9. If, however, we are to get the full benefit of the British oil companies' expansion, we must take vigorous action to achieve a substantial reduction in the dollar cost of the American share of trade in the sterling area, since this accounts for 60 per cent. of the dollar deficit in 1949-50 and 77 per cent. in 1953. Ways of doing this are examined in Section II of the Annex (paragraphs 22–38).
10. I fully agree with the conclusion (paragraph 24) that there would be no advantage to be gained by endeavouring to oust United States oil from the sterling area by a price war. In the first place, it is most unlikely to succeed there is no evidence to suggest that we can permanently sell oil in the sterling area at an appreciably lower price than the Americans-and as we sell so much more oil than we buy, the general reduction in prices that would result from a price war would have a markedly adverse effect on our general balance of payments position.
11. In view of this, discrimination against American imports of oil into the sterling area is the only way of reducing the dollar cost of the American share of trade without drastic curtailment of consumption, which is dealt with in paragraph 13 below. The Working Party examined three possible ways of discriminating.
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(a) By pegging American imports at the 1948 figure and using the unallocated surpluses of British companies to provide for the whole of the increases in consumption in the sterling area which have been allowed for in the previous calculations. This is estimated to save at the annual rate of 20 million dollars in 1949-50 and 60 million dollars in 1953.
(b) By reducing American imports to 90 per cent. of the 1948 figure. This would save at the annual rate of 42 million dollars in 1949-50 and 68 million dollars in 1953.
(c) By reducing American imports to the full extent of the British companies' unallocated surpluses. This would save at the annual rate of 50 million dollars in 1949-50 and 116 million dollars in 1953.
12. Method (a) would not absorb the whole of the potential surplus of British Companies and the balance could be used to remove some of the restrictions on consumption in the sterling area without additional dollar cost. The Americans could hardly maintain a serious resistance to this. Even they should appreciate that it is politically impossible for us to continue restrictions on the use of oil indefinitely on the grounds that we cannot use the oil we produce ourselves because, while non-discrimination is in force, we should have to allow a propor- tionate increase in imports of dollar oil which we cannot afford!
Methods (b) and (c) will be more difficult to get the Americans to accept; for the American oil companies would find it difficult to secure other markets for the oil displaced and might have to cut back production. Moreover the American oil imports into the United Kingdom are at present financed with E.R.P. dollars and any reduction in them might cause a corresponding cut in the allocation of E.R.P. dollars. Proposals (b) and (c) would also add to the difficulties in getting E.C.A. to finance a part of our refinery expansion pro- gramme; for the American oil companies will argue that American aid should not be used to finance British companies in taking away their oil trade.
Consumption in the Sterling Area
13. Under a policy of non-discrimination, it is useless to try to save dollars by cutting sterling area consumption; for to save 1 ton of dollar oil, consumption would have to be cut by 3 tons in the United Kingdom and 2 tons in the rest of the sterling area. There would also be no point in cutting consumption in addition to pegging the level of American imports (method (a) above). For, once the level of American imports was settled, any cuts in consumption would merely fall on sterling oil. If, however, we were to pursue a fully discriminatory policy, any cuts in sterling area consumption would serve to increase British companies" unallocated surpluses" and so enable more dollar oil to be displaced. The Working Party are examining the extent to which further economies in consumption ping the United Kingdom and the rest of the pegling 4 rate
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possible (Anner, Appendices VIa and VIb) but it does not appear likely that the scope for economy is very great unless drastic cute involving considerable political difficulties are imposed.
The Discussions in Washington
14. I do not think that we need yet make up our mind which of the three methods of reducing the American share of trade in the sterling area we should advocate. The best course to adopt in the Washington talks seems to me to present the problem as we see it to the Americans, and try to get their agreement to our negotiating a solution with the American oil companies direct which, while securing for us the dollar savings that we must have, will damage them as little as possible. Under this procedure we should not press the discussions on oil too far in Washington but would aim at securing a firm understanding that the principle of non-discrimination should not apply strictly to oil in the United Kingdom and the sterling area. The subsequent negotiations with the American oil companies, which are bound to be highly technical, should, I suggest, be con- ducted by the Treasury and my Department in London in close touch with the Foreign Office and the American Embassy.
Summary
15. I recommend
(a) That the British oil companies should be encouraged to proceed with their programme of expanding their production and refining capacity to the maximum extent that they feel commercially desirable, while at the same time cutting the dollar cost of their 1949-50 operating expenses by 50 million dollars.
(b) That we should, in the Washington talks, present our problem on oil to the Americans, endeavour to obtain their agreement that the principle of non-discrimination should not apply strictly to oil in the sterling area and suggest that a solution to our problems that will damage the American oil companies least should be sought by negotiations in London between the British Government and the American oil companies.
I should hope that the outcome of the measures recommended above would be a reduction in our dollar deficit on oil in 1949-50 of the order of 70 million dollars.
Ministry of Fuel and Power,
7, Millbank, S.W.1,
18th August, 1949.