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

249. Memorandum From Secretary of the Treasury Miller to President Carter¹

Washington, December 5, 1979.

SUBJECT

• Middle East Trip Report
• Visit to Saudi Arabia, United Arab Emirates, Kuwait
• November 23–29, 1979

The three countries together produce almost one-half of OPEC oil and earn well over one-half of OPEC financial surpluses. In each country, our party was received with warmth and cooperation, despite tension in the area.

Summary

It is probable that the three countries will maintain oil production into the early part of next year at current levels, in excess of their preferred rates. This will be favorably influenced by evidence that the U.S. and other oil importing countries are making progress in containing and reducing demand. However, some scale-back in production can be anticipated as 1980 progresses, if the expectation of the three countries that supply will be comfortable is realized.

The countries seek return to a single benchmark price system,² although they do not believe it is likely to be achieved at the OPEC meeting in December. However, they feel that continued higher production levels will put downward pressure on spot prices as stockpiling ends and it becomes apparent (in their view) that production now exceeds final oil consumption. Their price objectives for December appear moderate, but uncertain because of the breakdown in OPEC price compliance.

All this is on the assumption that there is no serious reduction in Iranian oil exports.

The three countries’ production and pricing plans seem motivated by (1) desire to return to stable oil pricing system with all producers receiving equal treatment, (2) concern over impact of oil shortages or substantial price increases on U.S. and world economies and hence on their own investments, and (3) internal pressures which question desirability of more rapid production than needed to finance orderly development plans.

Kuwait is most likely to cut back production somewhat next year, probably starting in the second quarter.

The three countries all expressed concern over the freezing of Iranian official assets.³ After explanation of the unique circumstances, there was a better appreciation and some public expression of understanding and acceptance of the action. Nonetheless, there remains an underlying nervousness, perhaps best illustrated in the comment: “capital is a coward.” If the hostages are released and the assets unblocked promptly thereafter, the concern will probably fade away.

Underneath is the nagging question: “If we embargo oil or oppose the U.S. on major policy issues, will our assets be blocked?” We did our best to reassure them on this score.

The incident at Mecca⁴ somewhat preoccupied the Saudis. My appointment with Crown Prince Fahd in Riyadh was cancelled since he remained in Jeddah (or possibly Mecca itself) to deal with the Mecca situation.

Oil Production

In the aftermath of the Iranian revolution and the cut back in Iranian crude exports, each of the three Arab countries increased or maintained production. (Saudi Arabia from 8.5 to 9.5 mb/d; UAE stayed at 1.8 mb/d; Kuwait from 2.1 to 2.6 mb/d, including the neutral zone.) Even so, the world oil supply has been tight and there has been a breakdown in the pricing system. Officials of the three countries believe that current production is slightly above actual final oil usage, but that excess demand is resulting from stock building either as a hedge against shortages or to reduce dependence on supply from major oil companies. They, therefore, expect the supply-demand relationship to be more comfortable in the near future as stockpiling subsides.

The three also take the position that oil supplies will be adequate in 1980—with perhaps one million barrels per day surplus—provided there is no substantial reduction in Iranian output. Underlying this viewpoint is an implied willingness on their part to maintain production levels at or near present rates.

There is some reluctance to make public commitments as to production levels. Each country is now generating substantial financial surpluses, and there are internal pressures to reduce output to levels more in line with financial needs. There are those who question the wisdom of converting domestic oil resources into financial assets held outside their domains. Recent events in Iran and Mecca add weight to these voices. But the Governments recognize their interdependence with the world economy and appear prepared to maintain somewhat higher levels of production as their “sacrifice”, provided the U.S. and other oil importing countries make their “sacrifice” by conservation and constrained demand.

Saudi Oil Minister Yamani has stated publicly that his Government will consider extending the current production level of 9.5 million barrels/day into the first quarter of 1980 if the consuming nations will do their part to constrain demand. Any public commitment to this effect is not likely to be made until after the upcoming OPEC meeting. Privately, the assurances are somewhat more positive, again depending on evidence of U.S. and others taking measures to curtail demand. The value placed on our conservation is reflected in Minister Yamani’s statement that Saudi production was increased in the third quarter as a direct result of the Tokyo Summit commitments on energy consumption.

In the UAE, there seemed to be an unqualified and public commitment to maintaining the current production level of 1.8 mb/d. However, in more specific discussions, we were informed that 1980 production would be down by about 70,000 b/d because of the need to treat a field that has been mishandled by the oil operating company. The production would be restored after treatment, we were told.

The Kuwaitis were more outspoken about cutting back production. This may be because of the greater internal pressure, a reflection of the population mix which includes large numbers of Palestinians and substantial numbers of Iranians. In private conversations with Oil Minister Ali Khalifa, I was told that the Council of Ministers was likely to approve a production scale-back (perhaps several hundred thousand b/d) in 1980, to be effective sometime between April and July. Actual cutback may be influenced by supply conditions, and the Minister told me he would advocate higher production rates if there was a significant reduction in Iranian exports.

Oil Production Capacity

Privately and in confidence, the Saudis indicate plans to expand production capacity to 10.5 to 11.0 mb/d by the end of 1980, and then going on to the 12 million level by 1982. The UAE, after some setback to treat a field, expects to double capacity to about 4 mb/d. Kuwait indicates a return to its previous maximum capacity of 3 to 3.5 mb/d.

Such expansion in capacity is, of course, important for longer run stability in the oil markets and I came away increasingly impressed with our own energy vulnerability. I believe that these three countries will respond positively on production as our energy program increasingly takes hold and accelerates. In view of existing plans, I see no need at this point for us to propose inducements to expand capacity levels.

Oil Pricing

All three countries share our desire to return to a single benchmark price for oil and limit the spot market—though none are confident that this can be accomplished soon. No one seems able to predict the outcome at Caracas and no one has decided or was willing to reveal his own position. The Kuwaiti Oil Minister—an avowed price hawk—told me privately that he is thinking of an increase of $2 from the current average price of about $23. The Saudis and UAE will almost certainly be moving to bring their prices up to the level of the other producers. The effect of this on oil consumers will depend on overall pricing and the change in the average of actual selling prices.

Financial Matters

Our freeze of Iranian assets was uppermost on the minds of all those we met, both governmental officials and private business executives. Most of the officials expressed concern about the precedential implication on their own sizable holdings.

At the same time, putting aside the question of blocked assets, they noted that the dollar had become increasingly superior to other currencies as an outlet for their investments—given the instability of sterling and the yen, and increased German restrictions on foreign investors. These attitudes are central to our own efforts to maintain a stable dollar over the longer term.

The three countries will probably run a combined surplus of over $50 billion next year ($30–35 billion for Saudi Arabia alone).

In this context, I stressed your commitment to reduce inflation and strengthen the dollar. All my counterparts indicated satisfaction with our efforts, though they also adopt a wait-and-see attitude regarding actual results.

Other Issues

The Saudis seem to have become somewhat unhappy with the American companies who have traditionally been their close friends. They said that these companies had taken advantage of Saudi price moderation by increasing their profits rather than passing on the lower prices to consumers. Although unrelated, the Saudis noted that a U.S. windfall profits tax would capture some of the excess profits; otherwise, they would consider larger price increases. Saudi officials, particularly Yamani, are also incensed that two of the companies complied with a Church Committee subpoena to reveal what they consider to be proprietary data.⁵ Crude allocations of those companies have been reduced as a form of punishment.

At present, the Saudis are extremely agitated with us over two company-related issues: the risk that Saudi taxes on oil companies will be declared non-creditable against U.S. tax liabilities of the companies (this affects Aramco, of which they own 60%); and the Justice Department’s Civil Investigative Demand (in connection with its anti-trust investigation of the oil companies) for data which the Saudis consider to be their own sovereign property. These matters deserve early attention.

Conclusion

Deep reservoirs of good will for the United States continue to exist in all three countries, despite the current unrest in the area and some unhappiness with our Middle East efforts. We must expect occasional bursts of unhelpful rhetoric, but I believe their underlying interests will keep them largely in harmony with our own, if we do our part in the relationship.

In the economic area, this means above all showing steady progress in (1) reducing our requirements for imported oil and (2) maintaining a stable dollar. As we do so, I believe we can count on these three Arab countries to maintain adequate oil output, seek orderly pricing with greater stability, and continue to invest the bulk of their earnings in dollar assets.

There is, understandably, an underlying concern about the current Iranian incident (and the Mecca incident) and the fear that violence or force could spill out into the region and cause great harm. While less explicit, there is also concern about regional security and the Mid East peace process.

It is clear that personal relationships are of critical importance to the Arab countries. The trip has strengthened ties with my counterparts there, and I plan to maintain contacts on a regular basis.

1. Source: Carter Library, National Security Affairs, Brzezinski Material, Agency File, Box 22, Treasury Department, 3/79–3/80. Secret. Copies were sent to Vance, Duncan, and Eizenstat. At the top of the page, the President wrote: “Good trip. J”
2. See footnote 3, Document 220.
3. Carter issued Executive Order 12170 freezing Iranian Government assets in the United States on November 14. It reads, in part: “I, Jimmy Carter, President of the United States, find that the situation in Iran constitutes an unusual and extraordinary threat to the national security, foreign policy and economy of the United States and hereby declare a national emergency to deal with that threat.” The full text of E.O. 12170 is printed in Public Papers of the Presidents of the United States: Jimmy Carter, 1979, pp. 2118–2119.
4. On November 20, 26-year-old Saudi religious extremist Muhammad Abdallah and approximately 300 well-armed followers seized the Grand Mosque in Mecca and took hostages. An assault on the Mosque by Saudi forces on November 24 ended the incident. The Embassy in Jidda reported on the incident in telegrams 8041, November 21, and 8119, November 25. (National Archives, RG 59, Central Foreign Policy Files, D790536–0257, D790543–0581)
5. The Subcommittee on Multinational Organizations of the Senate Foreign Relations Committee, chaired by Senator Frank Church (D–ID), was investigating bribery payments by U.S. companies to foreign governments.