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

98. Telegram From the Department of State to Secretary of State Kissinger in Oslo¹

Washington, May 22, 1976, 2132Z.

Tosec 130192/126380. Subject: Action Memorandum: Possibility of an OPEC Price Increase. To the Secretary from Robinson and Rogers.

1. The Problem. On May 27 OPEC Oil Ministers will meet in Bali to discuss, among other things, the possibility of raising oil prices.² You earlier approved a recommendation that we instruct our Ambassadors in key OPEC capitals to make appropriate representations after we had a chance to assess the effects of your UNCTAD speech.³ The question is whether we should now proceed with those representations.

2. Background Analysis. The non-confrontational atmosphere generated by your speech in Nairobi has enhanced the possibility of moderation by the cartel in its deliberations on prices. On economic grounds alone, the cartel might have trouble with an increase because of the drop in demand for heavy crude and the problem that it has with price differentials. All these factors will tend to support the OPEC moderates—Saudi Arabia, Kuwait and the Emirates—who are opposed to an increase at this time.

A. We have already made clear our view that new price increases are not warranted. In April in the CIEC Energy Commission we put forward a strong analytical case against high oil prices, emphasizing the particularly severe impact further rises would have on non-oil LDCs.⁴ We also took issue directly with the OPEC contention that higher prices are needed to ration oil for its “non-substitutable” uses. During his recent trip to the Middle East, Zarb pushed for a continuation of the price freeze.⁵

B. On the other hand, OPEC has clearly sought in the CIEC Energy Commission to lay the basis for justifying an increase in oil prices. More recent reports also indicate that OPEC’s Economic Commission Board has prepared studies purporting to show that import prices from industrialized countries have increased 15.4 percent over the past nine months, thus further buttressing the case for an increase. Finally, it is clear that some of the producers, such as the Iranians and Indonesians, are determined to press for an increase.

3. Options.

A. Instruct our Ambassadors in key OPEC capitals to make discreet, non-confrontational representations pitched to the circumstances and views of each OPEC government. (A suggested cable is at Tab A)⁶

Pros:

—A direct approach would give us the opportunity to explain that our own studies show the price of OPEC imports from industrialized countries has gone up only 2.72 percent (instead of 15.4 percent) as alleged by OPEC’s experts over the past nine months. We could thus further strengthen the hands of the OPEC moderates. In the capitals of the hard-liners, we would stress our mutual interest in maintaining the present constructive atmosphere, in improving economic stability and in expanding world demand. If done without being abrasive and confrontational, it could do some good.

—More importantly, domestic political considerations require that we do all we can to influence the OPEC decision. DepSec Robinson will testify before Senator Kennedy’s Energy Subcommittee on June 8. This will probably be just after the outcome of the OPEC price deliberations become known. If we are confronted with a price increase it would not be enough to respond to Congress and to the American people that we made our case on oil prices in the CIEC and that Frank Zarb raised the question during his recent Middle East swing. Ambassadorial representations would enable us to say that we had gone directly to producer governments with our case at a crucial time.

Cons:

—If the producers decide to continue the freeze or to raise prices only slightly for any of several reasons (including market conditions), they could nevertheless contend that they acted in compliance to our démarches and that we should in turn make concessions in other areas (e.g., commodities). This could make our dealings with North/South economic issues in CIEC and elsewhere more difficult.

—Our position against further price increases is well known to key OPEC countries through intensive discussions and analysis at the April CIEC Energy Commission. If additional action is needed, we could reemphasize our position unilaterally in a public statement (option B below).

—A further démarche at this stage is unlikely to change the position of any OPEC government. Moreover, it will make us look like mendicants and provide another opportunity for OPEC members to lecture us on the rationale for a possible increase.

—If OPEC raises prices despite our démarches, we demonstrate our impotence on oil price issues, which serves neither our domestic political nor international interests.

Option B: Issue a public statement prior to the Bali meeting that makes the strong economic case against new price increases. This statement would stress that the prices of OPEC imports have risen less than three percent since the October price hike of 10 percent, that further increases would endanger the fragile economic recovery that is beginning to be widespread, and that market conditions do not warrant higher prices. (A draft statement for your consideration is at Tab B).⁷

Pros:

—The statement would give wide domestic and international exposure to our case against new price increases.

—With this statement, our price arguments in CIEC in April, and the recent Zarb trip we can demonstrate to the Congress and public that we made an effort to influence the OPEC price decision.

—The public statement could challenge the credibility of the study of the OPEC Economic Commission Board and provide ammunition for the use of the Saudis and other OPEC moderates at Bali as well as démarches.

—Should OPEC continue the oil price freeze, the producers could not assert that it was in compliance to our bilateral démarches, thus requiring concessions on our side. (They will, in any event, insist in CIEC and elsewhere that the industrialized nations must take action to match their “contribution” to global warfare.)

Cons:

—Would not take advantage of personal influence that our Ambassadors might be able to exert on key officials in producers’ capitals.

—If producers raise prices despite our efforts, it would publicly demonstrate our inability to influence pricing decisions.

—Our statement would probably be characterized by some producers as unwarranted interference in OPEC affairs, perhaps making it more difficult for the moderates to oppose price increases.

Option C: To make démarches in OPEC capitals and issue a public statement (i.e., options A & B).

Pros:

—Will doubly emphasize our opposition to oil price increases and show Congress we pulled out all the stops to influence the OPEC decision.

—Will give two opportunities to take issue with the OPEC Economic Commission Board’s study.

Cons:

—Same as all cons for option A.

—Same as second and third cons for option B.

—May be seen as over-reaction by the U.S. and result in non-moderates in OPEC pressing harder for a significant price increase.

Option D: Decide not to take any additional action prior to the Bali meeting.

Pros:

—We have already made our position known in the CIEC and through the Zarb trip.

—Is consistent with non-confrontational approach to oil price issue through multilateral dialogue.

—Avoids calling attention to our impotence if OPEC decides upon a price increase.

Cons:

—Administration open to charge that we made insufficient effort.

—Gives up opportunity to challenge OPEC’s study of import inflation, which will probably be an important element in Bali discussions.

—Could be viewed by producers as acquiescence to “moderate” price increases.

Recommendation:⁸

D, E, NEA and ARA prefer option C and recommend you approve the attached cable instructing our Ambassadors in OPEC countries, at their discretion and only if they believe that it would not be counterproductive, to make appropriate representations, based upon the circumstances and views of the governments concerned. The Department simultaneously to issue a statement, preferably in response to question at noon press briefing.

As a fallback, D, E, NEA and ARA believe that at a minimum we should instruct our Ambassadors to make appropriate representations as in the attached draft cable at Tab A.

EB, EA and AF, on the other hand, recommend option B that you agree to the Department’s issuing a public statement along the lines attached at Tab B. We will coordinate the final statement with FEA and Treasury before it is issued.

If you do not favor a public statement, EB, EA and AF recommend option D—that we rely on the record made already in CIEC and with the Zarb trip and take no further action prior to the Bali meeting.

4. Approved by ARA–WRogers; cleared by D–Mr. Robinson, ARA–Mr. Grunwald, NEA–Mr. Sober, EB–Mr. Katz, EA–Mr. Edmond, AF–Mr. Blake, S–Mr. Aherne.

5. For S/S: Tabs A and B follow in septels.

Robinson

1. Source: National Archives, RG 59, Central Foreign Policy Files, D760199–1131. Confidential; Immediate. Drafted by Sorenson; cleared by Robinson, Katz, and Sober and in AF, EA, S, and ARA; and approved by Rogers. Kissinger was in Oslo for a meeting of NATO Foreign Ministers.
2. On May 28, at the conclusion of the 2-day meeting in Bali, OPEC announced that it would continue its 9-month-old freeze on oil prices. (The New York Times, May 29, 1976, p. 1) On May 24, the Embassy in Jidda transmitted a message from Prince Fahd in which he noted that after his contacts with “all the Gulf countries,” he could say that “no increase in oil prices” would result from the OPEC meeting. Fahd added that he would be “confronted with difficulties from one or more members, Iran in particular,” but confirmed that the Saudi position would “not change.” (Telegram 3703 from Jidda, May 24; Ford Library, National Security Adviser, Presidential Country Files for the Middle East and South Asia, Box 24, Saudi Arabia—State Department Telegrams to SECSTATE–NODIS (12))
3. Kissinger’s address before the fourth session of UNCTAD in Nairobi on May 6 included this statement on energy: “In energy we strongly support the efforts of oil producers and consumer from both the industrialized and the developing world to achieve cooperative solutions at the Conference on International Economic Cooperation. We urge that our proposal for an International Energy Institute—which would help developing countries take advantage of their domestic energy resources—receive priority attention in the months ahead.” For the full text of Kissinger’s speech, see Department of State Bulletin, May 31, 1976, pp. 657–672. Excerpts of the speech were published in The New York Times, May 7, 1976, p. 12. Kissinger first proposed an International Energy Institute to study the availability of energy resources, especially in non-oil-producing developing countries, in his address to the Seventh Special Session of the UN General Assembly; see footnote 3, Document 80.
4. According to the Mission to the OECD’s summary of the first 2 days of the April round of the CIEC, the United States tabled a paper in the Energy Commission “which argued essentially that world is in transition from economy based mainly on oil-produced energy to economy based on other forms; this transition should be smooth, not based on crisis atmosphere; sufficient fossil fuels are available to bridge the transition; danger exists that too rapid concentration on expensive alternatives could lead to serious misallocation of resources; and that oil prices should be at level which encourages economically efficient use of resources and smooth transition to alternatives.” The G–19’s response to this paper was “highly critical.” (Telegram 12032 from USOECD Paris, April 23; National Archives, RG 59, Central Foreign Policy Files, D760155–0147) An overview of the entire April round of the CIEC is in telegram 12482 from USOECD Paris, April 29. (Ibid., D760162–0152)
5. During Zarb’s visit to Saudi Arabia in early May, Yamani informed him that he thought the OPEC meeting in Bali would result in a price increase. (Telegram 3264 from Jidda, May 6; ibid., D760175–0884) On May 9, Zarb met with Amouzegar in Tehran, and the two discussed what might happen at the OPEC meeting. Amouzegar said that “he was not at all sure what line OPEC would take,” but that Iran would “probably occupy its traditional position between the price extremists and the price moderates.” (Telegram 4694 from Tehran, May 10; ibid., D760179–0725)
6. The draft instruction to Embassies in OPEC capitals is in telegram Tosec 130196/126371, May 22. (Ibid., D760200–0095)
7. The draft statement is in telegram Tosec 130195/126370, May 22. (Ibid., D760200–0093)
8. No record of whether Kissinger approved any of the recommendations has been found.