173. Memorandum From Rutherford Poats of the National Security Council Staff to the President’s Deputy Assistant for National Security Affairs (Aaron)1
SUBJECT
- Long-Term International Oil Price Strategy
On October 20, 1978, after submitting a summary report to the President on a DOE-led interagency task force paper on this subject,2 Zbig asked John Renner to identify key issues and options for a PRC meeting based on this paper.
At the same time you asked Renner to consider the effects of continued use of the dollar in OPEC pricing, as opposed to a basket of currencies, on the costs of production and consequent industrial export prices of Japan and Germany. This question arose from the paper’s recommendation, endorsed by the September 21 ad hoc NSC meeting,3 that we should strongly encourage continued use of the dollar as the denominator of OPEC prices. Treasury undertook an econometric study of this question and now has reported that the declining relative cost of imported oil in Germany and Japan (resulting from the appreciation of the Deutsch Mark and yen against the dollar) has offset about four percentage points of Germany’s 38% Deutsch Mark appreciation and about 5–10 percentage points of the Japanese yen’s 55% appreciation.4 These are relatively small competitive benefits for those two countries as compared with competitive disadvantages of their currencies’ appreciations. They also have realized competitive benefits from dollar-denominated contracts for other imported industrial raw materials. The sum of these benefits would go a long way toward explaining how Germany and Japan have remained competitive in industrial exports. However, the particular advantage that derives from dollar pricing in oil is not so great as to outweigh the threat to our dollar-defense program of OPEC’s abandoning the dollar at this time.
In response to Zbig’s request, I have reviewed the interagency paper and found no issues that, in my judgment, require Presidential decisions. The summary of conclusions, circulated after the ad hoc [Page 555] meeting of September 21, was focused on the immediate issues of how to resist a large OPEC price increase for 1979 and how to persuade OPEC not to switch to a basket of currencies. The other policy recommendation made by the paper was that the US Government “establish the longer term strategic goal of seeking to expand world (oil) productive capacity as a major foreign policy objective”. Bill Odom, in a memorandum at that time,5 pointed out that this policy formulation was susceptible of various interpretations, including US support of expansion of Soviet oil production without regard to other aspects of US-Soviet relations. We are currently dealing with the application of this general policy to Mexican oil production, and we occasionally return to this subject in considering US-Saudi Arabian relations. In the IEA and the World Bank we are encouraging joint measures to stimulate greater oil and gas production in less developed countries. In short, we are adapting the general policy suggested by the paper in specific cases.
If you agree, the record will show that work has been completed on the task force paper, “Long Term Oil Price Strategy”.
- Source: Carter Library, National Security Affairs, Staff Material, International Economics File, Box 44, Rutherford Poats Files, Chron, 12/5–13/78. Secret. Sent for information.↩
- See Document 162.↩
- See Document 161.↩
- The Treasury Department report was not found.↩
- See footnote 4, Document 162.↩