gMENT IS T H E P R O P E R T Y OF H E R B R I T A N N I C M A J E S T Y ' S G O V E R N M E N T )
C O P Y NO
C(67) 136
. 6 cj
21st July, 1967
CABINET
T H E OIL. S U P P L Y
SITUATION
M e m o r a n d u m b y the M i n i s t e r of P o w e r
Supplie s
The supply p o s i t i o n is i m p r o v i n g slightly.
In g e n e r a l , it
remains a tanker p r o b l e m but this is being eased somewhat by the g r o w t h
of exports f r o m L i b y a and the L e v a n t p i p e l i n e s . T h e r e a r e signs that
Libya is i n c r e a s i n g the number of countries (other than the United States
and United K i n g d o m ) to which it p e r m i t s e x p o r t s ; Iraq has confined
exports to c e r t a i n countries in Southern E u r o p e .
This means that
Southern E u r o p e , including F r a n c e - which throughout has drawn supplies
from A l g e r i a - w i l l i m m e d i a t e l y be b e t t e r off than N o r t h e r n Eux-ope,
including o u r s e l v e s .
The main oil c o m p a n i e s through their supply
p r o g r a m m e s a r e adjusting f o r this as f a s t as p o s s i b l e ; though tanker
rerouting i m p o s e s d e l a y , the r e a r r a n g e d pattern of supply is now settling
down.
2.
F o r the United K i n g d o m i t s e l f , the A r a b ban r e m a i n s in b e i n g , and
with N i g e r i a n oil e x p o r t s stopped, supplies a r e being p r o g r a m m e d to us
from V e n e z u e l a , the United States of A m e r i c a , and I r a n , w h e r e production
has been stepped up to the l i m i t .
Of our three main s u p p l i e r s , accounting
for t h r e e - q u a r t e r s of our i m p o r t s . B P a r e r e l y i n g on I r a n ; Shell on Iran
and V e n e z u e l a ; and E s s o on V e n e z u e l a and the United States of A m e r i c a .
I shall keep in c l o s e touch with the c o m p a n i e s to see that the United K i n g d o m
gets at l e a s t i t s f a i r share of d e l i v e r i e s .
So f a r it is s a t i s f a c t o r y that
they have been able to a r r a n g e this d e s p i t e the ban on United K i n g d o m and
United States d e s t i n a t i o n s .
On e x p o r t s , I a m discussing with the oil
companies how best to strike a balance b e t w e e n our i m m e d i a t e needs (to
keep oil h e r e and to i m p o r t products f r o m o v e r s e a s r e f i n e r i e s ) and our
l o n g - t e r m i n t e r e s t in keeping e x p o r t o u t l e t s .
The industry w i l l be
increasing product i m p o r t s ? some useful amounts, I h o p e , w i l l be drawn
from Italian r e f i n e r i e s running L i b y a n crude but this w i l l have to be done
d i s c r e e t l y and perhaps i n d i r e c t l y , to avoid r i s k of L i b y a n counteraction.
The Russians have again refused to supply u s .
United K i n g d o m Stocks
3.
The i m p r o v e d supply p r o s p e c t was r e f l e c t e d in the e s t i m a t e of
stocks as at e n d - S e p t e m b e r which I c i r c u l a t e d e a r l i e r this w e e k
(C(67) 134).
I shall have r e v i s e d e s t i m a t e s in time to r e p o r t them o r a l l y
to my c o l l e a g u e s when we m e e t .
T h e e n d - S e p t e m b e r f o r e c a s t , although
5 million tons or n e a r l y a third b e l o w n o r m a l , is not c r i t i c a l , and since
-1­
some s m a l l e r companies have not y e t r e c e i v e d p r o g r a m m e s f r o m their
f o r e i g n parent c o m p a n i e s it i s , if anything, a cautious e s t i m a t e .
We
must b e a r in mind a l s o that in addition the G o v e r n m e n t holds in stock
about f i v e d a y s ' supply against just such an e m e r g e n c y as the p r e s e n t .
s
Particular Products
4.
I attach in an annex the stock position product by product.
These
are c o m p a n i e s ' stocks, and they r e v e a l no i m m e d i a t e cause f o r anxiety
except o v e r naphtha and fuel o i l .
The naphtha p o s i t i o n is v e r y s e r i o u s .
In the W e s t e r n w o r l d there is an absolute shortage at the present t i m e .
Naftamondial, the Zurich oil t r a d e r s , have had their p r o p o s a l to supply
Russian naphtha v i a R o t t e r d a m turned down by the R u s s i a n s .
The f i r s t
reaction f r o m Rumania has been that there i s p r o b a b l y nothing a v a i l a b l e
for the r e s t of this y e a r (but v/e still await their c o n s i d e r e d a d v i c e ) .
United K i n g d o m r e f i n e r s a r e m a x i m i s i n g their production but n e v e r t h e l e s s
the oil industry may s h o r t l y have to cut its c u s t o m e r s in the United
Kingdom b y an a v e r a g e of 20 p e r cent.
Consultations a r e being p r e s s e d
ahead with our tv/o main c o n s u m e r s (the Gas B o a r d s and the p e t r o c h e m i c a l
industry) on the use of a l t e r n a t i v e fuels and how best to apportion the
short supplies of naphtha,
5.
F u e l oil stocks s t i l l g i v e some grounds f o r concern in v i e w of the
much g r e a t e r demand expected in the w i n t e r , when stocks a r e n o r m a l l y
run down.
The industry is planning to draw e x t r a supplies f r o m the
W e s t e r n H e m i s p h e r e , and this should shortly be r e f l e c t e d in the f o r w a r d
stock p o s i t i o n .
Price s
6.
I have had no application f o r a further p r i c e i n c r e a s e , though we
know that not a l l companies w e r e fully c o v e r e d by the recent i n c r e a s e .
O v e r a l l , the p r i c e i n c r e a s e s on the Continent have been of the same o r d e r
as h e r e but with c o n s i d e r a b l e v a r i a t i o n s e . g . a good deal higher in
W e s t e r n G e r m a n y and much l o w e r in F r a n c e and I t a l y .
I shall need to
keep a c l o s e watch on the p r i c e situation to ensure that our d o m e s t i c
p r i c e s a r e right in r e l a t i o n to the c o m p a n i e s costs in the United K i n g d o m
and to p r i c e l e v e l s in Europe which could, if they r o s e steeply, tend to
draw off supplies f r o m the United K i n g d o m m a r k e t .
1
The I m m e d i a t e Future
7.
H i t h e r t o the oil industry has been concentrating on the i m m e d i a t e
and c r i t i c a l task of rerouting supplies to get oil flowing in the m a x i m u m
possible q u a n t i t i e s to this country, and the supply and stocks f o r e c a s t
made by m y Oil Industry E m e r g e n c y C o m m i t t e e have been r e l a t e d to the
current q u a r t e r ( e n d - S e p t e m b e r ) .
T h i s i s a short p e r i o d , e s p e c i a l l y
with the approach of w i n t e r , on which to base d e c i s i o n s on p e t r o l
rationing or the r e s t r i c t i o n of industrial oil consumption,
I have
therefore asked the OIEC to p r o v i d e by the end of this month its b e s t
estimates of the position at the end of the y e a r .
-2­
Balance of P a y m e n t s
8.
O f f i c i a l s of the D e p a r t m e n t s concerned have examined the
balance of payments c o s t s .
T h e i r p r e s e n t e s t i m a t e is that if the
dislocations l a s t f or six months i . e . t i l l the end of N o v e m b e r , the
additional cost to the United K i n g d o m balance of payments would be
about £85 m i l l i o n , of which s o m e £15 m i l l i o n would f a l l in 1968.
The
l a r g e s t i t e m in these costs is the c h a r t e r of tankers ( a l m o s t w h o l l y
f o r e i g n - o w n e d ) at v e r y high r a t e s , but the purchase of some h i g h - c o s t
oil in the W e s t e r n H e m i s p h e r e i s a l s o a l l o w e d f o r .
The e s t i m a t e takes
account of the effects f o r the business of B r i t i s h oil companies o v e r s e a s ,
where Shell hope to r e c o v e r the e x t r a cost of supplies and perhaps even
do b e t t e r , w h i l e B P a r e l i k e l y to f a l l short by £10 m i l l i o n or so of
recovering costs.
My o f f i c i a l s a r e keeping these e s t i m a t e s under
continuous r e v i e w as the situation d e v e l o p s and a r e consulting with other
Departments and with the industry on m e a s u r e s which might m i n i m i s e
these balance of p a y m e n t s c o s t s .
1
9.
I a l s o a r r a n g e d f o r o f f i c i a l s to c o n s i d e r whether e v e n if supplies
prove adequate, rationing and other r e s t r i c t i o n s of consumption might
They
n e v e r t h e l e s s be d e s i r a b l e on balance of p a y m e n t s g r o u n d s .
estimate that in the p e r i o d S e p t e m b e r (the e a r l i e s t the r e s t r i c t i o n s could
be introduced) to N o v e m b e r , about £15 m i l l i o n might be saved on oil
account by the r e s t r i c t i o n s mentioned in p a r a g r a p h s 10 and 11, and about
£25 m i l l i o n by m o r e s e v e r e cuts, e s p e c i a l l y on industrial f u e l s .
On the
other hand, the effect of the cuts on industry in g e n e r a l , while incapable
of c l o s e calculation, could e a s i l y be so g r e a t as to r e s u l t , through a f a l l
in e x p o r t s , in a net l o s s to the balance of p a y m e n t s .
Thus r e s t r i c t i o n s
are not r e c o m m e n d e d on balance of payments g r o u n d s .
1
R e s t r i c t i o n of Consumption
10.
T h i s i s the p o s i t i o n against which we have to judge whether
immediate action is r e q u i r e d to introduce m e a s u r e s to ration m o t o r fuel
or r e s t r i c t industrial oil consumption.
Planning f o r p e t r o l rationing is f a r advanced and the scheme could
be launched f r o m the end of this month.
B e f o r e rationing b e c o m e s
effective a six w e e k p e r i o d i3 r e q u i r e d f o r the issue of ration books and
for dealing with applications f o r supplementary a l l o w a n c e s .
Rationing
could not t h e r e f o r e b e c o m e e f f e c t i v e b e f o r e m i d - S e p t e m b e r , and only
then if we announce i m m e d i a t e l y that the final p r e p a r a t o r y steps a r e to
be taken and coupons i s s u e d .
If we did this it would not of c o u r s e c o m m i t
us to ration in m i d - S e p t e m b e r , though it would be w i d e l y assumed that
this was the intention.
11.
R e s t r i c t i o n s on indtxstrial oil consumption would be handled by
the oil industry under m y i n s t r u c t i o n s .
The scheme would be to reduce
d e l i v e r i e s to industry by a g i v e n amount - probably 10 p e r cent i n i t i a l l y .
Before it could be introduced there a.re two further stages of planning to
be undertaken, f i r s t , c o m p l e t i o n of the central planning, which w i l l take
another two w e e k s and w i l l p r o c e e d in any e v e n t ; and second, the
preparation of detailed d e l i v e r y schedules by the oil industry, which
would take about foiir w e e k s .
T h i s scheme a l s o could not be introduced
before e a r l y or m i d - S e p t e m b e r ,
12,
On the basis of the supply and stock p o s i t i o n and the i n d u s t r y s
forecasts to e n d - S e p t e m b e r I d o not think it is n e c e s s a r y to g o ahead at
once v/ith the issue of r a t i o n books in p r e p a r a t i o n f o r rationing p e t r o l
from m i d - S e p t e m b e r .
Stocks of p e t r o l at the end of S e p t e m b e r a r e
estimated at only Z\ w e e k s below n o r m a l and, if rationing w e r e introduced,
the savings f r o m the cuts e n v i s a g e d would amount to a reduction of no
more than 4 p e r cent or thereabouts in total s a l e s of oil p r o d u c t s .
With
demand declining in the w i n t e r months t h e r e might e v e n be a r i s k that a
surplus of p e t r o l v/ould a r i s e resulting in a cut back in r e f i n e r y runs and
a reduction in the supply of other v e r y i m p o r t a n t products including naphtha.
J
13.
On industrial f u e l , the c e n t r a l planning b y the oil industry f o r
r e s t r i c t i o n of consumption should c e r t a i n l y be c o m p l e t e d , and I can then
review e a r l y in August whether the supply situation makes it n e c e s s a r y to
proceed with the detailed scheduling of d e l i v e r i e s in p r e p a r a t i o n f o r
restrictions.
Future U n c e r t a i n t i e s
14.
The b r o a d rule of thumb is that s o m e s h o r t a g e s a r e l i a b l e to occur
when o v e r a l l stocks get down to 7 or 8 w e e k s supply,,
I have asked f o r
the industry*s specific a d v i c e on m i n i m u m stock l e v e l s so that I can
judge the need f o r r e s t r i c t i o n s with g r e a t e r p r e c i s i o n .
But there a r e
of c o u r s e unpredictable f a c t o r s to be taken into account such as the
possibility of a v e r y bad w i n t e r and of further d e t e r i o r a t i o n in the
oversea,s supply p o s i t i o n .
15.
On the l a t t e r p o s s i b i l i t y , this is m o r e a m a t t e r for the F o r e i g n
Secretary,
A n e x t r e m e case v/ould be if A r a b o i l e x p o r t s would again
cease a l t o g e t h e r , as they did f o r a short p e r i o d in June.
A less extreme
case would be the r e c l o s u r e of the L e v a n t p i p e l i n e s and of the L i b y a n
export t e r m i n a l s .
Syria has a r e c o r d of c a p r i c i o u s b e h a v i o u r , and in
Libya although the G o v e r n m e n t is i n c r e a s i n g l y i n control of the situation
the w o r k e r s a r e subject to Egyptian and A l g e r i a n influence.
Tf this did
happen, the consequent tanker shortage v/ould reduce supplies to W e s t e r n
Europe as a whole s e v e r e l y .
Supplies, m o r e o v e r , would be l o s t while
tankers w e r e being r e r o u t e d .
A l t o g e t h e r , if these s o u r c e s w e r e l o s t
for, say, a month, a stockdraft of 10 to 14 d a y s supplies m i g h t be needed
to help m e e t n o r m a l demand.
It N i g e r i a n oil w e r e to begin flowing again
in the last q u a r t e r of this y e a r , the p o s i t i o n would of c o u r s e be v e r y
much i m p r o v e d ,
1
Conclusion
16.
The g e n e r a l supply and stock situation h a s i m p r o v e d slightly in
the last w e e k or s o .
T h e exception to this is naphtha, on which urgent
discussions a r e taking place with the o i l , gas and p e t r o c h e m i c a l i n d u s t r i e s .
I am quite c l e a r that on p r e s e n t i n f o r m a t i o n t h e r e is no need to decide
now to introduce either p e t r o l rationing or r e s t r i c t i o n of industrial oil
consumption; n o r do I chink it n e c e s s a r y t o start the issue of ration books
so as to be able to introduce rationing by m i d - S e p t e m b e r .
H o w e v e r , the
situation r e m a i n s p r e c a r i o u s , and v/e shall need to r e v i e w it again as
soon as we have the oil i n d u s t r y ^ f o r e c a s t of the position at the end of
the y e a r .
If it shows a d e t e r i o r a t i n g trend it m a y be n e c e s s a r y to take
the final steps in p r e p a r a t i o n f o r r e s t r i c t i n g consumption,
I v/ill r e p o r t
to the P r i m e M i n i s t e r on the situation e a r l y in August when I have the
companies end y e a r f o r e c a s t s ,
1
-4­
17c
A s t o the balance of payments a s p e c t s of the p r o b l e m , the danger
of damage to industrial production f r o m r e s t r i c t i n g supplies would s e e m
to outweigh the savings on f o r e i g n exchange expenditure on oil supplies.
I do not t h e r e f o r e think that we should introduce rationing on this account,
since it might do m o r e h a r m than g o o d .
W e shall h o w e v e r have to
consider v e r y c a r e f u l l y what guidance to g i v e to the oil industry on its
restocking p r o b l e m s so as to s t r i k e the balance between s e c u r i t y of
supply and further strain on the balance of p a y m e n t s .
Officials a r e
working on t h i s .
18.
line s.
I invite m y c o l l e a g u e s to a g r e e that I should p r o c e e d on these
R.W.M.
Ministry of P o w e r . S . W . 1 ,
20th July, 1967
-5SEGREi
C O P P A N Y ..j?JFCJC^OJGG^
Position at
3rd July
Product T o t a l
tons
Position
Weeks*
E L D
£"ARONX
I N
OAMCLE
T H E
Estimated^position
at
10th July
Product T o t a l
m. tons
forward
&asolines
Motor s p i r i t
C2) Weeks'
Product
TotalT
m. tons
f orward
Weeks
1
forward
TJK.
Estimated P o s i t i o n
Estimated P o s i t i o n
at 30th September
at 31st August
Product
T o t a l Weeks' Product T o t a l Weeks
m. tons
El. tons
forward
forward
1
1.3
2.3
9
1.3
2.3
9
1.3
2.1
8
1.3
2.0
3^
1.2
1.9
8? (11)
Naphtha
0.5
0.9
8
0.5
0.7
7
0.5
0.7
6
0.4
0.5
4
0.2
0.4
3
Other
0.1
0.1
16
0.1
0.1
16
0.1
0.2
24
0.1
0.1
22
0.1
0.2
25
(25)
Kerosenps
0.9
1 .2
17
0.9
1.3
17.
0.9
1 .2
15
1.9
1.1
14
0.8
1.1
13
(16)
G^/Diesel
1.7
2.8
16
1.7
2.9
16
1.3
2.3
12
1.5
2.3
1C%
1.4
2.3
9
(g)
8
6
2.8
4.8
11
2.9
5.1
12
2.9
4.7
10
3.2
4.8
9
3.0
1
Q
4 C O
Opier
0.5
0.8
7
0.5
0.8
7
0.5
0.7
7
0.5
0.7
0
0.5
0.7
T?£al stocks
7.8
12.9
11.3
7.9
13.2
11.4
7.5
11.8
9.8
7.9
11.6
3.9
7.3
11.4
F^l
oils
(9)
(fe)
(gO
7.9 ( f e
H
P
r
0) Product
stocks exclude an allowance f o r exports and bunkers of a m i l l i o n t o n s .
(2) T o t a l stocks are the product stocks plus the product equivalent of the crude o i l stocks.
( )Normal end-September weeks' supply forward.
Note: In addition, the Government holds peacetime emergency stocks
of 1.1 m i l l i o n tons i n the form of gas o i l (0.6 m i l l i o n t o n s ) ;
f u e l o i l (0.2 m i l l i o n t o n s ) : and very low grade motor s p i r i t
(0.3 m i l l i o n t o n s ) .