Reference: Our Tels 2273 Oct. 25,† 2382 Nov. 8,† and Desp 1655 Nov. 27.†

1. The special Cabinet Committee²²²to investigate crude oil imports is expected to arrive at its conclusions and make its recommendations to the President most probably within a week on what, if any, steps it feels should be taken to curb rising crude oil imports in the USA west coast known as District V. The stage was set for this action by the initial report to the President of July last which recommended that the District V situation be reviewed before the end of the year, and the resultant public hearings of November 25 and 26 reported in the reference despatch.

2. We learned of the imminence of the Cabinet Committee decision and something of its nature in a rather unexpected, if not unique, way. Mr. Moline, Deputy Director, Office of British Commonwealth and Northern European Affairs of State Department, told us that Mr. Herbert Hoover Jr., former Under Secretary of State and presently adviser to the State Department on matters concerning the special Cabinet Committee, would like to talk about oil, quietly and quite unofficially. We responded to the invitation and saw Mr. Hoover yesterday afternoon. While Moline was present the meeting was clearly neither initiated nor sponsored by the State Department.

3. While the reason for it being Mr. Hoover who informed us on the probable nature of the Cabinet Committee's conclusions and recommendations rather than the State Department is obscure, there can be no question as to Mr. Hoover's warm and friendly attitude.

4. In a nutshell he confirmed the views transmitted to you after the hearings of November 25 and 26, that the arithmetic was such that the Cabinet Committee has no alternative but to recommend to the President that some form of voluntary action be undertaken by the District V crude importers to bring imports into better balance with domestic production, demand, and the inventory position.

5. The proposal that the Pacific Northwest area be split off from the balance of District V (which we characterized as problematical) was quickly discounted by Hoover, but it was not clear whether this idea which had received considerable discussion during the course of the hearings had reached the Cabinet Committee or had been screened out by the staff and advisory group. Hoover feels that District V is an homogeneous area with respect to the administrative aspects of oil exploration, production, refining, imports, exports, etc. and should not be tampered with. As for one part being oil deficient and the other having significant domestic production, he maintained that did not contribute to the argument for splitting the district so as to afford different treatment to imports into the two parts. It would make as much sense, he said, to break off, say, the New England States and New York from the balance of District I (which comprises the entire east coast) because that group of states has no indigenous oil production. Later, Moline mentioned that the breaking up of the USA into five petroleum administrative districts has a sound background based on the need for controls in World War II, and the whole statistical, administrative and transportation arrangements since that time have been based on the districts as they are presently constituted.

6. Hoover, after outlining the arithmetic, said that one of the problems in extending the voluntary program to the west coast was to arrive at a formula which would cut back total imports by a significant amount, while at the same time doing the least possible to disturb the flow of Canadian crude into the Pacific Northwest. This was the more difficult, he commented, in that the action would have to be within a nondiscriminatory framework. The weighting in favour of the Pacific Northwest refineries, he thinks, could, and indeed will, be achieved by using the years 1956 and 1957 as base periods. While he did not reveal the exact formula, the general effects can be deduced from what he did say. The overall objective will be for the first six months of 1958, to limit imports into District V from all foreign sources to approximately 220,000 barrels per day. This is about 129,000 barrels per day less than the estimates of the importing companies for the first half of next year, as tabled with Office of Defense Mobilization, and 89,000 barrels per day less than the current rate of imports. This very sizeable cutback of 37 percent from planned imports overall compares with something in the order of 5 percent to 10 percent cutback for the three Pacific Northwest refineries which might be expected to continue to import Canadian crude, i.e., General Petroleums, Shell, and the Texas Company. The peculiarity of the formula which would permit the flow of crude to the Pacific Northwest refineries to be cut back in a minor way as against the major cutbacks for all other refineries, was not spelled out but, as mentioned above, it is based upon the using of 1956-57 as the base period.

7. Mr. Hoover appeared to have a considerable knowledge of the Canadian petroleum scene and was generally aware of the developments of the past few months in Alberta. He may have had some recent prodding on the Alberta picture as we learned from Mr. Moline that Hoover had met Mr. I.N. McKinnon, Chairman of the Alberta Oil and Conservation Board, at the Oil Compact Commission Meeting in Tulsa last week. In fact, he was using statistics provided by Mr. McKinnon as part of the basis for his discussion with us.

8. His views on the Alberta production picture are pretty close to those expressed in the latter part of our 2273 October 25. The general flattening out of demand, the Vancouver refinery strike, the loss of the Suez-born temporary market in California, and increasing competition from Saskatchewan crudes, were all mentioned by him. In addition, however, he said that it should not be forgotten that in terms of competition in the crude oil markets Alberta crude is high priced.

9. We suggested that in addition to the direct effect on Canadian exports, the extension of the voluntary import program to the Pacific Northwest area could have the effect of at least deferring the plans of other refiners to establish facilities in that area based upon a supply of Canadian crude. Hoover felt that companies which hope to get into the Pacific Northwest refining picture would have the opportunity to state their positions on a case-by-case basis in much the same way as new importers into Districts I to IV are given an opportunity to share in any increased demand for petroleum and its products.

10. While we did not pursue the point with Mr. Hoover, it seems to us that the threat to Canadian marketing in the Pacific Northwest area over the short and middle term futures might be more significant than the relatively small cutback expected under the formula which Hoover anticipates the Cabinet Committee will recommend. There is no rationing or pro-rationing of oil production in California, and one might reasonably expect that the California producers will continue to raise oil at "maximum efficient rates" indefinitely. In addition, there is the new Four Corners Pipeline which, while it is expected to put only an average of 28,000 barrels per day into California during the first six months of 1958, has an initial installed capacity of 60,000 barrels per day and, with additional compression, could easily be increased to 150,000 barrels per day. There is as well the replacement of heavy oils for energy producing purposes by natural gas as quickly as additional gas is available. (Interestingly, one of the reasons for the supplanting of oil by gas is that the combustion process in the plants has been found to be a heavy contributor to California's "smog" problem.) With the prospects of increased supply, probably in excess of even optimistic estimates of increases in consumption, the companies thinking in terms of new refineries in the Pacific Northwest may find themselves limited to the ability of that area to absorb their products. It is even possible that the Pacific Northwest refineries might encounter increased competition from products brought north from the California refining areas based upon indigenous California production plus the West Texas oil through the Four Corners Pipeline plus the allowable imports from Venezuela, Mideast, and Southeast Asia crudes at favourable tanker rates.

11. An interesting sidelight of the California position was revealed in Mr. Hoover's discussion when he told us that one of the factors contributing to the top heavy inventory position in District V is that military liftings of petroleum and petroleum products have been down considerably. These liftings are significant and when they were all from west coast sources amounted to from 100,000 to 150,000 barrels per day. The navy had ceased to take west coast oil and had switched to the products of the Aruba-Curacao refineries because of a small price advantage and the availability of navy tankers freed by the reopening of Suez. A contributory factor which made the Caribbean products attractive to the USN was that being USA government-owned ships, they did not pay a toll for passage through the Panama Canal and the national freight rates were low. Mr. Hoover expressed the opinion that the price advantage to the USN appeared to be marginal and pressures would be brought to bear to induce the USN to resume its liftings from the west coast. In fact, the District V demand figure for the first six months of 1958 of just under 1,300,000 barrels per day which Mr. Hoover mentioned, includes sizeable military liftings.

12. In reply to a query concerning the possible effect of the extension of the voluntary program to District V on congressional and particularly senatorial thinking, with particular reference to Section 7 of the Trade Agreements Extension Act, Hoover gave as his opinion that a successful voluntary program extended to cover the west coast could not help but contribute to the strength of those who are opposed to writing more restrictive measures into the trade agreements legislation. In thinking out loud, Hoover said he thought the question of increasing the tariff on crude oil, if it is raised, could and would be beaten back on general USA policy grounds which would leave the alternative of writing specific and mandatory allocations into the trade agreements legislation. He thinks the entire oil industry of the USA is against any thought of rigid mandatory quotas or allocations and this, of course, makes the success of the voluntary program that much more important. He mentioned quite directly that he felt it would be in the best interests of Canada and the Canadian petroleum industry if the USA could avoid mandatory controls. We told Mr. Hoover that we were grateful to have his views and to get from him an idea of what the Cabinet Committee will probably recommend, but we also expressed the view that any cutback in exports of Canadian crude to the Pacific Northwest would not be favourably received in either Ottawa or Alberta. He replied that he understood this but that there had been a genuine effort to establish criteria which would disturb the importations from Canada to the minimum and that the alternatives to this voluntary system under which the Canadian imports would be reduced in only a minor way would be some form of inflexible mandatory controls.

13. Since dictating the above, we have received further indications of the formula which the Cabinet Committee is expected to suggest to the President and some information on its derivation. We shall transmit a separate message covering the statistical aspects.

14. We would be grateful for any comments on the substance of this message and the information on the formula for onward transmission to State Department which has indicated it would be grateful to receive Canadian reactions.

15. Whether other countries who are significant exporters to the USA are being informed prior to any announcement is not known, but it is assumed that at least the Venezuelan representative will be briefed by the State Department.

[N.A.] ROBERTSON

²²²En mai 1957, le président Eisenhower a chargé un comité spécial du Cabinet d'étudier si les quantités de pétrole brut importées aux États-Unis menaçaient la sécurité nationale. Le comité était composé des secrétaires du Commerce, d'État, de la Défense, du Trésor, de l'Intérieur et du Travail. Le comité a remis son premier rapport en juillet 1957 et Eisenhower a approuvé rapidement la proposition qu'il avait formulée de demander aux entreprises de raffinage du pétrole de limiter volontairement leurs importations. Les seules entreprises à qui on n'a pas demandé de restreindre les importations étaient les entreprises de raffinage de l'ouest des États-Unis (District V) qui importaient du pétrole brut du Canada.
In May 1957, President Eisenhower commissioned a special Cabinet Committee to investigate whether the quantities of crude oil being imported into the United States threatened national security. The committee was made up of the Secretaries of Commerce, State, Defence, Treasury, Interior, and Labour. The committee submitted its first report in July 1957, and Eisenhower quickly endorsed the committee proposal calling on oil refiners to voluntarily limit their imports. Only refiners in the western United States (District V) who imported crude oil from Canada were not asked to restrict imports.