Foreign relations of the united states 1969–1976 volume XXXVII energy crisis, 1974–1980 department of state washington
Summary of Conclusions of Policy Review Committee
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186. Summary of Conclusions of Policy Review Committee Meeting 1 Washington, February 6, 1979, 4:10–5:30 p.m. SUBJECT U.S. Policy to Mexico PARTICIPANTS
Deputy Secretary Warren Admiral Turner, Director of Christopher Central Intelligence Matthew Nimetz, Counselor Hans Heymann, National Jules Katz, Assistant Secretary for Intelligence Officer for Economic and Business Affairs Political Economy Luigi Einaudi, Staff Director, NSC OMB Interdepartmental Groups James McIntyre, Director of OMB Ambassador Patrick Lucey, U.S. Domestic Policy Ambassador to Mexico Stu Eizenstat
Kitty Schirmer Stanley Resor, Under Secretary of
Defense for Policy Ben Huberman
Secretary of Treasury Michael Ambassador Henry Owen Blumenthal Robert Pastor C. Fred Bergsten, Assistant Rutherford Poats Secretary for International Affairs White House JCS Dr. Brzezinski Lt. Gen. William Smith, Assistant Rick Inderfurth to the Chairman, JCS
Secretary of Energy James Schlesinger Les Goldman, Deputy Asst. Secretary for Policy and Evaluation Richard Smith, Director of Office Coordination 1 Source: Carter Library, National Security Affairs, Staff Material, North/South File, Box 32, Pastor Country Files, Mexico: PRM 41 (Policy, 2–7/79). Confidential. The meeting was held in the White House Situation Room. The agenda paper for this meet- ing, which Dodson sent to the participants on February 2, is ibid.
365-608/428-S/80010 594 Foreign Relations, 1969–1976, Volume XXXVII SUMMARY OF CONCLUSIONS PRC on Mexico Chaired by Warren Christopher, the PRC met for its third session on PRM-41 (U.S. relations with Mexico) 2 and considered three issues: (1) energy relations, including Presidential discussions and U.S. strat- egy for subsequent negotiation of a gas price formula; (2) organization of the U.S. Government for a more coordinated approach to relations with Mexico, and (3) the general approach to the Presidential visit to Mexico.
. It was agreed that the United States should seek to develop an extensive set of energy relationships with Mexico, designed to in- crease world energy supply, enhance U.S. energy security, and support rapid but stable Mexican economic and social development. The Presi- dent’s visit is critical to establishing a more positive political climate for negotiations on gas supply and a possible subsequent oil supply agree- ment. He should sensitively refute Mexican suspicion of U.S. inten- tions. As a way to improve the atmosphere and place the gas issue in a broader context of energy cooperation, he could suggest: (a) joint studies of potential electric power interchange and gas transmission co- operative arrangements along the common border; (b) U.S. technical consultation and R&D cooperation on solar and geothermal develop- ment, enhanced recovery of oil, and uranium processing; and (c) if the Mexicans express interest, support of an accelerated rate of oilfield de- velopment through long-term U.S. purchase contracts for the Strategic Petroleum Reserve or the Defense Supply Agency. He should indicate to President Lopez Portillo that we are interested in a long-term ar- rangement for importing natural gas from Mexico. It was agreed that the President should outline in general terms the U.S. approach to gas pricing (including the fact that our regulatory agencies must approve any agreement), and elicit Lopez Portillo’s posi- tion, but he should avoid a discussion over whether residual oil is the right price yardstick, referring it to the technical experts. 3 The President should express interest in completing negotiations early. To do this, the President would designate a representative who will work with one designated by Lopez Portillo to decide on a formula for natural gas pricing that takes into account market conditions, the prices of compa- 2 For PRM 41, see footnote 3, Document 167. The first two PRC meetings were held on December 6, 1978, and January 19, 1979. See footnote 2, Document 170 and footnote 2, Document 184. 3 The Department of Energy’s “Staff Discussion Paper Proposing a U.S. Strategy for Mexican Natural Gas Negotiations,” January 29, is in Carter Library, National Security Affairs, Staff Material, North/South File, Box 32, Pastor Country Files, Mexico: PRM 41 (Policy, 2–7/79).
365-608/428-S/80010 January 1979–January 1981 595 rable products, and the long-term relationship we wish to create with Mexico.
We should seek inclusion in the joint communique´ of agreement to an early specified date for negotiation of the gas price formula. Negoti- ations between Mexico and the gas companies would proceed only after negotiators of the two governments agreed on standards. In discussions of oil, the President should welcome Mexican in- terest in swapping Mexican oil for Alaskan in supplying Japan and the U.S. Gulf Coast, but note that this depends on U.S. Congressional ap- proval. He also should encourage Mexico to increase oil exports to Israel. [Omitted here are conclusions unrelated to energy.] 187. Minutes of Policy Review Committee Meeting 1 Washington, February 8, 1979, 4–5:30 p.m. SUBJECT Oil Supply Outlook; US Oil Supply to Israel PARTICIPANTS
Richard Cooper, Under Secretary for Economic Affairs Stephen Bosworth, Deputy Assistant Secretary, International Resources and Food Policy
Treasury Anthony Solomon, Under Secretary for Monetary Affairs C. Fred Bergsten, Assistant Secretary for International Affairs
Walter Slocombe, Under Secretary for Policy Energy Secretary Schlesinger—Chair Bruce Clarke, Deputy Assistant Secretary for International Affairs Alvin Alm, Assistant Secretary for Policy and Evaluation 1 Source: Carter Library, National Security Affairs, Staff Material, International Eco- nomics File, Box 44, Rutherford Poats File, Chron, 2/79. Secret. The meeting was held in the White House Situation Room. The agenda paper for this meeting, which Poats at- tached to a February 7 memorandum to Brzezinski and Owen, is ibid., as is the meeting’s Summary of Conclusions. 365-608/428-S/80010 596 Foreign Relations, 1969–1976, Volume XXXVII JCS Lt. Gen. William Smith, Assistant to the Chairman DCI Admiral Turner [name not declassified], Office of Economic Research
James McIntyre W. Bowman Cutter
Charles Schultze Robert Litan
Stu Eizenstat Kitty Schirmer
Dr. Brzezinski NSC Amb. Henry Owen Rutherford Poats MINUTES
Turner—In the short run, stocks are adequate to cover the loss in oil production, but are being drawn down at over twice the normal first quarter rate. The market is reflecting anxiety about the future, with spot prices rising and spot sales broadening. A turnaround will depend on political events in Iran and what Saudi Arabia does. If Iran comes back to 3–4 mmb/d of exports soon and the Saudis stay at 9.5 mmb/d, a real shortage can be averted, although supplies will remain tight through the first quarter of 1980. If the Saudis cut back in the latter half of 1979 to maintain an 8.5 mmb/d annual average, stock recovery will be inad- equate for next winter and price pressures will be extreme. Schlesinger—My understanding is that 9.5 is out of the question for the whole year. Turner—If we try to force this on Fahd, I’m afraid we may be pushing him into a corner politically with serious consequences for our other interests. 2 Schultze—Will we get the full benefit of increased supply when Iran comes back into exporting, or will the others revert to their normal production levels? Schlesinger—If Iran returns to 3 mmb/d, I expect we will get a net 1.5 mmb/d augmentation. 2 See footnote 6, Document 185. 365-608/428-S/80010 January 1979–January 1981 597 Turner—Now, as to the long-run outlook, the prospects have worsened by about 1 mmb/d compared with our predictions before the Iranian crisis. The new Iranian government’s policies on oil produc- tion are problematical. An unknown amount of permanent damage to the oil fields has occurred. If they don’t get back about one-fourth of the expatriate technicians, total production may not exceed 3 mmb/d. The Saudis could reach 12 mmb/d by 1982 if they make the deci- sion to invest, but they are reluctant, realizing that if they have the ca- pacity they will be pressed to use it. The others are a net wash—in- crease in Mexico and the North Slope offset by declines in net Communist Bloc exports. Eizenstat—What correlation can be assumed between this decline in oil supply and GNP? Schultze—We can’t say without defining first the form of demand constraint; for example, a curb on automobile use would have little ef- fect on GNP. Jim, what about deferring SPR procurement? Schlesinger—We have ceased buying because the response to our last request for offers has been very low. But we ought to have as sub- stantial an SPR as possible next winter. Schultze—SPR purchases are not in the 500,000 barrel shortfall you’ve mentioned? Schlesinger—That’s right. Owen—What could the President announce at his press confer- ence next Monday? Schlesinger—Administrative action and stand-by mandatory con- trol proposals. McIntyre—The press will ask him what he is going to do to get oil from Mexico. Owen—Perhaps he should put off his press conference. 3 McIntyre—Agree. Schlesinger—We are going to have to curtail oil use by 3–5%. We can do it relatively painlessly. Eizenstat—Jim, your statement yesterday 4 on steps you were thinking about involve the interests of a number of agencies—environ- mental protection, for example. You put us in a difficult position if you 3 President Carter did hold a press conference on Monday, February 12. For the text, see Public Papers of the Presidents of the United States: Jimmy Carter, 1979, pp. 255–264. 4 Schlesinger testified before the Senate Energy Committee on February 7 and warned that the prospect of an oil shortage had “grown more serious in recent weeks” because of political turmoil in Iran. The result was that the dollar fell sharply in foreign exchange markets, and stock prices dropped as well. He also appealed again for volun- tary conservation measures. (The New York Times, February 8, 1979, p. A1) 365-608/428-S/80010 598 Foreign Relations, 1969–1976, Volume XXXVII scare people but the Administration doesn’t have an agreed program to meet the problem. In order to deal with this problem and develop the necessary responses we need a regular interagency consultative process. I propose an interagency task force meet two or three times a week during this period of world oil supply shortage, go over the figures, define measures, determine what opposition there may be from some of the agencies, and in 10 days or so establish a program of action. We should convene such a group right away. Brzezinski—Yes, and it should be chaired by your shop, Stu, be- cause the primary difficulty will be in dealing with the domestic pro- grammatic conflicts. 5 Alm—I don’t want you to think we have been developing our pro- gram in isolation or in the dark. We have been in touch with the inter- ested agencies. Owen—Let’s form it and have the first meeting on Monday. Schlesinger—The US supply shortfall (net of SPR imports) is only about 500,000 b/d. Under the IEA sharing formula it would be about 800,000 b/d. We can save 500,000 b/d by reducing use of resid and dis- tillates, using coal rather than oil in coal-capable utility plants, halting the phase-down of lead in gasoline, and using natural gas in boilers now using oil. We should lean on the Saudis very hard. Eizenstat—These administrative measures such as lead
phase-down should be considered in an inter-agency group. Owen—I agree, we need to assure review by the interested agencies. Schlesinger—The gas shift-over is underway. No further action or announcement is required. There are a couple of environmental issues that need interagency review—that’s it. Costle 6 is prepared to take these two steps in an emergency situation. Turner—I don’t think it would be wise to push the Saudis very hard, all for a shortrun benefit of 1 million barrels a day of oil. Owen—What are you saving them for? 5 On February 8, Poats sent a note to Brzezinski informing him that Eizenstat in- tended to “propose formation of an interagency working group to assure coordinated re- view of issues requiring urgent decision during the present oil supply problem.” Poats explained that he or Kitty Schirmer would manage the group and concluded: “Energy won’t like the idea, but our experience is that we cannot count on Energy’s furnishing ad- vance information on Schlesinger’s plans for putting proposals through a proper intera- gency review process if coordination is left to them. Owen agrees that it is needed. I rec- ommend that you endorse the suggestion.” (Carter Library, National Security Affairs, Staff Material, International Economics File, Box 44, Rutherford Poats File, Chron, 2/79) 6 Douglas M. Costle, Administrator of the Environmental Protection Agency. 365-608/428-S/80010 January 1979–January 1981 599 Turner—To establish a sense by the Saudis that the “special rela- tionship” doesn’t mean our pushing them to get what is not in their best interests. And to get Saudi production when we really need it, next winter.
Cooper—We are aware of the fragility of the Saudi political system. We are trying to strike a balance. Schlesinger—We should distinguish in our pressure between price and production volume. On price they are very sensitive and think they have a case. On production they are more vulnerable to our arguments. Turner—Are you pressing them now to keep production up? Cooper—Encouraging them to, yes. Eizenstat—The President is thinking about making a statement or speech on energy. To what extent must we get back into the oil price issue in that statement? Schlesinger—It doesn’t absolutely have to include crude price decontrol. Solomon—Any energy speech by the President that excludes do- mestic oil prices is incomplete and would be seen by the financial and political audiences abroad as indecisive. Schlesinger—We could include in it relief for marginal wells and new-new decontrol. I agree that it would be better to cover the whole price issue, but not essential. Eizenstat—The Iranian situation has sharpened the arguments on both sides of this issue. It shows the danger of dependence on foreign sources and the need to induce more domestic production. On the other hand, it shows the danger of pegging our oil prices to crazy world prices. Owen—Stu’s question might be rephrased this way: If we assume that the President will decide to decontrol oil prices, when should he make the announcement or speech? McIntyre—What would decontrol gain us in supplies six months from now? Schlesinger—It would slow the decline in our production by about 200,000 barrels or so in the first year. Solomon—Benefits are greater in the long run. Inaction on this is creating the impression that we are not facing up to our energy problem. Owen—I wonder whether delaying a decision until after the Teamsters’ negotiation would create a shyster appearance if decontrol follows shortly thereafter. Schultze—This is not a major issue with them.
365-608/428-S/80010 600 Foreign Relations, 1969–1976, Volume XXXVII Brzezinski—We need to consult with the Japanese and the Euro- peans before announcing a decision on decontrol. Cooper—We will be consulting with them through the IEA on the subject of conservation and supply-sharing when the IEA Governing Board meets March 1–2. Schultze—We don’t need to let the Iranian problem complicate the decision on domestic oil price decontrol. We could put a ceiling on our definition of world prices. Owen—Should we put off the speech until that decision is made? Schlesinger—When to make it depends on the size of the package needed. If it includes deferral of SPR procurement, allocation measures, we are ready to go. Every day we postpone a firm, comprehensive statement past March 15 will be torture. Eizenstat—Limited action announcements by Jim are fine, but if it appeared that our response to a crisis that may be as grave as 1973–74 is to ask people to turn their thermostats down, we would look foolish. Owen—Jim can deal with the partial measures, and the Presiden- tial statement could be held until it can include world pricing of oil. Eizenstat—The President will need to say something at his press conference Monday. Solomon—We need to show bold action on both the domestic and international fronts. I saw the vice-minister of the Japanese MITI today and he wanted to know what the US is doing about the Iranian oil situation. Cooper—We should discuss in advance with the IEA members any international action. Brzezinski—The President also might address in this speech the security of the Middle East region. There is growing apprehension in Europe about this. Schlesinger—I urge caution on getting into that. It would inject a politically divisive point in a speech that needs to rally American public opinion. Brzezinski—Domestic measures to reduce oil consumption will be unpopular. If the President is asserting American will and resolve to deal with the whole problem, it will be understood. We must deal with anxiety in the rest of the world. Owen—Why not say at the press conference that he will have a comprehensive statement within 30 days? Eizenstat—No more deadlines on energy policy, please. Schlesinger—He could say he will have a package of measures to announce after consulting with Congress.
365-608/428-S/80010 January 1979–January 1981 601 A climate of rising oil prices will increase the need for a windfall tax as oil prices rise. Eizenstat—If he announced tough conservation measures and lim- ited oil production incentives without general decontrol, what would be the reaction? Solomon—Critical, by the foreign press and exchange markets. Schultze—You’ve got to go very strong on the tax side (of a decon- trol package). Ask for a sacrifice and be sure it is not profitable for a few. Eizenstat—Yes, the more you tax the oil companies, the more you blunt the reaction. Solomon—Would gasoline decontrol be in the package? Schlesinger—Could be, but the climate is not right now. Schultze—At a time like this, you sure don’t want decontrol of gas- oline. You can move the price up but not turn it loose. Schlesinger—But we could go ahead with a tilt. [Omitted here is discussion of U.S. oil supply to Israel.] Schultze—One other point: Your comparison of the present oil sit- uation with 1973–74 is cockeyed in that the big impact then was the four-fold price increase. That was equivalent to a $12 billion price in- crease in today’s dollars. Cooper—Yes, but the big worry now is escalation of prices. This is the bleak scenario we are trying to avoid.
1 Washington, February 9, 1979, 0202Z. 33924. For the Ambassador. Subject: Meeting with Crown Prince Fahd: Oil Matters. Ref: Jidda 1010 and 1104. 2 1
cret; Nodis. Drafted by Twinam and Bosworth; cleared by Cooper, Katz, Saunders, Solo- mon, Schlesinger, and Brzezinski; and approved by Vance. Repeated to Dhahran and the White House. 2 For telegram 1010 from Jidda, February 1, see footnote 6, Document 185. Telegram 1104 from Jidda, February 5, reported that the Saudi Foreign Minister presented a de- tailed explanation of the Kingdom’s decision to increase prices on incremental oil pro- duction. (National Archives, RG 59, Central Foreign Policy Files, P850027–2594)
365-608/428-S/80010 602 Foreign Relations, 1969–1976, Volume XXXVII 1. Please seek meeting with Crown Prince Fahd at next appropriate opportunity for discussion of need for coordinated response to situa- tion caused by loss of Iranian oil exports. You should draw on points contained in para 2 and indicate that you are conveying this message at the request of the President. 3 Our objective is to obtain insofar as fea- sible: (1) assurance SAG will not impose any production ceiling below full capacity levels which, subject to possible temporary fluctuations for maintenance reasons, we believe is from 10.0 to 10.5 MBD; (2) assur- ances SAG will oppose any effort by OPEC to respond to current oil market situation through a formal price increase; (3) also we wish to prepare the ground for active discussion with SAG on need to expand capacity above current levels. In conversation you should draw on the following: 2. USG regards Fahd’s visit to Washington in March as a most im- portant point in our relationship. It will be a time for extensive consul- tations on the range of major issues which impact upon our common interests. —We share Crown Prince’s sensitivity to the importance of dealing with issues of common concern in a way that will provide an ever stronger basis of public support both in the U.S. and Saudi Arabia for the deepening of our relationship in all its aspects. —On the security side we will be pursuing an important dialogue during Secretary Brown’s visit which we view in part as preliminary to Crown Prince’s Washington visit. —The USG has conducted an intensive review of the current status of the world oil market and its implications for shared US-Saudi inter- ests. We would like to share our conclusions from this review and our views as to how we should deal with the situation with the SAG. —Thus far, the loss of Iranian supplies has not caused serious eco- nomic dislocation. Increased production by Saudi Arabia and a few other producers with spare capacity has covered part of the supply gap. —However, if, as now seems possible, Iran has not resumed ex- ports of at least 3–4 million barrels per day on a steady basis by the end of March, we will begin to experience growing product shortages, the risk of sharply rising prices, and increasing economic disruption. The longer the Iranian situation persists, the greater the risk of serious damage to the already fragile world economic and financial systems. 3 According to telegram 1398 from Jidda, February 15, West delivered the message to the Crown Prince on February 14. (Ibid., P850027–2619) 365-608/428-S/80010 January 1979–January 1981 603 —We believe that the US and Saudi Arabia have a particular re- sponsibility to provide strong leadership to meet this situation and minimize its effects. —USG has begun in the International Energy Agency and in direct contacts with other major industrialized countries to establish a coordi- nated program to respond to the current situation. We will aim through an intensification of voluntary conservation measures, supplemented if necessary by mandatory government programs, to reduce demand by a significant amount. We will have the framework of this program in place by early March. We will also be working with other consuming countries to assure that any shortfall in normal supplies is being appor- tioned equitably among all countries and that existing stocks are being used in a rational manner. —However, if we are to succeed in minimizing the disruptive ef- fects of a prolonged loss of Iranian exports, we must assure that the maximum amount of oil is made available to the market. Saudi Arabia has responded promptly to the Iranian situation by expanding its pro- duction to a maximum sustainable level of more than 10 million barrels per day. Saudi production at this level is important, not only because of its critical contribution to meeting essential world needs for oil but also because it serves as an example to other oil producers to do likewise. The Saudi action has been noted with appreciation by the administra- tion and the American public. We hope that Saudi Arabia will continue to use its influence with other producers to ensure that they too re- spond to the current crisis by producing at maximum levels. —We recognize that the current tight market situation is causing upward price pressures as reflected by recent spot price quotations. However, these abnormal “distress” prices should not be used to jus- tify a formalized or general OPEC price increase. We hope that Saudi Arabia can exercise leadership to dissuade others from revising OPEC price decisions adopted at Abu Dhabi last December. 4 Even reports of such an OPEC Ministerial meeting to consider a price increase would add major pressures on the dollar to those which we are already experi- encing because of Iranian developments. —The Iranian situation indicates the need both for consumers to take further steps to conserve and to develop alternate sources and for producers to take steps to expand existing capacity. This is particularly significant in the case of Saudi Arabia and we hope that Crown Prince will give some thought to this question in anticipation of discussions during his Washington visit. 4 See footnote 2, Document 176. 365-608/428-S/80010 604 Foreign Relations, 1969–1976, Volume XXXVII —USG intends to be in touch with other governments as appropri- ate on how we can work together to deal with the several aspects of the oil and economic problems created by the Iranian production cutback, but we look to continued Saudi leadership among the producers in serving our broad common interests in international economic health and related political stability. 3. If the Crown Prince agrees with the foregoing you should add that a public clarification of Saudi production policy would be very helpful to the dollar in the foreign exchange markets as well as reassure American public opinion. 4. With respect to the points noted above (particularly that relating to Saudi production levels) you might at your discretion seek Fahd’s concurrence in your going over them carefully with Yamani.
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