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

292. Memorandum From Secretary of Energy Duncan to President Carter¹

Washington, December 12, 1980.

SUBJECT

• Trip Report (December 6–11, 1980)
• IEA Meeting
• Visit to Saudi Arabia
• Producer Bilaterals in Paris
• Summit Energy Ministers’ Dinner

IEA Meeting²

It was necessary to do considerable preparatory work with other delegations in advance of the meeting. On Sunday and Monday³ we had bilateral or multilateral discussions with the United Kingdom, Germany, Canada, Japan, Holland, New Zealand, Australia, Turkey, Greece, Spain, Austria, and Sweden. In addition, I had dinner Sunday evening with Minister Giraud of France and attended a dinner of Summit energy ministers that he hosted Tuesday evening.

Though there remains considerable variance in Ministers’ attitudes respecting the severity of the current situation and appropriate actions to take now, it was apparent that the range of differences had narrowed substantially since the May meeting and that there was a greater sense of urgency and the need for discipline and cohesion than I have observed at any prior IEA meeting. It was apparent that the Ministers were not ready to adopt country specific import ceilings, particularly the Germans, but opposition was less vociferous than heretofore and U.S. efforts to at least quantify a group goal for lessening market demand in the first quarter were successful.

Ministers concluded in the meeting that the current situation is manageable in the short-term, and agreed on a series of actions designed to remove market pressure which could lead to higher prices. The actions taken are essentially embraced in the following five-point program:

—Drawing on stocks as necessary to maintain a balance between supply and demand in the world market for the first quarter.

—Taking further action to pursue and implement policies to encourage the rational use of oil (demand restraint) and its replacement by other energy sources.

—Discouraging undesirable purchases of oil at price levels that serve to increase market pressures.

—Working together to correct serious imbalances in oil supplies among countries and companies.

—Encouraging high levels of indigenous oil and gas production in member countries.

The group’s aggregate quantitative commitment is contained in the Secretariat’s statement that the successful implementation of this program will result in an oil demand reduction by member countries of about 10% in the first quarter of 1981, with demand reduced from a previously anticipated 264 million tons to a new estimate of 238 million tons (a savings of approximately 2.2 million barrels per day). The EC has separately committed to meet their entire share of this cutback with a stockdraw through the first quarter, although the U.S. remains free to use a mix of options like stockdraw and demand restraint to meet our share. For this program to work, the Secretariat and the U.S. will have to monitor the efforts of each country and be prepared to jawbone our companies and other countries on import levels and prices paid.

There was considerable discussion about the need to price petroleum products in member countries at levels indicated by international oil prices. This is repetitious of the discussion on energy pricing in the Venice Summit. The Canadians dissented vigorously from language proposed by the United Kingdom, which was acceptable to all other major delegations. We did include a paragraph on energy pricing which tracks language used at the Summit meeting and in the European Community meetings.

There is also language in the communiqué which addresses the need to review continuously the situation and to consider further action if necessary, “including the possible use of oil import ceilings.” This language was objected to by several delegations, but primarily through our persistence it remained in the communiqué.⁴

There was also considerable discussion respecting the appropriate mechanism to discourage “undesirable purchases.” (The Japanese objected strongly to use of the word “undesirable.”) Only after significant pressure from us and others did Japan realize that it was isolated on the issue, and that payment of high prices for spot purchases or high premiums on conventional purchases was an undesirable practice.

I have attached hereto a copy of the communiqué of the meeting which provides further detail.⁵

Visit to Saudi Arabia

1. IEA Meeting

Minister Yamani seemed well informed as to the conclusions of the meeting and the content of the communiqué. He asked several questions about the stockdraw plan, the system for correction of stock imbalances, and the plan to discourage “undesirable” purchases. (On the latter item he seemed interested in the attitudes of individual country delegations.) It is my impression that he thought the actions taken were appropriate ones, though he did not make a categorical statement to this effect.

He was particularly interested in the stockdraw plan and related that to expected OPEC production and pricing, and linked it to the forthcoming Bali meeting.

2. OPEC Production and Supply Levels

Yamani felt that OPEC production levels would be maintained at a rate approaching 25 million barrels/day (mb/d) provided there are no further “political interruptions.” He said this was approximately the present level. He assumes that Iraq exports will soon approach 1.5 mb/d, primarily through the pipelines, and noted that Iran is now beginning to export again, mentioning two supertankers having loaded at Kharg Island last week. His expectation is that the current production levels, in combination with a successful IEA drawdown of stocks as envisioned in the Paris meeting, will permit 1981 to “go smoothly.” Other IEA actions, such as correction of stock imbalances and avoidance of “undesirable purchases,” are also important. He assumes that economic recovery will not contribute much to demand in 1981 as he feels economies will remain flat.

Yamani is optimistic concerning 1982 supply. He feels we can assume that the war will have been terminated by that time, and that Iran and Iraq “will have to resume exports at high levels.” He said it was entirely reasonable to assume that the combined exports of the two countries would be 5.0 mb/d. Iraq was exporting 3.5–4.0 mb/d just prior to the conflict and Iran would only have to add 1.0–1.5 mb/d to those numbers to accommodate a 5.0 mb/d combined total. He feels their revenue needs will require exports at these levels.

The combination of Iran’s and Iraq’s resumption of exports, continued demand reduction in the consuming countries, and increased production in non-OPEC countries “amounting to about 1.0 mb/d,” indicate to him that there will be substantial supplies of crude oil on the world market in 1982. This would permit, he said, certain OPEC countries, “like Saudi Arabia and perhaps Kuwait,” to reduce their export levels to quantities more compatible with their long-term interests. He stated, for example, that Saudi Arabia might then reduce its export level to a number more like “7.0 mb/d” because world demand and production levels would accommodate a reduction of that magnitude without precipitating undesirable market impact.

3. Pricing and the Bali OPEC Meeting

The above scenario, in combination with current world economic conditions, causes him to feel that there should not be any agreement on a price increase at the Bali meeting.⁶ The prospective supply picture outlined above indicates the probability of downward price pressure in the 1982 time frame, and he felt “OPEC should avoid a situation such as followed 1973 when real prices of oil declined for several years.” He said that while he opposed price increases now, he also opposed future price decreases, noting that the price decreases in real terms following 1973 contributed to energy waste, the lack of alternative energy development, and the deferral of conservation investments.

He said that Algeria, “joined by others,” had been advocating “substantial” increases and that he had been working with other OPEC oil ministers to argue against this. (He likened this to our twenty percent prime rate earlier this year, which declined temporarily and has now climbed back to twenty percent.) I believe his expectation is that the meeting in Bali will be brief, that there will be little or no price increase, and that the primary effort will be to re-establish OPEC cohesion.

Notwithstanding all of the above, Yamani did indicate that at some point Saudi Arabia would be raising its price to $32.⁷ I understood this comment to be unrelated to the Bali meeting. He said that maybe other members “would be satisfied if we came to the agreed OPEC minimum.” I told him that this had never worked before, and any time the Saudi price was raised, it invariably caused instantaneous similar action on the part of others.

4. Iran/Iraq War

Yamani indicated that he saw no evidence that the parties were any closer to a political settlement; therefore, it was impossible to predict the duration of the conflict. He observed once again the importance of strict U.S. neutrality. He noted that the Soviets are actively supporting Iran now with petroleum product supply and seem anxious to get closer to Iran. He said the Soviets are also sending a “small quantity” of spare parts to Iraq.

5. Algeria

During lunch I mentioned that I had seen Minister Nabi of Algeria⁸ while in Paris. (Yamani invariably finds out who I talk to and I felt it better not to disguise the fact that I had seen Nabi since we were discussing Algeria at some length.) He was interested in our discussions on liquified natural gas and I gave him a quick brief on the difference between Algeria and the United States on LNG pricing. Yamani’s attitude was that gas competes with fuels other than oil and its price does not move identically, in absolute terms, with increases in oil prices. Gas prices move in proportion to oil price increases which is, of course, the U.S. position with Algeria.

I gained the impression through subtle, but not direct, comments by Yamani, that the fact that we did not close a gas deal with Algeria prior to the Bali meeting was beneficial to his efforts to achieve either no increase or extreme moderation in any price increase at that meeting.

6. ARAMCO Tax Issue

Yamani mentioned the Aramco tax issue and asked me if I had seen the letter Secretary Miller had sent him.⁹ I told him I had seen it and I had some familiarity with the conversation he and Ambassador West had about the letter. Yamani said that he would personally appreciate my getting into this issue, that he was very anxious that it be resolved during this Administration, that while he expected a “clarification from Secretary Miller” he felt the issues were very important. He talked to me in a very low-key, very friendly way about the matter, but it was apparent that he feels very strongly that we should resolve this issue immediately. He noted Saudi Arabia’s repeated actions respecting price moderation and oil production levels to accommodate U.S. interests and requests. He directly linked those actions to this request, and urged that this matter be handled in a very expeditious and positive way. I told him I would discuss the matter with Secretary Miller.

7. Breakfast Meeting with Calderon-Berti, Minister of Venezuela

Yamani knew that I had seen Calderon-Berti in Paris and invited me to comment on this meeting by saying that the Venezuelans “surprisingly” supported the Algerians in seeking a price increase in Bali but he did not believe that to be “the Minister’s attitude.” I told him I had had a lengthy discussion with Calderon-Berti at breakfast Monday morning and that he had focused with unusual intent on what I was saying when I discussed the economic havoc that would be precipitated by another round of price increases at this time, noting its inflationary impact, its impact on a fragile economic recovery, and the shrinkage in world gross national product which would result. I told him I felt I had made an impression on Calderon-Berti but only time would tell.

8. U.S. Political Scene

Yamani inquired as to whether the Department of Energy would continue and who the next Secretary of Energy might be. I told him I was the wrong person to ask about either question but mentioned to him “press reports” of President-elect Reagan’s substantial retreat from campaign rhetoric on energy and those mentioned as possible candidates for Secretary. He indicated that everyone would have to go through a learning curve once again.

I also told him about statements made by Senator McClure¹⁰ which tended to indicate more consistency in energy policy than had the campaign rhetoric.

He asked about oil and gas decontrol. After I mentioned a “press report” on the issue, he stated that oil decontrol in September seemed “sensible” to him since it avoided inflationary shock, September was close anyway, and firms considering exploration expenditures would not be impeded considering the short time frame. I told him in quantitative terms about the substantial increase in drilling in the United States. We discussed gas decontrol and I told him of developing attitudes in the Congress and elsewhere to accelerate the decontrol of gas, but warned that this was an intensely political issue where Congressional sentiment ran high.

He said he had heard that Reagan tends to surround himself with capable people and I responded I certainly hoped that would be the case because it would be in our National interest.

In conclusion, we spent some time discussing my personal plans. He seemed interested, as a friend, in knowing what I would be doing. He said he would be in the United States in March and would call me before coming so that we could arrange to meet.

Producer Bilaterals in Paris

1. Algeria—Minister Nabi

I had two meetings with Minister Nabi on Sunday involving more than three hours in total. Nabi seemed anxious to conclude an interim agreement on Algerian LNG prior to the next Administration’s assuming office. (It is my impression that he fears the political clout of our domestic gas producers which might discourage the importation of gas.) I believe we could reach agreement on the basis of a $3.25/MMBTU f.o.b. Algeria price which would reconstitute in U.S. markets at a price only a few cents above the current Canadian and Mexican import prices. However, the Algerians were also insisting that we accept an escalation formula which would move gas prices upward in the full btu equivalent amount of oil price increases. We explained that gas competes with fuels other than oil and that while its price moves in a proportionate way to oil price increases, it does not move in identical btu equivalence to oil price increases. We also explained our regulatory mechanism respecting the approval of prices for imported gas.

At our second meeting with Nabi we advised him that we could not agree to an escalation formula such as envisioned above, and he would, therefore, have to recommence negotiations with the next Administration. We stated that we regretted this since we felt starting over would involve substantial delay, perhaps many months, and that we felt it was in the interest of both countries that gas begin flowing again.

After hearing these statements, Nabi said perhaps we could agree to their formula, but also agree to a provision that the price would not exceed that of other gas imports into the U.S. This might avoid the regulatory problem for a short-term (up to one year) agreement and would insure competitive pricing. This means, in effect, that they might be willing to put a “cap” on their prices at the Mexican/Canadian level. We agreed we should analyze this new proposition, and representatives of Algeria will be coming to Washington for this purpose December 22nd.

I also discussed with Nabi the disastrous economic consequences of further oil price increases at this time, and expressed our view that price action at Bali was not appropriate for these reasons.

2. Venezuela—Minister Calderon-Berti

I had breakfast Monday morning with Calderon-Berti and we discussed a variety of subjects. (He told the press Sunday morning, before our appointment was arranged, that he would be seeing me.) We spent considerable time discussing the world economic situation and I mentioned the report of the Economic Policy Committee of the OECD which projected the severely adverse consequences of another round of oil price increases. I urged that there not be any increases in Bali. Calderon-Berti followed this discussion carefully.

He concluded the meeting by saying to me that “price was not the priority in Bali” and that his objective would be to help reestablish OPEC cohesion and not to seek price increases.

He said that his information was that the hostages would be released soon.

We discussed the Venezuela/Mexico program to help Central American and Caribbean governments finance their oil purchases and diversify their energy sources. He said they had received good cooperation from all American oil companies except Texaco in Guatemala. He said that Texaco wanted to charge a $4/barrel refining fee which he regarded as excessive.

He mentioned Jamaica and the fact that Mexico and Venezuela had each granted a $60 million credit under this new program. He felt it important that we support the new Jamaican government and stated that there was “disappointment” that a $45 million U.S. assistance package has not yet been approved. (I have no knowledge of this issue.)

Calderon-Berti expressed satisfaction at the progress being made between the two countries in our technical cooperation. He urged that I communicate to the Reagan transition team the fact that Venezuela regards this program as a key part of our bilateral relations, that Venezuela would “respect its commitments,” and that he hoped the program would continue.

Summit Energy Ministers’ Dinner

Minister Giraud of France hosted a dinner Tuesday evening for Summit energy ministers. The principal subject discussed was medium- and long-term energy strategy. It centered around progress being made on the energy objectives of the Venice Summit, the need for an energy affiliate of the World Bank, the forthcoming U.N. Conference, and the importance of our having a coordinated reaction to the OPEC long-term strategy plan when it surfaces in an official way. There was general agreement that these issues need to be addressed but I, of course, disqualified myself respecting any actions of the next Administration.

Both Giraud and I urged the others to become more realistic as they approached the future, particularly concerning the need for stronger collective action. It is my judgment, and I expressed it rather positively, that all member countries of the Summit continue to lack the political will to do what is really necessary to manage effectively our inevitable transition from excessive oil dependency to a more diversified energy resource base.

As discussion progressed, a consensus seemed to emerge that an overriding issue of the 1980s would be the ability of the industrialized world to deal with intermittent supply interruptions, not only from an energy supply standpoint, but also from the standpoint of associated economic and security questions.

1. Source: Carter Library, National Security Affairs, Staff Material, Special Projects File, Box 19, Henry Owen, Chron, 12/10–31/80. Confidential.
2. The IEA Governing Board met at the Ministerial level in Paris December 8–9. The meeting is summarized in telegram 38287 from Paris, December 9. (National Archives, RG 59, Central Foreign Policy Files, D800587–0490)
3. December 7 and 8.
4. The text of the communiqué was transmitted in telegram 38286 from Paris, December 9. (National Archives, RG 59, Central Foreign Policy Files, D800587–0318) Telegram 327578, December 11, instructed the Embassies in Libreville, Quito, Jidda, Kuwait, Abu Dhabi, Algiers, Lagos, Doha, Caracas, and Mexico to deliver the communiqué to their respective Energy Ministers and OPEC Ministers before they left for the Bali meeting beginning on December 15. (Ibid., D800589–1048)
5. The communiqué is printed in Scott, The History of the International Energy Agency, vol. III, pp. 377–384. The statement on Ministerial Measures on Draw of Stocks, Undesirable Purchases of Oil, and Correcting Imbalances, which includes an annex entitled “Decision by the Governing Board for Correcting Imbalances” is ibid., pp. 123–129.
6. The meeting in Bali, held December 15–16, concluded with OPEC’s decision to raise “allowable official prices” by up to $4 per barrel. The price of Saudi marker crude was fixed at $32 per barrel, while the price of OPEC crudes could be “set on the basis of an oil price ceiling for a demand marker crude” of up to $36 per barrel. The maximum price of OPEC crude was set at $41 per barrel. While the Iran–Iraq conflict “figured prominently throughout the conference” it did not “disrupt its basic business,” and the meeting ended without “an open confrontation” between the two countries. (Telegram 19269 from Jakarta, December 16; National Archives, RG 59, Central Foreign Policy Files, D800597–0887) Summaries of the conference’s first day are in telegrams 19196 and 19200 from Jakarta, December 15, and a “wrap-up” is in telegram 19323 from Jakarta, December 17. Telegram 19268 from Jakarta, December 16, contains the final communiqué. (All ibid., D800597–0241, D800596–0481, D800599–0861, D800598–1167)
7. Yamani personally announced the Saudi price increase at the OPEC meeting in Bali. The $2 per barrel price increase would be retroactive to November 1, and the new base price of $32 per barrel “would hold for only the 9.5 million barrels per day,” meaning that oil produced beyond that level would be sold at $34 per barrel. West commented: “Decisions on oil production beyond 9.5 MB/D are made on monthly basis and statement that 10.3 MB/D production level would continue through January has no implication for later months. Oil sales agreements have clause allowing retroactive price rise for previous month, if notification is received by 15th of the subsequent month. Notification of price increase was received on 15th of December.” (Telegram 7663 from Jidda, December 17; ibid., D800599–1091)
8. Algerian Oil Minister Belkacem Nabi.
9. In the letter, transmitted in telegram 320362 to Jidda, December 4, Miller informed Yamani that on November 12, the Internal Revenue Service issued a revised proposal on the issue of which foreign taxes were creditable against U.S. taxes. Miller wrote: “The revised proposals make clear that a country may impose a tax only on non-nationals and still have a creditable income tax for U.S. purposes. It is my understanding that in April 1980 Saudi Arabia restructured its relationship with Aramco and that it is likely that there will be new Saudi tax arrangements because of the new relationship.” (National Archives, RG 59, Central Foreign Policy Files, D800577–0744)
10. Senator James A. McClure (R–ID) had recently been elected chairman of the Senate Republican Conference.