Foreign relations of the united states 1969–1976 volume XXXVII energy crisis, 1974–1980 department of state washington
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- 180. Telegram From the Embassy in Saudi Arabia to the Department of State
- 181. Memorandum From Secretary of Energy Schlesinger to President Carter
See Document 168. Senator Byrd visited the Middle East in early December.
In a press conference at Abu Dhabi on December 17, Yamani commented that he
had wanted a lesser price increase, “but when you look at what happens in the market,
and particularly at the shortage caused by the Iranian situation, it is very difficult to hold
the prices down under such circumstances.” (The New York Times, December 18, 1978,
A January 5, 1979, intelligence memorandum, much of which was characterized as
“speculative” reads: “Saudi Arabia’s participation in OPEC’s decision last week to raise
oil prices was not in itself a specific ‘message’ to the United States. The Saudis believe
there are valid economic reasons for the price hike. In addition, they were subject to in-
tense pressure at the Abu Dhabi meeting from other OPEC members, and their ability to
enforce a lower price in the market by expanding production was virtually nonexistent.”
The memorandum continues: “There may well be, however, a broader message in the
Saudi support of the price hike that goes beyond just the issue of oil. The Saudis could be
demonstrating to the United States their willingness to pursue policies—on issues rang-
ing from Middle East peace efforts to future oil production and pricing rates—that risk
strains in ties with Washington.” (Carter Library, National Security Affairs, Brzezinski
Material, Country File, Box 67, Saudi Arabia, 1–3/79)
574 Foreign Relations, 1969–1976, Volume XXXVII
180. Telegram From the Embassy in Saudi Arabia to the
Department of State
Jidda, January 2, 1979, 0606Z.
13. Subject: Potential Impact of OPEC Price Increase—Saudi Ara-
bia. Ref: Jidda 8880 and 9044.
The following message represents a con-
sensus of the Embassy’s Oil Committee members including USLO Ri-
yadh and Consulate Dhahran.
1. The 14.5 percent price increase decided at the OPEC Ministerial
conference in Abu Dhabi possibly represents the over-riding decision
of Saudi Arabia to maintain OPEC unity over its somewhat weaker
wish to be responsive to Western, and especially US, pleas for price
moderation. The desire to maintain OPEC unity was exemplified by the
intensive bilateral consultations that preceded the conference. These
began in early fall, with Saudi Oil Minister Yamani leading off with his
first visit to Venezuela in several years. This was followed by a series of
visits by Abu Dhabi’s Oil Minister, Mani al Utayba, to virtually all the
Midle East OPEC capitals. In the final days before the conference, the
Oil and Finance Ministers of Qatar and Abu Dhabi, as well as Kuwaiti
Oil Minister Ali Khalifa and Iranian NIOC official Parviz Mina all
visited the Kingdom. These visits are believed to have set the stage for
the price decision taken at Abu Dhabi.
2. At the same time, external factors contributed pressure for a
price increase. Most significant was the early December drop in Iranian
production occasioned by renewed internal difficulties. This, combined
with pre-conference liftings by oil companies in anticipation of a price
increase, and usually high fall demand in Europe combined to soak up
surplus production. At the same time, the renewed strength of the
dollar in response to the U.S. support program had only limited impact
on Saudi thinking. Saudi officials commented that it was still too early
to base oil price judgments on this strengthening, and stated that sev-
eral months would be necessary to tell if the program was indeed
3. In contrast, the West’s efforts to contain a price increase were
primarily intensive high-level representations by the United States, and
Source: National Archives, RG 59, Central Foreign Policy Files, D790001–0551.
Limited Official Use. Repeated to Abu Dhabi, Caracas, Algiers, Doha, Jakarta, Kuwait,
Lagos, Libreville, Manama, Muscat, Quito, Tehran, Tripoli, Vienna, Baghdad, Dhahran,
Riyadh, Bonn, London, Mexico City, Paris, and Oslo.
In telegram 8880 from Jidda, December 19, the Embassy informed the Department
that the Saudi and English press “reported extensive comments by Crown Prince Fahd
defending the OPEC decision to increase the world oil price.” (Ibid., D780524–0707) Tele-
gram 9044 from Jidda is Document 179.
February 1977–January 1979 575
relatively mild public statements by EC Energy Commissioner, the
FRG’s Brunner. These were obviously not enough to convince the Sau-
dis to take a hardline stand against the concerted pressure of the other
OPEC members. The end result was the decision to boost prices an av-
erage of 10 percent for all of 1979, with the overall increase totaling 14.5
percent to be applicable in the whole of calendar year 1980, in the ab-
sence of any further increases. These figures contain something for both
the moderates and the price hawks. Both can quote the figure that
serves them best.
4. Initial local reaction has been reported in reftel. In his press con-
ference immediately following the conference, Zaki Yamani indicated
that Saudi objectives had been a smaller price-hike
but Crown Prince
Fahd’s statement of following day, while emphasizing the 10 percent
average, called the price hike “logical and objective” and blamed the
deterioration of the dollar and high inflation in the West which made
such a hike necessary.
5. An initial calculation indicates that the Saudis will receive
roughly an additional $3.8 billion in 1979 as a result of the price hike if a
production level of 8.5 billion B/day is maintained. Obviously, this will
assist the Saudis in meeting any further short-fall in the current fiscal
year budget and provide something of a cushion for next year’s expen-
ditures if production falls. It will not provide sufficient funds to under-
take any ambitious new plans beyond those already projected, but,
with the recent emphasis on cost cutting and tighter control of expendi-
ture, together with the maintenance of a domestic inflation rate of 10 to
12 percent, well below earlier levels, further cuts in current project
spending are unlikely.
6. To the extent that the dollar deteriorates as a result of this price
hike, so will the over 80 percent of Saudi assets and reserves denomi-
nated in dollars. However, this loss in dollar values will actually be ap-
plicable only when the Saudis need to exchange them for other cur-
rencies to pay for imports or services. On the other hand, to the extent
that this price increase fuels U.S. inflation, Saudi purchases of U.S.
goods and services will be directly affected.
7. We do not expect this price increase to have any major effect on
Saudi foreign aid. Aid will probably be sustained at current levels, with
Arab and Islamic political considerations continuing to be the over-
riding factors in aid decisions. There may be some aid given in the form
of oil grants as claimed by Mobutu of Zaire
after a recent visit to the
See footnote 7, Document 179.
Mobutu Sese Seko, President of Zaire.
576 Foreign Relations, 1969–1976, Volume XXXVII
8. In the longer range, the new base for possible OPEC price in-
creases for 1980, will be 14.5 percent higher than the current price. The
Saudi third five year plan is scheduled to begin in April, 1980. This plan
is expected to be more costly than the second plan, and there is a grow-
ing sophisticated realization among Saudi planners to match revenues
with expenditures. What impact this will have on long-term pricing
policy is uncertain, but will become more apparent as precise outlines
of the third plan emerge.
9. Another interesting, but as yet unresolved, question is what im-
pact this price increase will have on maintenance and expansion of oil
productive capacity. The possibility that some of this additional profit
be diverted to maintenance and expansion of oil facilities will, in some
measure, be determined by how sales and budgeting procedures of the
to-be-nationalized ARAMCO are organized.
10. One of the most significant effects of the Abu Dhabi conference,
from the Saudi point of view, was the restoration of OPEC unity which
was badly shaken by the Saudi break and the resultant two-tiered price
in 1977. The willingness of Saudi Arabia to accept the majority decision
has redeemed Saudi Arabia and banished, at least temporarily, linger-
ing doubts as to its pro-OPEC stance towards the other members. The
Saudis see this as a positive good, and this accounts for the spirited de-
fense of the price increase now appearing in the local press.
11. Some element of Arab unity may also be involved. Perhaps
more concretely, the Saudi action has played a major role in the signifi-
cant improvement of relations with both Kuwait and Iraq. Here, the
Saudi posture can be interpreted as pro-Arab following on the results
of the Baghdad conference,
as well as pro-OPEC.
12. It is still too early to say how the Saudis evaluate the impact of
the price increase on Saudi-U.S. relations. The instant defensive reac-
tion leads us to believe that they are perhaps nervous over what the im-
pact will be, especially if they are singled out for blame by the U.S.
press as they were praised after the 1977 price split. Certainly, there are
no current indications that they will respond positively to President
Carter’s request for reconsideration of the step increases later next
If anything, the general tenor of remarks is that the Saudis will
stand by their OPEC brethren for 1979, and closely watch the progress
of the dollar before committing themselves to any course of action for
Arab League summit in Baghdad November 2–5. In a show of Arab solidarity, the leaders
rejected the Camp David Accords and ejected Egypt from the Arab League.
See Document 176.
February 1977–January 1979 577
13. They have and will continue to argue both publicly and pri-
vately that the price increase would have been even greater if not for
Saudi moderation, and will point to the OPEC decision to continue use
of the dollar as a pricing mechanism to be the result of their defense of
U.S. interests. What other steps they may take to alleviate U.S. disap-
pointment over the price increase are not clear, but may include
stepped up dollar purchases from the United States.
14. The biggest danger arising from this most recent OPEC deci-
sion is that OPEC and Saudi Arabia may find themselves locked into a
continuation of the system of quarterly phased increases. Yamani much
earlier publicly advocated such a system, and this is probably one
of the questions being studied by the OPEC Ministerial Long-Range
Strategy Committee. Since OPEC pricing decisions are in the last analy-
sis more political than economic, such a procedure, once institutional-
ized, may be very hard to undo. As a result, another inflationary factor
will be built into the world economic system. Significantly, although
potential future price increases are stated to be hinged to the fate of the
dollar, there is no assurance that the dollar’s strengthening will lead to
any price decrease.
The Iranian Oil Shortfall,
January 1979–January 1981
Washington, January 4, 1979.
Iranian Oil Situation
The shortages that are currently projected to result from the cessa-
tion of Iranian oil production are manageable in the short-term. Contin-
uation of the curtailments through the summer of 1979, however, could
lead to actual supply shortages during next winter’s peak demand
The elimination of Iranian exports since Christmas
is now being
offset by increases in production in other producing countries. On bal-
ance, world oil markets have lost 5.0 to 5.5 million b/d of Iranian oil ex-
ports. Increased production elsewhere, the largest portion of which is
from Saudi Arabia, is adding almost 3.5 million barrels a day. The cur-
rent worldwide shortfall is, therefore, approximately 1.5 to 2.0 million
barrels of oil a day.
In the short-term, this shortfall can be managed by stock draw-
downs. This, however, requires the consuming nations to borrow
against future supplies. Before the onset of winter, petroleum stocks
are normally high so they can be drawn down to meet high winter de-
mand. If higher than normal drawdowns occur this winter to compen-
sate for Iranian shortfalls, and if Iranian exports are not resumed in the
next month or two, the normal build-up of stocks that occurs in the
spring in preparation for summer demand peaks could be jeopardized.
If Iranian production remains at substantially curtailed levels beyond
the summer of 1979, it is clear that supplies will be inadequate to
build-up inventories for next winter’s peak demand, even if we experi-
ence no actual supply shortages this summer.
Source: Carter Library, National Security Affairs, Staff Material, International Eco-
nomics File, Box 44, Rutherford Poats File, Chron, 1/1–21/79. Secret.
The strikes and ongoing unrest in Iran led to a sharp reduction in oil production,
and all exports were stopped by December 27. By the next day, oil production was at a
January 1979–January 1981 579
In the very near-term, minor product shortages and rising prices for
small volumes of spot purchases could trigger hoarding by private citi-
zens and businesses, thereby creating a more serious, psychologically-
induced shortage. This possibility makes it critically important that the
Administration reassure the public that the current situation is manage-
able while urging prudent, voluntary conservation efforts as a hedge
against possible longer-range curtailments.
During the duration of any Iranian production curtailment, the
world’s oil supply system will have virtually no reserve capacity
should some other crises develop. With a major portion of the Iranian
shortfall being made up by increased production in Saudi Arabia, the
ability and willingness of the Saudis to maintain such levels of produc-
tion also becomes critical. If the Saudis continue to produce at full ca-
pacity for several more months, the reservoir problems that were an
important factor in the Saudi decision to restrict the volume of produc-
tion to 8.5 MBD last year could reappear. If these problems become se-
rious, the Saudis will be under increasing pressure to once again order
The technical concerns over the Saudi fields have not disappeared,
and each day output stays above the 8.5 million barrel per day ceiling,
some of the reservoir pressure improvements made in 1978 are lost. It
will be up to the Saudi leadership to decide at what point the technical
damage that results from sustaining production is greater than the po-
litical damage that would be sustained by lowering output.
Another major variable during the duration of any continued Iran-
ian curtailment is the weather. The warmer-than-average winter being
experienced in the United States reduces the level of required stock
drawdowns and improves the chances for successfully rebuilding
stocks for the next peak demand period. The colder-than-average
winter now being experienced in Europe places increased demands on
an already oil-short world market. Even if supplies prove sufficient for
the duration of any curtailment, the price effects of the demand for oil
that will be needed to rebuild stocks may well have a serious infla-
tionary impact on U.S. prices.
We will be monitoring all of these world oil market factors closely,
and have developed a set of domestic contingency plans which could
be activated quickly, if necessary.
Until strikes began in late October, Iranian oil production was av-
eraging about 6 million b/d. As a result of intermittent strikes and
slowdowns, production during November and December averaged
less than 3 million b/d. Since Christmas, production has averaged less
than .4 million b/d, sufficient to meet less than half of Iranian domestic
580 Foreign Relations, 1969–1976, Volume XXXVII
consumption, and all exports have ceased. Expatriate supervisory per-
sonnel of the Iranian oil consortium companies are being evacuated.
The prospects for increased production and resumption of exports
• Under current conditions, production is not likely to be restored
beyond the level necessary to meet domestic demand (.8 million b/d).
• If the political/security situation improves, but expatriate per-
sonnel do not return, restoration of production to even 3 million b/d
could take up to 90 days.
• If political stability and security are reestablished and foreign
personnel return promptly, production could be restored to a level of
4–4.5 million b/d within 60 days.
In the most pessimistic case, world oil markets will have to accom-
modate the loss of 5.0 to 5.5 million b/d from Iran for a prolonged pe-
riod. Increases in production elsewhere of up to a maximum of 3.5 mil-
lion b/d have reduced the net shortfall to a range of 1.5 to 2.0 million
b/d, with Saudi Arabia representing the single largest source of this
General Worldwide Impacts
Thus far the impact of the Iranian oil cutbacks on world oil
markets has been limited by transportation lags, the rapid availability
of alternative supplies and the high level of world oil stocks. World oil
stocks, including oil currently at sea, are sufficient to cover the net
shortfall resulting from a complete loss of Iranian exports for at least 2
to 3 months. Based on the experience of 1973–74, the international oil
companies will probably redistribute world supplies to spread the
shortfall relatively evenly among the various consuming regions.
Over the next three months, however, some problems can be
• Prices. As the oil market continues to tighten, spot prices for both
crude oil and refined products will rise rapidly. Isolated bids of $20/
barrel have already been reported.
• Distribution. While worldwide stocks in the aggregate are ade-
quate to make up the shortfall for 2–3 months, there is the possibility
that certain countries or regions will be more severely impacted than
others. If redistribution efforts by the international oil companies prove
insufficient, one or more of the seriously affected member countries
might seek to activate the International Energy Agency’s emergency
sharing system, which goes into effect when any country experiences a
7% reduction of normal supply. Based on discussions with the gov-
ernments of the Netherlands, Japan, the UK, and other IEA gov-
January 1979–January 1981 581
ernments which are heavily dependent on Iranian supplies, it appears
unlikely that the IEA emergency sharing system will be triggered in the
• Hoarding. Rising spot prices and isolated regional shortages
could trigger hoarding by individual consumers. If gasoline and
heating oil tanks are constantly being topped off, working inventories
would be further reduced, leading to more serious spot shortages.
Over the next 6–12 months the outlook varies considerably, de-
pending on the assumed level of Iranian and Saudi Arabian oil
• If Iranian production is restored to a level of 4–4.5 million b/d,
and the Saudis continue production at a level of approximately 2 mil-
lion b/d above their ceiling of 8.5 million b/d, market conditions
would return to normal. Stocks would be rebuilt in time for next winter
and a margin of spare capacity to cope with other supply cutbacks
would be restored.
• If Iranian production rises to a level of 2–3 million b/d, the world
oil market will remain extremely tight even if the Saudis continue their
increased production. Stocks may not be fully rebuilt for next winter
and there will be little if any spare capacity to accommodate any addi-
tional supply interruptions. Spot prices are likely to stay above OPEC
official price levels.
• If Iranian production remains between 0 and 1 million b/d, even
with a continuation of increased Saudi production, world oil markets
would clearly experience actual supply shortages no later than early
next winter. Additionally, spot prices could be substantially above offi-
cial OPEC prices by late fall, encouraging OPEC to impose another
large official price increase in late 1979 or early 1980.
Effect on U.S. Markets and Measures to Reduce Domestic Petroleum
The U.S. share of the net worldwide shortfall of 1.5 to 2.0 million
b/d of oil production will be approximately 500,000 b/d. U.S. stock
levels are sufficient to accommodate additional drawdowns equal to
this rate for approximately 60 days. Because of tankers already at sea, it
will be another 30 to 40 days before the shortage is actually felt in re-
duced tanker deliveries.
Continuation of Iranian curtailments beyond the next several
months could turn an already tight gasoline market into one of spot
shortages this summer, and may well jeopardize distillate fuel supplies
and prices next winter. In an effort to minimize the difficulties of re-
building stocks whenever production is restored, it will be important to
582 Foreign Relations, 1969–1976, Volume XXXVII
both assure Americans that the current problem is manageable while
urging them to undertake voluntary conservation efforts such as ob-
serving the 55 mph speed limit, reducing discretionary driving, turning
back thermostats, and using natural gas wherever possible as prudent
steps in anticipation of any prolonged curtailment. A more detailed
description of potential effects on various U.S. markets is attached in
If the curtailment continues beyond the next several months, a list
of initiatives that can save approximately 750,000 barrels of additional
oil per day has been prepared. The following table summarizes the oil
savings associated with these initiatives:
Oil to Natural Gas Switching by
up to 300–400*
Utilities and Industrial
Oil to Coal Switching
Transfer of Electricity from Coal
or Nuclear Facilities to Oil
Higher Lead and MMT in
sion of EPA
Deferral of Deliveries to the
Negotiation of time
Strategic Petroleum Reserve
up to 775–935
*The variation in the estimate depends upon the severity of the winter
**The higher figure includes north to south wheeling along the West
Coast from the Pacific Northwest.
A more detailed discussion of these and several other possible
measures is attached in Appendix II:
The cutback in Iranian production does not pose substantial
problems in the short-term. The measures outlined above should be ad-
equate to deal with a prolonged shortfall caused by virtually no Iranian
exports over an extended period of time. The greatest short-term
danger, outside of another crisis elsewhere in the world, would be an
Appendices I and II are attached but not printed.
January 1979–January 1981 583
overreaction by the public,
leading to panic buying and hoarding. I
have therefore taken steps to urge the public to conserve where pos-
sible as a prudent step in anticipating any longer-term curtailments
while offering the assurance that these developments do not currently
pose significant oil supply problems for the U.S.
events in Iran is that you were right in stressing the need for a national energy policy,
which would reduce our dependence on imported oil. We should make more an effort to
stress this lesson in public discussion of Iran, in order to: —increase public support for
your energy policy; —focus public attention on the future policy implications of events in
Iran, instead of merely their past causes; —enhance the Administration’s prestige by re-
minding people that you weren’t far off in warning about the insecurity of oil supplies.”
(Carter Library, National Security Affairs, Brzezinski Material, Country File, Box 29, Iran,
In an undated memorandum to the President, Aaron wrote: “Jim Schlesinger’s
January 4 assessment of the prospective impact of the Iranian oil situation on US energy
supply is generally consistent with CIA, State Department and NSC estimates.” He ad-
ded that “the likelihood of continued instability in Iran points to a probable tight oil mar-
ket throughout 1979, with little chance of market forces’ undermining the OPEC price in-
creases,” and concluded: “The policy implications are heightened priority for oil
conservation, for accelerating Mexican oil/gas development and exports, for clearing ob-
stacles to investment in pipeline capacity to deliver Alaskan oil and gas to markets, and
for substantial expansion of Saudi Arabia’s oil production capacity.” (Ibid., Staff Mater-
ial, International Economics File, Box 44, Rutherford Poats File, Chron, 1/1–21/79)
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