Foreign Relations of the United States, 1969–1976, Volume XXXVII, Energy Crisis, 1974–1980

106. Memorandum From the President’s Assistant for National Security Affairs (Scowcroft) to President Ford¹

Washington, October 28, 1976.

SUBJECT

• Possible Oil Price Increase: Letters to Key OPEC Leaders

We have been receiving increasing indications [less than 1 line not declassified] through public statements of officials of various OPEC countries, that a decision to increase the price of oil may be taken at the meeting of OPEC Petroleum Ministers in December.

It is important that you make known to key OPEC leaders, forcefully and unequivocally, your opposition to any such price increase. It would have serious and perhaps even catastrophic effects in both developed and developing countries.

—In the case of the developed countries, an increase would have a significant inflationary and recessionary impact. Our analysis indicates that a 15 percent increase in oil prices would cost the developed countries $15 billion directly and $32 billion in reduced GNP. Even in countries where economic recovery is well underway, its continuation is by no means assured. In other developed countries, the recovery remains fragile and uneven, while in still others it has scarcely begun. The critical balance of payments difficulties of Italy and the United Kingdom would of course be made significantly more severe, with consequent additional strain on the economic and political stability of those countries.

—In the case of the oil-importing developing countries, the cost would be $3.5–$4 billion, roughly half in direct costs and the other half from oil-related increases in import prices. Some of the healthier economies have been able to begin to adjust to the quadrupling of oil prices since 1973, and are also feeling the positive effects of increased economic activity in the developed countries. Other developing countries, however, remain in desperate financial straits and are politically unable to further curtail their imports. Their increased oil bills represent a direct burden on the already strained international financial system.

The attached letters to the Shah of Iran, King Khalid of Saudi Arabia, and President Perez of Venezuela² point out how disruptive a price increase would be, both politically and economically, and also rebut the argument that a price increase is necessary to offset the increased price of OPEC imports from the developed countries. The letters are somewhat firmer in tone than your previous communications on this subject,³ as is appropriate given the apparent willingness of the oil producers to continue to maximize their short-term income at the expense of the global community. The letters also point out that an increase would negatively affect the images of the producers in this country at a critical time.

Saudi Arabia’s position on oil prices has been consistently more moderate and responsible than that of the other oil producers. They singlehandedly blocked the last attempt at increase by walking out of the Bali OPEC meeting. We have recently had indications, including your recent conversation with Prince Saud,⁴ that the Saudis remain concerned about the effects of a price increase but need our help in reducing pressure on them from other oil producers. Your letter to King Khalid reflects this distinction. It also reassures those Saudis who reportedly believe we are not sufficiently appreciative of what they have done to date in holding the line on price increase.

I have requested development of an overall strategy paper on this issue,⁵ to include diplomatic options for complementing these letters. I will report to you separately on the recommendations of this strategy paper.

Recommendation:

That you approve the letters to the Shah of Iran, King Khalid of Saudi Arabia, and President Perez of Venezuela, which are attached at Tab A. If the letters are satisfactory, I propose dispatching them by cable and following up with originals which you can sign on your return to Washington. (Secretary Kissinger, Alan Greenspan and Clement Malin of FEA concur)⁶

1. Source: Ford Library, National Security Adviser, Presidential Subject File, Box 5, Energy (17). Secret. Sent for action. A stamped notation on the first page reads: “The President has seen.”
2. See Document 110.
3. See Document 80.
4. See footnote 6, Document 103.
5. The strategy paper, “Policy Actions to Attempt to Influence the Saudis to Hold Price Line in December OPEC Meeting,” is attached to an October 25 memorandum from Executive Secretary of the Department of State C. Arthur Borg to Scowcroft. (Ford Library, National Security Adviser, Presidential Subject File, Box 5, Energy (17))
6. Ford approved the recommendation. The Department sent instructions to Ambassadors in OPEC capitals—not including Jidda, Caracas, and Tehran—to “make early approach at highest available level to host governments to convey our concerns over the impact of a further oil price increase.” (Telegram 279392, November 12; National Archives, RG 59, Central Foreign Policy Files, D760424–0298) The Department also sent guidance to all diplomatic posts “for use in any conversations with host government officials in which the December OPEC price decision is raised.” (Telegram 278391, November 11; ibid.) Kissinger also sent a personal message regarding U.S. concerns about an oil price rise to the Foreign Ministers of Brazil, Peru, India, Sri Lanka, Yugoslavia, Congo, and Zambia. (Telegram 281096, November 16; ibid., D760426–0833)