Must an Oil War Follow This War?

VOLUME 173

NUMBER 3

MARCH, 1944

87th YEAR OF CONTINUOUS PUBLICATION

by JOSEPH E. POGUE

FROM its very humble beginnings only eightyfive years ago, the oil industry has grown to command world-wide attention. An “exrailroad conductor wearing a top hat” drilled the first commercial oil well in Pennsylvania in 1859. The scene had all the elements of drama — a rugged individual, a pioneering spirit, a new adaptation of an old technique, the goal of great riches, even a setting for politics! And the industry still holds these features of popular interest.

The scene has shifted to the tragic and heroic struggle of World War II. The United Nations are now flying to victory on the wings of petroleum.

Mechanization is the keynote of modern warfare, and mechanization means oil. Airplanes and jeeps and tanks move on oil. Every modern navy is oilpropelled. The matériel which we are supplying to theaters of war is more than 50 per cent petroleum. More than half of our overseas cargo capacity is filled with oil. Seven million barrels of oil are now being consumed each day — nearly two million more than the world’s daily consumption before the war. New and specialized oil products are demanded, in quantities undreamed-of a few years ago. One year’s production of 100-octane gasoline alone now approximates the annual output of all oil products forty years ago.

Petroleum is also the key to the strategy of this war. To assure their supply of oil, the Germans occupied Rumania, and brought on our attack on Ploesti and the present Soviet advance toward Bessarabia. The invasion of Russia became a mad gamble for the oil reserves of Maikop and Baku, and the blunder may have marked a turning point in the war in Europe. The African campaign was conducted on both sides with an eye on the oil fields in the Middle East. In seizing the Dutch East Indies, the Japanese had oil as well as rubber for a prize.

The burden of the war’s requirements is being borne by our American oil fields. When the submarine campaign in the Atlantic cut off other sources of supply for the war in Europe, the accessibility of our ports saved the day for the United Nations. The result has been not only a drain on our productive capacity: the whole pattern of the industry has had to be altered, and the American petroleum industry has been mobilized under a Petroleum Administration for War.

Our domestic consumption has been reduced to bare essential use. Oil drilling has been cut, and the withdrawals from existing wells have been increased. Construction of new refineries has been necessary to meet the need for such special products as aviation gasoline, toluene, and butadiene. Transport has been reorganized to shorten the haul and to meet the menace of submarines, and an overland detour has been constructed for the 40 per cent of our domestic supply which was previously handled by coastwise tankers. The efforts of producers have been handicapped by shortages of material and manpower and by frozen prices, and legitimate desires of consumers cannot be met.

Copyright 1944 by The Atlantic Monthly Company, Boston, Mass. A11 rights reserved.

The changes and dislocations which have resulted have inevitably produced many apprehensions. Chief of them is the fear of exhaustion of our natural resources, with a recrudescence of the theme that we have already passed the peak of our production. Discoveries seem to lag, and the newly discovered fields appear to be less extensive. An oil-conscious public falls easy prey to the idea that our supply is running short. On the basis of such fears, government regulation is easily extended and the industry sees its foreign position imperiled. Confidence in the future is lacking, and temporary conditions threaten to undermine the foundations of long-term policy. The shortage scare has brought on a climate in which pessimism and defeatism flourish, and it has become a force to be reckoned with.

Oil in the Last War

Turning back a quarter of a century, we find a striking parallel in the First World War. Oil played a dominant role then, too. Consumption was on a smaller scale, for mechanization was just emerging — airplanes were only beginning to show their importance in operations, the tank was a new invention, and the mule still had his day as the forerunner of the jeep. Yet a great volume of oil was needed, the submarines took their toll of tankers, civilians lived through the gasless Sundays, and strategy turned on oil control.

When the First World War was ended in 1918, apprehensions had been engendered which parallel those of today. A graphic picture of the situation which then existed was drawn by two Englishmen, Davenport and Cooke, in a book published in 1924, The Oil Trusts and Anglo-American Relations: —

American oil consumption 400 million barrels a year.

Foreign countries’ oil consumption 200 million barrels a year.

Reserve Supply for America = 18 years.

Reserve Supply for Foreigners = 250 years.

Horizon — very black.

The same outline would serve for a delineation of our present temper, but the colors might now be even more lurid.

International Complications After the Last War

Even before World War I, rivalries had become intense between the oil interests of various countries. American, British, German, Russian, and French companies were involved. The contest centered for a time on the Turkish Petroleum Company with its concessions in Mesopotamia in which German interests had a share of the control. In 1913, Mr. Winston Churchill announced the British government’s policy to acquire and own oil reserves and to draw its oil supply from sources under British control or British influence; in consequence the British government acquired control of the AngloPersian Oil Company. During the war itself, a struggle was waged for control of the oil reserves in the Middle East, and it led to some of the secret treaties which later vexed the negotiation of the peace.

The Peace Conference was long engrossed with oil problems, and even territorial settlements had to wait upon their solution. The chief contestants were the British and French, with the Americans looking on with jealous eyes. Mandates for Iraq and Palestine and Syria could not be assigned until an oil agreement was reached at San Remo in 1920. The negotiations had to be renewed at Lausanne, in 1922 and 1923, and they were partly responsible for the delay in concluding a treaty of peace with Turkey. Eventually, the German interest in the Turkish Petroleum Company was squeezed out. Contemplated divisions between British and French interests brought vigorous protests from the United States, but in the final dispositions Americans were admitted to share.

Both Britain and the United States emerged from the last war with an augmented sense of the importance of oil. This attitude created in each case a fairly definite foreign oil policy, but with the contrast that Britain pressed for a “preferred status” for its nationals, whereas the United States advocated the traditional open-door policy of “equal access” for all. Despite its prior participation in the Anglo-Persian Oil Company, Britain did not further extend its policy of mixed governmentindustry operations, but limited itself to a promotion of the interests of its nationals through diplomatic channels, and apparently took measures to assure an increase in the interest of British nationals in the stock of the Royal Dutch-Shell.

The United States government accorded diplomatic support to its nationals, was successful in gaining for American companies a position in Iraq and the Dutch East Indies, and encouraged them to explore and to acquire reserves in all parts of the world. In consequence, American oil companies have attained a position in foreign oil reserves equal to that of British interests. This position was gained with almost continuous expansion, despite a change in the foreign oil policy of our government some ten years ago, when the official attitude became one of indifference and neglect, if not discountenance. This reversal was shortsighted, for it encouraged the ejection of our nationals from a number of countries of important oil potentialities, such as Mexico and Bolivia, without advantage to them or to us.

It is noteworthy that the British position in foreign oil reserves was mainly established prior to World War I, while the American position has been largely attained since that event. The British government’s control of the Anglo-Persian Oil Company has apparently retarded the expansion of the British oil industry; otherwise, with that head start, the British should have gained precedence over United States nationals operating abroad without governmental subsidy or sustained diplomatic support.

It is a striking fact that the policy of governmental participation formulated by Mr. Churchill at a time when the British Navy was shifting from coal to oil was not expanded later. This was probably due to a realization that command of the seas assured control of oil resources, regardless of governmental participation. In the last war, British needs required recourse to both American and Mexican oil; again in this war Iranian oil for a considerable period was cut off from Britain by the submarine campaign and for the second time American oil was called upon to fill the gap. Nor did the presence of the British government on the directorate of the Anglo-Persian Oil Company prevent the long dispute occasioned by the cancellation of its concession by the Shah of Persia in 1932.

Will an Oil Crisis Follow This War?

The war-engendered attitudes on oil, prevailing in official as well as unofficial circles, create a danger that this country may adopt a foreign oil policy which will not only impair the functioning of the oil industry here and abroad, but will also lead to international complications which might even produce a third world war. The setting in which our national thinking must now proceed, the shortage psychosis, and the tendency to imitate the policy of Britain without subjecting it to critical analysis conspire to encourage hasty action in wrong directions.

Ideas of far-reaching import are current, which could lead to drastic changes in our economy. Starting with the premises that we have barely enough oil to fight this war, that we are going to run out of oil, and that for our security we need reserves for the next war, various suggestions are being advanced or are lurking in the offing.

First, that our government must acquire ownership of foreign oil reserves, widely distributed geographically, and particularly in the Middle East. Second, that our government must acquire ownership of domestic oil fields to be held for emergency use. Third, that our government must pile up huge stocks within our own borders, from three to seven years’ supply. Fourth, that our government must restrict our national production and leave our needs to be met from imports. Fifth, that our government must curtail domestic consumption and continue rationing in order to do so.

What would be the effect of the implementation of one or all of these proposals? The consequences, far from being constructive, would be the reverse of those contemplated and would be damaging to our country. Government participation in foreign oil reserves would retard further progress of our nationals abroad, would endanger our Good Neighbor policy, and would lead to endless political complications. Aside from being incredibly costly, a vast storage campaign is wholly impracticable: to be large enough to be significant, say a three years’ supply, the full use of the Big Inch and the Little Big Inch pipe lines would be required for a period of twenty-five years merely to move such volumes of oil to storage points throughout the country!

As to the concept of national reserves, our existing naval reserves have been so restrictively administered that the Navy lands today, in the midst of our gravest emergency, are producing under 10,000 barrels daily, against a total United States production of 4,400,000 barrels. National reserves cannot be the answer. Then what about a drastic restriction in United States production and consumption, a permanent cut in our standards of living? That might work — or would it? This is a question for the public to decide.

Proper Policy Can Avert an Oil War

What are the alternatives? Everyone would agree that our oil policy should envisage three objectives: national prosperity, national security, and world peace. Many would concur that the lastnamed, if not all three, can be attained only through expanding world production and trade.

To gain these ends, we must substitute a positive, expansionist approach for the negative, restrictionist one. We need a policy that will shift the focus away from the inevitability of a third world war to those measures most likely to prevent such a catastrophe. And if such measures would at the same time maximize our national security and economic health, the answer is clear.

The policy suggested here is confined to three simple and readily understandable objectives: First, our government should encourage private enterprise in the development of the world’s oil resources, by according to our own nationals such diplomatic support as to assure them an even break with the nationals of other countries. Second, our government should refrain from participating in foreign (or domestic) oil operations, either directly or through some subterfuge. Third, our government should take the leadership in promoting measures of international consultation and collaboration concerning world oil developments, at the outset with Great Britain and the Soviet Union and later on with all peaceful nations, ultimately implementing some international agency to maintain the undertaking.

Such is the policy which the American petroleum industry wishes our government to adopt. Such is the program which the American petroleum industry invites the American public to examine and to support.

Obstacles lie in our path, to be sure. Lack of knowledge of a complex technical industry, misunderstanding of the position attained abroad, the trend to autarchy in many countries and the rivalry between government and private enterprise in our own country, the undercurrent of politics which agitates any question connected with oil — all these factors make an intelligent approach to the problem difficult.

The oil potentialities of the United States are much greater than is generally supposed; those of the world, almost immeasurable. The “oil reserve” figures customarily cited include only the oil which has been proved by commercial wells; the estimates usually omit the oil yet to be discovered, the resources which with chemical treatment are convertible into usable oil products, and the materials for the production of synthetic oil. One of our leading geologists suggests that our “American oil reserve,” instead of 20 billion barrels, may be 102 billion barrels, taking into account 17 billions in the form of natural gas, 20 billions controlled by American nationals abroad, and 45 billions of potential discoveries in this country. If to these figures we add the “technological oil” available through chemistry at somewhat higher prices, and the vast supplies of ordinary petroleum that can be uncovered by our nationals in all parts of the world by really vigorous search, we reach a grand total that should dispel all fears of impending scarcity. Not all this is “easy” oil. Enterprise and skill will be required. Yet the picture is not one of defeatism but of challenge.

In 1938, the United States produced 61 per cent of the world’s oil, and nationals of the United States operating in other countries produced an additional 9 per cent; British-Dutch interests produced 15 per cent, the Soviet Union 11 per cent, and all other interests only 4 per cent. Expressed in other terms, 24 per cent of the world’s oil outside the United States was produced by American interests, 39 per cent by British-Dutch interests, and 27 per cent by the Soviet Union. These figures show that three countries, or even two, are in a position which enables them to assure the success of an international policy. This fact should facilitate the conclusion of an international agreement.

The position of the Soviet Union is a special one. It possesses enormous potential reserves; yet its production is scarcely sufficient for the domestic consumption. For many years to come, it is not likely to be a great exporter, unless compelled by the need for foreign exchange. Nor is it likely to feel a need for controlling foreign reserves. So long as enterprise is kept within the hands of the government itself, Soviet nationals will probably be restrained from operations in foreign fields.

The world’s oil reserves are widely scattered, but unusual concentrations occur in certain strategic locations such as the United States, the Caribbean area, and the Middle East. Five countries in the Persian Gulf area — Iran, Iraq, Saudi Arabia, Kuwait, and Qatar — may have reserves equaling, if not exceeding, those of the United States. All five are within the sphere of British influence and in proximity to territory of the Soviet Union. Iran and Iraq are the most highly developed of the five, but Saudi Arabia and Kuwait may have comparable potentialities.

While the ultimate productivity of the areas cannot be closely measured, it is fairly evident that British and American nationals together control at least a 90 per cent position in these countries, in the approximate ratio of 3 to 2. The American holdings are in a much earlier state of development than the British. The position of American nationals in Iraq was obtained shortly after the last war as a result of negotiations growing out of the peace settlement; our position in Saudi Arabia and Kuwait was obtained more recently as a result of private initiative. It is here that the United States government, through its recently formed Petroleum Reserves Corporation, is proposing to construct a major pipe line to the Mediterranean, an action fraught with far-reaching international implications,

The meaning of “reserves” can be easily misunderstood. Proved reserves only are definitive, whereas the real issue is always the reserves to be discovered. This dynamic aspect of the situation is usually overlooked, and the consequent misconception constitutes a danger to any proper settlement of the oil problem, domestic as well as foreign.

The world needs American enterprise and skill in the discovery as well as in the development of its oil reserves. A distinguished geologist gifted with insight, Wallace Pratt, states in his readable little book, Oil in the Earth: —

. . . there is abundant evidence that Americans search for oil more assiduously and find oil more effectively than any other people on earth. In fact, it is Americans who find the oil in the earth. In addition to the oil in their own country Americans have found much of the oil in other countries. Even where foreign capital has financed oil-finding enterprises, the actual work of exploration has commonly devolved upon American technologists, geologists and engineers. More than once the American staffs of foreign oil companies have succeeded in finding oil on a prospect after earlier attempts by foreign experts have failed. Mexico, Colombia, and Venezuela are outstanding achievements of Americans in oilfinding. In Iran, Iraq, Burma, and Peru, American technical skill as well as American machinery bore the brunt of the exploratory effort. Americans were identified too with the early development of the oil fields of Russia and Roumania. . . .

If we could only drive this simple fact home and affirm its dynamic and constructive implications, there might be some chance of escaping from the dampening clutches of such clichés as “dollar diplomacy,” “international cartels,” “Yankee imperialism,” and the like, which politicians are prone to employ to obscure the issue and to promote narrow objectives. The fact is that our nation and all nations would be immeasurably benefited if American oil-finding genius were encouraged to go into the far places and vigorously develop the commodity that confers such benefits upon mankind. No government, not even the greatest, can match this potent force; but our government can make it possible that this benefit be conferred more amply upon all peoples. It can also prevent it.

The United States Can Offer a Practical Solution

The United States is in a preferred position to seek a practical solution of the intricate problems involved in the international development of the world’s oil resources. Our nationals are successful operators in every region in the world where they have not been handicapped or ousted by nationalistic policies. They have the requisite experience, capital, and initiative for further undertakings. The American oilmen have unique methods for the discovery of new oil fields and these have been demonstrated in all parts of the world. The world economy needs this “know how.” Moreover, by reason of its position of leadership among the United Nations, the government of the United States has an opportunity to promote those measures in the international field which may lead to world reconstruction and permanent peace. Rarely in history has such a combination of favorable circumstances opened up the way for constructive endeavor.

To take advantage of our position, we must prepare for a pioneering job. The search for new oil fields must go on, and it will require the initiative of pioneers, free from the restraints of collectivist economies. Risks must be faced, and the willingness to face them will spring from individual enterprise. In the past, discoveries have been largely due to American daring, to American methods, to American technique; and future expansion will require a setting for the exercise of the special American competence. Undiscovered oil will not serve as a medium for world reconstruction.

Another aspect of the oil economy in the United States is available for wider application. For over a decade our oil fields have been operated according to strict conservation practices administered through the various state conservation bodies and coördinated by means of an Interstate Oil Compact Commission, with the assistance and sanction of our Federal government. Confronted many years ago with the need for greater efficiency in oil-field operations, and handicapped by the existing subdivision of our oil pools into small leases, the petroleum industry worked out a decentralized structure of laws and administrative procedures that functions with increasing effectiveness and avoids the stifling effects of regimentation.

And when oil went to war, the government took the industry into collaboration. A dual system of planning and directives was developed in Washington, with the Petroleum Administration for War and the Petroleum Industry War Council working together as a team toward a common end. These new and effective administrative forms take rank, along with the other achievements of the American petroleum industry, as an outstanding contribution for future building. They may be commended to our lawmakers and administrators as an advance in the art of democratic government that deserves the widest attention. They offer the means of bringing the genius of oil enterprise in full measure and in acceptable form to the peoples of all nations.

Proposal for an International Oil Compact

It was this experience, and the belief that worldwide oil developments by our nationals would not only add to the security of the United States but would foster the social and economic advancement of all peoples, that prompted a group of oil leaders in November of last year to prepare and submit to our government a report on “A Foreign Oil Policy for the United States.”

This report outlined the factors that create an international oil problem, pointed out the special interests of the United States in oil, and listed the principles that should govern in framing a proper policy. It emphasized the effectiveness of private initiative, and the damaging results that would come from mixed operations with the participation of government. It stressed the necessity of dealing with both the interim and the long-term aspects of the problem, and differentiated between those measures which our government could take alone and those measures which, concerning the policies of other nations, required consultation and collaboration with others.

Recognizing that a foreign oil policy requires not merely the formulation of principles but also the establishment of means for making these principles effective, the report offered two additional suggestions. One concerned special coéperation with Great Britain as the first step in achieving an agreement on general principles; the other proceeded on the idea that the forms of administration developed in the United States, in coérdinating the oil interests of the Federal government, the oil-producing states, and the oil industry, could be adapted for effective application in the international field. To this end, the report concluded with a design for an International Oil Compact, in effect an Oil Conservation Treaty.

The suggestion is offered that an International Oil Compact should be negotiated with the following general objectives: (a) efficient and orderly development of the world’s oil resources; (b) prudent conservation of the world’s oil reserves; (c) equitable distribution of oil to the peoples of all nations; and (d) avoidance of national restrictions imposed as artificial aids to the production of synthetic or substitute products. The Compact would be open to adherence by all countries, producing and consuming countries alike. It would become operative upon the adherence of five countries, provided the United States be one of the five; it is implicit, also, that Great Britain should be one of the five.

The machinery of the proposed Compact would accord representation to all interests and yet provide an executive agency small enough to prove practical in functioning. The provisions also include the principle of industrial representation, so as to effectuate the experience gained in the United States and to avoid an undemocratic overweighting of the political forces. The instrument envisages four related agencies — a General Conference, a Permanent Commission, a Technical Institute, and Regional Councils.

The General Conference would be composed of representatives of all the adhering countries. The Permanent Commission would be smaller, as necessary for executive action, and would be made up of representatives of the countries of chief importance as consumers of petroleum, and of representatives of the oil organizations in the leading oil-producing countries. Under the Permanent Commission would be placed a Technical Institute, which would conduct the necessary economic, statistical, and engineering studies for the promotion of the objectives of the Compact. Regional Councils are envisaged, with mixed governmental and industrial representation, to promote the special coördination which might be needed in particular regions, such as the Middle East and the Caribbean area. Finally, the Compact carries suggestions for the orderly settlement of disputes which may arise, utilizing, among other agencies, the World Court.

The proposed Compact seeks no preferential treatment for the nationals of any particular country, but provides a modus operandi by which the competitive forces can express themselves without distortion by artificial or uneconomic pressures. It is based upon orderly development, equitable distribution, and the avoidance of waste — the identical objectives sought and achieved by the existing American procedures.

The plan is not to be confused with intergovernmental commodity schemes of the kind so often tried in the past. International agreements have been made and coördination attempted, occasionally with limited success, in the case of tin, rubber, coffee, sugar, wheat, and other commodities. Nearly all those schemes, however, have been developed on behalf of producers or producer countries. Most of them were instituted to correct conditions of overproduction, and their purposes have usually been the restriction of production and the raising, or at least the stabilization, of prices. They have come into disfavor because of their tendency to create artificially high prices and to support marginal production. In some cases, they have stimulated and aggravated conditions of overproduction and restraints on distribution. The public revulsion against so-called international cartels and similar agreements has not been without some foundation, and yet it can easily be carried to a dangerous extreme.

The present proposal is entirely different in derivation, in purpose, and in structure. It focuses upon orderly expansion instead of restriction. It imposes conservation practices. It seeks to eliminate handicaps to exploration and production. It gives representation to all parties in interest, particularly to consumer countries, thus creating a mechanism of checks and balances under which monopolistic tendencies, whether by government or industry, may be curbed. It opens the field to smaller units of capital by reducing the political risks. It is balanced by the integrated structure of the oil business, whereby operators as a rule are simultaneouslyengaged in both production and distribution. The Compact is purely consultative, its members are voluntary adherents, and it entails no power of enforcement. Its workability depends upon enlightened knowledge and the compulsions of mutual self-interest.

Much the same system has been in operation in the United States for more than ten years, with the full sanction of our government. It is generally regarded as a conservation measure of great success which has contributed economic stability to a formerly highly cyclical industry. The low price level prevailing during this period attests that the system has been in the public interest. The results have met with general approval in this country, and without the existing structure it seems doubtful whether our oil supply could have been effectively marshaled for the prosecution of this war.

The proposed international Compact is constructed therefore on an American model. It would offer a means for coördinating the oil policies of various countries, precisely as we have succeeded in coördinating the policies of the American states. Without any invasion of national sovereignties, it would make possible progress toward an effective development of the world’s oil reserves in an atmosphere of mutual understanding. It would bring together in common effort consuming and producing countries, local governments in special areas, and the competent men who must do the work if the world’s oil needs are to be met.

Oil is a great social and economic force. It can be made to serve as a catalytic agent for the progress of human society. It holds the key to a development of automotive transportation which may destroy the barriers to neighborliness among the peoples of the world. It promises to facilitate an industrial development which will make the well-being of the common man more than an empty phrase.

An oil war does not need to follow this war. To prevent such a catastrophe, however, effort will be required, organization will be needed, and policy must be consciously evolved. It is a happy augury for the future that the American petroleum industry is alive to the opportunities which lie ahead, and that it is seeking to employ its talents in a way which will at once promote American security and contribute to world-wide reconstruction and permanent peace.