Foreign relations of the united states 1969–1976 volume XXXVII energy crisis, 1974–1980 department of state washington
Memorandum From the Under Secretary of State for
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- 176. Telegram From the White House to the Embassies in Saudi Arabia, Iran, and Venezuela
- 177. Memorandum From Secretary of State Vance to President Carter
- 178. Telegram From the Department of State to Selected Diplomatic Posts
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175. Memorandum From the Under Secretary of State for
Economic Affairs (Cooper) to the President’s Assistant for
Domestic Affairs and Policy (Eizenstat)
Washington, December 15, 1978.
Recommendation for the President on U.S. Oil Pricing Policy
How to fulfill the President’s commitment to reduce U.S. imports
of oil by raising U.S. crude oil prices to world level by the end of 1980,
while at the same time limiting the inflationary impact of this action.
The policy adopted should also eliminate the complicated oil price con-
trol and entitlements programs and prevent oil producers from cap-
turing windfall profits.
An interagency memorandum to the President on December ,
1978, described options on oil pricing policy.
The policy the State De-
partment recommends is a phased decontrol of U.S. crude oil prices
combined with an excise or “severance” tax on old oil (excluding
stripper and enhanced recovery production). The decontrol of oil prices
should not be contingent upon Congressional passage of the excise tax
but should proceed independently. This policy will minimize the infla-
tionary impact of decontrolling oil prices while permitting the Presi-
dent to fulfill his Bonn summit commitment to raise prices paid for oil
in the United States to the world level by the end of 1980.
The proposal is illustrated in a schematic diagram on page 5 and
would work as follows (on the assumption of annual 10% OPEC price
—Early in 1979, the President would announce that controlled
prices for all U.S. oil would be raised by the statutory limit through De-
cember 31, 1979, and that on January 1, 1980, wellhead prices for
upper-tier oil would be completely decontrolled, as would retail
product prices. As stripper and enhanced recovery oil prices are al-
ready decontrolled, this would leave only the price of lower-tier oil
controlled. These price controls would be gradually raised until the
control authority expires in September 1981.
Source: Carter Library, White House Central Files, Subject File, Box TA–26, Trade.
The date was left blank on the original. The memorandum was not found.
See footnotes 2 and 3, Document 157.
February 1977–January 1979 565
—At the same time, the President would propose legislation for an
excise or “severance” tax to be initiated on January 1, 1980. This tax will
increase during the year to raise the price of old oil to refiners to the
world level by the end of the year. After December 31, 1980, this tax
would prevent oil producers from obtaining windfall profits from old
—If OPEC increases oil prices on January 1, 1981, the excise tax
would be used to adjust the composite price to U.S. refiners to the new
world price level by September 1981, when the control authority ex-
pires. U.S. prices thereafter would remain at the world level.
—After October 1, 1981, the excise tax would be adjusted to permit
wellhead prices of old oil to reach world levels gradually, minimizing
any incentive to withhold production, while preventing windfall
profits in the interim.
III. Pros and Cons
Advantages of this approach are:
—It utilizes your existing authority to implement a phased decon-
trol of oil prices without requiring Congressional action.
—Decontrol is not contingent upon Congressional enactment of a
windfall profits tax. In fact, the reverse is true. The burden falls to
Congress to act quickly and responsibly on the Administration’s excise
tax proposal if it wishes to restrict excess profits by producers.
—Internationally, the United States would fulfill what is viewed
by our allies to be an important Bonn Summit commitment. Failure by
the United States to honor this commitment, together with Japan’s
failure to implement fully their summit commitments, may be used by
others, especially West Germany, as an excuse to back away from some
of their own already-implemented commitments. Our failure would
also have an adverse effect on U.S. credibility regarding future
—It would eliminate the need for the complex entitlement and
price control programs after September 31, 1981, because the refiner ac-
quisition price for all categories of oil would be equalized.
—Because the date at which the excise or “severance” tax drops to
zero is unspecified, companies will have no incentive to withhold pro-
duction of old oil.
—The major economic impact would not be felt until 1980 or 1981,
thereby minimizing adverse effects on your anti-inflation program in
Some disadvantages are:
—The proposal includes Congressional passage of an excise tax. It
may be difficult to get Congressional approval at the time, in the form
566 Foreign Relations, 1969–1976, Volume XXXVII
and with the tax revenues allocated as envisioned by the
—Failure to enact the tax would mean that producers of old oil
would receive windfall profits when control authority ends on October
1, 1981. These producers would also be likely to reduce production of
old oil until that date.
—Small windfall profits will accrue to producers by decontrolling
upper tier oil.
—An excise tax which varies with world prices and with the old oil
wellhead price may be criticized as too complex. However, it will be
less complex than the present entitlements program.
That you adopt the approach described above.
[Omitted here is the schematic diagram described in Section II.]
There is no indication of approval or disapproval of the recommendation.
176. Telegram From the White House to the Embassies in Saudi
Arabia, Iran, and Venezuela
Washington, December 15, 1978, 0013Z.
WH81609. Subject: Presidential Message: OPEC Meeting.
1. Embassy is instructed to arrange the earliest feasible delivery of
the following message from President Carter to, respectively, King
Khalid, or the Shah, or President Perez, with a view to inducing instruc-
tions compatible with this message to their delegates to the OPEC
2. Text: (appropriate salutation)
“I have heard a number of reports that the OPEC nations may de-
cide, at their forthcoming meeting in Abu Dhabi this Saturday, on an oil
price increase that would average around 10 percent for 1979. I am
deeply disturbed by these reports, because I believe that an increase of
this magnitude would be highly disruptive and damaging to the world
Source: Carter Library, National Security Affairs, Brzezinski Material, President’s
Correspondence with Foreign Leaders File, Box 21, Venezuela: President Carlos Andres
Pe´rez, 6/78–3/79. Confidential; Exdis; Flash.
February 1977–January 1979 567
economy, affecting not only my own efforts to stabilize the U.S. econo-
my and strengthen the dollar but your country’s economic interests as
well. I would stress in particular that the international monetary sys-
tem is at an extremely delicate stage, in which the United States, in co-
operation with other major industrial nations, has committed itself not
only to utilize massive foreign exchange resources but to undertake dif-
ficult domestic stabilization measures in an effort to restore and main-
tain world monetary order. The shock of a large oil price increase
would seriously jeopardize this effort, in whose success you have a
“It is for these reasons that I am expressing to you, personally and
directly, my strong hope that any oil price increase in 1979 will be ex-
tremely moderate, and that delegates to the OPEC meeting will exert
their best efforts to this end.”
(complimentary close) Jimmy Carter
3. Report transmittal and response.
On December 17, OPEC members announced their agreement to increase oil
prices by quarterly increments in 1979, such that the weighted average for the year would
total nearly 10 percent. The Embassy in Abu Dhabi, where the meeting was held, report-
ed: “Decision reflects compromise between moderates who started out at zero and others
who pressed for increases of up to 20 percent. Supply shortage caused by Iranian situa-
tion as well as impact of inflation and past weakening of dollar were stated to be princi-
pal factors which prevented moderates from holding price increase to more modest level.
Adoption of quarterly incremental increases poses problems for future since it could set
pattern for OPEC pricing which will be very difficult to stop.” (Telegram 3293 from Abu
Dhabi, December 17; National Archives, RG 59, Central Foreign Policy Files, D780535–
Poats sent a memorandum to Brzezinski on December 18, in which he wrote: “The
White House used my revised press release expressing hope that OPEC will reconsider
before the next steps take effect. We need to follow up officially and confidentially on
this. Lonely US protests are not likely to avail much. For the first time, Japan and Ger-
many may be willing now to consider joint approaches to Saudi Arabia because they may
no longer enjoy oil price insulation due to dollar depreciation. Our best hope is to get
high Saudi production along with resumed full production by Iran, creating a glut that
leads to price-shaving by the OPEC hawks before the June OPEC meeting.” (Carter Li-
brary, National Security Affairs, Brzezinski Material, Subject File, Box 48, Oil: 8/78–2/79)
The December 17 White House press release is printed in Public Papers of the Presidents of
, p. 2271.
King Khalid replied: “When the Kingdom sensed that the OPEC states, under
pressure of economic conditions, sought a large increase in petroleum prices, the King-
dom did its best in order to have that increase made in steps and within very reasonable
limits so that its total would not exceed (10 percent) from the beginning of 1979 and so
that it would not harm the world economy. Your Excellency is well aware of the efforts in
this direction exerted by the Kingdom.” He added: “In order to avoid continuing rises we
hope that you will continue your efforts towards raising the value of the dollar and re-
ducing or stabilizing the price of manufactured materials. These steps will restore eco-
nomic balance so that there will be no justification for raising petroleum prices in the fu-
ture.” (Telegram 8857 from Jidda, December 18; National Archives, RG 59, Central
Foreign Policy Files, D780522–1020)
568 Foreign Relations, 1969–1976, Volume XXXVII
177. Memorandum From Secretary of State Vance to President
Washington, December 26, 1978.
Mexican Natural Gas
As requested, I have reviewed Jim Schlesinger’s memorandum on
Mexican gas negotiations.
It is a thorough analysis of the technical as-
pects of the gas question. From the perspective of our overall relation-
ship with Mexico, however, I am concerned that the analysis does not
fully take into account the critical importance of increased
U.S.-Mexican cooperation in areas such as migration, trade, and en-
ergy. In particular, I believe that Jim’s proposed strategy of going back
to the Mexicans with an offer essentially the same as the one rejected
by Lopez Portillo a year ago could adversely affect your trip
longer-term prospects for U.S.-Mexican cooperation.
The Mexicans view these gas negotiations as an indicator of our in-
terest in over-all cooperation. They have displayed anger and bewilder-
ment over the events which led up to the suspension of discussions last
year. While their reaction may be part of the bargaining process to
some extent, the outcome apparently has left Lopez Portillo personally
troubled and has provided a major focus for domestic criticism of his
efforts to strengthen ties with the U.S. The Mexicans see us as paying
very high prices for Algerian or Indonesian liquified gas, but vetoing a
deal negotiated between PEMEX and U.S. companies which would cost
American consumers much less than this other imported gas—or than
the gas we are planning to bring down from Alaska. While they can un-
derstand our concern with the effect of a Mexican deal on the Canadian
price, they are also aware that this concern has not deterred us from ar-
ranging for gas from these other sources at even higher prices than the
Against this background, I fear that Jim’s going-in offer will not
provide a basis to continue the discussions. It is essentially the same
offer we made a year ago—$2.60 price when the gas starts flowing in
1980, with an escalator related to the inflation rate and/or world oil
price increases. It would come after another round of OPEC price in-
creases and after press reports of high level attention to Mexican policy
Source: National Archives, RG 59, Central Foreign Policy Files, P860136–2560. Se-
cret. Printed from an uninitialed copy.
A State visit to Mexico was scheduled for February 14–16, 1979.
February 1977–January 1979 569
in the U.S. Government. Lopez Portillo could cut the dialogue short
and your visit would take place under adverse conditions.
This is not to say that we should simply accept the Mexican price.
At the very least, I think Jim should consider how to make sure that our
positions are presented in such a way as to keep the negotiations going
forward. He might emphasize that he is talking about general pricing
concepts (not hard and fast numbers) and that the actual purchase
would be negotiated in detail between private companies and PEMEX.
When you visit Mexico, you could discuss the gas issue briefly and in
general terms (since in any event the Mexicans would not want a com-
mercial transaction to become the focus of your state visit) and set the
stage for serious commercial negotiations commencing after your visit,
in an atmosphere that will increase—rather than diminish—the
chances for growing cooperation between our two countries in the dec-
In preparation for these negotiations, I question whether our ulti-
mate fallback should be, as Jim proposes, a link to residual fuel oil that
closes less than half of the price gap between us and the Mexicans. In
light of the larger stakes we have in U.S.-Mexican cooperation, I am not
sure we can afford to adopt as a final bottom line a proposal that
refuses to meet the Mexicans half way.
Mexico’s population may exceed ours in a few decades. With a
2,000-mile border and 160 million legal crossings (and about a million
illegal crossings) a year, with narcotics a major concern, with a level of
bilateral trade exceeded by only four countries, with Hispanics soon to
be our largest minority, with the real possibility of social turbulence in
Mexico in the coming decades as migration, income-disparity, urbani-
zation and unemployment all increase, it is in our interest to work
closely with Mexico—not antagonistically.
A policy of waiting three or four years to pressure a weaker
Mexico into submitting to our terms would, I believe, be detrimental to
our national interest. A more dramatic concrete example of
North-South confrontation could not be imagined—right on our own
borders. We are likely to pay for it in many ways—in reduced coopera-
tion on narcotics, migration, trade, border issues, and also politically
within the Hispanic community. Although Jim may be correct that
Mexican gas will flow into the U.S. market in the next few years, the
Mexicans have demonstrated over the years that they are capable of
making decisions to their economic detriment where national pride is
570 Foreign Relations, 1969–1976, Volume XXXVII
178. Telegram From the Department of State to Selected
Washington, December 29, 1978, 0327Z.
326855. Subject: U.S. Position on OPEC Price Increase.
1) At their discretion Ambassador and senior Economic Officer
should take the occasion, when it is appropriate, to inform senior levels
of the host government of the U.S. Government’s reaction to the OPEC
oil price increase. We do not wish you to make a formal de´marche at
this time, but we also do not wish to leave an incorrect impression
about this government’s position. Talking points follow:
2) The U.S. very much regrets the recent OPEC price increase,
which we do not believe warranted by underlying market conditions or
by other considerations.
3) Prior to the OPEC meeting, we had made clear our desire that, if
an oil price increase could not be avoided, it should be an extremely
moderate one in order to minimize damage to international economic
recovery. The four-stage price increase just announced, culminating in
OPEC oil prices 14.5 percent higher nine months from now, cannot be
considered moderate in its impact on the world economy.
4) This large price hike clearly has prejudiced the U.S. and world
economic outlook, and will impede programs to maintain world eco-
nomic recovery and to reduce inflation.
5) The oil price increase will also unfavorably affect global trade. It
will not only impose the burden of additional import costs on all
oil-importing countries but will also reduce overall export opportu-
nities as economic growth becomes more difficult to achieve in all in-
dustrialized and oil-importing developing countries.
6) The strong reaction by other oil-consuming nations to the price
increase gives ample evidence of the serious and widespread concern
over the harm it will likely do to the achievement of the universal eco-
nomic goal of sustainable non-inflationary growth.
7) The OPEC members themselves have an important stake in the
world economy. They must share the responsibility for the success of
programs designed to improve payment balances, maintain economic
growth, and reduce inflation. We are disappointed, therefore, that
Source: National Archives, RG 59, Central Foreign Policy Files, D780539–0146.
Confidential. Drafted by James C. Todd (EB/ORF/FSE); cleared by Rosen, Bosworth,
Katz, Twinam, Solomon, and in NEA/RA; and approved by Cooper. Sent to Riyadh, Abu
Dhabi, Algiers, Baghdad, Caracas, Doha, Jakarta, Jidda, Kuwait, Lagos, Libreville, Quito,
Tehran, Tripoli, and Dhahran.
See footnote 2, Document 176.
February 1977–January 1979 571
OPEC’s decision to date has not given adequate consideration to the
world economic situation, and the basic oil market conditions.
8) For Jidda: FYI—We are considering further approaches to the
Saudis concerning their production ceilings and the Iranian production
situation. But you should proceed now to make appropriate use of the
points in this message.
9) For Tehran: Department leaves to your judgment the advis-
ability of making an approach at this time.
179. Telegram From the Embassy in Saudi Arabia to the
Department of State
Jidda, December 31, 1978, 0511Z.
9044. Subject: Aftermath of OPEC Price Increase. Ref: Jidda 8735.
1. We have attempted to reconstruct both the political and eco-
nomic happenings which led to the higher than expected OPEC price
increase at Abu Dhabi.
In this connection we have talked informally
with numerous Saudi officials as well as private sector Saudi business
persons who are generally knowledgeable about SAG policy matters.
2. We conclude that the following factors were primarily determi-
native of the final action taken at Abu Dhabi:
A) A conclusion reached early on that Saudi Arabia could not
withstand another split in OPEC ranks, and would at all costs avoid the
two-tier system which resulted from the Saudi action at Doha in 1976.
The Saudis were determined because of the 1976–77 experience to pre-
vent a recurrence.
Source: National Archives, RG 59, Central Foreign Policy Files, D790001–0049.
Confidential. Repeated to Riyadh and Dhahran.
In telegram 8735 from Jidda, December 13, West reported that Yamani told him
that “the Saudi ultimate compromise position at the December 16 OPEC meeting would
be for a 5 percent increase on January 1 with subsequent periodic increases so that the to-
tal cost of oil for 1979 would be no more than 10 percent above that of 1978.” Yamani also
noted that “the feeling of most OPEC countries was strong and beginning to be bitter
toward Saudi Arabia for its stance for a freeze or modest increase” and pointed out “con-
ditions in Iran as substantially weakening the Saudi argument for a minimal increase.”
See footnote 2, Document 176.
See Document 113.
572 Foreign Relations, 1969–1976, Volume XXXVII
B) The Saudis, therefore, were unwilling to face their OPEC col-
leagues alone; at the 1977 December meeting
they had the support,
which was essential to the ultimate action taken, of Iran. This year they
recognized that they would have no support from Iran and, in fact, the
Iranian situation undercut their influence and leverage at the OPEC
C) Accordingly, in looking for other substantial support, they
turned to Kuwait. The general outline of the agreement was reached
during the visit of Kuwait’s Crown Prince approximately ten days
prior to the OPEC meeting. The Saudis gained what they considered to
be a major concession from Kuwait in having them agree to a phased-in
series of small increases rather than a single large increase at the begin-
ning of the year.
3. The agreement reached with Kuwait was essentially that there
be a phased-in price rise which would average 10 percent over the year.
This agreement was discussed and probably approved by the Oil Min-
ister of the UAE during a visit to Saudi Arabia immediately after the
Kuwaiti delegation departed.
4. The Saudis feel that the price increase as finally adopted was a
creditable achievement for them and the interests of the U.S., and point
out the following arguments which were being advanced by the other
OPEC countries as a reason for a much larger increase:
A) The report of the Economic Commission Board of OPEC report-
edly showed that the purchasing power of oil had declined 38 percent
since the last price increase (I have requested a copy of this report and
have been told that one would be made available).
B) All of the OPEC countries with the exception of Kuwait and
Libya, but specifically including Saudi Arabia, had negative cash flow
positions for 1978, and even with the projected increase there will prob-
ably be a similar situation existing in 1979.
5. There is some resentment being expressed by Saudi officials on
two points in connection with the increase:
A) The price characterization by the press of the increase as a 14.5
percent increase. At least two high Saudi officials have expressed re-
sentment at such characterization, pointing out that the increase for
1979 is only 10 percent (overlooking of course that the ultimate price in-
crease is the higher figure).
B) A feeling that the U.S. does not appreciate the efforts made by
the Saudis in holding the increase to what the Saudis consider to be an
See footnote 2, Document 142.
February 1977–January 1979 573
A) The visits of Secretary Blumenthal and Senator Byrd
my judgement, most helpful in strengthening the Saudis’ resolve to
hold for a moderate increase. The principal reason assigned by the
Saudis for not keeping the increase at or below the 10 percent level is
the situation in Iran which continued to deteriorate rapidly in the days
just before the OPEC meeting.
B) Whether or not this was in fact the controlling reason for the
Saudis’ ultimate decision to compromise at a higher figure, we can use
this happening as an argument to the Saudis that they should make a
commitment now to increase substantially their productive capacity.
As long as they do not have productive capacity to compensate for a
sudden reduction in the world supply, then their influence on OPEC
measures is diminished as well as their leadership position in the Arab
C) In my judgement the chances of any favorable change in the de-
cision reached at Abu Dhabi is small. If the Iranian situation stabilizes
and production returns to pre-crisis levels, and if the dollar
strengthens, we would then have some basis to ask Saudi Arabia to
take a lead position in postponing some of the proposed quarterly in-
creases. Even with these two favorable developments, however, it
would be difficult for Saudi Arabia to take this action in view of their
stated position, including the post-OPEC statement by Oil Minister
Yamani at Geneva.
The loss of face and the appearance of responding
to U.S. pressure are difficult to overcome.
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