12.
TABLE V
000 Tons Imports of dollar oil by U.S. companies
Page 403
000 Tons British companies' unallocated
$ Million
Potential saving
Method III
supplies*
To U.K. To R.S.A.
Total
(i)
(ii)
(iii)
(iv)
(v)
1949-50 (full year)
4,015
4,068
8,083
2,033
50.9
1951
4,454
4,958
9,412
4,211
94.7
1952
2,967
5,234
8,201
3,633
133.8
1953
559
5,582
6,141
3,172
116.3
1954
520
5,850
6,370
3,949
136.6
NOTE.-The value of column (v) is the value of the products in column (iii) that can be replaced by
products in column (iv) plus the value of any stockdraft assumed under Methods I or II.
""
* The figures for 1949-50 and 1951 exclude fuel oil for which there would be no " discriminatory outlet in the sterling area. The potential " discriminatory" outlet for fuel oil in the special case of Britmex could be met out of these excluded quantities up to 1952, by which time Britmex is expected directly or indirectly to draw its requirements from the Fawley refinery.
33. The amount of British Companies' unallocated supplies and, therefore, the scope for discrimination under Methods II and III would of course be increased if consumption in the Sterling Area were reduced or if supplies to other areas could be cut. The practicability of making reductions in Sterling area consumption is examined in Appendix VI and though there may be some savings possible in consumption they are not likely to be large. The saving of 250,000 tons a year in United Kingdom motor spirit consumption which has been specifically suggested as the possibility would increase the amount of the British Companies' unallocated supplies available to replace dollar oil. Under Method II this would make it possible to peg imports at 85 per cent. instead of 90 per cent. It would make no difference under Method I, since the United States Companies' dollar imports are based on the 1948-9 level. It would, of course, be possible, though obviously commercially distasteful, to restrict supplies to these countries to current levels or to check the rate of increase, but it must be remembered that of the increase of over 10 million tons in sales of oil to other than dollar or hard currency countries shown in Table I as expected to occur between 1949–50 and 1953, nearly 7 million tons is in respect of crude oil and would not therefore increase British companies' supplies of refined products. Moreover any such restrictions would be liable to raise political issues which might result in the matter being raised at United Nations on the grounds that we were depriving people of an essential raw material. On balance it was, therefore, felt wise to treat such possible additional available supplies as a margin of safety.
34. Administratively Methods I, II and III would all throw up problems. These would be more troublesome under Method III owing to the inherent uncer- tainty that there will inevitably be about actual availabilities and demand (as opposed to forward estimates) which would make the planning of movements of oil-in which both United States and British companies would be involved-- a difficult operation.
35. Further, we shall have to ensure that other Commonwealth countries' systems of control over dollar oil import is effective-there has already been considerable confusion over imports from Bahrein, which is in the Sterling Area but whose oil is in effect 90 per cent. dollar oil (see Appendix VII). Moreover, even if it may not prove necessary to have a Commonwealth allocation scheme for British companies' oil under Method I or II, it would certainly be necessary under Method III.
36. The potential savings shown in Tables III-V are at an annual rate. In fact, the machinery for operating any of the methods of discrimination would take time to set up and retrospective restriction on United States Companies' imports would probably not be practicable.† As a working hypothesis, it would
† For this reason, the possibility of the Haifa refinery resuining operations before January 1950 — Phigheis the date @agsmed—would be unlikely to enable any addition403aving 66 Be made.
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e
probably be wise to assume a potential saving of only half the amounts shown for 1949-50 to be derivable from the three methods of discrimination examined.
Probable American reactions
37. While to date nothing has been said in America about discrimination in the Sterling Area there has, of course, been a great deal said about "unfair competition in markets outside the Sterling Area since lack of dollars has already encouraged some Governments to insist on oil companies importing sterling oil rather than dollar oil. The Anglo-Argentine Trade and Payments Agreement caused a considerable stir. We must, therefore, expect adverse reaction to any suggestion of further "discrimination" though some people in the United States Government service if not United States oil companies have certainly envisaged the possibility of our being forced to do something to reduce our dollar outgoings on oil. It is because of this that there has been so much trouble regarding the United Kingdom's and European countries' plans to build refineries. Broadly speaking, the Americans feel that there is a serious risk of over-expansion of refinery capacity and crude production and that this constitutes a threat to American oil interests. What has happened on these two questions is set out in Appendix VIII. It is mentioned here since any emphasis on availability of sterling oil to oust dollar oil will exacerbate the refinery trouble.
38. Methods I and II would certainly be less objectionable to them than Method III, though it must be noted that there is a fundamental difference between pegging at current levels and pegging at something lower. In the former case we are in effect telling the Americans that they must not expand any further until the world's currency position has been corrected; in the latter case, they must actually cut back-since there is little hope of the Americans being able to find new outlets for any displaced oil. Method III would probably be particu- larly repugnant to them since the inroad on the American companies' business would be progressive as British companies' expansion proceeded. In point of fact, there would appear to be little point in broaching Method III at the moment. It would not produce in the first years a much bigger saving than Method II and it could always be introduced later if our position necessitated such drastic action.
Section III
The Possibility of Saving Dollars by restricting the British Companies*
Expansion Schemes
39. The direct dollar cost of expanding the production and refining of oil consists of payments for dollar equipment and designers' fees. Where, however, the expansion is taking place, physically, within countries whose currencies are the equivalent of dollars in addition to these items, account has to be taken of local expenditure on wages and materials.
40. It is in any case difficult to distinguish between expenditure on expansion and expenditure required to maintain production at the current level even as regards refineries. Where crude oil production is involved it is virtually impossible since new wells have to be drilled even to maintain production.
41. Moreover, the expansion of refinery capacity achieved in any one year is the result of expenditure over a number of years and work on a considerable part of the expansion programme has already been undertaken. In fact, out of a total estimated dollar expenditure on equipment and fees during the period 1949-1954 of $116 million only $33 million is in respect of projects which have not yet been started. Any reduction above $33 million in current dollar expenditure must therefore involve delay in completing plans which have already been started.
42. In these circumstances, it was felt that the only way of assessing the effect of a cut in expenditure was to put direct questions to the oil companies. Accordingly, we have asked the major oil companies concerned what effect specified cuts in dollar expenditure would have on their future operations. They have not been able to give very specific answers at the moment, since, to do so, involves re-working their whole plans. But, it seems that a reduction of about $50 million on the figure at present taken to cover dollar operating expenses and purchases of equipment away 404achieved in 1949-50 largely due to Shelaghopes regeling
194
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a revision of the basis of calculation of the value of royalty crude, to their present expectation that outgoings for 1949-50 on foyalties and for taxes will in any case be lower than was estimated last September, and to postponements of capital expenditure. A saving of more than $50 million could only be achieved by:
(a) Shell reducing current production, for example Shell have indicated that to save an additional $40 million might involve a shutting back of production in Venezuela by 6 million tons or nearly 30 per cent. of their current Venezuelan production. But as, broadly speaking, the value of oil produced is greater than the total costs of production, the loss in value of oil produced would be substantially more than the saving in dollar expenditure. Moreover, any suggestion of a large cut in production would be very badly received by the Venezuelan Government.
(b) Slowing up the construction of refineries that have already been started.
43.
It would be theoretically possible to eliminate expenditure on explora- tion, but this would be deplored by Shell (which dollarwise, is the only company involved) since the work will have to be done some time and, it must be remem- bered that exploration work has its disappointments as well as its successes-and it is more satisfactory to operate a steady programme of exploration work than to find oneself one day in the position of having to do more exploration work than can conveniently be handled at one time. Shell's estimated expenditure on exploration work is $10 million in 1949–50.
Tanker Hire and Freights
Section IV
44. The increase in the dollar expenditure on tanker hire and freight between 1949-50 and 1953 is largely on account of freight on United States Com- panies shipments of oil into the Sterling Area and reflects the increase in imports *by them during this period.
45. The dollar expenditure of the British-controlled oil companies on tanker hire is rigidly supervised, and is at present confined to period charters entered into in 1947-48, at a time of great tanker shortage. It is unlikely that they will require to charter additional tankers for dollars during the period under review.
46. The main dollar expenditure on tanker hire so far as the United Kingdom is concerned is by the Anglo-American group and discussions are in progress to see what reduction in dollar expenditure under this head is possible, e.g., by chartering soft-currency instead of dollar tankers.
47. The freight on oil shipped by American companies into the rest of the Sterling Area also costs us dollars. The methods of reducing their dollar imports of oil considered in Section II did not necessarily envisage a reduction in their total imports, since it may be agreed to allow them to import sterling oil in place of dollar oil.
48. A dollar saving would be achieved if this substituted sterling oil were sold c.i.f. to the United States distributing companies and carried in non-dollar tankers. As regards dollar oil in the United States distributing subsidiaries in the Sterling Area might be persuaded to change their existing practice and to buy f.o.b. from their parent companies and to transport their oil in non-dollar tankers directly chartered by the subsidiaries themselves. It is not certain whether the non-dollar tonnage available would be sufficient to displace all dollar tankers now employed in the Sterling Area programme and the United States companies would doubtless offer considerable opposition to the suggestion that they should alter their trading practice on these lines.
Summary
49. Present estimates are that the Sterling Area dollar deficit on oil will be $580 million in 1949-50 and that by 1953 it will still be $500 million in spite of the oil companies' very large expansion plans.
15
50. The
Amate§
based on normal expansion of Boumpf in the rest of Sterling Area and the maintenance of restrictions on the consumption of petrol and fuel oil in the United Kingdom where, however, it has been assumed that the basic petrol ration will have been restored by 1953 to the 1947 level.
51. The estimates also assume what are regarded as being maximum sales for dollars which can reasonably be expected in the light of current circumstances. These are put at $225 million in 1949-50 and $370 million in 1953.
52. It would be possible to achieve a cut of $50 million in the dollar expenditure involved in the production of sterling oil in 1949-50 without serious effects on the current rate of output. Any further cuts would have an immediate effect on production.
53. As regards dollar expenditure on freight some small savings, to the extent of a few million dollars at first but more in the long run, may be possible if United States companies can be persuaded to use non-dollar tankers to import oil into the Sterling Area.
54. Purchases of dollar oil by British companies are already expected to fall from $56 million in 1949-50 to $16 million in 1953.
55. Dollar expenditure on oil which United States companies import into the Sterling Area can only be reduced by—
(a) reducing Sterling Area consumption—and so long as the United States companies are allowed to meet their share of trade with dollar oii the reduction on consumption to achieve any given reduction in dollar imports will have to be 2 and 3 times as much in the rest of the Sterling Area and the United Kingdom respectively;
(b) using British companies' supplies to replace United States companies'
imports of dollar oil. Three methods have been examined:
(I) Limiting American 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. A cut to 90 per cent. could be put into operation by using British companies' supplies at present unallocated and this is illustrated below; a cut to 85 per cent. would be possible if United Kingdom consumption of motor spirit can be reduced by the suggested 250,000 tons a year. (III) Replacing American companies' dollar imports with the full amount of British companies' unallocated supplies as and when they arise.
56. Savings under these three methods are estimated as below. (In 1949-50 the saving has been calculated on the basis of six months' effective operation) :—
Method I
Method II
Method III
$ million
1949-50
1951
1952
1953
11
46
41
55
21
68
56
68
25
95
134
116
57. Any of the three methods would be distasteful to the Americans and Method III particularly so since it would involve the prospect of progressive replacement of dollar oil to an undefined extent; it would certainly accentuate our present difficulties with the Americans over the United Kingdom oil com- panies' refinery expansion plans. The Americans regard these as excessive and therefore likely to aggravate the difficulties of American companies selling oil in a world that is short of dollars.
58. Apart from discrimination on United States oil imports into the Sterling Area there is the special case of Britmex (an American-owned but British-registered bunkering company) on which an additional dollar saving might be achieved at the expense of arrangements that have been in force for 30 years.
59. By adopting discrimination on the lines of Method Pace ph 55 and
graph 56 assisted by the cuts in consumption referred to in paragraph 55 and a parallel reduction in the dollar cost of Britmex's operations a saving of
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$80 million to $100 million would be achieved in 1953. To achiegg a comparable saving without discrimination would require a combination of drastic cuts in consumption (both of dollar and sterling oil) throughout the Sterling Area; a very severe shutting back of Shell's Venezuelan production, which would have political repercussions in both Venezuela and Holland, and a curtailment of British companies' oil expansion programmes everywhere with consequent restriction of foreign sales.