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

148. Memorandum From the President’s Assistant for National Security Affairs (Brzezinski) and Henry Owen of the National Security Council Staff to President Carter¹

Washington, April 15, 1978.

SUBJECT

• Saudi Oil Production

1. Introduction. Jim Schlesinger’s memo concerning Saudi oil production (Tab A)² raises two issues with broad policy implications: oil prices, and Saudi investment plans in the energy sector.

2. Oil Prices. Jim correctly points out that we may have to reconsider our strategy toward OPEC. We managed to avert a price hike last December, but a freeze may be difficult to maintain beyond 1978 in view of the dollar’s weakness in exchange markets, continued high inflation in the industrialized world, and strong pressures on Saudi Arabia and Iran within OPEC. Furthermore, a freeze might not be in our best interest, if it were followed by a sudden and substantial price rise which could have a disruptive effect on the world economy. The next decision point will come shortly before the December OPEC meeting, if not earlier. Thus, a review of our strategy toward OPEC pricing is both timely and appropriate. We will arrange to have this strategy considered in an inter-agency framework, so that recommendations can be prepared for your consideration.

3. Saudi Investment Plans. Jim suggests that we acquiesce in a modest (5–10%) price increase in 1979³ if the Saudis will agree to earmark additional revenues for investment in new production capacity. We strongly doubt that acceptance of a price hike would give the US any leverage over Saudi investment plans. The US should, however, take every opportunity to urge Saudi Arabia to step up capital outlays in production facilities without linking investment to any increased revenues resulting from higher prices, since the Saudis must invest more if we are to avoid a potentially serious shortfall in oil supplies during the early or mid-1980s. If you agree, Zbig will send the attached memo to Jim Schlesinger to underscore this point. (Tab B)⁴

1. Source: Carter Library, National Security Affairs, Brzezinski Material, Country File, Box 67, Saudi Arabia, 1–5/78. Secret. Sent for information. At the top of the page, Carter wrote: “Zbig—Send cc memo back.”
2. Undated; attached but not printed. Carter wrote a note on this memorandum asking Brzezinski for “brief comment” on it.
3. Owen wrote a note on an April 15 covering memorandum to Brzezinski: “ZB—I strongly disagree with the idea of accepting a 10% price increase in 79. You should not endorse that and instead refer it to Schultze, etc.” (Carter Library, National Security Affairs, Staff Material, Special Projects File, Box 5, Henry Owen, Chron: 4/16–30/78)
4. Not attached, but a copy is ibid. In this undated and unsigned memorandum, Brzezinski wrote that Carter agreed that the United States “should take every opportunity to urge the Saudis to step up capital outlays in new production facilities, regardless of near-term price developments.” He also wrote: “As we strengthen our overall relations with Saudi Arabia on both the political and economic front, we should intensify energy cooperation to assure that there is adequate installed production capacity in Saudi Arabia to meet anticipated needs for oil in the 1980s. Meanwhile, price strategy should be studied in an appropriate inter-agency forum, and I will be in touch with you shortly with specific proposals.” According to a note from Rich Hutcheson to Brzezinski, April 17, the memorandum was forwarded to Schlesinger. (Ibid.)