200. Telegram From the Embassy in Saudi Arabia to the Department of State1

3796. Subj: Factors With Regard to Financial Impact of Expanding Oil Production. Ref: State 172015; Beirut 10346.2

Summary. Saudi petrodollars continue to grow though SAG current income now actually being re-positioned more than 50 percent into European or other currencies. Reserves are expected to exceed slightly last January’s estimate by Embassy of 5.2 billion dollars at end of year. Growth in production continues but doubling in Aramco shipments to U.S. is in real terms only small percentage of increase in shipments to other markets. Saudi concern continues over upcoming monetary system and need to work out special petroleum country investment fund insulated both against penalties by international monetary institutions and against loss through inflation.3 Spending rate up sharply for domestic needs. End summary.

1. Continued concern of Saudis with economics of burgeoning oil production as expressed in several public and private interviews recently led us to inquire of Saudi Arabian Monetary Agency Adviser Said Ahmad (protect carefully) as to actual state of financial reserves. Reserves, even after paying half-billion dollars for SAG share in Aramco, as of early August exceeded four billion dollars and are growing at rate of seven to eight million dollars a day. By end of 1973 SAG will have reserves of about $5.4 billion, approximating Embassy projection of last January. Aramco program of rapid production increases continues uninterrupted despite public and private discussions of possible limitations, due to political and/or economic reasons. As reserves grow, we see various signs of increased Saudi inclination to expand [Page 546]foreign aid both for economic and military purposes (Beirut reftel describing al-Hawadith interview).4

3. Dhahran informs us that Saudi Central Planning President Hisham Nazer requested figures on Aramco exports to U.S. over past five years in preparation for meeting of Supreme Petroleum Council on August 27. Following is a breakdown, in millions of barrels, of the information provided to Nazer by Aramco (protect source):

Year Crude Oil Productions Total
1968 27 .379 27
1969 20 .073 20
1970 6 .082 6
1971 45 2.500 47
1972 66 5.400 71
1973–Jan 7 .05 7
Feb 8 .69 9
Mar 8 1.00 9
Apr 11 .561 12
May 11 .707 11
June 13 .44 13
1973 Total (6nos) 58 3.44 61

Crude oil includes Aramco exports from the Arabian Gulf terminals and from Sidon, Lebanon. Nazir request indicates Saudi interest in knowing degree of U.S. dependence on Saudi oil. U.S. off-take still very minor part (four percent) of whole Saudi output.5

4. Saudi Monetary Agency sources indicate that for every barrel of oil exported, SAG is now receiving an average of $2.00 and is trying to place a maximum of new funds immediately into other than dollar currencies, with some limited success. Perhaps a bit more than 50 percent of the total daily gain of $7–8 million a day is going into currencies other than dollars through a variety of devices. Little long-term portfolio or other investment activity so far, but Council of Ministers expected to approve new three-man international advisory board (including one American) for such activities and private banking proposals continue to be put before Saudis in this field. We foresee a gradual increase of sophistication in placement of the approximately 50 percent of earnings that will go into reserves during the next year.

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5. On spending, the rate for the last Saudi fiscal year reached $2.5 billion equivalent, and the rate for coming year is likely to exceed $3 billion.

6. Saudi advisers and SAG officials are following closely development of new international monetary system and parallel U.S. proposals designed to answer special needs of oil producing states. Two questions will be degree of freedom to be allowed oil states for transfer of reserves from one currency to another as investment opportunities change, and the insulation of these oil-spun funds from rampant inflationary pressures.

7. Interesting sidelight on sudden popularity of SAG as oil marketer is number of countries such as Korea, India and Brazil who are sending delegations here seeking tie down long-term supplies. These visitors are received with great politeness, but Saudis point out that under terms of participation agreements they do not yet have available crude for sale in quantity.6

8. Comment: From foregoing we conclude Saudis still struggling to come up with a more comprehensive policy for managing their rapidly expanding riches. Augmentation of foreign aid will help, through additional sums we have heard mentioned so far for this purpose will not make significant inroads on Saudi reserves. From our limited knowledge of existing international monetary system we suspect efforts to place funds in currencies other than dollars or euro-dollars may soon encounter resistance from, for example, managers of yen and Mark, who are not anxious see their currencies utilized extensively as international medium of exchange. Similarly, Saudi signals regarding oil production levels are conveying no clear-cut message—beyond one of general warning aimed keep U.S., Europe and Japan uneasy.

Thacher
  1. Source: National Archives, Nixon Presidential Materials, NSC Files, Box 1298, Saunders Files, Saudi Arabia, 9/1–12/31/73. Confidential. Repeated to Cairo, Algiers, London, Dhahran, Beirut, Tehran, and Tripoli.
  2. Telegram 172015 has not been found. In telegram 10346 from Beirut, August 31, the Embassy summarized interviews given to an independent Beirut weekly, Al Hawadith, on August 30, in which King Faisal and Prince Saud emphasized Saudi reluctance to use oil as a weapon against Israel; Faisal also stated that he and Sadat had agreed on a formula whereby Saudi Arabia would finance half of Egyptian arms expenditures from oil revenue. (Ibid., RG 59, Central Foreign Policy Files)
  3. Saunders underscored this sentence and wrote in the margin: “how seriously is US considering meeting Saudis’ concerns on this—if we want their coop. on oil. Who is handling in USG?”
  4. Saunders wrote “Saud Faisal?” in the margin.
  5. Saunders wrote in the margin next to this paragraph: “thus Saud Faisal statements? (that oil better to buy arms than to hurt US).”
  6. Saunders wrote in the margin at the end of this sentence: “maybe this leading them to want to better their agreements.”