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

267. Action Memorandum From the Assistant Secretary of Energy for International Affairs (Goldman) to Secretary of Energy Duncan and the Deputy Secretary of Energy (Sawhill)¹

Washington, April 23, 1980.

SUBJECT

• Impact of Iranian Oil Embargo/Boycott

Issue

What action should be taken in response to an Iranian oil embargo or in support of a coordinated boycott of Iranian oil by our allies.

Background

In the first quarter of 1980, Iranian oil production averaged 2.5 million b/d, with exports of about 1.8–1.9 million b/d. Of these exports, approximately 1.5 million b/d went to the OECD countries. Since early April, however, there has been a substantial drop in Iranian exports. In response to the pricing dispute between NIOC and various Japanese and British companies, exports are reported to have recently fallen to a level of .3–.4 million b/d. Thus, the balance of Iranian exports, roughly 1.5 million b/d, are at stake.

The distribution of Iranian exports among the industrialized countries is very uneven (as shown on Table 1),² ranging from the relatively high dependence of Japan, Germany, and some smaller European countries, to very low levels in France, the UK, Italy, and Canada.

The current debate over sanctions³ could result in various actions which might interrupt Iranian oil exports to major industrialized countries, or political groupings such as the European Communities or the IEA. The EC plus Japan might eventually discontinue their purchases of Iranian oil; the IEA might take action to activate its sharing system; or the Iranians themselves might declare an embargo in retaliation for other political/economic measures. Whatever the precise nature of events, the loss of Iranian oil to all or some of our allies does not appear at this juncture to pose insurmountable difficulties to the world oil market because:

• Analysis by both DOE and CIA suggests that the oil market could absorb a complete loss of Iranian exports with only modest pressures on oil prices, if spot market speculation or inventory hoarding can be avoided. Demand has been falling rapidly due to the past price increases and to the reductions in economic activity.

• Iran may elect to sell a substantial portion of its exports to alternative markets in Eastern Europe and the Third World. Such sales could displace other sources of supply which might then become available to our allies to offset the loss of Iranian oil.

• Some additional supplies may be available from other OPEC producers. Iraq might be willing to sell an additional 300,000 b/d. Venezuela may have some volumes of heavy oil for sale and might also be persuaded to raise its production ceiling by 200,000–300,000 b/d. Kuwait has some oil available for contract sales and could temporarily relax its recently announced production cut, although the Kuwait stance on prices and contract terms has become harsh, as of late. There may be offsetting potential elsewhere, such as Nigeria, the North Sea, and small Gulf producers such as Qatar.

• Current world stocks are 500 million barrels above last year’s level and at least 200–250 million barrels above normal. If properly used, these “excess” stocks could offset the loss of 1.5 million b/d from Iran for up to 6 months.

Discussion

The principal danger in the current situation is panic buying and a competitive scramble for incremental supplies, particularly by the Japanese and British companies which were most dependent on Iran. To deal with this threat, there is a continuum of actions which the United States might consider:

• Company Approach—The Deputy Secretary has initiated calls to major U.S. oil companies (Talking Points are attached),⁴ urging them to facilitate a reallocation of world oil supplies. Following the results of the ongoing IEA discussions, a second round of discussions with companies should be undertaken to cover spot market and inventory management policies.

• Good Offices—We could also approach key producing governments to urge that production be increased to offset the loss of Iranian oil.

• IEA Action—The IEA Governing Board (GB) is currently considering two possible courses of action:

—Soft Option—The GB may soon endorse this approach, which calls for consultations with oil companies, approaching other producing countries, careful monitoring of oil market developments, restraints on spot market activities and consultations on stock management.

—Hard Option—In addition to the above actions, the GB could trigger the IEA sharing system. If the loss of Iranian supplies stems from a self-imposed boycott rather than an embargo, there might be some opposition from the IEA neutrals, but this should be manageable. Preliminary calculations indicate that activation of the IEA system would only require a minor reduction in U.S. imports (of perhaps 100,000 b/d) and would require the triggering countries to first absorb a 7 percent shortfall; further work in this area is underway.

• Increase U.S. Production—If the State of Alaska would temporarily relax its MER requirements, we could increase Alaskan production by about 100,000 b/d for a period of perhaps 3 months. This would be a modest but dramatic gesture, emphasizing our willingness to be supportive. The incremental Alaskan oil should be kept in the United States. A more ambitious option—seeking legislative authority to exchange or export Alaskan oil, seems unnecessary and politically unwise.

• Reduce U.S. Import Quota—The President could also reduce the 1980 U.S. import quota to emphasize willingness to free up supplies for our allies. This action would not necessarily require additional U.S. policy actions since the impact of higher prices, existing prices, and lower economic growth seem very likely to keep U.S. imports well below 7.5 million b/d this year.⁵

Recommendation

Our most important objective should be to prevent a competitive scramble for marginal oil supplies which drives up spot prices, in turn touching off further increases in official prices. We need to reassure the Japanese, other allied governments, and the public that the loss of Iranian oil can be absorbed with only minor adjustments. Some overt U.S. action is essential in this regard, as is close cooperation with our allies.

As a first response, we should:

• Maintain close consultations with our major companies, advising them of Governing Board actions on inventories and spot market activity, and enlisting their support;

• Initiate approaches to other producing countries, in coordination with our IEA partners;

• Implement other elements of the IEA soft option, as they may emerge from today’s Governing Board;

• Assess rapidly the feasibility of quickly increasing Alaskan production.

As a later round of actions to be taken, if deemed necessary, we could:

• Support activation of the IEA allocation system;

• Increase Alaskan production;

• Reduce our oil import ceiling either individually or in conjunction with our allies.

We should maintain close consultations with the Congressional leadership throughout these efforts, but we need not seek new legislative authority at this time.⁶

Leslie J. Goldman⁷

1. Source: Department of Energy, Executive Secretariat Files, Job #8824, International Affairs, 4/80–5/80. Confidential. Drafted by Treat. A handwritten note indicates that the memorandum was handcarried to Duncan.
2. Attached but not printed.
3. On April 7, President Carter announced a break in diplomatic relations with Iran and issued Executive Order 12205, which imposed several economic sanctions on Iran, including the prohibition of U.S. exports. Executive Order 12211, April 17, extended the sanctions to include the prohibition of all direct or indirect imports from Iran. See Public Papers of the Presidents of the United States: Jimmy Carter, 1980, pp. 612–614 and 714–716. Meeting in Luxembourg on April 22, the European Community also voted to impose full economic sanctions on Iran on May 17. The text of the EC resolution was published in The New York Times, April 23, 1980, p. A12. On April 24, Japan allied itself with the EC decision.
4. Attached but not printed.
5. On April 22, Johnston sent an action memorandum to Vance on “whether to encourage or support a boycott of Iranian oil by our allies by a) obtaining White House concurrence that the United States would be prepared to forego a portion of our oil supplies to share in a likely supply shortfall, and b) exploring with Congress the possibilities of using existing authority or seeking new legislation to facilitate the diversion of some oil from the United States for this purpose.” Johnston added: “Whether or not a boycott is agreed on, these steps would encourage our allies to impose economic sanctions in the face of Iranian threats to embargo oil exports to nations joining in sanctions.” (National Archives, RG 59, Central Foreign Policy Files, P870128–2590)
6. No decision for action is indicated.
7. Printed from a copy with this typed signature and an indication that Goldman signed the original.