Foreign relations of the united states 1969–1976 volume XXXVII energy crisis, 1974–1980 department of state washington
Action Memorandum From the Assistant Secretary of State
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- 183. Memorandum From Rutherford Poats of the National Security Council Staff to the President’s Assistant for National Security Affairs (Brzezinski)
- 184. Memorandum From Secretary of Defense Brown to Secretary of State Vance
- 185. Memorandum From Rutherford Poats of the National Security Council Staff to the President’s Assistant for National Security Affairs (Brzezinski)
182. Action Memorandum From the Assistant Secretary of State
for Economic and Business Affairs (Katz) to the Under
Secretary of State for Economic Affairs (Cooper)
Washington, January 15, 1979.
U.S. Oil Strategy Toward Saudi Arabia
The uncertain conditions in the world oil market, as a result of the
cessation of Iranian oil exports, emphasize the need to update our
strategy to encourage Saudi Arabia to continue to meet the world’s es-
sential energy needs.
Source: National Archives, RG 59, Central Foreign Policy Files, P790016–0363. Se-
cret. Drafted by Todd on January 12 and concurred in by Crawford (NEA).
584 Foreign Relations, 1969–1976, Volume XXXVII
Our immediate objective is:
—to convince Saudi Arabia to continue to produce all the oil it can
to help offset the shortfall owing to the Iranian situation.
Over the longer term, we seek:
—to obtain a Saudi decision to expand production capacity more
—to produce conditions propitious for a freeze of OPEC oil prices
Background and Analysis
The strikes in Iran’s oil sector, which began to interrupt oil exports
in late October, led other OPEC nations—particularly Saudi Arabia—to
produce higher than normal levels of oil in November and December.
Tight oil market conditions and uncertainty over the likely course of
events in Iran were important factors behind the Saudis’ failure to press
OPEC members to decide upon a lesser price increase at the December
In normal circumstances, the world oil industry adjusts to seasonal
demand by building stocks during the second and third quarters of the
calendar year, and drawing down stocks during the first quarter and
part of the fourth. Since late December, the cessation of Iranian oil ex-
ports has withdrawn about 5.5 million barrels per day (mmb/d) from
normal oil supplies. Saudi Arabian production has increased to about
10.5 mmb/d, or 2 mmb/d more than would have been anticipated at
this time. Other OPEC members—primarily Kuwait and Iraq—have
also increased oil output, and there is ample economic incentive for
other oil producers to maximize output. We estimate that an additional
1 mmb/d is being supplied to the world oil market by producers other
than Saudi Arabia. The remaining “shortfall” of somewhat over 2
mmb/d is being met by drawing down stocks. World oil stocks were
very high late last year, partly as a result of seasonal stockbuilding and
partly owing to anticipatory purchases in advance of the expected
OPEC price increase.
With restoration of at least half of Iran’s normal exports within the
next few months and continued additional output by other producers,
oil market conditions will be manageable, though tight for the rest of
the year. Unless conditions improve more rapidly than now seems
likely, however, it would be futile to attempt to roll back any portion of
OPEC’s announced quarterly price hikes. A more feasible objective
would be to ensure that sufficient oil will be available to meet normal
See Documents 176 and 179.
January 1979–January 1981 585
demand, avoid hoarding, reduce the chance for market-induced price
increases in the remainder of this year, and set the stage for a price
freeze in 1980.
In the immediate future, there is a danger that Saudi output
ceilings or other restrictions could reduce incremental oil output
needed to help offset the shortfall in Iranian exports. Since mid-1977,
Saudi Arabia has maintained a ceiling of 8.5 million barrels per day,
calculated as an annual average. Until the Iranian crisis, oil market de-
mand never tested this ceiling. The Saudis have publicly acknowl-
edged an obligation to meet the world’s essential oil needs and since
the cutback in Iranian exports have permitted Aramco to produce at
maximum sustainable levels.
A Saudi official recently warned Aramco, however, that Saudi
Arabia is considering application of the ceiling on a quarterly basis.
Aramco responded that this would impede its normal adjustments of
output to meet seasonal demand, as well as interfere with the current
all-out level in response to the Iranian cessation of exports. A series of
exchanges was inconclusive, though it ended with an acknowledge-
ment by a senior Saudi official that Aramco for the present could con-
tinue as before. Moreover, Deputy Petroleum Minister Khayyal, in a
conversation with our personnel in Dhahran, clearly implied that Saudi
Arabia would, at least in the near future, continue to produce over 8.5
mmb/d in order to help meet the Iranian shortfall without referring to
Even when Iran’s production is restored in large measure, it will
be necessary for higher than normal liftings from Saudi Arabia to con-
tinue. Strict application of the Saudi ceiling could interfere with the sat-
isfaction of deferred demand and normal second and third quarter re-
building of stocks by the oil industry.
Because the Saudi output ceiling has in the past served as evidence
of their willingness to restrain production in order to maintain OPEC
prices, we should not expect them to abandon the ceiling publicly or
permanently. To do so might provoke cutbacks in production by other
OPEC members now helping to offset the Iranian shortfall, especially if
they suspected the Saudi action was a prelude to an attempt to freeze
oil prices next year. Thus our approaches should be made privately,
and we should not make any reference to the price issue while we urge
According to telegram 21697 to Riyadh, January 26, Aramco sources informed the
Department that Saudi Arabia formally notified the company that the 8.5 million barrels
per day production ceiling would be raised to 9.5 million for the first quarter and would
be applied on a monthly basis. (National Archives, RG 59, Central Foreign Policy Files,
586 Foreign Relations, 1969–1976, Volume XXXVII
continued maximum production in response to the shortfall in Iranian
The current Iranian situation has driven home the dangers of a
world oil market with only 5 percent spare capacity. While Saudi pro-
duction capacity is adequate for foreseeable world demand over the
next few years, present Saudi conservation and investment policies
prevent the expansion of that capacity which will be necessary to meet
unexpected contingencies as well as essential world needs in the mid
and late 1980s. We must plan to discuss with some intensity with the
Saudis the need for increased investment in production capacity,
keeping in mind the danger that a premature approach might detract
from our efforts to encourage the continuation of maximum Saudi pro-
duction for a sustained period.
Our immediate goal is to obtain continued maximum Saudi output
to offset the Iranian shortfall, stressing that this need does not end
when Iranian exports resume, but will continue for a further time in
order to enable the oil industry to replace abnormal stock drawdowns
and resume normal stock rebuilding. The attached cable
bassador West to encourage such a Saudi response. The President was
advised to suggest that the Guadeloupe summit
countries also ap-
proach the Saudis in this regard. It would be useful if you could inform
their Finance Ministers that we will be making our approach shortly.
The next step is to impress upon the Saudis, particularly in light of
the fragility of the market balance revealed by the events in Iran, the
need to approve additional plans to expand production capacity, both
to maintain their own influence within OPEC and to be able to meet in-
creased world oil demand expected in the next few years. This step
should be taken by West in a low-key way. It may be desirable thereaf-
ter to reiterate it in a more direct way and at a high level, either by the
President if Crown Prince Fahd visits the U.S. soon, or by Secretary
Schlesinger if he undertakes a trip to Saudi Arabia later this spring.
If we are successful in obtaining Saudi agreement to high produc-
tion levels throughout the current year in response to the Iranian situa-
tion, and if they agree to commence investment in expanded produc-
tion capacity, this may set the stage for pressing for an OPEC price
freeze throughout 1980. Specific presentations on the price issue should
be withheld until later in the year unless conditions change markedly.
Attached but not printed.
See footnote 2, Document 183.
January 1979–January 1981 587
That you approve the attached instructions for Ambassador West
as a first step in the implementation of our strategy.
A handwritten note dated January 15 reads: “Mr. Cooper requested several
changes in the cable and initialed off. Cable returned directly to EB for retyping and
transmission.” The cable is telegram 11004 to Jidda, January 15. (National Archives, RG
59, Central Foreign Policy Files, D790020–1041)
183. Memorandum From Rutherford Poats of the National
Security Council Staff to the President’s Assistant for
National Security Affairs (Brzezinski)
Washington, January 16, 1979.
Follow-up to Guadeloupe Discussions on Oil
All concerned (in State, CIA, DOE and NSC) with forecasting Iran-
ian oil production agree that we should expect a prolonged and sub-
stantial shortfall, with a serious possibility of further use of the oil
weapon by contending Iranian political factions if not by a new gov-
Management of Iranian production by foreign oil compa-
nies through expatriate technicians seems to be finished. The necessary
programs of investment in oil well rehabilitation and enhanced recov-
Source: Carter Library, National Security Affairs, Staff Material, Middle East File,
Box 121, Stoddard File, Oil, 11/77–11/79. Secret. Sent for information. Copies were sent
to Aaron, Owen, and Quandt. A notation on the first page reads: “ZB has seen.”
Carter met with Giscard, Schmidt, and Callaghan on the island of Guadeloupe
January 4–5 to address common issues, including the Iran crisis and the energy issues as-
sociated with it. On January 10, Brzezinski sent a memorandum to Aaron and Owen in-
forming them: “The four agreed informally that we would explore the possibility of ob-
taining an OPEC price increase stretch-out. The basic notion would be that the first price
increase would be delayed by three months; the second by some six months; etc. Our
allies are supposed to send messages along these lines to Saudi Arabia prior to the Fahd
visit to Washington.” (Ibid.)
On January 16, the Shah left Iran for Cairo, beginning what became a permanent
exile. Ayatollah Ruhollah Khomenei returned to Iran on February 1, after having been ex-
iled himself by the Shah for 15 years, and on February 11, the Bakhtiar government,
which Khomeni declared illegal, resigned. Documentation on the revolution in Iran is
scheduled for publication in Foreign Relations, 1977–1980, volume X, Iran: Revolution,
January 1977–November 1979.
588 Foreign Relations, 1969–1976, Volume XXXVII
ery have been suspended for three months and are unlikely to resume
for at least another three months. Meanwhile, world oil stocks will be
drawn down, despite partially offsetting increases in other OPEC coun-
Consequently, the world oil market will be tight through at least
the first half of 1979. In this situation, we cannot reasonably expect po-
litical appeals to the Saudis or market conditions to cause an under-
mining of the scheduled OPEC price increases. Our best hope is to
avoid real shortages by using the Iranian situation to persuade the Sau-
dis to set aside arbitrary production ceilings and to encourage their
Arabian Gulf neighbors to do the same.
State is sending an instruction to West to tell the Saudi government
that (1) we appreciate their authorization of Aramco’s continued pro-
duction at maximum levels (10.3 mmbd) to help offset the Iranian
shortfall, (2) even after Iran has resumed substantial oil exports there
will be a need for continued Saudi and other Arabian Gulf production
above normal limits to restock inventories, and (3) the Iranian case fur-
ther emphasizes the importance of expanding Saudi capacity.
I understand that Dick Cooper plans to suggest to his British,
French and German counterparts attending the OECD XCSS meeting
tomorrow that they use the first two points summarized above.
Saudi responses to these approaches will help define two issues for
the PRC meeting in preparation for the Fahd visit: whether and how to
press Fahd during the visit to commit to lifting the 8.5 mmbd limit for
all of 1979; and whether and how to influence a Saudi decision to pro-
ceed with the stalled investment program to raise capacity to 13 mmbd.
See Document 182. The instructions were sent to West in telegram 11004 to Jidda,
January 15; see footnote 6 thereto. On January 22, West reported that he had a 2-hour
meeting with Prince Fahd the previous day. Analyzing his meeting with the Crown
Prince, and one with Yamani the day before, he wrote: “Both [Fahd] and Yamani have
been extremely sensitive to USG’s criticism of the OPEC price increase and it was my
sense that he welcomed this opportunity to demonstrate once again SAG’s friendship
and concern. However, both Fahd and Yamani recognize the leverage they now have in
terms of supply because of Iran.” (Telegram 567 from Jidda; National Archives, RG 59,
Central Foreign Policy Files, D790031–1032)
January 1979–January 1981 589
184. Memorandum From Secretary of Defense Brown to Secretary
of State Vance
Washington, January 27, 1979.
In conjunction with preparations for the President’s trip to Mexico
and as a part of the ongoing review of our policies toward Mexico, I be-
lieve we should address, as a major issue of U.S. security interest, the
question of a broad petroleum agreement with Mexico.
I believe Mexican petroleum is, or should be, one of the basic
factors in our quest for an improved bilateral relationship. Our PRC de-
liberations in this area, however, have centered only on the narrow
subject of the importation of natural gas.
The deteriorating situation in Iran has magnified the serious ques-
tion of continuing availability of oil from the Persian Gulf in the future,
causing us to reexamine our military requirements and look for alterna-
tive sources of supply. Accordingly, our bilateral relations with Mexico
and ready access to Mexican oil have rapidly emerged as extremely im-
portant U.S. security interests.
The attached assessment
prepared by my Assistant Secretary for
Program Analysis and Evaluation provides a starting point for consid-
eration of our future requirements and how we should be attempting to
satisfy them. If we add to these concerns the potentially precarious po-
litical scenarios that could develop in the Persian Gulf area there is even
more reason for concern. Given these facts, prudence dictates ad-
dressing these issues prior to the President’s trip to Mexico. As Secre-
tary Schlesinger has recognized, the pace at which Mexico expands its
petroleum production is an important factor in the equation—one
which we should be working on at top levels in our bilateral
I believe that it is essential that we address this subject in the forth-
coming PRC meeting on Mexico, now scheduled for January 31.
Source: Carter Library, National Security Affairs, Staff Material, Special Projects
File, Box 9, Henry Owen, Chron, 1/27–31/1979. Secret. A copy was sent to Brzezinski.
See footnote 2, Document 170. Another PRC meeting on Mexico was held on Janu-
ary 19. The Summary of Conclusions is attached to a February 2 memorandum from
Brzezinski to members of the Cabinet, informing them that the President had approved
the conclusions. None of the conclusions concerned energy, which would be the subject
of a future PRC meeting. (Carter Library, National Security Affairs, Staff Material,
North/South File, Box 32, Pastor Country Files, Mexico: PRM 41 (Policy, 12/78–1/79))
Attached but not printed.
590 Foreign Relations, 1969–1976, Volume XXXVII
185. Memorandum From Rutherford Poats of the National
Security Council Staff to the President’s Assistant for
National Security Affairs (Brzezinski)
Washington, January 30, 1979.
Urgent Presidential Message to Prince Fahd
Tony Solomon, Dick Cooper, Bill Quandt and I recommend that
the attached Presidential message, prepared in State/NEA and
amended here, be sent this morning to Prince Fahd. Its purpose is to nail
down our understanding of Fahd’s commitment to Secretary Kreps
verse it or compromise it.
Briefly, the sequence of events was:
1. Yamani instructed ARAMCO to limit production to 9.5 mmbd
and to pay for the increment above the normal 8.5 mmbd limit at fourth
quarter 1979 prices, i.e., an increase of 9.5%.
2. Kreps asked Fahd about “rumors” of such a decision.
nied the report and assured her and West that Saudi policy remained as
before: maximum sustainable production during the Iranian crisis and
at posted current OPEC prices.
3. West told Yamani of Fahd’s statement, and Yamani expressed
amazement because he said he had acted on written instructions from
Fahd. He said he would seek urgent clarification.
File, Box 67, Saudi Arabia, 1–3/79. Secret. Sent for action.
Secretary of Commerce Kreps visited Saudi Arabia at the end of January for dis-
cussions on trade.
See footnote 3, Document 182.
As reported in telegram 785 from Jidda, January 28. (National Archives, RG 59,
Central Foreign Policy Files, D790042–1228) Kreps also read aloud a message from Carter
to Fahd welcoming “the fact that Saudi Arabia has maintained its petroleum production
levels, thus helping to compensate for the Iranian shortfall.” The message continued:
“Given the tightness of the current market, our understanding is that Saudi Arabia will
continue production at full capacity levels. It is our further understanding that you will
continue to sell at the price schedules agreed upon at the OPEC meeting in Abu Dhabi. A
pricing change by Saudi Arabia would encourage other producers to increase their
prices, and could therefore lead to a general price increase above the OPEC level.” The
message concluded: “We therefore urge you, as a sincere friend, to reject any thoughts of
reducing production from recent high levels or accelerating the schedule of price in-
creases.” (Telegram 822 from Jidda, January 29; ibid., P850017–2222)
As reported in telegram 857 from Jidda, January 30. (Ibid., D790046–0109)
January 1979–January 1981 591
We know that others in the Saudi cabinet favor restricting produc-
tion and pressing other OPEC countries to increase production.
already is pushing prices up to fourth quarter levels. Saudi profiteering
on the Iranian situation would spread like wildfire through OPEC.
We need to bolster Fahd’s commitment before it is undermined by
If you can’t clear this as a Presidential message during this
morning, Secretary Vance is prepared to send it.
Presidential Message on Saudi Oil Policy
Ambassador should deliver urgently following message from the
President to Crown Prince Fahd, provided, understanding expressed in
second paragraph is consistent with latest statement by Fahd of SAG’s
Your Royal Highness:
I want you to know how delighted I am that we will be getting to-
gether in Washington in March. I very much look forward to that op-
portunity in view of the importance I attach to having a quite thorough
exchange of views on matters affecting the strong community of in-
terests between the Kingdom of Saudi Arabia and the United States.
In the meantime, I wish to express my appreciation of your deci-
sion to maintain Saudi Arabia’s oil production at maximum sustainable
capacity of over 10 million barrels daily and at OPEC first-quarter price
schedules. This will make a major contribution to world economic sta-
bility during the difficulties created by the Iranian situation.
Saudi Arabia’s wise decision is particularly important at this time
in view of our strong mutual interest in the strength of the dollar in
world markets. The dollar has weathered the pressures created by the
recent OPEC price decision and the Iranian problem and we now ex-
pect that it will maintain stability with some possibility for further re-
On February 1, West wrote: “Our apparently successful efforts to persuade Prince
Fahd to reverse the recent Saudi oil pricing decision may well be a pyrrhic victory. What-
ever the economic benefits may be to USG, and in the Saudi view they are infinitesimally
small, we will have exacerbated existing divisions within SAG and damaged further
Fahd’s credibility here.” (Telegram 1010 from Jidda; ibid., P850027–2583)
The Department instructed the Ambassador in Kuwait to seek similar assurances
on oil pricing from the Government of Kuwait. (Telegram 37743 to Kuwait, February 13;
592 Foreign Relations, 1969–1976, Volume XXXVII
covery. Any unexpected increase in oil prices could have serious im-
pact on the dollar with consequences that we cannot fully foresee.
The constructive approach of Saudi Arabia to this problem will, I
am certain, have a significant and favorable impact on American and
world public opinion, and will lay an even stronger basis for the broad
cooperative relationship which I am dedicated to building between our
Sincerely, Jimmy Carter
The message was not sent. A handwritten note at the top of the first page of the
covering memorandum by Poats reads: “ZB: Last minute telephone conversation with
West conveyed West’s belief that Fahd’s commitment will stick so no Presidential mes-
sage is necessary now. State/NEA is asking Vance whether he wants to proceed with this
message. He may call you. I still prefer Presidential message and Quandt will settle for
Vance message. RP” Above Poats’s note, another note in an unknown hand reads: “ZB
agrees message should not be sent at this time.”
January 1979–January 1981 593
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