Office of the Historian

161. Summary of Conclusions of Ad Hoc National Security Council Meeting1

Washington, September 21, 1978, 10:30–11:45 a.m.

SUBJECT

  • OPEC Oil Prices

PARTICIPANTS

  • State:
  • Richard Cooper, Under Secretary for Economic Affairs
  • Julius Katz, Assistant Secretary, Bureau of Economic-Business Affairs
  • Treasury:
  • Secretary Michael Blumenthal
  • Anthony Solomon, Under Secretary for Monetary Affairs
  • Energy:
  • Secretary James Schlesinger
  • Walter MacDonald, Deputy Assistant Secretary for International Affairs
  • Council of Economic Advisers:
  • Chairman Charles Schultze
  • Domestic Policy Staff:
  • Director Stu Eizenstat
  • Kitty Schirmer, Associate Director
  • White House:
  • Zbigniew Brzezinski
  • David Aaron
  • NSC:
  • Henry Owen
  • John Renner
  • Gary Sick
[Page 517]

Summary of Conclusions

1. OPEC Oil Price Increase

It was agreed that US spokesmen would make a strong case against an oil price increase for 1979, that this case would be made as persuasive as possible taking into account political and economic realities, and that Presidential involvement was not appropriate. If an increase cannot be halted, we will work toward the lowest possible price hike—hopefully taken in two stages. The Department of State will prepare a telegram to the field setting forth the points to be used in our initial discussions.

There has been no price increase since July 1977. Inflation and the depreciation of the dollar have reduced the real income of OPEC countries. The OPEC countries with high revenue needs are pushing hard for a price increase; Iran has signalled that an increase is desired; Saudi Arabia is not working for a continuation of the price freeze.

There was a consensus that if we were to go flat out against any price increase, we would lack credibility and our ability to influence the extent of the price increase would be greatly reduced. We would also not be in a good position to argue for additional investment to increase production capacity, which is essential if we are to avoid supply stringencies in the mid to late 1980s. Furthermore, the more ammunition we use against a price increase the less we would have to oppose OPEC pricing on the basis of a basket of currencies.

2. OPEC Oil Price Based on Basket of Currencies

It was agreed that the US should make a maximum effort to persuade OPEC not to price its oil on the basis of the value of a basket of currencies, that this objective had a higher priority than avoiding a price increase, and that the President’s prestige should be engaged if necessary. It was also agreed that when the monetary situation stabilizes we should consider whether a properly defined basket would be to our advantage.

Treasury believes exchange markets would react badly to OPEC pricing oil based on a basket of currencies. The exchange markets are nervous and the adoption of the basket would cause a run from the dollar. Furthermore, regardless of the theoretical symmetry of the basket, the OPEC countries would not lower prices when the dollar strengthened.

However, because OPEC oil prices are denominated in dollars, the cost of oil to Germany and Japan falls as the dollar depreciates in relation to the DM and the Yen. This reduces German and Japanese production costs and improves their competitive position. Thus, at some [Page 518] future date when the pressure is off the dollar, a basket might serve our interest and help improve our competitive position.2

  1. Source: Carter Library, National Security Affairs, Staff Material, International Economics File, Box 44, Rutherford Poats File, Chron, 9–11/78. Secret. The meeting was held in the White House Situation Room.↩
  2. Brzezinski sent an undated memorandum to Carter the following week informing him of the conclusions reached at the meeting. (Ibid.)↩