The Politics Of Oil MIDDLE EAST NEEDS THE WESTERN MARKET

Press, Volume XCVIII, Issue 28890, 9 May 1959, Page 12

The Politics Of Oil MIDDLE EAST NEEDS THE WESTERN MARKET

(By

“LYNCEUS’

»’* of the “Economist")

[From the “Economist' Intelligence Unit]

London, April 28.—The oil industry throughout its comparatively short life has stirred up more political turmoil than any other. This must be due partly to the huge scale of financial resources required for the operation of the industry and to the substantial profits that are derived from it once oil is found. The arbitrary pattern of its location, mostly in otherwise underdeveloped countries, is another cause of instability in the industry. Too much oil has been found in countries to which it has brought riches faster than the wisdom with which those riches can best be used. Reminders of the high political content of oil development have been provided recently by events in the Middle East, particularly in Iraq and at the Arab oil conference in Cairo—a conference at which Iraq was, understandably, not represented.

The Cairo conference was notable for bringing together representatives of the producing countries and of the large oil groups. It opened with a surprising speech by an American lawyer, briefed by the Saudi Arabian Government, propounding the thesis that a government has the right to repudiate any contract it has made if that contract is deemed to be against the national interest. “Responsibility towards its citizens,” said this counsel, “is the only reason for a State’s existence.” “The National Interest” Who is to be the judge of the national interest in this context, and what is required by the State’s “responsibility” to its citizens was not disclosed. The point the speaker was no doubt making was that an undertaking to share profits on a 50-50 basis between the government in whose territory the oil has been found and the company operating the field can be repudiated if the government considers its share has become inadequate.

This astonishing contention seems to have fallen on unreceptive ears. Its cynical opportunism was refuted by most representatives at the Cairo conference —not merely by the large oil companies but by most of the Arab countries attending the meeting. The conference was, in fact, a most reassuring and reasonable assembly though it lived up to expectations by introducing the demand by oil-producing countries for a larger share of profits. The proposals to this end were two-fold. The first suggestion was the formation of purely Arab companies to develop the areas not yet worked by the existing concessionaires and to handle the whole scale of subsequent operations; shipment, refining, and distribution. It is difficult to visualise Arab-managed and controlled companies mobilising the vast amounts of capital that would be required to put such projects into operation.

The second, which found more favour among the representatives of the Arab countries, was that in renegotiating the profit-sharing agreements the oil companies should be given a share not only of the profits derived directly from the sale of crude oil but from all subsequent activities of the oil companies, including the distribution and presumably going as far as the manufacture of petrochemical products. Admittedly all such operations are based on the existance of oil; but one of the Europeans said to the delegates, pointing to a steel bridge structure visible from the conference room, “See that bridge? Do you think that the company which produced the iron ore that went into it should share in the profits of the steel-maker and the engineers who built it?”

Extending Government Interest If the governments of the oil countries are prepared to invest part of their royalties in refining and distributing companies they could in that way secure some return from activities based on the oil produced within their territories. It is in that way that some of the Middle East contracts with Italian and Japanese oil groups may, in the long run, give the governments of the producing countries a participation in the ancillary activities of the industry. The notable absentee at the Cairo conference was Iraq, whose views and plans are at present shrouded in the greatest uncertainty. The new chairman of the Iraq Petroleum Company, Lord Monckton, recently visited his company’s installations in that country and took the opportunity of meeting the new leaders of

Iraq. On his return, Lord Monckton made the very cautious statement that he did not see any immediate threat of nationalisation of the foreign oil interests in that country.

There is no mistaking the increasingly collective or Communist pattern of economic organisation in Iraq and the importance being given to industrial and trading links with the Communist bloc. It may well be that the stridency of this pro-Communist campaign in Iraq is in part due to the desire to establish a contrast with the policy of Egypt and its United Arab Republic. The hard argument that must be understood by all Arab countries is that Russia does not need their oil. It is, on the contrary, seeking new export outlets for its own surplus oil. What is more, its sales are one of the reasons for the weakness of oil prices, to which so much critical attention was paid by the Arab countries at the Cairo meeting. The Arab countries realise that it is in the free world that the principal outlet for their oil must be found. They have not forgotten the damage to Persian interests that was caused by the activities of Dr. Mossadeq. His oil nationalisation policy was broken because* he could not find outlets for Persian oil products in world markets. Vast New Sources in Sight The dependence on the free world is made all the more formidable by the tremendous rate of expansion of Middle East production. It is now running at about 200 million tons a year. This will have doubled by 1965 and the figure of 1000 million tons may have been reached by 1075. That will take a great deal of marketing, especially as new potential sources of supply are beginning to emerge. Every week brings added confirmation that the discoveries of oil deposits in the Sahara are enormous and may in due course match those of the Middle East.

What the Sahara promised to be for the economy of France and Western Europe, Northern Canada may be for that of the United Kingdom. Fascinating reports have recently been coming from Canada of vast oil deposits in the Northern territories. They have hitherto been inaccessible to tankers, but might be open to transport by nuclear submarine tankers able to navigate under the Arctic icefields as the Nautilus has done. Work is proceeding on these plans, which would bring large oil sources within 3000 miles of Britain’s shores as against the 8000 miles that have to be navigated by tankers bringing in Middle East oil.

In the decades beyond the development of these potential oil fields there lies the growing force of nuclear power. This must, in due course, supplant coal and oil as the main source of fuel for thermal power stations and certain other purposes. The world’s needs for energy will grow at an ever-steepening curve, but all that is known about the expansion in supplies of oil and, later, of nuclear energy, suggests that the will not outstrip these supplies. Oil is likely to remain deeply involved in politics. But it will offer little scope for blackmail on the part of countries which are fortunate enough to hold the main proved reserves of oil today. In this fact lies the main hope that no absurd irresponsibility will be shown by Middle East oil countries in the tough negotiations that lie ahead.