Foreign relations of the united states 1969–1976 volume XXXVII energy crisis, 1974–1980 department of state washington
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- Agency (Ernst) to Gary Sick of the National Security Council Staff
- Maurice C. Ernst Attachment
- 263. Memorandum From Secretary of Energy Duncan to President Carter
- 264. Editorial Note
None of these studies has been identified.
826 Foreign Relations, 1969–1976, Volume XXXVII
262. Memorandum From the Director of Economic Research,
National Foreign Assessment Center, Central Intelligence
Agency (Ernst) to Gary Sick of the National Security Council
Washington, February 25, 1980.
The Oil Supply Problem in the 1980s
1. Jim Cochrane indicated to me that you want to read a paper re-
cently done by the Office of Economic Research for Ed Fried.
2. This is OER’s first hurried attempt to analyze and project the
OECD energy supply through 1990. We have sketched out the main el-
ements of our thinking on the subject and made up 2 scenarios, which
we consider to be respectively, highly optimistic or highly pessimistic.
We have not detailed oil and other energy production projections on all
individual countries to avoid unnecessary arguments. We could
specify several combinations of country projections that would be con-
sistent with our more aggregative projections.
3. The paper reflects current OER views. It is still in rough-draft
form and the subject needs a great deal of additional work. I would like
to present it as a basis for discussion, not as representing CIA’s even-
tual best estimate. So please do not give it wide dissemination.
4. Specifically, the following additional types of analysis are
• More systematic calculations of potential oil production profiles
in key countries under various assumptions. We are currently doing
this for Saudi Arabia and Iraq.
• More systematic analysis of the probability of finding new oil in
various areas, and of the difficulty in extracting it.
• A fuller assessment of projected revenue requirements of key
• Assessments of the possibilities for changes in the composition
of final energy demand to accommodate the changing mix of energy
• [2 lines not declassified]
Source: Carter Library, National Security Affairs, Staff Material, Middle East File,
Box 66, Middle East Oil, 11/79–10/80. Confidential.
January 1979–January 1981 827
5. We hope to put out a more elaborate study, with some of these
gaps partially filled, this summer.
The Oil Supply Problem in the 1980s
World oil production may have already peaked and is likely to de-
cline at least slowly throughout the 1980s. Whether the decline is slow
or rapid will depend on the following:
—whether greater oil exploration efforts occurring in response to
growing oil scarcity are successful in offsetting more of the depletion of
oil reserves than was the case in the 1970s;
—whether oil production rates in the Persian Gulf and other
policy-constrained countries will be cut as depletion progresses;
—whether political change in key producing countries will lead to
a further curtailment of oil supply.
Specifically, we expect:
—Persian Gulf production to decline, or at best to remain near cur-
—production in other OPEC countries to decline, at least slightly;
—OECD production to decline after the mid 1980s;
—production in LDCs to increase, the extent depending largely on
Mexican discoveries and decisions;
—Communist oil trade to shift from a net export to a net import
Overall, we project declines in Free World oil supply in the 1980s
ranging from less than 5 percent to about 25 percent. Most of the de-
cline will be in the lighter grades of oil, from which most light oil
products are made. The interaction between OPEC price decisions and
the production decisions of OPEC countries will tend to give results
closer to the lower than to the higher end of the range. As oil prices are
ratcheted upward during periods of tight markets, oil producers often
cut production—initially to avoid excessive surplus revenues, and
later, as demand drops, to sustain the new real oil price.
It is virtually certain that the OECD countries will get a declining
share of Free World oil supplies, as has been the case in the past decade.
This is because of the tendency of the oil producers to give their own
The study has not been found.
Confidential. The paper is dated February 1980.
828 Foreign Relations, 1969–1976, Volume XXXVII
needs priority, a likely continued differential in economic growth rates
between the LDCs and the OECD countries, and the particular energy
needs of developing countries. We consequently expect OECD oil sup-
plies to fall at least 15 percent and as much as one-third.
Increased supplies of other forms of energy to the OECD, espe-
cially coal and nuclear power, are likely to just about offset the decline
in oil supply. At best, total OECD energy supplies would grow about 1
percent a year; at worst, they would decline 1 percent a year.
It would be extremely difficult for the OECD to achieve acceptable
rates of economic growth with energy supplies stagnating. To achieve
even 3 percent economic growth would require annual declines in en-
ergy consumption per unit of GNP of between 2 and 4 percent, or 2 to 3
times the rate achieved since 1973. Energy, especially oil, prices are
bound to rise rapidly in this situation, leading to far greater conser-
vation, as well as to slower economic growth.
Adjustment of energy
demand to stagnating energy supply will be hindered by the likely de-
pressive effect of slower economic growth on investment and conse-
quently on the rate of introduction of more efficient energy-using dura-
bles. And demand adjustment will be greatly complicated by a rapid
decline in supplies of light oil products for which there are no good
substitutes while potential coal supplies may not be used.
[Omitted here is the body of the 35-page paper.]
The International Energy Weekly Review produced by the National Foreign As-
sessment Center, March 19, focused on “International Payments Implications of Rising
OPEC Oil Prices.” A copy is in CIA’s FOIA Electronic Reading Room.
January 1979–January 1981 829
263. Memorandum From Secretary of Energy Duncan to President
Washington, March 6, 1980.
Saudi Arabia Trip Report, March 1–4, 1980
I travelled to Saudi Arabia at the invitation of Sheik Zaki Yamani,
Minister of Petroleum and Mineral Wealth, and held a series of discus-
sions with Minister Yamani and other Saudi officials with economic
and finance portfolios, including Crown Prince Fahd; Mohammed Aba
Al-Khayl, Minister of Finance and National Economy; Hisham Nazer,
Minister of Planning and National Economy; Ghazi al-Gosaibi, Min-
ister of Industry and Electricity; Farouk Akhdar, Secretary General of
the Royal Commission on Yanbu/Jubayl; and Abdel Hadi Taher, Gov-
ernor of Petromin.
We found in Saudi Arabia a strongly held view that they were
managing their oil industry responsibly and with broad international
objectives in mind. They alleged that it was at some “sacrifice” that
they maintained their production level at 9.5 MMB/D. It is significant
to me that the economic officials with whom I spoke gave no discern-
ible weight to the American national security commitment to the re-
gion, as expressed in your State of the Union speech.
Their view seems
to be that we had no option but to provide regional security. I believe,
however, that ministers with military and foreign affairs responsibil-
ities would take a different position, as did the Crown Prince. The dis-
cussions with the Crown Prince were primarily on subjects other than
energy and are summarized in a separate memorandum.
1. Excise Tax on Gasoline—We mentioned the “possibility” of a tax
on gasoline that would be imposed through an import fee on crude oil
Source: Carter Library, National Security Affairs, Brzezinski Material, Agency
File, Box 8, Energy Department, 11/79–9/80. Secret. Copies were sent to Brzezinski,
Vance, and Brown. Carter initialed the memorandum.
A summary record of Duncan’s meetings in Saudi Arabia is in telegram 63912 to
Riyadh, March 10. (National Archives, RG 59, Central Foreign Policy Files, D800123–
1051) His March 4 discussion with Yamani was reported in telegram 1621 from Jidda,
March 10. (Ibid., D800123–0373) A memorandum of his March 2 conversation with Prince
Fahd is in the Carter Library, National Security Affairs, Brzezinski Material, Agency File,
Box 8, Energy Department, 11/79–9/80. His March 3 discussion with Taher was reported
in telegram 1622 from Jidda, March 10. (National Archives, RG 59, Central Foreign Policy
See footnote 4, Document 257.
830 Foreign Relations, 1969–1976, Volume XXXVII
and allocated to gasoline through the entitlements system. Yamani in-
dicated that would cause him great difficulty with other OPEC mem-
bers but was supportive of the conservation objective of such a fee. Af-
ter considerable discussion, it is my view, and also that of Ambassador
West, that an import fee would be manageable provided that proposed
legislation imposing a gasoline tax was submitted to the Congress si-
multaneously with the introduction of the import fee and that it is
made clear the fee would be terminated if and when legislation were
2. Strategic Petroleum Reserve—We discussed the filling of the Stra-
tegic Petroleum Reserve and Yamani’s reaction was vigorously nega-
Yamani said he was doing everything possible to create a surplus
of crude oil in the world market in order to achieve both price disci-
pline and pricing unity among OPEC members.
To add to crude oil de-
mand at a time when he was trying to build a surplus was counter to
this objective. It would make it difficult, if not impossible, to hold Saudi
production at present levels in view of the belief of many Saudi officials
that current production levels are too high. In effect, our action could
defeat his program to achieve real progress at the June OPEC meeting.
He raised this issue with me on three other occasions and reverted to
it in his final comments to me just before my departure. He repeat-
edly urged, in the strongest possible terms, that we not compromise
his program at this time. He indicated in a private conversation that
he would have no problem with a U.S. decision to fill the SPR after
the market stabilizes and that he understood our national security
3. Energy Conservation—I described in some detail both the actions
that we have taken and the substantial results we have already
achieved. Saudi officials expressed strong and continuing interest in
conservation measures, not only in the United States but also in other
industrialized countries. They seem to be impressed by recent achieve-
ments in the United States, against a background of skepticism con-
cerning the ability of the industrial countries in general and the United
States in particular to get energy demand under control. The Saudis see
reduced demand for oil by the industrialized countries as a necessary
complement to their own policy of high production levels in the effort
to reintroduce order into the world oil market. They also see sustained
conservation as necessary to avoid future “gaps” between supply and
demand and consequent pressure on them to increase production to
undesired levels, which they are determined to withstand.
See footnote 2, Document 258.
Next to this sentence, Carter wrote: “I agree.”
January 1979–January 1981 831
4. Production Policy—Yamani believes that the current level of
Saudi production is in excess of that warranted by Saudi revenue needs
and reaffirmed the baseline Saudi production target of 8.5 MMB/D. He
indicated, again privately, that he favored continuing production at 9.5
MMB/D at least through the next quarter to achieve his objective of
We were told by Dr. Taher, Governor of Petromin, and the
Chairman of ARAMCO, John Kelberer, that the Saudis are on an invest-
ment course to expand their production capacity to 12 MMB/D. It is
my view that this capability is a lever to discipline other OPEC produc-
ers, rather than a reflection of a desire to increase actual production.
5. Continuing Dialogue—Yamani believes that a world “dialogue”
on energy matters that involved many countries and a broad agenda is
bound to fail. He believes constructive results can be achieved if a rela-
tively few countries, using a narrow agenda, work bilaterally or in
small groups for the next two years. Only then will it be possible to
reach agreement in a broader international arena such as the United
6. Other Issues—Yamani mentioned the Civil Investigative demand
issued by the Department of Justice requiring ARAMCO to provide in-
formation respecting Saudi Arabian reserves, production potential,
and other prospective activities. He expressed his view that these re-
quests for information had no bearing on an investigation that is di-
rected to past practices and are unacceptable intrusions into high confi-
dential national secrets. We informed him that a team from the Justice
Department would be in Saudi Arabia next week to address this issue. I
am meeting with Ben Civiletti tomorrow before the team leaves.
Yamani also expressed concern over proposed Internal Revenue
regulations “directed at ARAMCO,” that would preclude ARAMCO
from realizing a tax credit against U.S. income taxes for taxes paid to
Saudi Arabia. He reiterated the point made strongly to Secretary Miller
that the end result of this tax action would be the dissolution of
ARAMCO to the detriment of American policy. In a separate discus-
sion, Mr. John Kelberer, Chairman of ARAMCO, told me that the
$300 million to $1 billion in additional taxes such a regulation would re-
quire would destroy ARAMCO’s utility to its American corporate
In this paragraph, Carter underlined “world ‘dialogue’” and “bound to fail” and
wrote in the margin: “I agree” and “good.”
Carter underlined “meeting with Ben Civiletti tomorrow” and wrote in the
margin: “OK.” Benjamin R. Civiletti was the Attorney General. Regarding the investiga-
tion, see footnote 5, Document 249.
832 Foreign Relations, 1969–1976, Volume XXXVII
Many in the American business community and the Saudi Govern-
ment raised the issue of heavy U.S. income taxes on American expa-
triates, arguing that the effect of these taxes is to render American in-
dustry noncompetitive with Europeans and Japanese. In the judgment
of these people, shared by Ambassador West, American industry is
losing billions in Saudi business as a result.
1. OPEC Discipline—The Saudis are exerting strong pressure and
undertaking various initiatives to achieve pricing unity. Yamani thinks
there is a possibility of achieving this objective at the June OPEC meet-
ing if continued Saudi production of 9.5 MMB/D results in crude oil
surpluses. He thinks that will happen even if Kuwait reduces produc-
tion, as announced.
The Saudis are also interested in achieving future stability and pre-
dictability in pricing and supply. Yamani believes pricing shocks such
as those that occurred in the latter part of 1979 could be avoided by
having regular quarterly adjustments to compensate for inflation and
to share in real economic growth.
Presumably, downward adjust-
ments in real prices could be made during economic down-turns.
Yamani did little more than float the concept and indicate he had the
approval of several other OPEC countries.
2. Industrialization—The Saudis are concerned about the post-oil
era and want to take actions now to plan for that inevitable transition.
They are investing billions in an industrial infrastructure (e.g., ports,
cities, gas distribution systems, electrical grids, and communications
systems). They will be finalizing arrangements with foreign companies
for huge industrial facilities in the petro-chemical area during the next
The Saudis mention the need for “technology transfer,” but I sus-
pect they understand they are now purchasing the best foreign tech-
nology available in their industrialization projects and other moderni-
3. Less Developed Countries—The Saudis seem to have a genuine in-
terest in assisting the oil importing developing countries to expand
production of energy alternatives to oil. We mentioned World Bank ini-
tiatives in this area and the possibility of this being on the agenda at the
Venice Summit. The Saudis also seem to be willing to consider addi-
tional development assistance in general but they are chary of ex-
Next to this paragraph, Carter wrote a question mark.
Carter underlined “to share in real economic growth” and wrote in the margin:
“Here’s the problem.”
January 1979–January 1981 833
tending direct long-term government-to-government credits to the oil
importing developing countries.
4. Political Relations in the Region—Progress in Arab/Israeli peace
negotiations is an overriding issue with the Saudis. The issue arises
constantly, softly but resolutely. They are very concerned about Soviet
moves and objectives in Afghanistan, and seem proud that the Islamic
population is resisting Soviet aggression strongly.
I view the trip as successful, even though I could not gain Saudi
understanding for filling the SPR now. I believe we made some head-
way on this issue, particularly because they said, for the first time, that
they have no objection in principle to our building up the SPR—once
the market has stabilized. I also believe a comfortable relationship has
been established with Yamani, in which easy, forthright, and construc-
tive communication can be maintained on a regular basis. Finally, I
would stress the need to preserve the confidentality of Saudi views and
intentions, even though, as a consequence, there will be reverberations
from the Hill and the press on the short run issues that have received
prominence—the SPR and whether the Saudis are specifically commit-
ted to continue production at 9.5 MMB/D. I did a press conference to-
day on the trip, and I think these issues were handled satisfactorily. By
preserving confidentiality, we would improve our credibility with Sau-
dis and greatly improve their ability—internally and within OPEC—to
come through on the more durable and important issues.
On March 14, 1980, President Jimmy Carter addressed the nation
on the rapid rise in inflation and interest rates during the previous 8
weeks. After outlining what he viewed as the domestic and interna-
tional causes of soaring inflation, including “the soaring prices for en-
ergy throughout the world,” he announced a five-part intensive anti-
inflation program, which contained these components: 1) a balanced
budget for fiscal year 1981 based on expenditure cuts in personnel, op-
erating, and maintenance throughout the Federal government; 2) re-
straining the growth of credit by using the Credit Control Act of 1969 to
authorize the Federal Reserve to impose new restraints on credit on a
limited and carefully targeted basis; 3) requesting voluntary wage and
price standards based on the revised pay standards of the Council on
Wage and Price Standards and expanding the price and wage moni-
834 Foreign Relations, 1969–1976, Volume XXXVII
toring activities of the Council on Wage and Price Stability; 4) asking
that Congress finish work on the administration’s energy policy con-
cerning the windfall profits tax, the Energy Security Corporation, and
the Energy Mobilization Board, reiterating his goal to cut the nation’s
oil imports by 50 percent by 1990, and also exercising Presidential
authority to impose a gasoline conservation fee on imported oil
amounting to 10 cents a gallon on gasoline; and 5) pressing for long-
term structural economic changes that would encourage productivity,
savings, and research and development based on specific recommen-
dations from the Presidential commission on an agenda for the 1980s.
For text of the President’s remarks, see Public Papers of the Presidents of
, pages 476–482.
The Department of State sent a telegram to the Embassies in all
OECD and OPEC capitals instructing Ambassadors to inform the high-
est available level of the host governments of Carter’s address, particu-
larly the gasoline conservation fee on imported oil. (Telegram 67332,
March 14; National Archives, RG 59, Central Foreign Policy Files,
January 1979–January 1981 835
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