8
Page 399 and fuel oil prices were to rise by 10 per cent. the dollar balance of payments would benefit by $10 million whilst the non-dollar balance of payments would only show a loss of $1 million.
15. The general conclusion, therefore, is that on the whole forces already at work should lead to some improvement in the above picture of the Sterling Area dollar balance of payments (though not necessarily in the balance in other currencies), but that this improvement in the dollar balance will not make any major change so far as we can forecast at the moment in the 1949-50 or 1953 position.
16: This memorandum therefore examines the scope for positive action to reduce the dollar drain on oil not only in the context of the immediate dollar crisis of 1949-50 but also with regard to long-term considerations.
(iv) The Possibility of Increasing Dollar Receipts
17. Everything possible is already being done to maximise sales for dollars, but, in view of the extraordinary swings that occur in the United States of America domestic oil position, it is not felt that it would be wise to assume higher sales than those which have been taken in the estimates and of which in fact about 80 per cent, are covered by contracts or are with purchasers with whom the British selling companies have historical or financial connections. Last year a more optimistic view was taken.
18. The question of dollar invoicing of oil has been re-examined and found to be unlikely to yield any substantial net gain to the dollar balance of payments as a whole (Appendix IV).
19. It might also be possible to draw some immediate benefit by accelerating the drawings on the Shell Caribbean Loan (Appendix V). Any action of this kind would aggravate our position in later years.
(v) The Possibility of Reduced Dollar Expenditure
20. Possible ways of reducing dollar expenditure on each item shown in Table II have been considered together with the probable repercussions of such reductions. The courses that have been considered are:--
(a) Reducing the Cost of Dollar Imports by United States Companies
1. Reduction of United Kingdom Consumption.—Under present trading conditions of non-discrimination a cut in consumption only reduces United States companies' dollar imports by the proportion of their share of trade which, overall, amounts to one ton in three and a half in the United Kingdom and one in two and a half in the rest of the Sterling Area. There is therefore no major dollar saving to be obtained from this method on its own. Further- more, any reduction of consumption in the United Kingdom would raise considerable difficulties and there is no reason for thinking that oil is any less an essential raw material to the rest of the Sterling Area (Appendix VI).
2. Discrimination. It is possible, however, that to some extent dollar oil could be replaced by "sterling" oil now that British companies, owing to the expansion which they have already carried out, are likely to have surpluses instead of the deficits which they have had to meet in the past by buying from United States companies (see next paragraph). Apart from the remote possibility of ousting dollar oil by a price war, discrimination against United States companies is the only way of reducing dollar imports A detailed examination of the scope and consequences of discrimination is set out in Section II, where it is also shown that a price war is not likely to improve the dollar balance significantly and would have a serious effect on the United Kingdom's earnings of other foreign currencies.
(b) By Reducing British-Controlled Companies' Purchases of Dollar Oil
These purchases are already at a minimum and consist of oil bought under contract at a time of shortage, of crude oil bought as part of an arrangement whereby the resulting products are sold at a dollar profit or of specialised products which British-controlled companies do not produce all Page insufficient quantity (see Appendix II). In 1949 50 the possibility of A.1.0.C. negotiating the earlier termination of their contract for the purchase of motor spirit and gas oil is under consideration and may save
$3 million In any caset
to $16 milion by 1953.
9
the dollar cost is expected to
fall from $50 million
(c) By Reducing the Dollar Costs of Production and Expansion
This possibility is examined in paragraphs 39-43.
(d) By Reducing the Dollar Cost of Tanker Hire and Freight
This is examined in paragraphs 43-46.
(e) By Action in certain Special Cases
This is considered in detail in Appendix VIII. The special cases are :-
1. Britmex, an American-controlled bunkering company. By discriminatory action some saving might be made in the coming year and until 1953, when it is estimated that almost its entire needs will be met by the production at Fawley.
2. Bahrein Petroleum Company, an American-controlled company refining oil in the Sterling Area but operating largely on dollar crude. The substitution of sterling for dollar crude does not appear a practical proposition in the light of the considerations discussed in Appendix VII. The supplies by this company can, however, be treated as part of the American companies' dollar imports into the Sterling Area, and this is the assumption adopted in Section II.
21. It was clear that dollar savings on any significant scale could only be achieved by some form of limitation of American companies' imports or by reducing the rate of dollar expenditure by British-controlled companies on production and expansion. These two possibilities are examined in the following sections.
Section II. Replacement of United States Companies' Imports of Dollar Oil
into the Sterling Area
22. The f.o.b. cost of imports of dollar oil into the Sterling Area by United States companies is estimated to rise from $322 million in 1949-50 to $383 million in 1953.* As pointed out in paragraph 20 (a) (1), so long as present trading conditions in the Sterling Area continue, a reduction in the dollar cost can only be obtained by a larger reduction in total imports, i.e., by reducing total consump- tion by the larger amount, United Kingdom and United States companies reducing their imports proportionally.
23. This position might, of course, change from normal commercial develop- ments, but any major change is unlikely. Governmental action to produce any change would involve discriminatory measures of some kind. It has never been settled exactly how far the non-discrimination provisions of the Loan Agreement apply to the oil trade. Since a large part of the United States companies' imports of dollar oil are, for the convenience of suppliers, shipped from sources outside the Continental United States, they may be held not to be subject to these provisions, and certainly the Dominions are not bound by them. Nevertheless, any discrimination against oil anywhere in the Sterling Area would undoubtedly be held by the Americans to involve important questions of principle that could not be settled on technical grounds. The Argentine Agreement has already provoked unfavourable American comment even though we have been able to point out that it was Argentina and not the United Kingdom that chose to discriminate. Some of Commonwealth countries may, indeed, be already preparing to dis- criminate of their own accord, but it would be difficult to convince the Americans that they were doing so without prompting from the United Kingdom, especially afer the publicity accorded to the meeting of Commonwealth Ministers last July.
24. It has been suggested that British companies could drive United States companies out of their Sterling Area market by price-cutting. The suggestion assumes that British companies can produce oil at lower cost than United States companies. While there is no direct evidence available, there seems to bẹ no reason for thinking that British companies have any advantage over United States
* These figure dimer from Table II estimates because they exclude on 1929-5 and $4 million in 1935 for purchases of dollar oil by Britmex referred to in paragraph 20. (e) 1.
37457
C
192
10
conpaces Osinee Gaited States and British compages are producing in contiguous areas in Venezuela and in the Middle East so that it may be assumed that local operating expenditure is at the same rate. The question therefore depends largely on the relative efficiency of the British and American oil companies, and here, again, there is no reason to assume any great difference. Furthermore, in a price war selling prices are not related directly to costs and in the past the oil companies have been prepared to accept heavy marketing losses for short periods in order to retain the physical volume of their trade. The net result would probably be that each company would sell the same quantities of oil in the same markets but at lower prices. Since, as is pointed out in paragraph 14, lower prices do not substantially improve the dollar balance of payments and cause a large deterioration in our balance in other currencies, it appears that a policy of price cutting would be a dangerous expedient from the United Kingdom point of view.
25. Any decision to attack the level or growth of the American-controlled oil companies' trade in the Sterling Area must therefore be regarded against the general background of the issue of discrimination which is dealt with elsewhere in the brief. A further difficulty peculiar to oil is that the American oil companies, with the encouragement and often the active support of the State Department, have built up a large investment in crude oil production and refining in the Middle East, from which to a large extent they draw their supplies for their Sterling Area markets.
26. Clearly, the general questions of discrimination and of American participation in the Middle East requires some estimate of the quantities and values of the oil involved. These are set out below on the assumption that only the quantities of oil described in paragraph 7 as British companies' unallocated supplies are used for discriminatory purposes.
27. Below are given the dollar savings that would arise from three methods of replacing dollar oil with British-controlled companies' unallocated supplies. These calculations must only be regarded as a rough estimate of possible savings in view of the lack of adequate data on the past trade of the American companies in the Sterling Area. Any scheme involving other Commonwealth countries will obviously have to be cleared with them after discussion with the United States.
28. The three methods are:--
(I) Limiting United States companies' dollar imports into the Sterling
Area to the amount of their dollar imports in 1948-49.
(II) Cutting their dollar imports to a given percentage of their 1948–49
dollar imports.
(III) Replacing United States companies' dollar imports with the full amount of British companies' unallocated supplies, as and when they arise.
29. Only the replacement of the main petroleum products has been con- sidered. We shall not for some time produce enough of some grades of lubricants and other special products even to meet British companies' own trade, so that no question of replacement can arise.
Method I-Limiting Dollar Imports by United States Companies to Present Level 30. Table III sets out the future increment over the 1948-49 level of dollar imports by United States companies into the Sterling Area assuming pro rata increase of business done by them and compares it with the British companies' unallocated supplies in each year. In each year British companies' unallocated supplies are, in the aggregate, sufficient to replace the net increment over 1948-49. This statement conceals differing positions with regard to individual products; for example, there is a slight deficit in kerosenes even at the present level of trade, whilst in the long run there appears to be a deficit in fuel oil. But small shortages in the immediate future can probably be met by drawing down stocks. whing in the fo2run, shortages of fuel oil can pagalbefale good at the expense of other products. The last column therefore shows the full value of the increment as a potential saving under this method of discrimination.