115. Briefing Memorandum From the Assistant Secretary of State for Economic and Business Affairs (Katz) to Secretary of State Kissinger1

Preliminary Strategy for Dealing with the OPEC Price Increase

Our intensive diplomatic efforts prior to the Doha meeting2 favorably influenced the final OPEC price decision. As late as October, there was a general expectation that prices would be increased on January 1 by about 15 percent.

Because of the Doha decision to establish a two-tier price regime, it is impossible now to predict precisely at what level the price is likely to stabilize during the first half of 1977. Nor is it certain that the eleven producers, which decided on an immediate ten percent increase, will go forward with their announced additional five percent in July. The Saudis have moved promptly to increase production and appear to be very serious in their determination to limit the price increase to 5 percent. Increased Saudi production, along with the anticipated lower demand for liftings because of the pre-Doha buildup of stocks, should put considerable pressure on the other producers to lower their prices. Some of the eleven are already considering how they could lower their effective price by altering their credit terms and quality and transportation differentials. On the other hand, the eleven will undoubtedly [Page 404] threaten the companies that they risk their future access to assured supply if they shift purchases now to the cheaper producers.

Our evolving price strategy over the first six months of 1977 has two objectives: 1) to intensify pressure on the eleven to lower their prices to the level established by the Saudis and the UAE, and 2) to mobilize world opinion against a new price increase in July. We will be developing a full set of initiatives with other relevant agencies over the next weeks, but we intend to undertake the following actions soon:

—Document publicly the adverse impact of the Doha price decision on the global economy and particularly on the LDCs. I will make this point in my testimony before the Senate Banking Committee on January 5. In addition, we are coordinating in the IEA a common line and agreed projections on the Doha impact for use by member governments in discussions with LDCs and OPEC producers.

—Jawbone the Aramco partners to implement the lower Saudi and UAE price decision by passing the full savings through to their customers. The Saudis have indicated that they will scrutinize the companies’ behavior closely and hinted that they would raise prices if the companies try to circumvent the Doha decision by pocketing “wind-fall profits”.

—Continue our efforts to intensify LDC pressures on OPEC by making them more conscious of the adverse impact of high oil prices on their development. Our embassies have been given a series of studies that provide guidance for discussions with LDC governments, which we will update regularly. We will also continue to push this issue in upcoming CIEC sessions.

—Request the World Bank to undertake for the first time a study on the impact of high oil prices on LDC development. The Bank has refused to single out the price issue in the past largely because of its need for OPEC funds. However, because its reliance on OPEC funding is reduced now and because of the wide international discussion of the adverse impact of oil price increases, the Bank may be prepared to undertake such a study at this time. If so, its results will reinforce the case that we have been making.

—Work with CIA to develop an analysis of the impact of another price increase on the industrialized and developing countries in preparation for major diplomatic démarches prior to the OPEC meeting in July.

—Use the Doha decision as the basis for mobilizing Congressional and public support for a firm commitment to new tough measures to reduce our import dependence and to support the reduced dependency exercise in the IEA. A strong commitment to new energy initiatives would jar the perceptions of the OPEC producers, many of whom believe they will be able to control oil prices with impunity in the fore[Page 405]seeable future. I will make a strong pitch in this direction in my January 5 testimony.

To force the eleven to lower prices, it is imperative that Saudi liftings be maximized. The price differential should be a powerful incentive to induce companies to purchase all the oil the Saudis will produce. But should this not be the case, some form of USG encouragement to our companies or to the Saudis might be called for. We will continue to monitor the situation closely over the next several weeks to determine what if any action might be needed.

  1. Source: National Archives, RG 59, Central Foreign Policy Files, P770013–0590. Confidential. Drafted by Creekmore on December 30.
  2. See Documents 109, 110, 111, and 112.