow would be forced to sell it for hard currency rather than hold it off thehe amounts involved are so huge, both in terms of USSR's convertible currency reserves or ability to provide hard goods to the oil producers, that the Soviet Union would not be able toajor portion of Hear East oil for its ownikewise, the Soviet Union would be hard put to persuade Europe's Kiddle East suppliers to withhold their oil for any length or time since oil revenues are so important to their economies and national goals. Most Middle Eastern oil becomes valuable only when it ls processed,and oarketed ln Western Europe, Japan, and elsewhere. While Moscow has drilling contracts with the Egyptian, Syrian, and Iraqi national oil companies, it has become onlyinvolved in production or marketing.

1/ The USSR presently exportsarrels per day

to Western European countrlea, much of it for hold currency.

2j Soviet gold holdings are estimated6 billion,

palpably insufficient to carryreclusive action.

8. The actual Soviet role In the Kiddle Eastern oil Industry over the next five years Bay take several forms. Soviet advisors could assist certain of the Arab countries to nonage their national or nationalized oil companies. Already Soviet experts are engagedurvey of Libyan oil reserves. In addition the Soviets might become Involved as brokers ln the sale of nationalized oil: he Soviets acting asin finding buyers in Europe or elsewhere for Arab national oil companies producing petroleum from concessions seized from Western oil companies. Moscow might find this profitable both commercially and politically. Moscow could become involved as well in the construction of pipelinesthe Soviets built part of the Iranian-Soviet natural gas line and may build so oil pipeline in Syria. Thus, it is possible in the long run for the Soviets to gain important positions in the oil industry ln the Arab states.

9> We have seen no indications that Moscow has been encouraging any of the Middle Eastern oil producing states to nationalize foreign-owned oil concessions or to cut-off exports. However, should one or another of tnese states seize foreign-owned oil properties, there is little doubt that if asked

Moscow would step In to assist then ln producing and/or marketing their oil. The greater danger lies in the existing euphoria in the Arab states arising out of Moscow's support of the Arab cause against Israel. This could encourage one or another radical Arab state to seize oil concessions, banking on the prospect that Moscow would help it out in operating its oil industry.

10. Over the next five years pressures for change in the relationship between tbe producing companies and tbe oil states will increase, especially in the profit sharing arrangements. National oil companies will more frequently hold the concessions, with the private oil companies relegated to the role ofproducing tbe oil for these companies. In some cases, presently operating companies may be replaced by other companies operating as contractors. This may happen in the very near future to one or more of the companies operating in Libya. ikely target wouldmaller company, such as the Occidental Oil Company, which could be seixed and incorporated into the Libyan National Oil Company. One of the large international oil companies night be too big for the Libyans to seize and operate In the near future.

ET

TAKKERS

The world tanker fleet in oil service at the end9 totalledillion deadweight tons (DWT)arrying capacity equivalent tohe tanker fleet of the USSR and other Communist countries representedercent of the worldith the Suez Canal closed, oil production cut back in Libya, and the Tapllne shutdown, there will be little if any spare tanker capacity through the first quarter Eased on a6 percent annual growth rate in world oil consumptionhe demand for tankers at that time will bequivalents.

Even if the present tanker construction program geared to that goal is completed, there will be only moderate spare tanker capacity. If world oil consumption exceeds current forecaots, as seems possible, the tanker situation5 could be nearly as tight as it is in

ncluding vesselsWT and larger.

anker is defined for this purpose5 DWT tankerpeed ofnots.

in

y During the tight tankerhe USSR reportedly was having difficulty ln arranging tanker charters for delivery of oil to some of its customers in the Free World.

- Al -

Table 1

World Crude Oil Production0 (First Half)

fFlrst Half)

Barrels Per Dav

of Total

Barrels Por Dbv

of Total

Oil Production

World

Heal sphere

East

Saudi Arabia

Kuwait

Iraq

Abu Dhabi

Qatar

Oman

Other Middle East

600

320

162

egJ.

Africa

Algeria

Egypt

Indonesia

Other Eastern Hemisphere

1.9

;

Hemisphere

States

Canada

Venezuela

Other Western Hemisphere

Countries

Because of rounding, components may not add to the totals shown.

Table 2

Free World Oil95 a/

Aron

9

Perr>

*aaaaaaaaaaaaaaaaaaaaBaaBmt

Total World Free ubrld

Sim

Annufll

9

t

Europe

Germany

Kingdom

,

59.

urg

*

,

NATO

Western Europe

States

Countries

fiecaune of rounding, components may not add to the totala shown.

ousand Barrels Percent Per Dav of Total

Barrels Porcent Percent

Per Dhv

Total

Annual

0

45

0.2

185

60

540

2.6

5 US OIL9

Volumes In Thousands Barrels Per Day

Crudeaa

Percent of

Origin

Bant

Beat

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