CAB129-36 — Page 392

Printed for the Cabinet. August, 1949

Page 392

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The circulation of this paper has been strictly limited.

It is issued

for the personal use of

Sir Norman Brooks.

TOP SECRET

C.P. (49) 176

18th August, 1949

CABINET

Copy No.

31

OIL AND DOLLARS

MEMORANDUM BY THE MINISTER OF FUEL AND POWER

In E.P.C. (49) 71 of 29th June I set out the dollar deficit expected to be incurred on oil for the whole of the sterling area in the fiscal year 1949-50 and examined the possibilities of effecting economies in the various items. The Com- mittee agreed on 1st July that the issues raised in my paper should be discussed by officials before they were considered by Ministers (E.P.C. (49) 25th Meeting, Minute 2).

2. A Working Party of officials had already been set up as a result of the decision to make a comprehensive enquiry into the whole oil position (E.P.C. (49) 17th Meeting, Minute 2 (3)), and subsequently this Working Party was asked to prepare a brief on oil for the forthcoming talks in Washington. It was accordingly decided to combine the preparation of this brief with the discussion of my earlier paper. I now attach as an Annex the Working Party's report, which is also intended to serve as a brief for the Washington talks. Paragraphs 49–59 of this report contain a summary of the conclusions.

The Problem

3. The Working Party have re-examined the estimates on which the calcula- tions made in E.P.C. (49) 71 were based. As a result, they expect that the dollar deficit on oil in 1949-50 will be 580 million dollars compared with the figure of 600 million dollars given in my earlier paper. They have also estimated the dollar deficit for 1953, by which time the major part of the British oil companies' expansion plans should have been completed. A year ago, it was thought that the dollar deficit in 1953 would be reduced to 359 million dollars,* but it is now thought that it will still be 500 million dollars. The main reason for this change for the worse in the forward estimates is the fall in oil prices (averaging 30 per cent. for refined products and about 20 per cent. for crude oil) which has occurred during the past year.

In calculating this deficit it was assumed that the present restrictions on the use of oil in this country would be maintained, except that the basic petrol ration would be restored to the 1947 level of 270 miles motoring a month by 1953. It was also assumed that British companies would produce oil to the maximum extent that their physical resources would permit, and that the United States companies would maintain their present share of trade in the sterling area.

* This represents the £55 million (222 million dollars) given in the table annexed to E.P.C. (48) 72 plus 137 million dollars for sales to the Western Hemisphere countries which are no longer regarded as equivalent to dollar sales.

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4. But on these assumptions it is also expected that the British companies willagave 93 bstantial oil" surplus "above whatafe require6to meet their sales in the sterling area and to third countries. The surplus in 1949-50 is estimated by the Working Party at no less than 4 million tons, most of which is fuel oil, and in a few years' time the surplus would be enough to enable all restrictions on consumption in the sterling area to be removed. Because of the non-discrimination provisions of the Anglo-American Loan Agreement, however, we should not be able to consume this oil without at the same time buying a considerable additional amount of dollar oil and so increasing the dollar deficit. Alternatively, if oil consumption in the sterling area remains restricted these surpluses could be used to displace imports of dollar oil and so reduce the dollar deficit by amounts varying from 50 million dollars in 1949-50 to about 125 million dollars in 1952 onwards; but, again, action of this kind would almost certainly be regarded as an infringement of the non-discrimination obligations we have assumed. This is the main problem on oil that we have to face.

5. Our object must be to reduce the dollar deficit on oil as much as possible while maintaining a reasonable standard of consumption in the sterling area and involving ourselves in as little trouble as possible with the American oil companies and the United States Government.

The British Oil Companies' Expansion Programme

It

6. The Americans will probably suggest that we should cut back our oil expansion programme and so avoid producing the surpluses " referred to in paragraph 4. The American authorities are known to be anxious about what they feel to be an over-expansion in refinery capacity, particularly in Europe, and E.C.A. has for the time being refused to finance refinery expansion in Europe beyond an arbitrarily selected figure (see Annex, Appendix VIII). We embarked on our oil expansion programme for both strategic and economic reasons. was designed to enable us to maintain and develop our share of world trade in oil so as to maintain our concessionary rights (ie., our production of oil), to develop an export for which there is an assured and expanding market in the interest of our overall balance of payments and to reduce the dollar drain involved in the present dependence of the United Kingdom and the rest of the sterling area on the dollar oil provided by American companies. It was originally con- templated that the dollar drain would be reduced not so much by reducing the purchases of dollar oil as by increasing the sales of sterling oil to dollar and hard currency countries. But, as I have indicated in paragraph 3, owing to the fall in the price of oil and the quantity that can be sold, prospects for sales of sterling oil for dollars in 1953 are not as good as was previously expected. We can only reduce the dollar drain, therefore, by substituting for dollar oil in the sterling area the increased production of sterling oil which our expansion programme (and especially the refinery programme) will provide.

7. The Americans may argue that, since our own production of oil involves a substantial dollar cost, there is little benefit to be gained from displacing their oil by ours. Although the dollar element in the cost of Anglo-Iranian production is low, it is very much higher in the case of the Shell Company's operations in South America. But this is precisely the area where on strategic grounds it is most important to maintain and expand British-controlled production of oil; moreover, the oil produced by Shell in South America is being sold in increasing quantities for dollars and other hard currencies in the United States and the Western Hemisphere generally. And our balance of payments position will obviously benefit from the substitution of oil costing a proportion of dollars in place of oil imported into the sterling area by American companies, the whole cost of which has to be paid in dollars.

8. I suggest, therefore, that we should resist firmly any suggestion by the Americans that we should curtail the expansion of British oil companies' production in order to guarantee to the Americans their present share in the increasing oil trade in the sterling area. At the same time, the British oil companies should do everything possible to reduce the dollar costs of their expansion pofgramme. The Working Party consider393fe62Section III. paragraphs 39-43) that a saving of the order of 50 million dollars in the expenditure originally estimated for 1949-50 could be made without any reduction in oil production, and I shall certainly press the oil companies to do everything possible to achieve this saving.

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The American share of Tfade in the Sterling Area