65. Telegram From the Department of State to Certain Diplomatic Posts1

3777. Subject: Washington Oil Talks.

We met January 7 with UK, Dutch and French reps to discuss developments and strategy on OPEC oil price negotiations.
Deptoff (Akins) reviewed current status very tight tanker supply caused by closure of Suez Canal and cut backs in Libya which have now set stage for OPEC demands. Conservative estimate of costs if OPEC demands fully met in Persian Gulf only are dollars 1.3 billion in 1971 and dollars 7.1 billion over next 5 years. This assumes no increase in 55 percent tax rate now generally prevailing in Gulf. Increases elsewhere of only one-third as much would yield total increase in petroleum prices of dollars 9.5 billion over 5 year period through 1975 if all added costs are passed on to consumers. There could also be further increases if OPEC countries attempt to tie oil [Page 164]prices to some price index or value of money.2 OPEC countries complain that their revenue per barrel is less than in 1958 in current dollars and perhaps 40 percent less in constant dollars. They also point out that consuming governments are getting more in taxes per barrel than do oil producing governments. Akins said all details of OPEC demands are not yet known but situation should be clearer following meeting between oil companies and OPEC reps in Tehran 12 January to negotiate Persian Gulf prices. Akins also said Libyans have demanded meeting with Occidental and Bunker/Hunt in Tripoli January 9 and may present demands which could lead to further escalation oil prices in Persian Gulf and elsewhere.
Akins said we find the Libyan demands at this time most serious and disturbing and we have instructed our Embassy in Tripoli to tell Libya we trust they will not take immediate arbitrary action with oil companies.3 Akins said it is also possible richer oil producing countries could subsidize Iraq if it cuts off oil exports during confrontation over OPEC demands. Akins said we are deeply concerned with developments not only because of the effect on our companies and consuming countries elsewhere but also because of the direct effect on the US which now imports more oil than any other single country in the world except Japan.
Trezise asked other delegations whether they believed there was anything we can do collectively and individually.
UK rep (Beckett) said he agreed with US analysis but that our estimate costs of OPEC demands most conservative. He said one report was that OPEC resolution calling for increases due to changes in value of money might mean OPEC countries would demand price increases as much as 33 percent. If this indeed applied consequences would be horrible. He noted OPEC now negotiating from position of strength and companies must work together to avoid whipsaw effect of increases in one area followed by increases in another which could continue indefinitely. He added that oil companies which not members of Iranian Consortium but with interests in Middle East should be [Page 165]brought into negotiations since Consortium companies should not be forced into a position of negotiating on behalf of other companies.
French rep (Vaillaud) said he agreed tanker situation would remain very tight even with Tapline open at least until 1973 but he questioned pessimistic forecasts thereafter. He also said companies must act collectively to negotiate both with Libyan and Persian Gulf countries. He added there were good reasons for some price increases and that GOF would not oppose some increases in tax rates but that OPEC demands might surpass any reasonable increases. This he said would call for a solid front of both oil companies and governments.
Foreign reps asked whether joint action by companies would run into difficulties with US anti-trust laws. Trezise replied we disposed to support any reasonable request by oil companies to Department of Justice for collective action in order to give companies some room to maneuver.
Netherlands rep (Hartogh) described proposal by Shell for collective action by oil companies. Shell plans for negotiations with all oil companies together in attempt to get firm agreement lasting at least 5 years. Plan calls for general increases in posted prices of, say, 15 cents per barrel; a tax rate of 55 percent and some premium in short haul crude of, say, 25 cents per barrel to be open to review every year depending on freight rates. Vaillaud said he found 25 cents short haul premium very high.
Akins said we have urged companies not to mention any specific figures for posted price increases or short haul premium since these would immediately be taken by producing countries as minimum offers to be negotiated upward. He said we have suggested the talks rather start off dealing in principles of posted price increases, short haul premiums and perhaps some relation between oil prices and price index in consumer countries and that figures could be arrived at later.4
Trezise noted that principle of tying oil prices to price index in consuming countries was dangerous since principle could be applied to other commodities as well. However since oil producers may now have effective cartel such an arrangement might be difficult to resist in this case.
It was decided by reps that we should keep consuming countries informed of developments in OPEC negotiations without however mentioning any specific possible price increase. It was also decided that [Page 166]prior to the January 12 meeting in Tehran it would not be advisable to call a meeting of the OECD Oil Committee. However Beckett said he would be in touch with OECD SecGen Van Lennep and that if necessary emergency meeting OECD Oil Committee could be called following Tehran talks.
All agreed there was danger should negotiations break down and producing countries seize significant part or all of oil production and then offer negotiate directly for sale of oil with consuming countries, that consuming countries in pursuit of their vital interests would deal directly with the producer.
All agreed it desirable for industry-OPEC negotiations to be comprehensive as possible and that the four governments would so advise their oil companies. Trezise also said we would use such influence as we have to see that companies not arrive at settlements individually.
It was agreed to inform consuming countries of developments thus far, without, mentioning specific price increases proposed by Shell. US will talk to Japanese, French and Dutch will talk to EC partners, and UK will inform Scandinavians.
Reps agreed if circumstances warrant they might all meet again in Europe week of January 18 when Trezise will be in Europe.5


  1. Source: National Archives, RG 59, Central Files 1970–73, PET 3 OPEC. Secret; Exdis. Drafted by Clark; cleared by Trezise and in E/FSE, E/ORF/FSE, EUR/RPE, AF, S/S, and NEA/IRN; and approved by Katz. Sent to USOECD, London, Bonn, Brussels, Paris, Rome, Tokyo, The Hague, Luxembourg, Copenhagen, Stockholm, Oslo, Caracas, Tehran, Tripoli, Beirut, Dhahran, Jidda, Djakarta, Lagos, USEC Brussels, USNATO Brussels, and Algiers.
  2. “or value of money” was added in an unknown hand.
  3. In telegram 1810 to Tripoli, January 6, the Department stated that it was “actively engaged” in consultations with oil companies on a possible formula to respond to OPEC demands, wanted to avoid precipitate action by Libya, and was impressed that some major oil companies were taking a more flexible approach to the “new rules of the oil game.” The Department added that, “while we cannot become involved in substance of issues between LARG and companies, we favor positive USG role in facilitating communication between both sides and therefore, hopefully, genuine negotiation.” Palmer was instructed to approach Libya at the “appropriate high level” to gain time for the companies to respond to Libya’s request. (National Archives, RG 59, Central Files 1970–73, PET 14 LIBYA)
  4. The Embassy noted in telegram 36 from Tripoli, January 7, that “the situation appears even less promising than when posted price talks opened year ago.” Palmer thought Libya was “confident and resolute,” whereas the companies were “dispirited and uncertain about their ability to resist.” While Libya knows what it wants, he wrote, the companies were most concerned about passing on the costs to the consumer. (Ibid.)
  5. See footnote 8, Document 74.