seven years. Government subsidies amounting to about Yen 114,000,000 will be necessary to attain this end, in addition to the Government's investment in the Imperial Fuel Company. In view of the fact that coal hydrogenation industries in other countries have not been commercially feasible because of the high cost, as compared with the cost of petroleum gasoline, of the gasoline produced by such hydrogenation industries, it might be thought that the Japanese scheme is impractical. Foreign experts who have studied the question in Japan, however, are of the opinion that the project is feasible, largely because of the low cost of labor and coal in Japan, although it is improbable that the object can be attained in seven years (ten years being a more likely period) or that the scheme will cost only Yen 750,000,000. It is considered more probable that the total cost of the project will be about Yen 1,200,000,000. However, if the military authorities are determined to proceed with the plan and render Japan reasonably self-sufficient in liquid fuel, there is every reason to believe that they will eventually accomplish their object, regardless of the cost to the nation. The plans have been delayed for a time by the dissolution of the Lower House of the Diet before the Imperial Fuel Company bill and the bill providing for subsidies for the hydrogenation industries could be approved, but the bills will undoubtedly be reintroduced into the next session of the Diet and there is no reason to believe that they will not be approved. This scheme of the Government is of great importance to the foreign oil interests in Japan, principally because it will, if carried out, deprive them of their market here for gasoline and kerosene, although it is probable that they could continue to do some business in other petroleum products. As was stated before, the plan contemplates the production of 60 per cent of Japan's requirements of gasoline by the 1943-44 fiscal year. This production does not include the gasoline refined in Japan from imported crude oil. The existing Japanese oil refineries, plus those already sanctioned, will be able to produce the remaining 40 per cent of Japan's requirements. In regard to kerosene, the authorities are already in a position to dispense with imports from foreign sources at any time. The position therefore is that, by 1944, or a year or two later, there will be no room in the Japanese trade for imports of so-called "white products". The assurances recently received from the Japanese Government concerning the future position of the foreign oil companies in Japan do not protect the companies against reduction of quotas caused by increase of indigenous production of gasoline substitutes. The assurances only specify that "consideration will be given that the decrease is apportioned fairly in the light of actual conditions at the time". It may therefore reasonably be assumed that the decrease in the demand for petroleum gasoline caused by the increase in pro duction of gasoline from coal will fall upon the foreign gasoline importing companies, and that the domestic refineries will be authorized to care for the entire amount of gasoline which cannot be supplied by the hydrogenation plants. In regard to fuel and diesel oils, the foreign oil companies will be in a somewhat better position, as the hydrogenation plants, according to the estimate, will be able to supply only about 45 per cent of the demand, but the foreign companies estimate that most of the demand will be given to Japanese importers, unless and until the foreign companies lay in the six months' stocks required by law. As the foreign companies cannot store such stocks under present conditions in Japan, it appears that all or almost all of the fuel and diesel oil trade will go to Japanese importers. The same conditions apply to the lubricating oil and grease trade. Recent circumstances tend to indicate that the Japanese authorities have in mind the forcing out of Japan of the two foreign oil importing companies by the gradual reduction of their quotas as products from the hydrogenation of coal come into the market. This is, of course, implied in the whole scheme of obtaining oil from coal, but recently a new circumstance lends strength to this opinion. For months previous to last November the Government had been pressing both the foreign oil companies and the Mitsui interests, with whom the oil companies then were trying to reach an agreement in regard to the storage of non-commercial stocks of oil, to proceed with the laying in of six months' stocks as required by law. Since November, 1936, however, the foreign oil companies have heard nothing further, either from the Government or from the Mitsui interests, in regard to the matter, and the supposition is that the Government prefers that the oil companies remain in the position of law-breakers (not having stored six months' stocks as required by law), in order that they will have no claim to rights or privileges and that their quotas may be cut at any time to make room for the products of the projected hydrogenation plants. The above forecast of the situation is predicated upon the supposition that (1) the Japanese will be able to accomplish their program for the hydrogenation of coal and (2) that they will be able to obtain supplies of crude oil for their oil refineries. There is nothing now to indicate that they will not succeed in fulfilling both of these conditions. Of course, many things may occur between now and the year 1944 which will completely change the aspect of the case, such as a volte face in regard to Japan's policy of nationalistic economy, or trade agreements which would require the maintenance of the status quo as regards foreign investments in Japan. At the present time, however, it can only be said that conditions in Japan do not appear at all hopeful for the future of the foreign oil companies. The foreign oil interests, therefore, are confronted with the problem of deciding whether to sell out at once to Japanese interests (who undoubtedly would be protected by the Government in their trade) or to wait for two or three years longer in order to ascertain the probability of success of the Japanese venture in the production of artificial gasoline. The only other alternative, if the Japanese venture is successful, will be for the companies to stay in the market, selling what they are permitted to, and eventually withdrawing and selling their properties at such prices as may be obtainable under the conditions then prevailing. Under these circumstances, the Embassy believes that it would be most useful if the headquarters of the Standard and Shell interests could formulate a definitive policy in regard to their trade in Japan, based on the latest developments and trends, as well as upon their past experiences in this market. The time appears to have passed for the oil companies to be concerning themselves with minor details of their trade in the Japanese Empire, and it would appear to be the part of wisdom for them to consider with the utmost seriousness the question of their future in Japan in the light of the Japanese Government's apparent determination to acquire a degree of self-sufficiency in liquid fuels. If and when the oil interests reach a decision in regard to this matter, their respective diplomatic agencies will be able to adopt an intelligent policy of assistance to them. Respectfully yours, JOSEPH C. GREW 893.6363 Manchuria/294: Telegram The Secretary of State to the Ambassador in Japan (Grew) WASHINGTON, April 19, 1937-6 p. m. 62. The Standard-Vacuum Oil Company has informed the Department that it desires to press its claim in Manchuria which has been left in abeyance pending the outcome of negotiations in regard to its business in Japan. The Company proposes to act concurrently with the Asiatic Petroleum Company, which is requesting assistance of the British Foreign Office, and to make representations simultaneously at Hsinking and at Tokyo. The company has requested that the Embassy be instructed to support its representations at Tokyo. The company further proposes in its discussions with the authorities at Tokyo and at Hsinking to confine its arguments to the subject of the commercial losses incurred and to endeavor to avoid the raising of political issues. Before reaching a decision in regard to the company's request the Department would welcome an expression of the Embassy's views. HULL 893.6363 Manchuria/295: Telegram The Ambassador in Japan (Grew) to the Secretary of State TOKYO, April 21, 1937-5 p. m. [Received April 21-9: 10 a. m.] 115. Department's 62, April 19, 6 p. m. In view of the apparent desire of the present Japanese Government to cooperate with and conciliate other nations I believe that the present moment is propitious for opening the question of settlement of the oil interests' Manchurian claims. I see no reason why the Embassy should not support the representations of the Standard interests and believe that our representations should be based on the argument advanced in the penultimate paragraph of my note to the Minister for Foreign Affairs of April 15, 1935 (enclosure No. 3 to the Embassy's despatch No. 1250, April 18, 1935).34 The British Embassy has not yet heard from London on this subject but concurs in the foregoing opinion. GREW 893.6363 Manchuria/295: Telegram The Secretary of State to the Ambassador in Japan (Grew) WASHINGTON, April 22, 1937-2 p. m. 64. Embassy's No. 115, April 21, 5 p. m. Subject to concurrent similar action by the British Embassy, you are authorized to make an informal and oral approach to the Foreign Office in support of representations by the American oil interests to obtain settlement of their Manchurian claim. The Department is of the opinion that at the present time it would be unwise for the Embassy to base its approach upon the argument referred to in the Embassy's No. 115 of April 21, 5 p. m. The Department desires that the Embassy emphasize the equity of the case of the American oil interests and the hardship which is imposed upon them by deprivation of their trading rights in Manchuria without just compensation for their losses. Both the Embassy and the StandardVacuum Oil Company will of course endeavor to avoid injecting political issues into the discussions. In connection with simultaneous action which the StandardVacuum Oil Company expects to take at Hsinking, please repeat the text of this telegram to the Consul at Mukden and inform him that he is authorized, in case his British colleague is similarly instructed, to support the American company's representations at Hsinking in the manner and along the lines set forth in this telegram. The "See Embassy's telegram No. 87, April 16, 7 p. m., Foreign Relations, 1935, vol. III, p. 898. Embassy should of course keep the Consul at Mukden informed of action taken by it. 893.6363 Manchuria/299: Telegram HULL The Ambassador in Japan (Grew) to the Secretary of State TOKYO, May 24, 1937-6 p. m. [Received May 24-7: 57 a. m.] 135. Department's 64, April 22, 2 p. m. 1. Representatives of the oil interests conferred with Manchukuo Monopoly Bureau officials and with the Chief of the General Affairs Bureau of Manchukuo on May 21 and were informed that the monopoly would offer to purchase their properties, an offer which could be accepted by the oil interests under protest as being only a partial settlement but that settlement of intangible items of their claims would have to await a favorable opportunity for negotiation through diplomatic channels. The Chief of the General Affairs Bureau then referred to the possibility of improved relations between Manchukuo and the United States and Great Britain. 2. This definite indication that Manchukuo will not consider settlement of the intangible items of the claims of the oil interests without political considerations has complicated the problem and therefore the local representatives of the oil interests have referred the matter to their head offices which will probably consult with the Department and the British Foreign Office. In the meantime the Embassy and the Consul at Mukden will take no action. The Embassy is of the opinion that the injection of political issues by Manchukuo must be ignored and that all parties concerned should proceed as contemplated in the Department's 64, April 22, 2 p. m. GREW 894.6363/316: Telegram The Ambassador in Japan (Grew) to the Secretary of State 136. Embassy's 3, January 8, 7 p. m. TOKYO, May 24, 1937-7 p. m. [Received May 24-9 a. m.] 1. The oil interests have been unable as yet to obtain a settlement of the Korean gasoline quota question which they regard as a test case indicative of the treatment which they may expect under the assurances given by the Foreign Office in January last. At their last interview at the Foreign Office the Chief of the Bureau of Commercial Affairs suggested that they compile a strongly worded statement of their position for reference to the Minister for Foreign |