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

257. Telegram From the Department of State to Selected Diplomatic Posts¹

Washington, January 31, 1980, 1813Z.

27703. Subject: Gulf Oil Price Increases.

1. In the light of Yamani’s explanation to Ambassador West prior to last OPEC meeting and Shaikh Ali Khalifa’s comments to Embassy Kuwait, we are frankly confused as to how Saudi price increase to $26 followed by increases by Gulf states to what appears to be a $28 marker² squares with what Saudis, Kuwaitis and others have been telling us. Saudi announcement of $24 marker prior to OPEC meeting was allegedly part of a coordinated strategy designed to reach an OPEC compromise on a marker not above $26 and a narrowing of differentials above that marker. Price decisions by UAE and Qatar prior to OPEC meeting and Kuwait’s after meeting seemed consistent with this alleged strategy. In this context, Saudi increase to $26, once the abil-ity of higher price OPEC members to hold their prices had been thor-oughly tested is at least comprehensible (although retroactivity to January 1 is not). Decision by Kuwait, Iraq, Qatar, and UAE to increase prices an additional $2 is totally incomprehensible within this concept of a coordinated Gulf strategy. We therefore think a strong case can be made for holding Gulf prices to present $26 Saudi level (with appropriate differentials) and would of course welcome production policies and Saudi efforts with Gulf states to achieve a reunified Gulf price structure.

2. Action addressees are requested to approach host governments at Ministerial level to seek clarification of recent increases. You should seek clarification of following points:

—Are Gulf increases to $28 range part of a coordinated strategy with Saudi Arabia or do they represent a change in pricing policy?

—What is SAG attitude on increases by Gulf states?

—How does decision of Gulf producers to raise prices shortly after OPEC meeting and do so retroactively square with assertions by Yamani and Ali Khalifa and others that a substantial surplus in the market is developing? Have Gulf producers modified their market outlook and if they foresee a tighter market does this suggest Saudis and Kuwaitis will be prepared to maintain present level of production further into 1980?

—What do SAG and Gulf producers see as impact of their price increases on price decisions by other OPEC members?

—If latest price increases by Gulf states were part of strategy coordinated with Saudi Arabia, how does this square with professed desire of Saudi and Gulf producers to unify prices? Is unification now being sought nearer the price levels of the upper tier of OPEC states? Are we to anticipate an additional Saudi increase up to the Gulf level?

—What do host governments foresee as the course of OPEC pricing in the remainder of this year?

3. In this probing you should feel free to draw on State of the Union message³ and other available guidance, including Secretary Miller’s late November discussions in Saudi Arabia, Kuwait, and the UAE,⁴ to emphasize efforts US is making to reduce consumption, combat inflation, and maintain stable dollar while undertaking significant new obligation of resources to maintain the sort of global strategic balance which permits Saudi Arabia and Gulf neighbors to continue to feel able to assert that they need no outside help in defending Gulf region from aggression. While in course of these conversations you should give credit where due to those OPEC members who are making an extra contribution on the supply side and seem less eager than some to charge all the market will bear for their oil. You should in no way suggest USG condones latest increases; on the contrary, we are baffled and disturbed by them. You might seek assessment of host governments as to impact of their latest price increases on international economy, with particular reference to developing countries. You should also probe as to the possibilities for rolling back these price increases to Saudi price so as to re-establish a consistent pricing structure in the Gulf, either definitively or by substantially postponing the effective dates of the increase.

4. For Baghdad: You should exercise your own discretion as to whether and to what extent you wish to join action addressees in seeking above clarification.

Vance

1. Source: National Archives, RG 59, Central Foreign Policy Files, D800055–0244. Confidential; Immediate; Exdis. Drafted by Twinam, cleared by Calingaert and in E and the Energy and Treasury Departments, and approved by Cooper. Sent to Jidda, Kuwait, Abu Dhabi, and Doha. Repeated Priority to Dhahran, Riyadh, Baghdad, Muscat, Manama, London, Paris, Oslo, Lagos, Caracas, Jakarta, Algiers, Quito, and Libreville.
2. On January 28, it was reported that Saudi Arabia had decided to raise the price of a barrel of oil by $2 to $26, and that the price rise would be retroactive to January 1. The next day, Iraq, Kuwait, the United Arab Emirates, and Qatar raised prices to $28 per barrel. (The New York Times, January 28, 1980, p. 1, and January 30, 1980, p. D1)
3. President Carter’s January 21 State of the Union message, which is printed in Public Papers of the Presidents of the United States: Jimmy Carter, 1980, pp. 114–180, contains a section on “Creating Energy Security.” Delivered soon after the Soviet invasion of Afghanistan, the speech also emphasized the strategic importance of the Persian Gulf area and U.S. willingness to defend it: “In recent years as our own fuel imports have soared, the Persian Gulf has become vital to the United States as it has been to many of our friends and allies. Over the longer term, the world’s dependence on Persian Gulf oil is likely to increase. The denial of these oil supplies—to us or to others—would threaten our security and provoke an economic crisis greater than that of the Great Depression 50 years ago, with a fundamental change in the way we live. Twin threats to the flow of oil—from regional instability and now potentially from the Soviet Union—require that we firmly defend our vital interests when threatened.” On January 23, the President delivered his State of the Union of message to a joint session of Congress and declared what became known as the “Carter Doctrine”: “Let our position be absolutely clear: An attempt by any outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States of America, and such an assault will be repelled by any means necessary, including military force.” The address, which was broadcast nationwide, is ibid., pp. 194–200.
4. See Document 249.