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

261. Telegram From the Department of State to the Embassies in Nigeria and Saudi Arabia and the Liaison Office in Riyadh¹

Washington, February 15, 1980, 1407Z.

41711. Subject: Impact of Oil Price Increases. Ref: A) Lagos 1013 (Notal), B) 79 Riyadh 1986 (Notal), C) Lagos 1174.²

1. Entire text Confidential.

2. In response to request Refs A and B, Department is pouching all addressees copies of two CIA studies and a Department analysis of the impact of oil price increases in 1980. Most of the text and all of the tables in the CIA studies are unclassified; the Department’s analysis is administratively controlled and may be discussed privately with foreign government officials. We are also sending posts an unclassified paper describing methodological techniques used in preparing projections of OECD energy demand and the economic impact of oil price increases.³

3. Department wishes posts to be aware that, in the experience of Department officers who have discussed oil price increases with officials of various oil producing nations, the use of detailed economic analyses such as those described above has not been very productive. Discussions often degenerate into debates over the econometric model being used, premises and assumptions being employed, and disagreements over data chosen for base-line cases. (Even within the U.S. Government, there is considerable disagreement between various agencies and departments over these issues.) Furthermore, the use of various hypothetical oil price increases lends itself to misinterpretations, and can be misconstrued as evidence the USG was expecting such an increase when we are arguing against an increase.

4. Economic analyses of the impact of oil price increases are based upon weighted average oil prices; nothing in them examines the question of differentials among different qualities of crude oil, a topic which OPEC members themselves are notably unable to agree upon. When supplies are perceived as adequate, such as during the slack oil market conditions in 1974–78, these differentials would be determined by net-backs to refiners. The premiums charged by producers of high quality oil are theoretically limited by the ability of refiners to invest in facilities to handle lower-priced, lower quality crudes. As Embassy Lagos is aware, Nigeria and the North African producers were forced into competitive price reductions, discounts, etc. during slack market in 1978.

5. At the present time, Iran’s attempts to maintain a $6 per barrel differential vis-à-vis similar quality Persian Gulf crudes distort the crude oil market and encourages the upward ratcheting of oil prices we have seen thus far in 1980. These unstable conditions have created opportunities for producers in North Africa (and Mexico and the North Sea) to increase prices, using the excuse of Persian Gulf price hikes. In the long run, we expect the market will sustain some, but likely only a small portion, of the widening of differentials for North African/Nigerian crudes which occurred last year.

6. For Lagos: Ms. Schwartz (AF/W) will hand-carry documents described paragraph 2 to Lagos February 20 and will be able to provide additional background information.

Vance

1. Source: National Archives, RG 59, Central Foreign Policy Files, D800081–1236. Confidential. Drafted by Todd; cleared by Raymond Hill (E) and in EB/ORF/FSE, EB/PAS, AF/W, NEA/ARP, NEA/ECON, DOE/IA, and the Treasury Department; and approved by Calingaert. Repeated to Caracas, Quito, Jakarta, Algiers, Baghdad, Kuwait, Abu Dhabi, Doha, Dhahran, and Libreville.
2. Telegram 1013 from Lagos, January 30, reads in part: “Embassy agrees that it is both useful and important to engage FGN in meaningful dialogue on the price of oil. In our view FGN will be principally motivated by short-term considerations of maximization of revenue. Nevertheless, a strong and sophisticated argument which directly relates Nigerian economy to the health of Western economies and the world price of oil might make an impression over time.” (Ibid., D800052–0930) In telegram 1986 from Riyadh, December 13, 1979, the Liaison Office requested “specific data useful to a professional economist backing up conclusion of 0.8 percent decline in OECD GNP growth and 1 percent increase in inflation attributable to 1979 oil price increases.” (Ibid., [no film number]) Telegram 1114 from Lagos, February 2, contains a quote from the newspaper New Nigerian on the announcement of a crude oil price increase by the Nigerian National Petroleum Company. (Ibid., D800058–0360)
3. None of these studies has been identified.