Foreign relations of the united states 1969–1976 volume XXXVII energy crisis, 1974–1980 department of state washington
Vance 189. Telegram From the Embassy in Belgium to the Department
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- 190. Memorandum of Conversation
189. Telegram From the Embassy in Belgium to the Department
Brussels, February 12, 1979, 1002Z.
2699. Subject: Iranian Oil Squeeze: Time for an IEA Maximum Im-
port Passthrough Price? Ref: Abu Dhabi 339.
1. Confidential—entire text.
2. The spectacle of across the board cutbacks in oil supplies by the
international oil majors to firm contract customers and of rising spot
prices for crude and petroleum products in world oil markets brings
with it an uncomfortable feeling of “deja vu”. When the 1973–74 oil em-
bargo against the US began to pinch, panicky reactions by domestic in-
dependents, refiners and public utilities desperate for supplies touched
off frantic bidding for non-embargoed crude which at one point
reached over $20 a barrel. During those difficult times, some gov-
ernment officials and top oil executives (e.g. Pocock of Shell) pressed
Source: National Archives, RG 59, Central Foreign Policy Files, D790082–0500.
Confidential; Immediate. Repeated to Abu Dhabi, Algiers, Baghdad, Bonn, Caracas,
Cairo, Damascus, Dhahran, Jakarta, Jidda, Kuwait, Lagos, Libreville, London, Manama,
Ottawa, Paris, Quito, Tehran, Tokyo, Tripoli, Vienna, and Geneva.
Telegram 339 from Abu Dhabi, February 6, reported: “Abu Dhabi Petroleum De-
partment Under Secretary confirms that UAE still reluctant increase its oil production de-
spite approaches by BP, Exxon, CFP, and Japanese oil companies.” (Ibid., D790093–0774)
January 1979–January 1981 605
for rapid institution by the US, Japan and other important consumer
countries, of a maximum import passthrough price to thwart a sense-
less upward spiralling. This fleeting effort foundered largely for two
reasons. First, Congressional sentiment was judged to be unsympa-
thetic to such tampering with the oil market mechanism. Moreover, the
availability of substantial US domestic crude raised the overall com-
posite price for a barrel of imported and domestic crude by a compara-
tively marginal and acceptable amount. In retrospect, more than any
other single factor, our failure to even attempt to dampen this will-
ingness to buy at any price demonstrated to OPEC that the sky might
be the limit.
3. In the coming oil squeeze of 1979–80 (assuming a continuing
Iranian shortfall and unwillingness or inability of the Saudis, et al, to
cover it), it would seem pointless to permit a repetition of our earlier
experience. Spot prices already are approaching the $20 a barrel figure.
Beyond the inflationary impact on our economy of a price scramble,
under the International Energy Agency sharing agreement, the US
cannot as a country outbid its partners in the hope of gaining a larger
share of available supplies. We are prohibited from importing more
than our fair share regardless of price. But an individual enterprise
could still obtain a larger share of the US national allocation by aggres-
sive price competition—unless the USG adopted a maximum import
passthrough price system.
4. The idea is comparatively simple and its enforcement would
seem no more difficult than with previous ticket allocation schemes.
Any oil importer, including independent oil company, refinery or
public utility purchasers, would be inhibited from paying more for im-
ported oil than a specified fair market price to be determined on a peri-
odic basic by the USG or IEA. The allowable price of any further sale of
such imported oil, or of goods or services stemming from the use of it,
would be limited to an amount based on this maximum passthrough
figure. Beyond limiting the sales price of crude or its derivative petro-
leum products, for example, the price of electricity produced by a pub-
lic utility from imported oil would also be controlled. To insure equita-
ble domestic distribution of imported oil, an allocation system based on
prior consumption needs (instead of price competition) would insure
survival of independents and utilities as well as the majors and their
5. Although the US theoretically could implement a maximum
passthrough system on its own initiative, prudence and common sense
dictate that all IEA countries (and possibly other important consumers
such as France and the advanced LDC’s) should be persuaded to adopt
a similar scheme. It would be tempting fate to expect the IEA sharing
mechanism to function effectively without across the board adherence
606 Foreign Relations, 1969–1976, Volume XXXVII
to buyer discipline. Given common commitments to oil sharing and the
same interest in maximizing availability at the lowest possible price,
there should be little reluctance by our IEA partners to go along. A
more difficult question is what will be the reaction of OPEC. If posed in
a way which appears to be a threat to its “sovereign” right to fix world
oil prices, we naturally risk a direct confrontation which we can expect
to lose. But prior consultation with the Saudis and other moderates
pointing out the temporary nature of the passthrough device as a
means of avoiding market disruption, speculation and panic during a
period of still fragile recovery from economic recession and inflation
might very well find a receptive audience.
6. Time is of the essence. Once spot prices skyrocket and the
scramble really starts, it will be impossible to put the genie back in the
bottle. This time around do we act or react passively on the price side of
the supply equation?
January 1979–January 1981 607
190. Memorandum of Conversation
Mexico City, February 15, 1979, 9 a.m.–noon
Discussion of U.S.-Mexican Bilateral Issues
President Jose Lopez Portillo
Cyrus Vance, Secretary of State
Santiago Roel, Foreign Secretary
Dr. Zbigniew Brzezinski
Hugo B. Margain, Mexican
Patrick Lucey, U.S. Ambassador
Ambassador to Washington
David Ibarra Munoz, Secretary of
Viron Vaky, Assistant Secretary of
Finance and Public Credit
Miguel de la Madrid Hurtado,
Jules Katz, Assistant Secretary,
Under Secretary of Finance
and Public Credit
Matthew Nimetz, Counselor,
Ricardo Garcia Sainz, Secretary of
Department of State
Programming and Budget
Stuart Eizenstat, Assistant to the
Dra. Rosa Luz Alegria Escamilla,
President for Domestic Affairs
Under Secretary for
Jody Powell, Press Secretary to
Jorge de la Vega Dominguez,
Robert Pastor, National Security
Secretary of Commerce
Hector Hernandez Cervantes,
Under Secretary for Foreign
Jose Andres Oteyza Fernandez,
Secretary of National Wealth
and Industrial Development
Ing. Jorge Diaz Serrano, Director
Oscar Flores, Attorney General of
Jose Ramon Lopez Portillo,
Director General for
Documentation and Analysis,
Department of Programming
Rafael Izquierdo Gonzalez,
Advisor to the President
Fernando Rafful Miguel, Head of
Department of Fisheries
Source: Carter Library, National Security Affairs, Brzezinski Material, Subject File,
Box 37, Memcons: President, 2–3/79. Confidential. The meeting was held at Los Pinos,
Mexico’s Presidential residence. All brackets, except those indicating material omitted by
the editor, are in the original. Carter was in Mexico City February 14–16 for a State visit.
608 Foreign Relations, 1969–1976, Volume XXXVII
Lopez Portillo: Yesterday, Mr. President, we began our discussions
on international topics.
It is proposed that today we take up bilateral
matters. If you agree, you may wish to initiate the discussion.
Carter: I would like to do so. Let me say first that we are eager to
conclude this visit with an agreement between us—and with a percep-
tion by the peoples of our two nations—that this has been a successful
visit and constructive. Of all the visits I have made, this one has
aroused the greatest interest in my country. This is an accurate measure
of the importance we attribute to Mexico and our relationship.
There are serious problems and issues, but we want to turn them
into opportunities. Some of the major issues are energy, trade, border
questions and future collaboration on technology and the achievement
of a better quality of life for our two nations.
Let me begin frankly with energy:
We are pleased and excited over your prospects for developing
major energy resources. We have no desire to influence such matters as
your production, exploration, distribution of your resources. This is en-
tirely your prerogative. We would like to be good customers for what
you may want to sell to us. We want to pay a fair price and would like
to negotiate long-range arrangements without delay.
As far as oil goes, a fairly standard world price pattern exists in
terms of long-term contract and spot-price purchases. At present our
purchases of your oil are normal and routine—and are satisfactory. We
do think that there is an advantage to you in selling to us because our
location means lower transport costs. At present we import 45 percent
of our consumption. For a number of years therefore the U.S. will be a
ready market for whatever oil you decide to sell to us.
As regards gas, for now and the immediate future we have ample
supplies of gas. We have increased local production and are con-
structing the Alaskan pipeline which will increase supplies. But my ex-
pectation is that when your gas development reaches the point where
you are ready to sell, we would be prepared to buy it. Obviously the
terms of delivery and price would have to be arrived at through
I regret last year’s misunderstandings on gas.
It was embarrassing
to both. Our problem is that our government does not play a role in the
purchase, commercialization and distribution of gas and oil. That is in
the hands of private companies. But our regulatory agencies must con-
The memorandum of conversation of the February 14 meeting is ibid. It is sched-
uled for publication in Foreign Relations, 1977–1980, volume XXIII, Mexico, Cuba, and the
See Document 170.
January 1979–January 1981 609
trol prices and protect consumer interests. Private oil companies are in-
terested in keeping prices as high as possible because they control re-
serves they would like to sell in the future.
Our desire would be to have our government representatives meet
without delay to determine the terms of such future sales as you deem
it best to make. Then within those parameters, the companies would be
free to purchase gas or oil. I have studied the history of the negotiations
last summer, and I believe we can negotiate an agreement satisfactory
to the interests of both countries. There is no doubt that our market will
be a growing one. We want to be good neighbors and customers, recog-
nizing your patrimony over your own resources. Would you like to
comment on these points?
Lopez Portillo: I am afraid my answer will be long, because I want
you to understand our views. Oil for us is a symbol as well as an energy
source. The Cardenas expropriations
were historic milestones. Our
whole history has been a fight for decolonization. In the 19th century it
was a political fight. In the 20th it was oil expropriation. Thus oil is a
symbol and surrounded with great emotion here. We define our iden-
tity in terms of oil.
Oil is also a non-renewable resource. Thus we must plan carefully
for the future, and exploit oil on the premise that we do so to improve
renewable resources. We must “sow the oil.”
This year we will produce 1.5 million BPD. We are increasing at an
approximate daily rate of 25,000 barrels. All this requires considerable
investment; it also means we must import large amounts of goods for
this exploration and exploitation. Our studies show that we have oil
throughout the territory of Mexico. Thus two points come up with re-
gard to our economic structure—the amount of investment and the
level of imports. The first relates to indebtedness. We have agreed with
the IMF to respect certain limits regarding indebtedness—both public
and foreign. A great speed-up of investment could deform the whole
structure, and create inflation. Because we need imports we must also
watch the level of imports to avoid a balance of payments problem. We
have in short to be cautious with regard to our oil investment.
As far as production goes, there will come a time when we will
have export surpluses, and relatively soon. We thought by 1982, but
now it appears that point may be reached as early as 1980. What
volume of exports? We do not want to go too fast. We need to develop
projects first to use the petro-wealth we will earn, projects relating to
poverty and unemployment. That takes time, and we want them in
Reference is to Mexico’s nationalization of its oil reserves and its expropriation of
foreign oil company equipment under President La´zaro Ca´rdenas in 1938.
610 Foreign Relations, 1969–1976, Volume XXXVII
place first. Even if we have projects they must be implemented with a
certain rhythm. We do not want to go so fast we provoke inflation or
create a capital surplus and capital exports.
In short, we must link oil to internal development. We want to use
oil as the trigger for our development “take off.” We have a globally
congruent plan for development, centered around reorienting indus-
trial development and helping create a more equitable population dis-
tribution. Simple import substitution does not serve us now. We must
produce to satisfy the needs of the masses, not the middle and upper
classes. We must organize to export. Oil enables us to do this, and we
have a number of plans covering such things as agriculture, forestry,
tourism, marketing education, etc.
The general structure of our plan was to divide my Administra-
tion’s period into three 2-year periods. The first two years were aimed
at recovering from deteriorated conditions and reactivating the
economy. We have been successful. The present two years will be
aimed at consolidating our economy, and the last two years to accelera-
tion. What does consolidation mean? Maintaining the indices, re-
solving certain bottleneck problems—petro-chemicals, trained labor,
transport infrastructure. We have identified some seven to eight bottle-
necks. Transport is a good illustration. We need the infrastructure to
move the oil and the products of development. If we just produce oil
we cannot take advantage of it without transportation infrastructure.
What do we do first?
The fact that we found that gas was associated with oil meant that
to activate oil production we had to decide last year how to handle the
gas. Our alternatives were either to sell the surplus rapidly or use the
gas to foster our industrial development. At that time—a year ago—we
decided to sell the gas to our natural market quickly, i.e., the U.S. So I
authorized PEMEX to negotiate with private companies who were in-
terested. An agreement was not possible. This created political prob-
lems, but we have overcome those. We then decided to route the pipe-
line to Monterrey and circle our territory. This gas will replace other
fuels which are easier to export.
Let me now relate specific conclusions regarding production. By
1980 we should reach our first production plateau of 2.25–2.5 million
BPD. This will produce four billion cf of gas. Of this we will probably
have 600–700 million cf to export, and with some increasing trend.
There is a gas line from Reynosa to Monterrey that can carry this
amount now. When we reach that production plateau we will review
the economic situation to determine what we do next. Obviously we
are flexible. We will then decide on the next plateau.
Within the range of all that I have said, then, we are in the market;
we will respect the rules of the game. The U.S. is a natural client. We
January 1979–January 1981 611
have of course had relations with you for a long time, selling both gas
and oil. It would be absurd if for whim’s sake or xenophobia we with-
drew from the market. Negotiations should be opened to reach sales
agreement. Price and terms should be worked out.
On price, I repeat that the economic order is not designed to help
LDC’s. We want to rationalize flows. We need to revalue our assets be-
cause our terms of trade deteriorate. With reference to gas, price was
one of the objections to last year’s negotiations. Gas can be considered a
fuel; it has caloric value. Is it not reasonable to give it a price equal to
other fuels even if it is the lowest price? I put these considerations on
the table. This is the rationale that should govern the price of gas. We
are ready to talk about gas and oil. We should come to some agreement
on a system for long-term relationships, established on a rational basis
as regards terms for trading in this crucially valuable and emotionally
But I must say clearly and frankly, Mr. President, that the basis we
established for gas sales cannot be modified by us without domestic
difficulties and without damage to my own credibility and position.
This is not abusive; it is realistic.
In short, we are disposed, once the U.S. has determined its policy
(and we do not wish to interfere in its domestic politics or policies) to
negotiate. This is not a bluff. Neither you nor we are in a hurry. It
would not be a failure if we could not agree on price. What we should
do, however, is establish permanent bases for the long term. If these are
well balanced, flexible, there should be no problem.
Carter: I presume, then, that you think it would be advisable to re-
sume discussions at the government level, recognizing that we are not
in a hurry, and with respect for each other’s interests, looking to the
Lopez Portillo: Let me clarify this. You are talking about gov-
ernment negotiations? Because an alternative is to have the companies
negotiate with PEMEX.
Carter: Government to government.
[Lopez Portillo nodded assent.]
Good. Your explanation has been very helpful. I believe I under-
stand the special symbolic importance of energy to your country. Many
of these considerations are not unique to Mexico. The question of de-
pletion of non-renewable energy resources is certainly a concern of
ours. Problems of debt, balance of payments, trade—these issues are on
my plate as well.
As is true of Mexico, the U.S. also has a rapidly growing number
of adults entering the job market. We are also concerned about invest-
612 Foreign Relations, 1969–1976, Volume XXXVII
ments to provide employment for these people coming into the labor
It would be a mistake for the U.S. to blame Mexico or for Mexico to
blame the U.S. if we sometimes have difficulties. There is no question of
the need for fair play. I am determined that my country will always act
in good faith.
There are ways in which we could collaborate and cooperate. In
nuclear energy, we would be glad to cooperate with you, if you wish,
depending on what your plans are. Solar energy is another area in
which we would welcome close collaboration. We could study elec-
tricity exchanges along the border. Transportation systems in both
countries have needs. Railroad as well as other types. We could
collaborate in exchanging information in that regard. There would be a
great advantage in increasing tourism for both countries and ex-
panding student exchanges, and these areas offer opportunities for co-
operation. As your country industrializes, we would be glad to share
our experiences with you so that you could profit by our successes as
well as by our mistakes. Mutual financing arrangements and inflation
control are additional areas in which we could exchange information
and ideas. We have made full progress in the area of water resource
management, but there is a need for cooperation in sanitation and pol-
lution problems, and these should be tackled jointly.
I could mention other areas, but the point is that the bases for coop-
eration in all these areas would be complete equality and mutual re-
spect and with no intention to influence each other against each’s in-
terests. We established a Consultative Mechanism in 1977 to pursue
some of these subjects. It made some progress but my assessment is
that it needs to be improved. The ones that consult should have more
authority to decide and act, specific assignment should be broadened
and agenda items expanded.
Our Ministers should explore all this without delay—and you and
I can be in touch with each other personally or in writing to handle dif-
ferences that may arise. We can explore this more at our private
meeting at breakfast tomorrow.
I want our frankness to result in tangible accomplishments and fu-
And I hope we won’t wait two more years to get back together to
resolve our differences.
Lopez Portillo: I would like to go a little bit deeper into energy. I
want to ratify Mexico’s position that oil will be treated as the heritage of
mankind. I want to reopen the idea of establishing an international
Carter and Lo´pez Portillo met in Washington February 14–15, 1977.
January 1979–January 1981 613
order to manage consumption, production, distribution—not only of
oil but all energy sources. I note, by the way, that Mexico buys butane
and propane at American market prices.
Let me refer to uranium. My associates tell me that the U.S. has not
authorized the return of uranium sent up for enrichment, adducing the
need for some security safeguards. This illustrates the problem of de-
pendence, which we don’t want for other areas because it would en-
courage us to turn to other sources. We are a peaceful country, and we
will not use atomic energy for anything but peaceful purposes.
On electricity, let us by all means explore such exchanges. We are
totally willing to enter into such arrangements.
We believe the technological development of the United States is
extraordinary. We are certainly interested in making use of your tech-
nology. We need to explore its links to financing and markets. We are
interested greatly in solar energy and alternative sources of energy, and
we offer what we have. I believe we can find a just and fair exchange.
What you said is very interesting to us.
In general all these things would be part of the general system I
talked about yesterday.
Carter: I am pleased that we can move on electricity exchanges. On
nuclear fuels, I think I can assure you that the problem will be resolved
when you are ready for it. I will give this my personal attention when I
As you know, Congress has passed a non-proliferation law that
has caused problems and delays in regard to nuclear fuels,
are being resolved.
We can also explore the possibility of an oil swap between Alaska,
Mexico and Japan to save transportation costs and benefit all
I suggest that we allow our strengthened consultative group to ex-
plore all these things and then you and I get together again sometime,
perhaps this summer if that is convenient to you, to assess what has
happened and resolve any differences that exist. If we announce we
will meet personally to assess their work, this might stimulate our
staffs to move more expeditiously. We have done so well in narcotics
cooperation, under the leadership of Attorney General Flores. This
shows that when we work well together the progress can be great.
Lopez Portillo: I want to underline the importance of the possi-
bility of supplying oil to Japan from Alaska which we would deliver to
you. This is just the kind of rationalization of oil flow I referred to when
The Nuclear Non-Proliferation Act was signed into law on March 10, 1978.
614 Foreign Relations, 1969–1976, Volume XXXVII
I talked of international cooperation and organization. For ideological
reasons and clients we distort and make prices higher than necessary.
We accept the idea of a swap with enthusiasm.
Carter: Do you agree that we should meet early this summer or at
the beginning of summer?
Lopez Portillo: In view of the similar views of our associates about
the meeting [all around the table smiled after the President’s remarks
on the matter to expedite decision making by a Presidential meeting], I
am in agreement with your ideas.
[Omitted here is discussion of trade, narcotics, and immigration.]
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