116. Telegram From the Embassy in Kuwait to the Department of State1
210. For the Secretary and Asst. Sec. Atherton. Subject: Suggested Consideration of Policy Options and Actions To Support Saudi Arabia/UAE in OPEC Price Increase Dispute.
1. Summary: The uncertainty and confusion resulting from the two-tier oil pricing system which emerged from the Doha OPEC meeting2 are being compounded by the prospect of reduced liftings by some oil companies from OPEC eleven countries. Despite the great wealth of many of the eleven, their industrial and development commitments continue to require a high level of financing supplied by oil sales. The Doha meeting produced a crack in the facade of OPEC solidarity which is possibly worthwhile exploiting now in order to counteract the irresponsible trend displayed in OPEC actions. The USG should study carefully and consider seriously what policy options are open to support Saudi Arabia’s effort to hold the oil price increase to five percent and to persuade the OPEC eleven to settle for the same increase level by a variety of actions, including reduced liftings, increased non-OPEC production, drawdown of stocks and reserves, and conservation measures, as well as renewed diplomatic “jawboning.” Failure of this Saudi/UAE bold action due to lack of support from consuming nations [Page 406] could lead to eventual economic confrontation as well as damage to the political position of the West in the Middle East. End summary.
2. I have reviewed the spate of messages (including those from Kuwait) on post-Doha OPEC meeting developments and am prompted to offer the following observations and suggestions. Although most messages have stressed firm intention of OPEC eleven to hold firmly to their agreed oil price increase (at least the initial ten percent), with the expectation that Saudi Arabia (and the United Arab Emirates) would eventually fall into line, a current of uncertainty and confusion about the impact of the two-tier price system has been registered throughout. Another factor which emerges is the apparently serious determination of Saudi Arabia to maintain the lower five percent price increase by raising its oil production level.
3. Reduced Liftings: More recent developments have indicated that various oil companies, both small and large, have indicated to a number of producers among the OPEC eleven that they would be reducing or—in the case of a few smaller buyers—suspending their normal liftings in the first quarter of 1977. Here in Kuwait, two of the three major purchasers, Gulf and Shell, have reduced liftings; BP apparently will follow suit shortly. Oil Minister al-Kazemi has already announced publicly that Kuwait’s crude production would be lowered because of such reduced liftings. Iran, too, has reported a one-third reduction in normal liftings and has threatened publicly to “blacklist” those oil companies involved. A wire service report indicated that Exxon was planning to supply some Saudi Arabian crude to its Aruba refinery, heretofore reportedly run on Venezuelan crude.
4. Production Requirements. While one might assume that Kuwait, with its surplus wealth, could manage quite well on a lower output, this is not necessarily so. Kuwait is dependent upon associated gas for the generation of power, the demand for which is increasing rapidly and hit its high point during summer. Moreover, Kuwait is constructing a billion dollar gas utilization plant for production of LPG which will require by 1978 at least a two million B/D crude production if it is to obtain the necessary associated gas to commence partial operation. I am not fully familiar with the situation in the other OPEC eleven countries, but I am aware that a number of them, such as Iran, have extensive development programs which will need a continued high level of financing. It is therefore clear that the combination of the high level of oil purchases during the last quarter of 1976 in anticipation of the price rise, and reduced liftings in the first quarter of 1977 will put a certain squeeze on some of the OPEC eleven producers.
5. OPEC Threat to World Economy. Simple analysis shows that the trend in OPEC, as demonstrated by the actions of the OPEC eleven, is one which points toward continued irresponsible behavior on the part [Page 407] of the OPEC majority in respect to oil pricing. Continuation of such arbitrary price increases as have been levied by the cartel can only lead to eventual serious global economic consequences or even conflict. Repeated distortion of the world’s economic structure as the result of continuing price increase jolts will have far-reaching repercussions of a political as well as economic nature. Efforts to improve the lot of the developing countries in the framework of the North-South dialogue will prove fruitless if deliberations are continually upset by the introduction of a new set of economic equations and political problems—both in the developed and developing countries—brought on by a senseless succession of OPEC price increases. Moreover, the disarray in the industrialized world will afford an unsurpassed opportunity for the Soviet Union to tilt the global balance in its favor.
6. Consideration of Policy Options and Actions. Although one cannot say that there has been an irrevocable split in OPEC, the results of the Doha meeting have certainly produced a crack in its facade. We should therefore take this opportunity to examine what policy options and actions this development offers the US and the other industrialized countries to counter the potentially unfavorable future impact of OPEC policies and actions.
7. Support for Saudi Arabia. In the first instance, it is clearly in our interest to support the Saudi/UAE effort to restrict the oil price increase to five percent. This support may be demonstrated in a number of ways. Some have been suggested by Yamani himself, i.e., movement toward a Middle East peace settlement and progress in the North-South dialogue. I have not viewed these as conditions—indeed such progress would support our own policy objectives in these fields. Other ways to support Saudi determination in the matter could take the form of favorable response to further requests for arms—provided these are reasonable and do not disturb the military balance in the Middle East which is already considerably weighted in Israel’s favor.
8. Complexities of Situation. Although I assume consideration is already being given in the Dept. and elsewhere to possible steps the USG might take in this situation, I am not privy to any information in this regard. Nor is it easy to discern from this vantage point what actions, if any, may even be possible and effective. I am broadly aware of the complexities of the oil distribution and marketing system, and of the severe limitations placed on the flexibility of oil companies by their contractual purchase commitments and refinery supply requirements as well as of governments by domestic legislation and politico/economic pressures and demands in both the US and, especially, in Western Europe. I am also fully cognizant of the fact that the complexities of the situation will tend to dilute the effectiveness of any possible actions which may come in mind.
[Page 408]9. Possible Courses of Action. Nonetheless, with these caveats in mind, clearly I would like to outline below a few courses of action which could merit consideration:
A. USG might examine, in the context of the International Energy Agency (IEA), ways in which non-OPEC oil production could be rapidly maximized during this year, with emphasis on what measures might have some effect in the initial six months prior to the next OPEC meeting scheduled July 12. Emergency measures by the USG to increase our domestic production could also be considered: North Sea production, particularly Norway’s, might be expanded, etc.
B. Temporary measures to restrict both purchases and consumption of OPEC eleven oil should be undertaken, e.g. stocks which are now at a high level should not be replenished as early as usual, reserves might be drawn down, etc. Above all, restraint should be exercised so that the buying spree which preceded the present price rise does not occur again before the next price increase scheduled for July 1. There are already indications of prospects that the additional five percent increase raising the total oil price by fifteen percent might be abandoned in the hope of attracting a by-that-time disillusioned Saudi Arabia back in order to restore OPEC unity.
C. IEA governments should seek to coordinate with their oil companies to ensure that the latter make every effort to limit their purchases of OPEC eleven oil to the greatest extent possible. Reduced purchasing pressure should be brought on those countries among the OPEC eleven which might be more vulnerable, such as Kuwait, which is already uneasy about its being at odds with Saudi Arabia over this issue, and whose oil is already more difficult to market because of its high sulfur content and its gravity. Indonesia, which has increased the price of its key Minas crude by only 5.9 percent, might be amenable to friendly pressure to bring the rest of its crudes down to the five percent level, if liftings of those were to be reduced. Conversely, the oil companies might try to increase their purchases from Iraq, which in the past has demonstrated its willingness to ignore OPEC price strictures by granting favorable discounts in order to increase its sales volume. In addition, assurances should be obtained that Saudi Arabia and UAE will give sympathetic consideration to requests for crude from those oil companies which are not regular customers.
D. In the diplomatic field, USG and its allies should be willing to undertake a much more vigorous diplomatic campaign of “jawboning” members of the OPEC eleven. For example, we should make a maximum effort to counsel restraint to our ally, Iran, which because of its importance as large oil producer, has probably been the most irresponsible of all the OPEC members in demanding higher and higher price increases over the years. (My Saudi Ambassadorial colleague has al [Page 409] ready wryly commented on the minimal pressure exerted by the USG on Iran in this question.) While I recognize our dependence on Iranian purchases of US products and services (including the military category) as well as on Iranian oil in certain instances, I believe the time has come for the USG to demonstrate its displeasure with Iranian actions in OPEC in a firmer and sharper manner. Irresponsible threats to blacklist American oil companies which choose to buy oil at the lower Saudi price should not be meekly accepted.
10. Extent of Impact. The actions outlined, if feasible, should be taken with least fanfare possible. I do not suggest that we seek to engage in direct economic confrontation with the OPEC eleven. I do believe, however, that the uncertainty and confusion prevailing among them can be utilized to shake the arrogance and self-confidence brought on by the headiness of their great wealth to a sufficient extent to enable us to profit from the responsible attitude displayed by Saudi Arabia and the UAE. Even if such measures as proposed are only partially effective, the cumulation of their impact, if it comes early enough, could possibly be enough to persuade the OPEC eleven to settle for a five percent increase—or at least not raise the increase to 15 percent.
11. Recommendation. After weighing all the complications that are easy to foresee as well as the difficulties of discreetly organizing such an effort, I still feel that this situation presents an opportunity which should not be missed. Indeed, the price-conscious oil companies have already shown the way by their initial reactions. They should be supported by their governments. So should Saudi Arabia and the UAE for their politically independent stand. If the Saudi/UAE effort fails for want of support from the nations their action would benefit, I fear for the future behavior of OPEC which might indeed lead to a future economic conflict that could only be damaging to the position of the West in the Middle East. I therefore urge that Washington study carefully and give rapid and serious consideration to what early actions might be taken to exploit this disarray in OPEC to the advantage of both the industrialized and developing nations and in the interest of protecting the political position of the US and the West in the Middle East.
- Source: National Archives, RG 59, Central Foreign Policy Files, D770011–0988. Secret; Priority; Exdis. Repeated to Abu Dhabi, Caracas, Doha, Jakarta, Jidda, London, Tehran, Tokyo, Baghdad, USOECD Paris, USEC Brussels, and Dhahran.↩
- See Document 113.↩