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

248. Memorandum From the Deputy Secretary of Energy (Sawhill) and the Under Secretary of State for Economic Affairs (Cooper) to President Carter¹

Washington, undated.

SUBJECT

• IEA Update

The International Energy Agency (IEA) has decided to move forward its previously-scheduled January Ministerial-level meeting to December 10. This was done largely on the initiative of the U.S., for two reasons:

1. The Tokyo targets for the Summit countries, and other tentative 1980 oil import targets for the remainder of the EC and for non-Summit, non-EC countries, do not give the prospect of a balanced oil market in 1980; even against a projected optimistic OPEC production level of 30 mmb/d, after allowance for net demand for the rest of the world, the aggregate IEA oil import targets may overshoot OPEC output by 600 to 900 mb/d.

2. With the exception of France, which controls carefully its volume of oil imports, no other industrialized country has considered putting in place effective import control mechanisms such as an import quota.²

We therefore face the prospect of a worsening scramble for oil next year; this would aggravate price pressures in the market, would subject importing countries to political blackmail, and would create political tensions among importing countries.

To deal with this problem, we are proposing that the IEA adopt a system of national oil import targets, which would be adjusted quarterly to a level which gives a reasonable prospect of market balance. As a part of this system other countries will be required to put in place effective and credible enforcement mechanisms as well as demand restraint measures directed at achieving the targets. The proposed system would include penalties against countries exceeding the targets. Such an allocation mechanism should reduce incentives for buying at high spot market prices.

As part of the pro-rata reduction in import target levels to match available world oil supplies, the U.S. would have to be prepared to accept a 1980 oil import target below the level of 8.5 mmb/d agreed upon at the Tokyo Summit. Preliminary analysis indicates that the U.S. could comfortably accept an import ceiling in 1980 of approximately 8.1 mmb/d without adopting additional demand restraint measures. An interagency task force has completed a preliminary review and adopted an “unconstrained demand” estimate of 7.90–8.05 mmb/d (not including any SPR fill) as a safe projection for 1980.

In the judgment of some of your advisors, there is an additional safety margin built in to the high end of that range for the following reasons:

• An inventory build-up during 1980 of 100 m/b is included even though 1979 end-of-year inventories will be close to an all-time high;

• A voluntary nuclear moratorium is assumed which increases oil consumption by up to 250 mb/d. This moratorium could be offset instead by other policy actions such as coal-fired electricity and use of residual fuel oil from inventories. Additionally, if world oil supplies are as limited as currently expected, action to bring some of these 9 affected plants on line during 1980 will have to be considered.

We will press other countries to adopt stringent import control systems comparable to a quota mechanism as backstops for the reduced import targets. In the event that other countries resort instead to softer measures, such as “political” commitments rather than legislative actions, it would be appropriate for us to follow suit, and back up our lower target with a political commitment rather than an actual downward adjustment in the 8.5 mmb/d import quota trigger point.

If the industrialized world is unprepared to adopt stringent demand restraint measures of its own choice, demand will be effectively limited by short supply leading to still higher prices and further economic slowdown. We can take the fixed volume of oil that will be available on the world market in one of two ways: at the very high price that will result from IEA nations bidding against each other, which is politically as well as economically damaging, or at a somewhat lower price under a cooperative system of demand restraint where shortfalls are shared equitably.

In the upcoming working group meetings in Paris, we will stress the criticality of adopting meaningful enforcement systems (e.g., import quotas) to the success of any effort made at the Ministerial, while conditioning our willingness to lower our quota commitment on other nations’ willingness to commit to a rigorous enforcement mechanism.

We will report back to you on our progress following the Governing Board preparatory meeting in Paris next Monday.³

1. Source: Carter Library, National Security Affairs, Staff Material, International Economics File, Box 45, Rutherford Poats File, Chron, 12/79. Confidential. At the top of the page, Carter wrote: “cc: To Duncan, Vance. Sounds good. C”
2. Next to this sentence, Carter wrote: “Tell me briefly how France does it.”
3. December 3.