Foreign relations of the united states 1969–1976 volume XXXVII energy crisis, 1974–1980 department of state washington
Telegram From the Department of State to the Embassy in
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- 201. Memorandum of Conversation
- 202. Paper Prepared in the Department of State
- 203. Memorandum From Rutherford Poats of the National Security Council Staff to Henry Owen of the National Security Council Staff
200. Telegram From the Department of State to the Embassy in Saudi Arabia 1 Washington, April 16, 1979, 2210Z. 95864. Subject: Saudi Production Ceiling. 1. Embassy is instructed to approach SAG soon at an appropriate level to inform them of USG concern over reimposition of 8.5 million barrels per day production ceiling on Aramco, to stress the oil market’s continuing need for incremental output, and to urge SAG to continue to permit production at 9.5 MMBD level throughout this quarter. You should make it clear you are making this approach under instructions, and it may be made written or orally at your discretion. You should draw upon the following points: —We appreciate the fact that the Saudi Government has permitted Aramco to produce at near-maximum capacity levels since late last year in order to help offset the shortfall in world oil supplies owing to the interruption in Iranian oil exports. —Despite the recent resumption of Iranian oil exports (at a level still far below previous years), 2 there is a continuing need for increased production by other OPEC countries in order to permit orderly oil mar- ket conditions and the rebuilding of working stocks. In any event, Iran- ian production levels are uncertain and Iran cannot be firmly counted upon for 3.5–4.0 MMBD output levels for some time. —World oil stocks were drawn down during the December– March period by about 2 MMBD more than otherwise would have oc- curred. These stocks must be rebuilt prior to the heavy demand period of the 1979–80 winter in order to meet the essential energy needs of all oil consuming nations. 1 Source: National Archives, RG 59, Central Foreign Policy Files, D790175–0949. Confidential; Immediate; Exdis. Drafted by Todd; cleared by Rosen, Katz, Twinam, Ber- gold, Owen, and Helen B. Junz (Treasury Department) and in EB/ORF; and approved by Cooper. Repeated Immediate to Riyadh and Dhahran. 2 Iranian oil production had reportedly recently risen to its highest level since De- cember 1978. (The New York Times, April 11, 1979, p. D7) 365-608/428-S/80010 632 Foreign Relations, 1969–1976, Volume XXXVII —Market is very unsettled and a “shortage psychology” is devel- oping. Production cutbacks now will reinforce shortage psychology and will help sustain high spot oil prices, which will both further un- settle the world market and undermine the agreed OPEC price decisions. —The industrialized oil consumers are attempting to help offset the effects of the Iranian situation by reducing their collective demand on the world oil market by 2 MMBD by year-end. The President has just announced the steps the US will take to meet our share of the demand restraint commitment. It will take time to implement demand restraint and other measures, however, and the greatest impact will likely not occur until the fourth quarter. —At a time when there are differences on some issues between our two countries, we should seek to reinforce our longstanding history of mutually beneficial relations through cooperation wherever possible. —We believe that the steps the USG is taking to restrain demand for imported oil provide ample evidence of our good intentions and the seriousness with which we view the current oil situation; we urge con- tinued cooperation by the SAG in permitting maximum feasible output in order to help meet the world’s essential demand for oil and re-establish stability in the world oil market. 2. Ambassador West will discuss the production ceiling and other issues more generally when he returns, but Dept. believes it important that our views be made known to SAG very soon. Charge´ should there- fore proceed to target most appropriate SAG official for making above approach, keeping in mind likely Yamani sensitivity to recently re- leased SFRC Subcommittee staff report on Saudi oil 3 and possible need to let dust settle a few days before making above approach. 4
3 The report by the Subcommittee on International Economic Policy noted that the future output of Saudi oil would be “far less than predicted.” (Ibid., April 15, 1979, p. A1) 4 Charge´ Daniels met with Deputy Foreign Minister Abd al-Rahman Mansuri on May 6 and made his presentation as instructed. Daniels reported: “Mansuri was quick to the point and said that, in sum, our message was that we wanted increased production pari passu with Iranian shortfall. He promised to pass the information on to the appro- priate authorities.” (Telegram 3544 from Jidda, May 7; National Archives, RG 59, Central Foreign Policy Files, D790206–1126)
365-608/428-S/80010 January 1979–January 1981 633 201. Memorandum of Conversation 1 Washington, April 23, 1979, 5 p.m. SUBJECT Tokyo Economic Summit with Under Secretary Cooper at 5:00 p.m.—April 23, 1979, The Secretary’s Office PARTICIPANTS [See Distribution] 2 Mr. Bergold opened the meeting by noting he would be leaving the next day along with Mr. Poats and Mr. Rosen for Tokyo to discuss the preparations for the June Economic Summit. Mr. Poats then noted that the NSC had not sought formal interagency clearances of the various initiatives outlined in the attached NSC draft paper, 3 wanting to en- courage the development of “fresh ideas.” The participants then re- viewed the various options outlined by Mr. Poats. • Oil Import Target—Secretary Schlesinger indicated either of the two approaches outlined in the NSC paper 4 was acceptable, but pre- ferred to substitute the phrase “traditional exporters of oil” for “OPEC” to avoid a confrontational tone. He also suggested that the Summit or the IEA propose a comprehensive study of the advantages of rational- izing world refinery utilization, with a view towards increasing gaso- line production and minimizing the production of boiler fuels, which are more easily substitutable. • Coal—Participants agreed that a coal initiative and creation of an International Coal Advisory Board were highly desirable. • Nuclear Safety—Secretary Schlesinger stressed the need to make a positive statement about the need for nuclear power as an alternative to 1 Source: Department of Energy, Executive Secretariat Files, Job #8824, International Affairs: 1/79–6/79. Confidential. Drafted by John E. Treat who initialed at the bottom of the last page. 2 Brackets in the original. The list is at the end of the memorandum of conversation. 3 The April 19 draft, sent to Naohiro Amaya, chairman of the multilateral group drafting the energy issues paper for the Summit, is attached but not printed. According to the drafters, “These suggestions have not been fully reviewed and approved within the US Government and thus do not at this time constitute US proposals for Summit action.” Regarding the Amaya group, see Document 197. 4 The first approach, under the heading “Oil Imports and Prices,” delineated that the G–7 seek to preclude further oil price increases by reducing demand for oil through individual and cooperative action. The second approach added that the G–7 should reaf- firm the commitment of the seven heads of government to reduce oil imports by 5 percent in 1979 before looking beyond that year. It also noted that, regardless of the “recovery of Iranian oil production,” there would “continue to be a need to ease demand and price pressures on the world oil market.” 365-608/428-S/80010 634 Foreign Relations, 1969–1976, Volume XXXVII imported oil, while simultaneously pushing for expanded IAEA work on nuclear safety. • LDC Energy Development 5 —Mr. Poats discounted this initiative as unlikely to succeed. • Energy RD&D—All participants agreed that there is a clear need for financial support of technologies which are ready for commerciali- zation. Mr. O’Leary stated his strong support for the initiative devel- oped by the Treasury Department. Mr. Deutch stressed the need to dis- tinguish between research (capability) and demonstration (capacity). He stated that no new institutions are needed for international coopera- tion in research; bilateral agreements and the IEA provide the neces- sary frameworks. Mr. Deutch agreed that new financing efforts to sup- port demonstration facilities were warranted, but stressed the need to remain flexible on the institutional approach. Secretary Schlesinger agreed that a financing initiative should be explored. • Renewable Energy Development in LDCs—Mr. Poats described this initiative as a “reaffirmation” of the work already underway. Mr. Deutch and Mr. Rosen agreed that more emphasis should be given in national R&D programs to the development of appropriate technolo- gies for the LDCs. Mr. Owen opined that there was an urgent need for improved coordination of bilateral programs and noted a World Bank meeting on this issue has been scheduled for June. Mr. Cooper ob- served that the development of “a coordinated global program” for LDC cooperation was a laudable goal, but that previous multilateral ef- forts had failed. • Investment Targets—Mr. Poats described this initiative as of lim- ited merit and primarily an effort to respond to a Japanese suggestion. Secretary Schlesinger noted that the U.S. has little to fear since our record on the federal R&D budget is excellent and will continue to be so; he suggested the idea be further explored. DISTRIBUTION Department of State Richard Cooper, Under Secretary for Economic Affairs Julius Katz, Assistant Secretary, Economic and Business Affairs Gerald Rosen, Director, Office of Fuels and Energy 5 The fourth heading of the NSC draft paper was “Immediate Development of LDC Hydrocarbon Resources.” The last part of this section reads: “The heads of government expressed satisfaction with the positive response of the World Bank to their request at the Bonn Summit for expansion of the Bank’s assistance to oil, gas and coal exploration and development in developing nations. They agreed that additional measures may be re- quired to encourage the risk-taking participation of private foreign companies in energy exploration and production in developing nations and expressed readiness to consider support of sound private or public initiatives to assure greater reliability of agreements and contracts in this field.” 365-608/428-S/80010 January 1979–January 1981 635 National Security Council Ambassador Henry Owen, Special Representative of the President for Economic Summits Rutherford Poats, Senior Staff Member Department of Energy James R. Schlesinger, Secretary of Energy John F. O’Leary, Deputy Secretary of Energy Harry E. Bergold, Jr., Assistant Secretary for International Affairs John Deutch, Assistant Secretary for Energy Technology Les Goldman, Principal Deputy Assistant Secretary for Policy and Evaluation John Treat, Director, Office of Producing Nations International Affairs
1 Washington, April 23, 1979. PRC Meeting on Saudi Arabia, April 27, 1979 Discussion Paper We need to determine a strategy for managing our relationship with Saudi Arabia over the next few months in a manner which will further both our short and our long term interests in a number of areas of major importance—the peace process, energy and other economic questions, and regional security including our bilateral military rela- tionship and Saudi financing of US arms sales to other countries. The last year has witnessed an unprecedentedly intense US-Saudi contact involving frequent high-level discussions on a number of key issues. It has been a period of testing the limits of mutual interest, and in the process we have developed a finer appreciation of where the Saudis feel their basic interests on key issues part company with ours. In furtherance of Middle East peace, we have been willing to place sig- nificant strain on the overall relationship, while at the same time we have done much in the security area to strengthen it. [Omitted here is discussion unrelated to oil.]
The Saudis have clearly demon- strated their resistance to our persistent urging to increase sustainable production capacity, and recently have brought production back to the self-imposed 8.5 million b/d limit, over a million barrels per day below existing sustainable capacity. In the tight oil market foreseeable for at 1 Source: Carter Library, National Security Council, Institutional Files, Box 74, PRC 102, Saudi Arabia, 4/27/79. Confidential. 365-608/428-S/80010 636 Foreign Relations, 1969–1976, Volume XXXVII least the rest of this year and for most of the next decade, the Saudi atti- tude toward oil pricing, however moderate, becomes less relevant in the absence of greater Saudi production. While the overall quality of our relationship, particularly the Saudi perception of our pursuit of Middle East peace, does set the environ- ment in which the Saudis listen to our concerns on the oil front, there is increasing evidence that they perceive our interests diverging on en- ergy. Conservationist pressures on Saudi oil policy have intensified. There is no convincing evidence that Saudi Arabia’s income needs in the near future will require producing above the present production level. We have devised no persuasive economic incentives for in- creasing Saudi productive capacity, and both industrial prospects and social/economic concerns within Saudi Arabia work against the case for increased production. We have, however, a pressing national need to continue to urge the Saudis to keep production near sustainable capacity and to bring sustainable capacity promptly up to at least 12 million b/d. Absent eco- nomic incentives such as protection of financial assets and advantages for Saudi petrochemical industrialization, we have to base our argu- ments primarily on the substantial Saudi perception of mutual eco- nomic interest, an argument which has particular weight because of Saudi interest in protecting the value of their substantial dollar assets, and on the Saudi sense of responsibility toward the international economy. (It can be also argued that it is cheaper for the Saudis to in- crease capacity now rather than later.) This suggests that we need a sus- tained and sophisticated bilateral dialogue on the relationship of the energy problem to the overall health of the world economy, and the re- lated impact on the internal security stability. As they approach such a dialogue, however, the Saudis will be looking with increased skepti- cism at what the consumer nations, and the US in particular, are doing to bring use of energy under control and to assure economic stability in other areas. [Omitted here is discussion unrelated to oil.] 6. Oil —How to encourage greater production We need a sustained low-key and sophisticated dialogue with the Saudis on oil. It should focus convincingly on what we are doing in this country to lessen our dependence on foreign imports. This dialogue should be cast in the broader context of the international economic situ- ation, with emphasis on the sacrifice we are making in this country to strengthen the dollar and to curtail inflation. The Saudis are well aware that we want them to increase produc- tion and productive capacity. What is required in the coming months is not exhortation but a sophisticated exchange of views to set a better 365-608/428-S/80010 January 1979–January 1981 637 context of strong mutuality of economic interests as basis for our long-term persuasive effort on production. We need to engage the Saudis in serious discussion of the long-term supply and demand out- look for crude oil. In this dialogue we should appear receptive to seriously exam- ining Saudi ideas on financial or industrial incentives we might pro- vide for greater Saudi production. We should also seek wherever pos- sible to draw the Saudis into the international economic dialogue and to exhibit interest in Saudi ideas on the range of North-South issues. While the main burden of sustaining such a dialogue must fall on the diplomatic channel, it is essential that our diplomatic contacts be supported by sophisticated documentation and the occasional visit to Saudi Arabia of appropriate economic experts. Last year’s visit by a senior economic policymaker to brief the Saudis on the Bonn Summit was quite useful and might be repeated this summer. 2 Our tactical goal should be constructive Cabinet level discussions with the Saudis during a Fahd visit to Washington and a subsequent Joint Economic Commission 3 meeting here in the fall. [Omitted here is discussion unrelated to oil.] 4 2 At the President’s request, Cooper briefed Prince Fahd on the Bonn Summit on July 22, 1978. (Telegram 5680 from Jidda, August 2, 1978; National Archives, RG 59, Cen- tral Foreign Policy Files, D780316–0648) 3 Documentation on the meetings of the U.S.-Saudi joint commissions is scheduled for publication in Foreign Relations, 1969–1976, volume E–9, Documents on Middle East Region; Arabian Peninsula; North Africa, 1973–1976. 4 At the April 27 PRC meeting, “all agreed that some progress would be necessary on the peace negotiations and/or security issues” before the United States “could weigh in seriously with the Saudis on increasing their long-term production capacity.” The Summary of Conclusions of the meeting also noted: “With regard to current production levels, we probably cannot affect their decision to resume production at the previous level of 8.5 million barrels per day. However, we should be prepared to object if their pro- duction drops below this level. We should make clear that it is our understanding that they are reducing production in response to the resumption of a substantial level of Iran- ian exports, and we would anticipate a reconsideration on their part if Iranian production should again drop off.” (Carter Library, Plains File, Box 10)
365-608/428-S/80010 638 Foreign Relations, 1969–1976, Volume XXXVII 203. Memorandum From Rutherford Poats of the National Security Council Staff to Henry Owen of the National Security Council Staff 1 Washington, April 30, 1979. SUBJECT Output of Energy Working Group for Economic Summit Two and one-half days of committee drafting (including a session ending at 2:25 a.m.) produced the attached energy issues paper (Tab A) 2
nique´ material can be readily excerpted; however, the group refused, on the basis on instructions uniformly differing with mine, actually to draft the energy section of the communique´. In fact, no other delegation came to the meeting with specific proposals for action at the Summit. We agreed to meet on May 23 in Paris, immediately after the IEA Ministerial meeting, to draft the communique´ language in the light of IEA decisions and the Preparatory Group comments. Much of the debate was devoted to two of the proposals that I sub- mitted in writing and one contained in the Japanese draft of the issues paper:
—Our proposal of continued restraint on oil demand beyond 1979; —Our proposal of an international finance corporation to lend at market rates directly to commercial scale energy project enterprises employing innovative technologies. —The Japanese proposal to invite a resumption of multilateral dia- logue between oil producer and consumer nations. Differing views of the weight to give the Three-Mile Island inci- dent
3 in pronouncing on the nuclear option also consumed many hours. The result is at Tab A, paragraph 17–D, Nuclear. We reached general agreement on continued oil demand restraint, as reflected in the first strategy statement (paragraph 16(i)) and first concrete policy guideline (paragraph 17(a)(1)(i)). I believe the commu- 1 Source: Carter Library, National Security Affairs, Staff Material, International Eco- nomics File, Box 45, Rutherford Poats File, Chron, 4/12–30/79. Confidential. Copies were sent to Schlesinger, O’Leary, Cooper, Solomon, Katz, Brzezinski, Eizenstat, Press, Schirmer, and Cutler. 2 Tabs A–C are attached but not printed. Poats is presumably referring to meetings of the Amaya group. See footnote 2, Document 201. 3 The core of the nuclear power plant on the Susquehanna River near Harrisburg, Pennsylvania, experienced a partial meltdown on March 28. It was the worst nuclear ac- cident in U.S. history. 365-608/428-S/80010 January 1979–January 1981 639 nique´ language I submitted (Tab B) 4 can be adopted, after haggling over the Mexican “out” for the US. No delegation was ready to endorse our new IFI for energy com- mercialization without a detailed paper and governmental study, but Amaya personally supported it and McPhail was very positive. Lantzke of IEA also was enthusiastic. The text of my proposed commu- nique´ language on this initiative is at Tab C. 5 Note that it does not esti- mate total capitalization. I did not pass out the Treasury paper because it contained capitalization figures (contrary to Stu’s instructions to avoid numbers), implied that the institution would finance pre-commercialization projects, and was too heavy on technologies of primarily US interest or source. Despite these precautions, the Japanese evidently briefed the press during the last day of the meeting, leading to at least one news account that included the $20 billion figure. I am baffled as to the source of that number, unless it was retained by Sawada from his prior meeting with us in Washington. I promised to send to each member of the working group by the end of this week a paper stating the rationale, functional fields, fi- nancing methods, capitalization, etc., of the proposed international en- ergy finance corporation. Chairman Amaya urged that this paper ex- press a firm USG proposal, subject only to Presidential review in the light of responses from the other six governments. As you know, I could not present a firm US proposal at Hakone because of OMB reservations. The paper should spell out answers to the following questions, which I fielded orally at Hakone: —What evidence do you have that ad hoc arrangements won’t be sufficient, that is, that the number of large commercialization projects 4 The “Oil Import Restraint” statement at Tab B reads: “The heads of government reaffirm their commitments to achieve as early as possible in 1979 reduction of their na- tions’ demand for oil on the world market by the equivalent of 5% of previously projected 1979 oil consumption. Looking beyond 1979 they agreed that, irrespective of the recovery of Iranian oil production, there will continue to be a need to ease demand and price pres- sures on the world oil market. The seven governments will take individual and coopera- tive action to restrain demand for oil, increase production of oil, and expand production and use of alternative fuels, so as to avoid significant increases in their demand for oil from traditional suppliers while their economies continue to grow.” 5 The text at Tab C reads in part: “In order to assure that diverse, adapted technol- ogies are ready for large-scale, privately-financed investment in the 1990s, the first gener- ation of commercial applications should be operating by the mid-1980s. Accordingly, governments should act now to assure project financing to competent enterprises willing to take a substantial share of the investment risk in establishing commercial-scale projects employing innovative energy technologies. The seven heads of government decided, therefore to appoint representatives to prepare the charter of an international corporation which would provide or guarantee long-term loan capital at market interest rates to se- lected energy production projects.” 365-608/428-S/80010 640 Foreign Relations, 1969–1976, Volume XXXVII requiring public international financing will be great enough to war- rant the struggle to create a new IFI? Why not use the same informal consortium arrangement we use for grant-supported demonstration projects? —What’s in it for us? The technologies you mention are either US or German, and your proposal states that a project could be in an LDC that is not a subscribing member of the finance corporation, and the as- sisted sponsors must agree to license the technologies to all comers on non-discriminatory and reasonable terms. So why should my country put up money? —Private money will be available when output costs minus sub- sidies are seen to be equal to oil or gas prices. Until that is sure, you will need to offer subsidies (grants or off-take contracts) more generous than market rate loans to induce private companies to risk big money on commercialization projects. A lending corporation can’t solve this problem.
—In some cases, commercialization projects will be sponsored by state corporations such as utilities, which don’t need to borrow interna- tionally; if the project makes sense, their parent governments will or should put up the loan capital. —How can we make it attractive to OPEC governments to sub- scribe capital? —Can we create an international finance institution to support in- novative energy projects while continuing to refuse public financing for other high-risk energy investments, such as oil exploration? My answers satisfied some members of the working group, but I doubt that Sir Jack Rampton, the British delegation head, or Francois de Wissocq, the French Director General of Energy, was persuaded. The most persuasive argument in our favor is this: The world will need the equivalent in energy supply capacity of a present Saudi Arabia about every 10 years beginning around 1990; only wide commercial applica- tion of several new technologies starting in the 1980s can promise that; we would be reckless to count on private investment decisions on com- mercialization of new technologies to be made early enough in the 1980s to lay the basis for a broad proliferation of commercial applica- tions by 1990. |
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