Foreign relations of the united states 1969–1976 volume XXXVII energy crisis, 1974–1980 department of state washington
Paper Prepared by the National Security Council Staff
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212. Paper Prepared by the National Security Council Staff
The Politics of the Tight Oil Market
The tight oil market is tempting governments of middle-rank oil
powers to rattle the oil weapon and is multiplying the significance of
political turmoil in oil exporting nations. Five current cases outline the
shape of the future:
Nigeria’s Obasanjo threatens to end US “preference” in Nigeria’s
oil export market if the long-pending joint project to provide LNG to
the US east coast is frustrated by US Government action. Meanwhile,
lesser Nigerians are passing the word that our oil interests may
suffer in some way if we lift economic sanctions against Zimbabwe
Libya lets it be known that the Qadafi government is thinking of
denying oil to the United States in retaliation for our denial of export
licenses for large commercial transport aircraft.
Revolution in Iran, the prime cause of the present tight oil market,
now threatens further reduction of the world’s oil supply, enhancing
the political and economic power of the remaining producers. The cur-
rent Arab rebellion in the Kuzestan oil fields, if not promptly sup-
pressed, is almost certain to involve the rebels’ internal use of the oil
weapon against the Tehran government, which cannot function
without domestic revenues from oil.
Our current search for a way out of the oil supply/price bind leads
us back to Saudi Arabia, whose cutback in oil production to normal
levels seems to have been designed in part to build leverage over the
Middle East peace process. Now, as we plan a new appeal for increased
Saudi production, coupled with more credible restraint on oil imports
by the industrial nations, we must consider the political price we may
be asked to pay, now or next winter.
Finally, France and several European allies are probing for a new
“dialogue” with the Arab oil producers in which Europe might dis-
Source: Carter Library, National Security Affairs, Brzezinski Material, Subject File,
Box 48, Oil, 3–6/79. Confidential. The paper is attached to a June 1 note to Brzezinski in
which Poats wrote: “Here is a hurried response to your request for a paper for the Presi-
dent on the new politics of oil. Please let me know whether you want it further devel-
oped.” Poats added that Gary Sick concurred.
International sanctions had been imposed on the white minority Rhodesian Gov-
ernment of Ian Smith, which had declared unilateral independence from the United
Kingdom in 1967. In April 1980, the United Kingdom granted independence to Rhodesia,
which was renamed Zimbabwe, and Robert Mugabe became the first Prime Minister.
660 Foreign Relations, 1969–1976, Volume XXXVII
tance itself somewhat from the United States should a climacteric in the
Middle East peace process next winter evoke oil reprisals from the Per-
None of these signals portends disaster. Nigeria has only limited
alternatives to the use of the US oil companies’ distribution network
and cannot afford a prolonged reduction of export revenues. Saudi and
other conservative leaders in the oil world would be unlikely to sup-
port Nigeria over the Zimbabwe issue. Libya is unlikely to get Saudi or
other conservative Arab OPEC members’ collaboration in an embargo
against the United States, and a lone Libyan sanction against us would
simply cause shifts in the world oil marketing pattern without reducing
A targeted anti-US embargo by all the Arab OPEC countries
would, if not coupled with reduction in their total oil exports, send
shock waves through the world economy, but the IEA sharing system
would be likely to work in minimizing actual economic distress. How-
ever, a simultaneous cutback in production by the OAPEC nations
would be a different, far more serious, matter than the 1973–74 em-
bargo. Today Iran would be an ally of the Arabs rather than a collabora-
tor with the United States, and the international oil companies would
have much less latitude to increase other countries’ production than
five years ago.
Nothing in our present political intelligence suggests Arab plan-
ning for an embargo. Rather, more subtle pressure, designed to impose
pain on industrial nations capable of influencing US policies as well as
directly on Washington, appears to be the strategy of Arabian penin-
sula leaders. Their objective is both political—movement in favor of
Arab interests in the West Bank/Gaza and Jerusalem—and economic—
reduction of the pace of depletion of their oil reserves.
It is in the formerly very marginal area of a million or so barrels
daily oil production that prices and political clout are formed today.
This seems likely to be the main arena of oil politics in the near future.
In any event, the broader availability of the oil weapon is likely to whet
the international political ambitions of oil state political leaders.
January 1979–January 1981 661
213. Memorandum by the President’s Assistant for National
Security Affairs (Brzezinski)
Washington, June 1, 1979.
The Secretary of State
The Secretary of the Treasury
United States Permanent Representative to the United Nations
Director, International Communications Agency
Mobilizing LDC Pressure Against Oil Price Increases
The President wishes to stimulate more effective pressure by both
the developing nations and industrial countries against further oil price
He asks that you take appropriate steps, especially during
the period before the June 26 OPEC meeting, to develop official and
public awareness in all countries of the economic costs to poor coun-
tries of radical oil price increases. Such steps may include diplomatic
discussions with officials of LDC, OPEC and IEA governments, public
statements in speeches and press conferences, and encouragement of
similar efforts by governments of other consumer countries.
Attached is a brief background paper which may be drawn upon
for these purposes.
Oil Price Impact on LDCs
Oil price increases again are postponing hopes for economic
progress by oil-importing LDCs. A further price increase when the
OPEC oil ministers meet June 26 will deepen the distress of a majority
of the world’s nations.
Soaring oil prices—already more than 30% above December 1978
levels—have hit LDCs three ways:
Source: Carter Library, National Security Affairs, Brzezinski Material, Subject File,
Box 48, Oil, 3–6/79. Secret.
On May 30, the President sent a note to Brzezinski that reads: “Re OPEC price in-
creases effect on LDCs. We should organize a PR campaign about this with help of Andy
and others. Do so.” (Ibid.)
No classification marking.
662 Foreign Relations, 1969–1976, Volume XXXVII
adding $2 billion on an annual basis to the aggregate LDC
foreign exchange deficit.
adding about $4 billion to their annual foreign exchange
deficits by aggravating inflation globally and thus raising prices of all
other goods LDCs must import and by reducing global economic
growth and consequent demand for LDC exports.
Bigger current account deficits will require LDCs to go deeper into
debt or cut back on investment and consumption.
The inflationary impact of oil prices on LDCs has been particularly
disheartening. In each of the last three years, LDCs as a group had
gained in their battles against inflation. Now the resumption of radical
oil price rises is reversing that hopeful trend.
The impact of OPEC price increases on LDCs is more severe now
than in 1973–74 because modernization has greatly increased their de-
pendence on oil imports.
214. Memorandum From the Executive Secretary of the
Department of State (Tarnoff) to Secretary of State Vance
Washington, June 7, 1979.
Your Breakfast Meeting with the President Friday, June 7
1. International Energy Policy. As you know there has been consider-
able foreign criticism of some recent decisions that we have taken in the
field of international energy. The $5 per barrel entitlement decision has
drawn the most attention in foreign government and press circles.
Source: National Archives, RG 59, Executive Secretariat Files: Lot 84D241, Box 3,
President’s Breakfasts, 5/1/79–8/31/80. Secret; Nodis.
According to an undated NSC briefing paper, the Economic Regulatory Adminis-
tration of the Department of Energy announced a temporary program, lasting from May
1 to August 31, “for a $5 per barrel credit within the entitlements program on imports of
middle distillates,” or home heating oil, because of “concern over low levels of U.S. distil-
late stocks.” The paper noted that officials at the OECD “howled” about the decision,
with the EC Executive Commission telling the Ambassador in Brussels that the Commu-
nity viewed the “subsidy” as “an attempt to shift U.S. energy difficulties to them.” In ad-
dition, Schlesinger “was criticized for failing to warn his IEA colleagues during the May
21–22 meeting,” and Van Lennep “privately told the U.S. Government that the program
‘undercut the credibility of the IEA.’” (Carter Library, National Security Affairs, Staff Ma-
terial, International Economics File, Box 32, Rutherford Poats File, Summit: Tokyo)
January 1979–January 1981 663
might want to alert the President to the full dimensions of the problem
along the following lines:
—Energy may be the most important single issue discussed at the
Tokyo summit, and we have to make sure that the moves that we make
in the energy field are coordinated with our Summit partners and
allies. While the U.S. will have to make energy decisions on its own, we
have an interest in gaining the maximum understanding from our
major trading partners whenever possible. The senior administration
officials charged with developing energy policies—including Cabinet
officers—should be fully aware of the foreign policy dimensions of our
energy policy decisions. We cannot afford a repetition of some of the
shocks given our friends by several of President Nixon’s unilateral de-
cisions in the economic field. The State Department will be working
closely with other government agencies and the NSC to make sure that
our approaches to foreign governments on energy issues are well
—With the Schmidt visit, we have made considerable progress.
One reason for this success was the work of the recently organized oil
policy inter-agency task force directed by Secretary Blumenthal. It
might be useful to continue the task force beyond the Summit to insure
that all aspects of our foreign oil policy are under continuous inter-
—On a substantive point, we should hold open the possibility of
triggering the IEA sharing mechanism and controlling spot market bid-
ding, if our approach to the Saudis this weekend on increasing produc-
tion gets negative results. These steps may be the only way to curb fur-
ther price increases until additional conservation efforts begin to take
Attached is the summary section of a recent S/P paper on policy
options in the international energy field at Tab 1.
[Omitted here is material unrelated to energy.]
Carter held a breakfast meeting on June 7 from 7:30 to 9 a.m. with Vance, Harold
Brown, Brzezinski, and Hamilton Jordan. (Ibid., Staff Office Files, President’s Daily
Chancellor Schmidt visited Washington June 6.
664 Foreign Relations, 1969–1976, Volume XXXVII
Briefing Memorandum From the Director of the Policy
Planning Staff (Lake) to Secretary of State Vance
Washington, June 5, 1979.
U.S. Oil Policy
Attached is a memorandum describing the present oil market situ-
ation and summarizing a number of steps that the U.S. and other oil im-
porting nations might take to counter the present critical surge in world
The paper has not been cleared with other bureaus in the Depart-
ment. But in view of the urgent need for strong and concerted action by
the oil importing countries, I thought it would be useful for you to have
a paper which pulls together the basic facts and summarizes various
policy options. Almost every idea in this paper is controversial, within
the government as well as outside.
—Announce at the Summit that the major industrial countries
have agreed a) to stop purchasing oil in the spot market above official
OPEC prices, b) to trigger the IEA sharing agreement to assure equita-
ble distribution of available supplies and c) to take additional conserva-
tion measures to reduce consumption by 5–10% in 1980.
—Press the OPEC members, jointly or individually, in light of this
determined consumer action, to exercise moderation in setting official
—Ask Saudi Arabia to increase production, or at least use a poten-
tial increase to press for an OPEC price freeze.
—In the event OPEC continues to hold back supplies and push up
prices, consider a consumer agreement not to import oil priced above
the present levels.
—Conclude a gas purchasing agreement with Mexico.
—Seek continuous discussion or dialogue among consumers,
OPEC, and non-OPEC oil exporters to examine the future world oil
supply and demand situation.
Secret. Drafted by K. Lissakers. Copies were sent to Cooper and Katz.
The memorandum was not found.
January 1979–January 1981 665
—Encourage closer contact between OPEC and non-OPEC oil ex-
porters like Canada, Britain, Norway and Mexico, which can act as a
moderating force on OPEC. Perhaps encourage them to seek
—Provide multilateral financing and investment guaranties, and
unilateral tax incentives to stimulate petroleum exploration and devel-
opment in the developing countries.
—Examine the desirability of negotiating a long-term commodity
agreement for oil to provide predictability in production and pricing.
—Create a U.S. Government purchasing agency to act as an inde-
pendent check on private oil company transactions in the international
215. Telegram From the Department of State to the Embassy in
Washington, June 8, 1979, 1614Z.
147000. For Ambassador West from Under Secretary Cooper. Sub-
ject: International Oil Situation.
1. As we discussed during your consultations, I hope that you will
be able in next few days to meet with Crown Prince Fahd, Yamani, and
other appropriate Saudi leaders to convey our concerns about oil sup-
plies and prices. Prior to OPEC meeting we would like to do whatever
possible to restrain inevitable price increase, but more fundamental
problem is supply shortage which Saudis in particular are in some po-
sition to alleviate.
2. In your discussions you may draw on following points:
—Present price situation, in which spot market prices and sur-
charges are increasing in an uncontrolled fashion, presents a truly crit-
ical situation for the international economy.
—We fully understand and appreciate that SAG has been a force
for price restraint and does not wish to see the sort of price escalation
world is presently experiencing. We realize that present supply short-
Source: National Archives, RG 59, Central Foreign Policy Files, D790260–0365. Se-
cret; Immediate; Exdis. Drafted by Twinam and Rosen; cleared by Katz, Solomon, Owen,
and Schlesinger and in NEA, ARA, EA, EB/ORF, EUR/RPE, and AF/EPS; and approved
by Cooper. Repeated Immediate to Quito, Abu Dhabi, Algiers, Baghdad, Caracas, Doha,
Jakarta, Ottawa, London, Bonn, Rome, and Brussels for the Embassy and USEEC.
666 Foreign Relations, 1969–1976, Volume XXXVII
age has permitted market to drive prices upward, and that decisions at
upcoming OPEC meeting may to some degree reflect that reality.
—There is also, however, the related reality of the impact of price
increases on the international economy, including poorer countries.
—As we look ahead over rest of year there is even more profound
problem that oil supply at current production rates will sharply exacer-
bate world economic difficulties without contributing to energy conser-
vation measures now in train.
—In the absence of corrective action, international community
faces a critical economic situation which could well have unpredictable
effects on political stability in developing world and on the political
strength of US and its allies as well as Japan. This is a major long-term
problem, affecting efforts to control inflation, to maintain a strong
dollar, and to promote the sort of constructive economic growth which
will permit industrial world to maintain a global balance of power con-
ducive to world peace.
—As SAG is aware, the US administration is making a major effort
to deal with this problem, as are other industrial nations. The industri-
alized countries as a group have committed themselves to reduce their
demand for oil from the world market by an amount equivalent to five
percent of projected 1979 consumption by the end of the year. In the US
we are on track to achieve this goal. As you know, we have already be-
gun implementing an extensive program of fuel switching, voluntary
demand restraint measures, and mandatory measures to restrain US
demand for oil from the world market. In spite of strong domestic po-
litical opposition, the President has put in place a phased program to
bring domestic oil prices up to world levels. We are making substantial
progress, and intend to persevere for both the short and long run.
Other industrialized countries are taking similar actions.
—It is essential that producer countries also make an effort to help
stabilize the situation. While we understand the reasons why Saudi
Arabia has wanted to limit its oil production, we hope that in these crit-
ical circumstances, SAG will see its way clear to produce as much oil as
possible until the spot market situation is stabilized and the escalation
of surcharges is eliminated and to urge other producers with excess ca-
pacity to do the same. We all have an interest in an orderly market and
must all work together at such a juncture, since the potential for serious
harm to the world is great.
—We would be interested in your views of how much additional
supply will be necessary to restore order to the market, taking account
of the need to rebuild working stocks to normal levels.
3. In discussion you may wish to draw as you see fit on the fol-
lowing elaboration of the current USG assessment of various aspects of
January 1979–January 1981 667
A. Sharp oil price increases would have a severe impact on the
economies of oil importers.
The already slackening rate of economic growth in the US would
be further slowed if oil prices increased further. This would exacerbate
inflation, which we have been trying to keep in check through strong
domestic policies, and increase unemployment. The impact on most
other developed countries would be even more severe. These adverse
effects would be serious in the short run and would have a cumulative
effect, thus raising the possibility of another severe recession. The
dangers for the LDC’s would be particularly great since they would be
affected both by the direct burden of increased oil import bills as well
as by inflation and recession in their major trading partners.
—To illustrate, we estimate that the real increase in oil prices thus
far this year (including surcharges) over and above the 10 percent price
increase announced in December for 1979 as a whole, can be expected
by itself to have the following effects this year, even with no further
Increase inflation by about 0.3 to 0.5 percent in the US and raise na-
tional inflation rates in OECD countries by up to 0.9 percent.
Reduce real economic growth by about 0.3 to 0.5 percent in the US
and the growth rates of individual OECD countries by up to 0.7
Increase the number of unemployed in the United States by about
100,000 persons by end 1979 and over 200,000 by 1980.
Increase unemployment and consequently political instability in
several industrial and developing countries.
These figures are necessarily estimates, but they show that the
shock administered to the world economy is already substantial, that it
will be larger next year and that cumulative losses to the world
economy from any further large price increases would be severe.
B. Spot market situation and its impact on prices.
—In the short term much of the pressure from oil market imbal-
ances is felt on the spot market. Spot market is a small residual market
that is not representative of appropriate or market clearing prices. It is
especially sensitive to short-run disturbances. At the current time it is
being driven in part by market pressures (supply) and to a large degree
by speculative pressures, whose dynamic we must deal with as soon as
—We fear that some OPEC countries will point to high spot mar-
ket prices as a rationale for increasing surcharges on term contracts. We
are greatly concerned that these surcharges will in turn be built into
new base prices, for all of the reasons outlined in (A) above.
—In short, we feel that current market pressures have the potential
to push short term oil prices far above reasonable long term levels. We
668 Foreign Relations, 1969–1976, Volume XXXVII
are concerned that there will be a tendency for oil prices to “overshoot”
in the short term, with serious consequences for stability for the world
—Actions must be taken by consuming countries and by con-
cerned producers to bring the spot market under greater control.
C. Supply/demand outlook for remainder of year.
—We see a dual problem confronting consumers and concerned
producers for remainder of 1979: controlling spot market as per (B)
above, and dealing with the continued shortfall in supply.
—In order to do their share in bridging this gap the industrial
countries have committed themselves to restrain their oil import de-
mand by 2 MBD, which according to present indications should be of
substantial effect once the measures have their full effect.
—The United States has already taken measures, in consultations
with other governments, to reduce demand on the world market, con-
servatively estimated to be over one million BD below what it would
have been by the end of 1979. This result is based on conservation ef-
forts and efforts to bring on new supply, among which are: Conserva-
tion: 200,000–250,000 BD switching from oil to natural gas; 100,000 BD
from higher capacity use of non-oil fired utilities to replace base-load
capacity in oil-fired plants; 200,000 BD from voluntary saving of gaso-
line (recent data indicate that gasoline consumption is now 400,000 BD
lower than in 1978); 200,000 BD from building temperature controls.
Supply: 150,000 BD from increased Alaskan production by end of 1979;
20,000–50,000 from Elk Hills; 60,000–80,000 BD from decontrol in 1979.
—However, many demand adjustment measures will not take full
effect until the end of the year or beginning of next year. Moreover,
even with demand restraint measures in place, the oil situation will be
precarious because of (1) political uncertainties in Iran and consequent
vulnerability of its oil supply; and (2) uncertainties concerning how
some OPEC countries will behave as demand restraint measures come
—Therefore, we think it would be highly desirable in the imme-
diate future to have an increase in production to (1) prick the bubble on
the spot market; and (2) to be available in case production elsewhere
declines, for whatever reason.
—SAG cooperation in a joint effort to stabilize and restore order to
the world oil market would be extremely helpful at the present time. If
SAG could increase production temporarily until conservation and oil
import restraint measures of US and other importing countries take full
effect, a large and potentially destabilizing loss to world economy
could be avoided. US, for its part, will seek to work out procedures to
ensure that oil conservation measures of importing countries will be
January 1979–January 1981 669
fully effective. This type of joint effort could pave way for a continuing
program to avoid a replay of the 1974–75 world recession while dealing
realistically and constructively with the long-term adjustments needed
for a satisfactory oil and energy future.
4. Embassies Kuwait and Abu Dhabi should be prepared to raise
oil situation with host governments drawing on above as appropriate,
but they should await further instructions pending SAG response to US
5. Other Embassies in OPEC countries should provide views on
utility and reaction to possible approach on pricing pending SAG
6. For Embassies in Summit countries: Followup to US approach to
SAG will be discussed at Summit preparatory meeting scheduled for
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