98. Memorandum From the Executive Secretary of the Department of State (Eliot) to the President’s Assistant for National Security Affairs (Kissinger)1

  • SUBJECT
    • Possibilities of an Oil Crisis

Attached is the study which you requested2 on the possibilities of an oil crisis. The study concludes that a crisis of major proportions is [Page 230]not likely in the near term, although there is some danger of supply interruptions from Libya.

Theodore L. Eliot, Jr.
3
Executive Secretary

Attachment

OPEC Negotiations

Negotiations began in November between the Persian Gulf members of the Organization of Petroleum Exporting Countries (OPEC) and the international oil companies over OPEC’s demand for increased payments in compensation for revaluation of the “oil dollar.” (See my memorandum of October 18 for background to the negotiations.)4 The negotiations, including the work of a technical committee which has been meeting in Vienna in an attempt to sort out the complex fiscal and economic relationships involved, have proceeded without either incident or much progress. Both sides seem to be playing for time; the OPEC members in anticipation that a setting of new parities will strengthen their negotiating claim of compensation on the order of 8–14 percent, and the companies in the hope that they will be able to reduce the producers’ claims through hard bargaining. Both sides appear committed to carry the issue through by negotiation. The OPEC position on this score was reaffirmed at the just-concluded conference in Abu Dhabi, which called in its resolutions for a continuation of the negotiations. We believe the negotiations will continue for the next several months, at the end of which the companies will accede, with retroactive effect, to pay some compensation beyond that provided for in the Tehran and other pricing agreements.

Participation

The second OPEC demand, for participation, has not yet been discussed in a formal manner. The Aramco partners are expected to meet on the subject in January with Saudi Oil Minister Yamani (who has apparently been handed the negotiating role by the other Gulf states). The recent OPEC conference limited itself to endorsing further negotiations on the subject. There is substantial difference between members of OPEC, as well as between the various oil companies, in their positions on the issue and it is probable that meaningful discussions will [Page 231]be ultimately possible only on a country-by-country basis. For the moment, however, the issue has been in effect put aside while the compensation issue is brought to conclusion.

Events in Libya

The oil companies were already in a confrontation with Libya before the LARG’s nationalization of British Petroleum (BP) on December 7.5 The issue has been a Libyan attempt to change previous agreements through imposition of a two-level foreign exchange regime on the companies; the latter (able to act in concert as a result of Department of Justice Business Review Letters given October 22)6 have refused to abide by the new regulation. This confrontation may now be deepened by the nationalization of BP. Even though the latter action was ostensibly taken in the purely political realm of UK-Libyan relations, the companies may see it as a test of strength with the LARG and contest it through efforts to block sale of the nationalized oil. Whether or not the BP nationalization can or should be treated in isolation from the other aspects of the LARG-company confrontation will depend to some degree on decisions now being taken by the companies, who are meeting in London. The oil companies appear determined to stand up to Libyan pressure, and are strengthened in their position by the knowledge that, even if Libya were to take sweeping action and close down all production, European supply is assured for the winter as long as Persian Gulf and other production can be maintained. The takeover of BP, however, may serve to tie down the LARG and restrain it from taking action against the other companies in their continuing confrontation over the exchange issue.

Conclusion

An early major oil crisis is not likely. Negotiations with the Persian Gulf producers will probably continue, ending eventually with a settlement in which the companies agree to pay some compensation for currency revaluations. Negotiations on the more important participation issue will begin in earnest only after the compensation issue is settled, and will most probably not come to a head this winter; both [Page 232]sides appear to recognize the importance of the questions involved and appear ready to take a measured approach.

In Libya, however, there are always chances of a supply cut-off resulting either from the currency exchange issue, or from strong industry support to BP should it contest the nationalization. In either event, the crisis could probably be limited to Libya alone. The major Arab Persian Gulf producers are unlikely in the present circumstances to support Libya in its anti-British and Iranian posturing, and Libya in effect further isolated itself by refusing to attend the latest OPEC conference. Iraq, the one state which might feel inclined to support Libya, is probably too dependent on current oil revenue to do so by taking action against the companies. The other Persian Gulf states would clearly prefer an OPEC with Iran and without Libya than the other way around.

Even if a crisis in Libya does occur, the companies are in good position to meet European petroleum needs for the remainder of the winter. One major company has estimated that the industry could meet a shutdown in Libya for 6 to 8 months, with some drawdown of presently high European stock levels.

We continue to keep closely in touch with the international oil companies over developments in the situation. Under Secretary Irwin spoke to representatives of several companies on December 2,7 at which time the companies set forth their objections to the OPEC demands, particularly for participation.

  1. Source: National Archives, RG 59, Central Files 1970–73, PET 3 OPEC. Confidential. Drafted by Brown on December 10; cleared in draft in NEA/ARP, NEA/IRN, AF/EPS, AF/N, INR/REC; and cleared in E, E/ORF, and U.
  2. The White House requested that INR and E Bureaus prepare a joint study and a briefing memorandum for Kissinger before December 9. (Memorandum from Eliot to Kissinger, December 3; ibid., PET 1 US)
  3. Printed from a copy that Curran signed for Eliot above Eliot’s typed signature.
  4. See footnote 1, Document 94.
  5. Deputy Assistant Secretary of State for African Affairs Moore informed Acting Secretary Irwin of the Libyan nationalization of BP in a December 7 information memorandum; for text, see Foreign Relations, 1969–1976, volume E–5, Part 2, Documents on North Africa, 1969–1972, Document 80. The nationalization is summarized in the December 9 Intelligence Note, RAFN–60, “Libya/UK: Relations Near Nadir With Nationalization of British Petroleum.” (National Archives, RG 59, Central Files 1970–73, POL LIBYA–UK) Additional information on the nationalization of BP is in telegram 5616 to London, June 16, 1972. (Ibid., PET 15–2 LIBYA)
  6. As related in telegram 196129 to London, October 27. (Ibid., PET 3 OPEC)
  7. See Document 96.