Foreign relations of the united states 1969–1976 volume XXXVII energy crisis, 1974–1980 department of state washington
Summary of Conclusions of Ad Hoc National Security
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- 162. Memorandum From John Renner of the National Security Council Staff to the President’s Assistant for National Security Affairs (Brzezinski)
- 163. Telegram From the Department of State to the Embassy in Venezuela
- 164. Editorial Note
- 165. Telegram From the Department of State to Selected Diplomatic Posts
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161. Summary of Conclusions of Ad Hoc National Security Council Meeting 1 Washington, September 21, 1978, 10:30–11:45 a.m. SUBJECT OPEC Oil Prices PARTICIPANTS
Richard Cooper, Under Secretary for Economic Affairs Julius Katz, Assistant Secretary, Bureau of Economic-Business Affairs
Secretary Michael Blumenthal Anthony Solomon, Under Secretary for Monetary Affairs
Secretary James Schlesinger Walter MacDonald, Deputy Assistant Secretary for International Affairs
Chairman Charles Schultze Domestic Policy Staff: Director Stu Eizenstat Kitty Schirmer, Associate Director
Zbigniew Brzezinski David Aaron
Henry Owen John Renner Gary Sick 1 Source: Carter Library, National Security Affairs, Staff Material, International Eco- nomics File, Box 44, Rutherford Poats File, Chron, 9–11/78. Secret. The meeting was held in the White House Situation Room. 365-608/428-S/80010 February 1977–January 1979 517 Summary of Conclusions
It was agreed that US spokesmen would make a strong case against an oil price increase for 1979, that this case would be made as persuasive as possible taking into account political and economic real- ities, and that Presidential involvement was not appropriate. If an in- crease cannot be halted, we will work toward the lowest possible price hike—hopefully taken in two stages. The Department of State will pre- pare a telegram to the field setting forth the points to be used in our ini- tial discussions. There has been no price increase since July 1977. Inflation and the depreciation of the dollar have reduced the real income of OPEC coun- tries. The OPEC countries with high revenue needs are pushing hard for a price increase; Iran has signalled that an increase is desired; Saudi Arabia is not working for a continuation of the price freeze. There was a consensus that if we were to go flat out against any price increase, we would lack credibility and our ability to influence the extent of the price increase would be greatly reduced. We would also not be in a good position to argue for additional investment to increase production capacity, which is essential if we are to avoid supply strin- gencies in the mid to late 1980s. Furthermore, the more ammunition we use against a price increase the less we would have to oppose OPEC pricing on the basis of a basket of currencies. 2. OPEC Oil Price Based on Basket of Currencies It was agreed that the US should make a maximum effort to per- suade OPEC not to price its oil on the basis of the value of a basket of currencies, that this objective had a higher priority than avoiding a price increase, and that the President’s prestige should be engaged if necessary. It was also agreed that when the monetary situation stabi- lizes we should consider whether a properly defined basket would be to our advantage. Treasury believes exchange markets would react badly to OPEC pricing oil based on a basket of currencies. The exchange markets are nervous and the adoption of the basket would cause a run from the dol- lar. Furthermore, regardless of the theoretical symmetry of the basket, the OPEC countries would not lower prices when the dollar strengthened. However, because OPEC oil prices are denominated in dollars, the cost of oil to Germany and Japan falls as the dollar depreciates in rela- tion to the DM and the Yen. This reduces German and Japanese pro- duction costs and improves their competitive position. Thus, at some 365-608/428-S/80010 518 Foreign Relations, 1969–1976, Volume XXXVII future date when the pressure is off the dollar, a basket might serve our interest and help improve our competitive position. 2 2
him of the conclusions reached at the meeting. (Ibid.) 162. Memorandum From John Renner of the National Security Council Staff to the President’s Assistant for National Security Affairs (Brzezinski) 1 Washington, September 26, 1978. SUBJECT Long-term National Security Strategy on Oil Prices On May 12 you established a task force to prepare a study on long-term policy on imported oil prices for PRC consideration. Your tasking memo is at Tab B. 2 The report you requested has arrived. It is at Tab A. 3 There is an ex- ecutive summary. The main policy conclusions are that the US Govern- ment should: —Establish the longer-term strategic goal of seeking to expand world productive capacity as a major foreign policy objective. 4 —Reaffirm the policy of seeking to keep OPEC price increases as small and infrequent as possible within the limits of US influence and advisable trade-offs with other objectives. —Review periodically US posture and tactics with respect to OPEC in the light of market developments and past success in moder- ating price and expanding capacity. 1 Source: Carter Library, National Security Affairs, Staff Material, International Eco- nomics File, Box 44, Rutherford Poats File, Chron, 9–11/78. Secret. Sent for action. 2 Printed as Document 150. 3 Not found, but see footnote 2, Document 160. 4 In his September 29 memorandum to Brzezinski analyzing the study, Odom wrote that “this kind of generalized policy,—to increase global production,—is more likely to entangle us in contradictions than to help in pursuit of our interests.” He noted that Schlesinger had “serious reservations” about the study and that it would be “inter- esting to smoke him out.” (Carter Library, National Security Affairs, Staff Material, Inter- national Economics File, Box 44, Rutherford Poats File, Chron, 9–11/78)
365-608/428-S/80010 February 1977–January 1979 519 The next step should be a PRC meeting, which I will set up if you agree in principle. At such a meeting, we should examine the policy conclusions of the task force and attempt to reach agreement on our main policy objectives with regard to oil prices and supply. We should also agree on a follow-up mechanism. I recommend that, near the end of the PRC meeting, you propose that an interagency working group, chaired jointly by State and Energy, review annually US posture and tactics with respect to OPEC in the light of market de- velopments and past success in moderating price and expanding ca- pacity. The composition of the working group should be the same as the task force that produced the present report. 5
That a PRC meeting be held to review the report and determine policy objectives and follow-up. 6 5
vs. a basket on our competitive position also be added so we can look at that very impor- tant strategic issue—these other conclusions are obvious.” 6 Brzezinski did not indicate his decision on the recommendation. On September 27, the President issued Executive Order 12083 establishing an Energy Coordinating Committee “to provide for the coordination of federal energy policies” and “ensure that there is communication and coordination among Executive agencies concerning energy policy and the management of energy resources.” The committee had 23 members and included every major Cabinet officer. (Public Papers of the Presidents of the United States:
, pp. 1637–1638) Carter initially doubted “the need” for such a com- mittee, as he wrote on the June 28 memorandum that McIntyre sent to him proposing it, preferring instead to “let Schlesinger and Watson try this without a formal E.O.” (Carter Library, National Security Affairs, Staff Material, International Economics File, Box 44, Rutherford Poats File, Chron, 9–11/78) The committee’s first meeting was held on De- cember 19. (Draft minutes; ibid., Chron, 12/14–31/78)
365-608/428-S/80010 520 Foreign Relations, 1969–1976, Volume XXXVII 163. Telegram From the Department of State to the Embassy in Venezuela 1 Washington, September 28, 1978, 2010Z. 247461. Subject: Message to President Perez re Oil Prices. 1. Charge´ is instructed to seek appointment with President Carlos Andres Perez to make following points on behalf of President Carter. 2. Talking points are as follows: Begin text: It has come to our atten- tion that Venezuela is seeking to persuade other OPEC countries to agree to an immediate increase in oil prices and a further increase at the beginning of next year. 3. This would be a most inopportune time for such a step. It would damage the global economy, still struggling to emerge from a period of recession. The effect would be magnified by the uncertainties that would flow from a price increase which appears unwarranted by cur- rent market conditions. 4. Perhaps most important of all a rise in oil prices at this time would place further pressure on the dollar. This would not be in anyone’s interest, and would be particularly unfortunate when US Government is taking vigorous measures both to strengthen the dollar and to strengthen the international monetary system. Our Congress will, in the next few days, pass legislation that will bring into effect the bulk of energy program that you, President Carter and other world leaders have felt was needed. The Senate acted on September 27 and the bill now goes to the House. And we expect that it will next year enact additional energy legislation. The Congress is also about to give final approval to the Witteveen facility which will augment the re- sources of the IMF. 5. An oil price increase now could have other unfortunate implica- tions, globally and in the United States. It would place the Arab oil pro- ducers in the unhelpful position of raising the price of oil at a point when the results at Camp David have at last provided essential for- ward motion toward peace in the Middle East. 2 6. For these and other reasons, our government requests that you reconsider Venezuela’s position on oil prices and that Minister Her- nandez not continue his efforts to obtain a price increase at this time, 1 Source: National Archives, RG 59, Central Foreign Policy Files, D780396–1071. Confidential; Immediate; Exdis. Drafted by Rosen; cleared by Vaky, Blumenthal, Schle- singer, and Owen; and approved by Cooper. 2 The Camp David Accords were signed by Egyptian President Sadat and Israeli Prime Minister Begin on September 17. 365-608/428-S/80010 February 1977–January 1979 521 and that this issue should be deferred until the regularly scheduled re- view. Venezuela can in this way make a significant contribution to the maintenance of forward momentum for the solution of important world economic and political problems. President Carter intends to continue to pursue with vigor policies toward the same end. End text. 3
3 Charge´ d’Affaires John J. Crowley made the de´marche to Minister of Presidency Lauria on September 29. The Minister said that he would convey the U.S. position to Pe´rez, who had “an extremely full schedule” that day and believed that the President “would be willing to reconsider the current” Venezuelan position, although he “doubted this would result in any change.” Crowley characterized Lauria as “literally President Pe´rez’s right-hand man, and his views may be taken as accurately reflecting those of the President.” (Telegram 9294 from Caracas, September 29; National Archives, RG 59, Cen- tral Foreign Policy Files, D780398–1151)
On October 15, 1978, the U.S. Senate and House of Representatives passed the five bills that together constitute the National Energy Act of 1978: 1) the National Energy Conservation Policy Act, which funded conservation and solar energy initiatives (P.L. 95–619); 2) the Power Plant and Industrial Fuel Use Act, which encouraged the use of coal and other alternative fuels instead of oil and natural gas in both new and existing utilities (P.L. 95–620); 3) the Natural Gas Policy Act, which provided for the creation of a single national market for new natural gas sales (P.L. 95–621); 4) the Public Utility Regulatory Policies Act, which facilitated conservation through the efficient use of utility gener- ating equipment (P.L. 95–617); and 5) the Energy Tax Act, which estab- lished incentive tax credits to induce energy conservation and the use of alternative energy sources (P.L. 95–618). In a telegram to posts in both oil-producing and oil-consuming na- tions, the Department of State noted that the new programs were esti- mated to save 2.4–3.0 million barrels of oil per day by 1985, compared to what the United States would otherwise have required. Such savings, the Department explained, met a commitment that the United States made at the Bonn Economic Summit in July and also adhered to “the decision on group objectives and principles for energy policy adopted by the International Energy Agency at its October 1977 Gov- erning Board meeting.” (Telegram 273815 to Brussels and other posts, October 27; National Archives, RG 59, Central Foreign Policy Files, 365-608/428-S/80010 522 Foreign Relations, 1969–1976, Volume XXXVII D780443–0651) Regarding the October 1977 IEA meeting, see Docu- ment 129. President Carter signed the bills into law on November 9. For the text of his remarks on signing the bills, see Public Papers of the Presidents of the United States: Jimmy Carter, 1978 , pages 1978–1985. 165. Telegram From the Department of State to Selected Diplomatic Posts 1 Washington, October 20, 1978, 2259Z. 266410. Subject: OPEC Price Deliberations. 1) At an early opportunity, Embassies except Abu Dhabi, Jidda, Kuwait, and Tehran should make informal approaches to key officials to convey U.S. concern about upcoming OPEC oil price decision. You should not describe your approach as a formal de´marche made under instructions, but you may draw from points below in your dialogue. (For Abu Dhabi, Jidda, Kuwait, and Tehran: Secretary Blumenthal will visit all four posts in mid-November while Under Secretary Cooper will visit all but Jidda next week. Suggest you defer your approach at the highest level until after conclusion of these visits, since combined impact is likely to be greater in this sequence. We would appreciate your assessment of this proposed procedure.) 2) The U.S. is concerned that the pressures within OPEC may re- sult in a decision for a price increase which would have adverse effects on the global economic and financial systems. 3) Current oil market supply and demand conditions do not war- rant a price increase. Demand for OPEC oil has been in the 29.5–31 mil- lion barrels per day range for over 18 months—below projections, and for most OPEC members below desired production levels. Recent tight- ening of the market has been caused by inventory build-ups in antici- pation of future price hikes and by Saudi restraints on production of 1 Source: National Archives, RG 59, Central Foreign Policy Files, D780431–0447. Confidential; Immediate. Drafted by Moore and Hart; cleared by Bosworth, Rosen, Katz, Solomon, Bergold, and in NEA/RA and EUR/RPE; and approved by Cooper. Sent to Jidda, Kuwait, Tripoli, Abu Dhabi, Algiers, Doha, Tehran, Caracas, Lagos, Jakarta, Libre- ville, Quito, Ankara, Athens, Bern, Bonn, Brussels for the Embassy and USEEC, Copen- hagen, Dublin, London, Luxembourg, Madrid, Oslo, Ottawa, Paris for the Embassy and USOECD, Rome, Stockholm, the Hague, Tokyo, Vienna, Wellington, Baghdad, and Dhahran.
365-608/428-S/80010 February 1977–January 1979 523 Arabian light. Neither of these reasons reflect a shortage of oil which could justify a price increase. 4) While exchange market developments have been the subject of concern in OPEC countries, there is no reason to anticipate a long run decline of the dollar relative to other currencies. On the contrary, we believe that the dollar will be strengthened as a result of measures be- ing implemented by the U.S. and several other countries: (A) At the Bonn Summit in July President Carter reaffirmed the U.S. commitment to reduce its dependence on imported oil. 2 The recent passage of U.S. energy legislation should produce an oil import savings of over 2.5 mil- lion barrels per day by 1985. (B) Reduced deficit spending and tighter monetary policy measures by the U.S. will help reduce the U.S. infla- tion rate, as will a strong anti-inflation program to be announced later this month. 3 (C) There is a convergence of growth rates among OECD countries which will help the trade balance. U.S. growth is slowing somewhat, while Japan and Europe will achieve real growth in excess of the U.S. for the first time since 1975. (D) The dollar depreciation which has already occurred, coupled with an intensive export promo- tion program, should stimulate U.S. exports next year. (E) Japan and West Germany have both taken fiscal measures to stimulate their econ- omies. The Japanese Government has proposed a supplemental budget increase of about 13 billion dollars to achieve its growth target of 7 per- cent for 1978. Germany has also increased its fiscal expenditures by 5.6 billion dollars in 1979 and 1.6 billion dollars in 1980. 5) The U.S. trade and current account deficits are now expected to improve substantially next year. As these movements become more ob- vious to exchange markets, we expect exchange market conditions will improve. An oil price increase at this time would tend to offset part of these favorable developments and could put downward pressure on the dollar. 6) FYI: As Embassies are aware, projections of changes in economic growth, international trade, and inflation owing to oil price changes vary considerably, depending upon model used and assumptions made about fiscal and monetary policy responses. Thus, figures cited in following paragraphs may vary in differing analyses, but substance of basic argument remains unchanged. End FYI. Our analysis shows that for every 5 percent increase in oil prices, real GNP growth for the seven largest OECD economies as a group would decline by about 0.25 per- cent or some 10 billion dollars. Consumer prices in these seven coun- 2 See footnote 3, Document 157. 3 Carter introduced his anti-inflation program in an address to the nation on Oc- tober 24. For the text of his speech and a fact sheet issued by the White House, see Public
, pp. 1839–1848. 365-608/428-S/80010 524 Foreign Relations, 1969–1976, Volume XXXVII tries would increase also by about 0.25 percent for each 5 percent price increase. The level of GNP losses and overall price increases would vary from country to country, but according to our estimates, none of the big seven would be immune. In addition, the climate for capital in- vestment decisions would be more uncertain, and governments with increased oil bills would face protectionist pressures to reduce non-oil imports and would have to slow economic growth to reduce energy consumption. OPEC countries should be aware that these responses could under present conditions come about from a relatively small price hike in percentage terms. 7) A 5 percent price hike would increase the import bills of the big seven OECD countries by 5 billion dollars. Even though the impact of this would be softened by increased exports to OPEC of about 1.2 bil- lion dollars and decreased non-oil imports of about the same amount, exports to non-OPEC countries would decrease by nearly 1 billion dol- lars resulting in an overall increased trade deficit of around 3.5 billion dollars. Forty percent of this deficit would accrue to the U.S. Our esti- mate is that the smaller industrial countries would experience a 1.2 bil- lion dollar deterioration in their overall trade balances from a 5 percent oil price increase because of a 1 billion dollar increase in their oil import bills and reduced exports to other developed countries. 8) For non-OPEC developing countries, an oil price increase would worsen their external debt positions and current account deficits by in- creasing import costs and reducing exports. A 5 percent price increase would add about 700 million dollars in 1979 to their oil import bill. Price increases in developed countries induced by a 5 percent oil price increase would add 500 million dollars to the cost to developing coun- tries of non-fuel imports. The demand for non-OPEC LDC exports in the developed countries would be reduced as well, with the revenue loss offset only in part by higher export prices. A number of developing countries would be hit particularly hard. 9) FYI: Some projections indicate that the Japanese surplus on cur- rent account in 1978 will exceed that of OPEC as a group. Should OPEC officials raise the matter of surpluses within the OECD, you should in- dicate that we have consistently expressed our concern to the Japanese about their current account surplus and have received their assurance that actions will be taken to reduce the surplus. The Japanese commit- ment at the Bonn Summit to increase growth rates was in part a re- sponse to such pressure from the U.S. and other Summit countries. End FYI.
10) For OECD Embassies: You should add that U.S. believes that in any approaches to OPEC or public comments on OPEC oil prices, our governments should point out the adverse consequences of any price
365-608/428-S/80010 February 1977–January 1979 525 increase at all at this time, as the best means to encourage restraint in OPEC’s ultimate decision. 11) If asked about reports of estimate by Secretary Schlesinger of U.S. oil import level of 9–10 million B/D in 1985, 4 Embassies may point out (A) that the energy measures on which Congress has completed ac- tion will effectively fulfill President Carter’s commitment at the Bonn Summit to have measures in effect by the end of this year that will re- sult in oil import savings of approximately 2.5 million B/D by 1985; and (B) that the U.S. will continue to strengthen its energy efforts in the fields of both conservation and accelerated production of alternative energy sources, including through the adoption of new measures when needed. If asked about Secretary Schlesinger’s statement that demand for OPEC oil would approach the upper limit of current OPEC avail- ability in the last quarter of this year, Embassies may point out that this would be a reflection of high seasonal and anticipatory buying in ad- vance of any OPEC price increase, and not a permanent market condi- tion. While demand for OPEC oil will undoubtedly rise in the early 1980’s, we would in fact anticipate a drop in demand in the first quarter of 1979 as compared to the fourth quarter of 1978.
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