195. Editorial Note

By August 1973 the accumulation of foreign exchange reserves by Arab oil producing states sparked debates within the U.S. Government on the impact of these reserves on the international monetary system, U.S. foreign policy in the Middle East, oil production levels, and investment policies by the oil producing states. As the largest oil producer, this issue was critical to Saudi Arabia where, according to Executive Secretary of the Department of State Thomas R. Pickering, “important talks” were underway between ARAMCO and Saudi Minister of Oil Ahmad Zaki Yamani on production levels. At issue were: 1) “the accumulation of excess foreign exchange reserves and the inflationary impact of rising revenues with quantum jumps in Saudi oil production;” 2) conservation; and 3) Saudi dissatisfaction with U.S. policies in the Middle East, which might “make it difficult for the Saudis to cooperate with the U.S. in increasing production.” Pickering concluded that Saudi Arabia was the “only” country capable of meeting the “continued rapid growth in the Free World’s demand for oil.” Pressure on the Saudis to reduce production reflected political issues and the fact that “Saudi income from oil now well in excess of the Kingdom’s absorptive capacity.” (Memorandum from Pickering to Kissinger, August 4; National Archives, RG 59, Central Files 1970–73, PET 12 SAUD)

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In an August 13 meeting with Ambassador Nicholas Thacher, Yamani stated that the Saudi Supreme Petroleum Council was so concerned that the United States favored “some assertion of international authority over oil-producing governments’ investment policies,” that it determined to “at once put ceiling on oil production” if such action were taken. Yamani suggested that Thacher stress to Prince Fahd the vital importance of developing a long-range production policy that would meet Saudi requirements and give full weight to the needs of consuming countries. Ambassador Thacher urged the Department of State to carefully formulate his approach to Fahd with “four or five simply stated points of nature such that following their presentation piece of paper could be handed him containing points made orally.” (Telegram 3444 from Jidda, August 13; ibid., Central Foreign Policy Files)

Thacher’s arguments became the basis for a letter from Secretary of State William Rogers to Prince Fahd (telegram 167505 to Jidda, August 23; ibid.), which was subsequently given to Fahd in a meeting between him and Thacher; see Document 197. According to an August 17 covering memorandum to Secretary Rogers from Assistant Secretary of State for Near Eastern and South Asian Affairs Joseph Sisco, the letter to Fahd was part of a three-pronged approach to “deepen our dialogue with the Saudis and to make King Faisal and other Saudi officials feel that their political and economic concerns relating to oil and to Saudi Arabia’s overall relationship with the U.S. are being heard.” The letter was to draw Fahd’s attention to U.S. proposals before the International Monetary Fund’s Committee of 20, whose task was to develop proposals for international monetary reform, and to stress “the importance of developing policies relating to future oil production which will meet Saudi objectives of using surplus revenues wisely and productively for the Kingdom’s own development and at the same time give full weight to the growing needs of consuming countries for Saudi oil.”

An August 20 attachment to Sisco’s August 17 memorandum states the U.S. position on investment funds as follows:

“In the framework of U.S. proposals for adjustments based on reserve changes for countries with persistent balance of payments surpluses, we recognize that exceptions have to be made for certain oil exporters where oil is virtually the only export. Otherwise, these countries can adjust their payments surplus by cutting back on oil production. We have suggested to the Committee of 20 Deputies that these countries put some of their payments surplus in ‘investment funds’ which they would administer. These ‘investment funds’ would then not be a part of the country’s foreign exchange reserves. They would not be subject to international control except that these funds would have to be consistent with and not disrupt a new international monetary system. The IMF might also determine which countries could appropriately be authorized to establish such investment funds and might require quarterly statistics on the ‘investment funds’ quantity and makeup.”

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The other two initiatives Sisco noted were a letter to Faisal from President Nixon (see Document 198) and a proposed mission to Saudi Arabia that was to evaluate Saudi investment opportunities. (National Archives, RG 59, Central Files 1970–73, POL SAUD–US)