185. National Intelligence Analytical Memorandum1
[Omitted here are the title page and table of contents.]
INTERNATIONAL PETROLEUM PROSPECTS
- Energy requirements will increase by about six percent a year world-wide through 1980. Demand for oil, which fills half the energy need, will keep pace, reaching about 88 million barrels per day. One-third of the non-communist world’s oil supply will come from Saudi Arabia and Iran combined and another third from other members of the Organization of Petroleum Exporting Countries (OPEC).2 (Paragraphs 2–5).
- Saudi Arabia has the world’s largest reserves of oil, is already the largest exporter, and soon will be the largest producer. King Faisal or another member of the Saud family will probably rule through the decade. While it now seems likely that Saudi oil will remain available in growing quantity through the decade, internal developments or a further deterioration of Arab-Western relations could alter this favorable outlook. (Paragraphs 18–24, 67)
- Iran will have no interest in interrupting supply. Oil revenue is necessary to fund the Shah’s increasingly expensive industrialization program. Either he or a successor government will seek maximum oil revenues. (Paragraphs 16–17)
- There probably will be some small interruptions of oil supply during the 1970s. Those most likely to occur involve such states as Libya and Iraq; each will be producing less than five percent of world oil supplies. Oil shortages of this magnitude could be managed, albeit with substantial inconvenience. A major and sustained embargo on oil shipments by the Arab states working in concert is highly unlikely. (Paragraphs 25–29)
- The USSR is not likely to become a key participant in the international oil trade. By 1980 total Soviet oil sales—from domestic production and from foreign procurement—probably will amount to only three to five percent of that trade. The USSR’s interest in extended economic relations with Western Europe and the US, as well as its recognition of the risk of confrontation with the US, make a Soviet attempt to interfere with international oil supplies highly unlikely. The USSR might in certain circumstances, including support of other foreign policy objectives, be prepared to play on Western uneasiness about the security of oil supplies. (Paragraphs 35–46)
- The cost of oil imports will be huge. Even if prices remained constant, the world’s aggregate oil import bill would reach $55 billion (in 1973 dollars)3 in 1980; the US, Western Europe, and Japan combined would be paying $45 billion of this. The cost could be much more, depending on the increases in oil payments that OPEC states manage to get and the rate of inflation. If the price reached $5 per barrel, the 1980 bill would come to $90 billion for the world. (Paragraph 48)
- The producers, in the aggregate, will get much more revenue than they spend or give away to client states. This surplus will mount to at least $27 billion by 1980 (at today’s prices) and two or three times as much if per barrel revenues rise rapidly. (Paragraphs 54, 59)
- Most of the accumulation will be in Saudi Arabia, Kuwait, and Abu Dhabi. They probably will invest the bulk of it abroad. So far as investment is concerned, the large and flexible markets of the US will prove very attractive. Oil producing states with large liquid balances will have considerable potential for aggravating unsettled monetary conditions, but they will also have a strong interest in maintaining world monetary stability. (Paragraphs 56–60)
- The oil consuming countries as a group cannot break even on current account transactions with oil producers. The US, deriving large profits from overseas oil operations and importing only half its oil requirements, can—if oil prices do not rise too rapidly and if US exports maintain or increase their share of producer-country markets. Western Europe will run a deficit on oil-related transactions, but not necessarily one of staggering proportions. Japan will have a deficit on oil transactions that will be a burden even to an otherwise strong payments position. (Paragraphs 51–53)
- Intensified rivalry among the US, the West European countries and Japan for (1) oil, (2) extended export markets to pay for oil and (3) investments from oil producers will run serious risk of causing deteriorating terms [Page 482] of trade for all consumers and also of embittering political relations among major industrial countries. And bad political relations would in turn intensify economic rivalry. (Paragraphs 62–65)
[Omitted here is Section I, World Energy and Oil in 1980.]
II. The Producing States: Factors Affecting Reliability of Supply
[Omitted here are subsections A and B.]
C. Collective Arab Action—A Political Embargo
- The Arab countries have long been aware that their collective importance to world oil supplies is a potential source of leverage over the industrialized West. Arab leaders, including Sadat of Egypt and Qadhafi of Libya, frequently discuss the possibility of collective action designed to deprive the West of oil in order to bring pressure on Israel. In years to come, threats of embargo no doubt will be repeated frequently. The fact remains, however, that the Arab world has never undertaken an embargo on all oil shipments or a sustained embargo on any large share of them.
- In the absence of renewed or imminent Arab-Israeli hostilities, a collective Arab embargo aimed at forcing the Great Powers to impose a settlement is highly improbable. Saudi participation, vital to an effective embargo, would be virtually out of the question in this set of circumstances certainly while Faisal is actively in charge, and probably under his designated successor. (In the event of a more radical regime, the prospects would be more uncertain.) The mutual trust necessary to bring about an embargo does not exist among the Arab states; nor would they be able to agree on the objectives of any such action.
- However, the Arab-Israeli situation is volatile, subject to change because of developments in Israel, in Egypt, in Jordan, in Saudi Arabia, or in the policies of the Great Powers. It would be imprudent to assume that the decade will pass without some kind of crisis, involving hostilities or a level of tensions so high that some Arab governments would seek ways to strike at the US. It is possible that the cycle of terrorism and reprisal, sustained over time, could lead to interruptions of the flow of Arab oil. And in circumstances of Arab-Israeli hostility, certain governments would almost certainly act uni-laterally to suspend shipments to the US and in addition attempt to organize an Arab-wide embargo. Only as the 1980s approach, and non-Arab exporting countries reach their limits of producing capability, would an Arab boycott of the US alone, coupled with an equivalent decrease in output, be sustainable. In these circumstances, the oil withheld from the market could not be readily replaced and not only would [Page 483] the Arabs have substantial financial reserves, but they would continue to export enough oil to cover their current expenditures.
- Before then, an Arab-wide embargo of oil shipments extensive enough to bring effective pressure on consuming countries, even in highly charged circumstances, is unlikely. To mount an effective embargo, the Arabs would have to suspend shipments to Europe as well as the US, harming many countries that have helped the Arabs with political support, arms sales, and economic aid and injuring their own economic interest. Many Arab leaders would be reluctant to do this. Despite the ability of the Arab oil producing states to continue paying the import bills of the entire Arab world, while doing without oil income in whole or in part for an extended period, the Arab states would fear that consumers could freeze their assets and deny them needed imports. Finally, although the animosities and suspicions that hamper joint Arab action in normal times tend to subside when the Arabs believe that they are being humiliated by—or on behalf of—the Israelis, they do not disappear. In sum, an Arab-wide embargo of oil shipments to Western Europe and the US could happen, but it is only a slim possibility.
- Were all the necessary triggering events to occur and bring on an Arab-wide embargo of all oil shipments, the impact on consuming countries would be serious. A total Arab suspension of shipments would cut off roughly half of the oil normally moving in world trade at present and about 60 percent of what is expected to be moving in 1980. The effects would vary widely, depending on timing (year and season), tanker availability, stockpiles in consuming countries, ability to increase production in non-Arab producing countries and the rapidity with which Arab unanimity began eroding. In a purely theoretical worst case—complete embargo of all Arab exports and a poor stockpile situation—the industrialized countries as a group would be able to maintain normal oil consumption for only about three months.
- But an Arab decision to treat Japan and the smaller consumers on the same footing with the US appears very unlikely; if the Arabs were stung into declaring a sweeping embargo, they would at most cut off shipments to the US and West Europe. And, when realistic assumptions about US, West European and oil company reactions to an embargo are taken into account, it becomes clear that energy consumption can be reduced and oil supplies can be stretched out, although not without severe dislocations in some embargoed countries and very considerable difficulties in all of them. Output of operating oil fields can almost always be increased by five to 10 percent by making adjustments in techniques and in maintenance schedules. Certain steps to reduce oil consumption and increase the energy produced from other fuels can be taken fairly quickly. The US, for example, probably [Page 484] could save a million barrels a day by cutting oil-fueled transportation by 10 percent. A portion of US generating and industrial facilities are equipped to burn either oil or other fuels or can be converted readily; a million bpd or so could be saved over a few months by switching them from oil. Relaxation of pollution controls would yield more final energy from inputs of either oil or coal.
- After taking such initial measures, the embargoed nations as a group would find themselves with about 85 to 90 percent of the energy needed to maintain their essential activities, and they could do somewhat better if oil shipments were diverted from other customers.4 The US, with greater flexibility in its choice of energy sources, would be somewhat better off than Europe, even while sharing Western Hemisphere oil with Europe to spread the impact. To cope with the remaining shortfall (amounting to about 10 million bpd of oil in 1980), the US and West Europe would have other options—notably rationing—and stocks of about 3.6 billion barrels of oil to draw on. The consequences—in unemployment, pollution, money costs and other disruptions of normal life—would be very severe, but they would be manageable. (If Western Hemisphere oil were not made available to Europe or if the US alone were embargoed, the US would at worst retain about 90 percent of its normal energy supplies before making any of the adjustments in production, consumption, or fuel sources cited in paragraph 31.)5
- The support of non-Arab producers for any Arab-led embargo designed to punish the West for its policies toward Israel is virtually inconceivable. Each producing country has its own interests and desires; the Shah of Iran, for example, has in the past been eager to increase Iranian oil production in order to make up for shortfalls in Arab oil caused by politically inspired cutbacks. Venezuela, Indonesia, Nigeria and other West African states are not at all likely to sacrifice vitally needed oil revenues to promote the political goals of Arab governments. In short, non-Arab producers would see considerable opportunity in such circumstances both for increasing their income and for enhancing their position as suppliers.
- In sum, the producing countries’ appreciation of the need for revenue to run their governments and develop their economies will insure that most oil will flow to market most of the time. But there can be no guarantee that all oil needed will flow all the time. Interruptions [Page 485] to the flow of oil from the smaller suppliers are almost certain to occur—they are quite likely in some (e.g., Libya and Iraq) and possible in all. Hence those who produce, market and transport oil will probably have to cope with shortfalls of something like two to four million bpd (up to five percent of normal world demand) on a few occasions in the 1970s. The system can cope with shortfalls of this magnitude, albeit with considerable inconvenience.
[Omitted here is the remainder of the paper, including Section II, subsection D, Multiple Roles of the Soviet Union, Section III, The Consuming Side, Section IV, Concluding Observations, tables, figures, and annexes. See Appendix B for Figure 5: Major Oil Trade Routes.]
- Source: Central Intelligence Agency, National Intelligence Council Files, Job 79–R01012A, Box 448. Confidential. The Central Intelligence Agency and the intelligence organizations of the Departments of State, Defense, and Treasury, the AEC, and NSA participated in the preparation of this memorandum. The Director of CIA submitted this memorandum with the concurrence of all members of the USIB with the exception of the FBI, which abstained on the grounds that it was outside its jurisdiction. In a March 13 memorandum to Deputy Director of Intelligence Edward W. Proctor, the Director of the Office of Economic Research, Maurice C. Ernst, recommended that given the overlap between this NIAM and NSSM 174, the NIAM be suspended and focus placed instead on NSSM 174. (Ibid., Job 82–M00587R, Box 5) All attached annexes, tables, and figures are not printed.↩
- Saudi Arabia, Iran, Kuwait, Iraq, Abu Dhabi, Qatar, Indonesia, Venezuela, Nigeria, Algeria and Libya. [Footnote in the original.]↩
- Throughout this paper, 1973 dollars are used. In those instances where the distinction is relevant, the dollars are post-February 1973 devaluation dollars. [Footnote in the original.]↩
- The details of this calculation are shown in Annex D. [Footnote in the original. Annex D, “Approximate Dimensions of an Arab Embargo on Oil Shipments to the United States and West Europe,” is not printed.]↩
- These cases are discussed in greater detail in Paragraph 4 of Annex D, page 52. [Footnote in the original.]↩