to Haifa at considerable loss in revenue to itself. This action and the stopping of construction of the parallel 16-inch pipe line took place at the start of the first Israeli war but were not the result of military action. Neither pipe line was ever re-opened.

(b) From November, 1956, to March, 1957, the Suez Canal was closed as the result of the second war between Egypt and Israel. As a result of the closure, some Persian Gulf oil was not produced while other Persian Gulf oil had to be shipped around Africa to Europe. One pipe line from Iraq to the Mediterranean was sabotaged.

(c) In June, 1967, at the start of the third Arab/Israeli war, the Suez Canal was closed, the Trans-Arabian Pipe Line was shut down, and production was temporarily stopped in Saudi Arabia, Kuwait, Iraq, and Libya. As we have seen, an embargo was initiated by the Arab countries prohibiting oil exports to the U.S., U.K., and Germany. Production was restored in the major producing countries after stoppages lasting three to 27 days, but the embargo remained in effect until September; and the Suez Canal remains closed.

Note the incerasing scope of the steps taken. There has been, however, a notable lack of success in achieving the political purposes. This has been a result of United States and other Free World spare production capacity and an elastic and highly flexible transportation system. By increasing production in countries with spare capacity, re-scheduling tankers, and judiciously drawing down inventories, the industry managed to sustain its deliveries in these crises and thereby (with minor exceptions in 1956-57) avoiding the necessity of rationing.

Another example of political interference occurred in May, 1969, when the section of the Trans-Arabian Pipe Line in occupied Syria was sabotaged by Arab guerrillas. The guerrillas responsible were reported to have called the action the beginning of confrontation with American interests in the area." This was a case where the producing country was not involved. Thus, its need for petroleum revenues was not a restraint on the temptation to interdict.

(3) Economic Bargaining

A third source of possible foreign interference with U.S. petroleum supplies is foreign shutdown of production and transportation facilities for economic reasons. Governments might interfere with the flow of oil as an economic bargaining device. What is involved here is analogous to the traditional case of the monopolist or close-knit oligopoly adjusting supplies to suit its particular price or output objectives. In the case of oil, the only effective defenses are the accessibility of the consumers to alternative sources of oil or the failure of the producing countries to act in concert.

An example of government intervention for economic rather than political reasons is Syria's closing of the pipe line from northern Iraq to Tripoli and Banias in December, 1966. The purpose in this case was to force Iraq Petroleum Company to pay higher pipe line transit fees. The pipe line remained closed until March, 1967.

This was another case where the interruption was not by the producing country. Since Syria happened to have control over transport routes from the producing country to its markets, the producing country's heavy dependence on its oil revenues again exercised no economic restraint on the temptation to interrupt-as in the sabotaging of the Trans-Arabian Pipe Line.

B. Distribution of Alternate Sources of Crude Oil

If the United States were to adopt petroleum public policies which would make further exploration in North America generally unattractive, where would it turn for its petroleum supplies?*

(1) Individual Countries

At present, no fewer than 59 Free World countries have some crude oil production and reserves, but most produce relatively small amounts. The five largest exporting countries account for 66% of total Free World production outside North America:

11 The New York Times, June 5, 1969, p. 8.

1 As used here, North America includes the United States and Canada.eht Canadian oil is assumed to be substantially security equivalent of U.S. oil.

46-365-70- -30

1 In comparison, North American (United States and Canadian) production was1 0,200,000 barrels per day. Source: Production data from Oil and Gas Journal, Dec. 30, 1968, pp. 102-103.

Each of the five largest countries has more than 10% of production. Among them, the top 10 have 83%. However, since the largest producing country has only 17% of production, no one country is in a position to dominate the market-at least as measured by shares of production.

Another (and possibly preferable) measure of the distribution of world oil supplies is the current distribution of Free World proved reserves outside North America. Reserve holdings are more concentrated than production (see also Chart III):

1 In comparison, North American proved reserves of crude oil are about 40,000,000,000 barrels, not including reserves recently discovered on the Arctic Slope of Alaska. North America also has about 10,000,000,000 barrels of reserves of natural gas liquids.

Source: Reserves data from Oil and Gas Journal, Dec. 30, 1968, pp. 102-103.

The top five countries have 71% of proved reserves in comparison with 66% of production. The top ten have 89% of reserves versus 83% of production. Again, no country is in a position to dominate the market. If anything, these proved reserve data understate the importance of the Middle East, where there are large fields not yet fully developed. (An independent consultant has recently estimated Saudi Arabia's proved recoverable reserves at 142 billion barrels.)

Of particular interest is a comparison of the production and reserve percentages of the top five exporting countries:

The greater potential importance of the three largest Persian Gulf producers is evident. Not only do they have larger shares of reserves, the last column of Table III shows that their reserves were being produced at low rates averaging 1.4%. The comparable figure for the United States and Venezuela is about 9. (2) Groups of Countries

The chance for market control by producing countries is made clearer by appraising the shares of 1968 production and reserves held by particular groups of countries:

Of course, these groups overlap (for example, Kuwait is in the Arab, Persian Gulf, and OPEC groups). In all cases except North Africa, the groups hold higher shares of reserves than of production, especially in the Persian Gulf. Again, the last column shows that these reserves are being produced at low rates.

In view of the limited Arab embargo in 1967, the high Arab figures are particularly noteworthy in evaluating the possibility of exercise of market control by producing countries. Because of long water hauls and shut downs of the pine lines to the Mediterranean, the Persian Gulf position is an indicator of the degree of exposure which the United States would face during crises if it were dependent on overseas oil.

Table IV demonstrates conclusively that in the absence of a North American industry, this country would perforce turn to the Middle East and North Africa for the bulk of its petroleum supplies. Together, these areas have 86% of proved reserves. No other known or potential producing areas could supply the large North American market (Venezuela has only 4% of reserves-see Table III). The overseas reserves on which the United States would have to draw are highly concentrated-provided, of course, that the producing countries function as groups rather than individually. In fact, the OPEC group has already publicly indicated a desire to control the world export market for crude oil.

C. OPEC

As indicated above, almost 85% of Free World oil reserves outside North America lie within the countries which are members of the Organization of Petroleum Exporting Countries.12 About 80% of Free World production outside North America occurs within OPEC borders. Thus, with the stated aim of the Organization being "the coordination and unification of petroleum policies of Member Countries and the determination of the best means for safeguarding their interests, individually and collectively," 13 OPEC cannot safely be ignored. OPEC has been relatively unsuccessful in collective activity which might be construed as indicative of a viable cartel. Despite the stated aim of OPEC, efforts to coordinate market prices and supply have proved abortive because no individual country has, as yet, been willing to sacrifice output for the sake of another.

On the other hand, the members have made concrete progress in recent years toward achieving a greater share of the revenues realized from the production of oil within their borders. This demonstrates that at least where there is unanimity of interest, the organization can collectively achieve results for its members.

12 Saudi Arabia, Kuwait, Iraq, Iran, Libya, Qatar, Abu Dhabi, Venezuela, and Indonesia. (Admission of Algeria is said to be imminent.)

13 Quoted in Resolution 90, Sixteenth OPEC Conference, Vienna, June 24-25, 1968.

14

While control over market prices has not been achieved by the OPEC members, their resolutions make clear that the (low) level of market prices is one of their primary concerns. Resolution 42, for example, stated that "the Organization can in no circumstances cease to strive for an improvement in crude oil prices." A more recent, thinly-veiled statement resolved that "the Organization shall devise ways and means of ensuring the stabilization of price in international oil markets with a view to eliminating harmful and unnecessary fluctuations." The most recent and, to date, most significant resolution calls upon members to deny oil contracts or concessions to consuming countries whose of ficial policy is to reduce the prices of imported crude oil:

15

The Conference, "having noted that the policies of certain industrialized countries may tend to artificially depress petroleum prices in international markets; bearing in mind the potentially detrimental effects such policies could have on the economies of Member Countries; recommends that Member Countries should not grant any new oil rights of any nature whatsoever to companies whose home countries pursue such policies; and directs the Secretary General to study on a continuing basis the policies of those countries and to report back to subsequent Conferences on the subject."

99 16

D. Likelihood of Interruption if Dependent on Overseas Supplies

If the United States were to adopt petroleum public policies which resulted in its becoming dependent on overseas sources for a significant part of its petroleum requirements, the security of these petroleum supplies would depend entirely on the supposed existence of a mutually dependent relationship between producing and consuming countries. The argument is that the producers of oil need the money, the consumers need the oil, and neither can do without the other.

The fact is, however, that the relatively undeveloped economies of Eastern Hemisphere producing countries could abstain for some time from spending funds for economic development, while the United States economy cannot abstain from consuming energy. These producing countries have basically subsistence agricultural and pastoral economies. For this reason, a sharp decrease in oil revenues would be inconvenient but could be tolerated in the short term. The real effect of decreased oil revenues would be on long-term economic growth. Having been economically underdeveloped for centuries, the Eastern Hemisphere producing countries might well be willing to postpone further development for a few years in order to gain long-term economic concessions from North America. Note that Iranian production was shut down for three years.

And the OPEC countries have not hesitated to exert continuing political and economic pressures for increased revenues from the consuming countries. These pressures can well again result in supply disruptions, even at a short-term penalty to the producers.

Thus, it is by no means clear that the United States could triumph in a bilateral price bargaining contest with the producing countries, especially if the important ones were acting as a group. Furthermore, we have seen that nationalistic emotional or political considerations can easily rule in times of international crisis. Hence, the mutually dependent buying-selling relationship might well count for next to nothing in time of crisis-regardless of the economic rationality of that relationship.

E. Russian Intervention in the Middle East

Compounding the petroleum security problems discussed above are Russia's increasing advantures in the Middle East. Examples: arming, re-arming, and training Egypt's armed forces; a naval task force in the Mediterranean; and an agreement to assist the government of Iraq in petroleum exploration and development.

Consider the danger to the United States of Russian intervention in the Middle East if the United States were dependent on that area for a primary part of its petroleum supplies. By subverting or dominating Middle East governments friendly to the United States, the Soviet Union could gain control over a large part of United States petroleum supplies. The effect which this would have on the military, economic, and political security of the United States requires no elaboration.

14 Second Session of Fifth OPEC Conference. Riyadh, December 24-31, 1963.

15 Resolution 76, Twelfth OPEC Conference, Kuwait, December 4-8, 1966.

16 Resolution 94, Seventeenth OPEC Conference, Baghdad, November 9-10, 1968.