130. Briefing Memorandum From the Acting Assistant Secretary of State for Economic and Business Affairs (Hormats) to Secretary of State Vance1

Implementation of Strategy on Oil Prices

The Problem

There are strong pressures within OPEC from revenue-short members like Venezuela and Algeria for a further price increase for 1978. In July, Saudi Arabia publicly supported a price freeze and Iran, atypically, did not rule one out. Each has kept ample room to maneuver, however, and we believe it possible that they might in the end agree to a price increase of as much as 10 percent in the name of OPEC unity. At the same time, there is no OPEC consensus as yet, and we have an important opportunity to encourage the key members to support a price freeze and to discourage others from pushing for an increase.

US Strategy

We have developed a strategy consisting of the following principal elements:

—high level approaches by the President and Secretaries Vance, Blumenthal, and Schlesinger in all their meetings with OPEC member leaders this fall so that our opposition to a price increase is clearly understood. Such meetings are our best opportunities to convey our seriousness and make clear the importance we attach to a price freeze. We must be careful, however, to avoid giving weak signals through omission or lack of clarity;

—possibly a letter from President Carter to King Khalid to indicate appreciation for the Saudi position in favor of a price freeze and pointing out that we are assisting the Saudi effort. The point of departure would be whatever line Prince Saud indicates the Saudis are currently prepared to pursue on prices;

—démarches by our ambassadors in the OPEC capitals. These will ensure that we touch all bases and get firmly on record in OPEC capitals;

—appropriate contacts with selected LDC’s and IEA countries to provide arguments for a price freeze and encourage, directly or indirectly, approaches to OPEC members. Although our own efforts will be central to the outcome of our campaign, we want to build additional pressure at the margin and ensure consistency on the part of other major oil-importing countries.

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The US Case

Our strongest economic arguments against a price increase are that it would imperil the fragile global economic recovery and is not justified by the current market supply and demand balance for oil. We must also be prepared to counter OPEC claims that continued world inflation and currency exchange fluctuations justify a compensating oil price increase. Secretary Blumenthal is best-suited to make these global economic arguments authoritatively. In addition, we want to call in some of the chits that the Administration has earned by its expenditure of political capital on bilateral and regional initiatives of great importance to such countries as Saudi Arabia, Iran, Venezuela, and Nigeria, while pointing out that an oil price rise would be likely to arouse a strong negative reaction in Congress and among the American people, complicating the pursuit of these initiatives. The President and you can make these political arguments with best effect.

The basic arguments in our approaches to the OPEC countries will be:

—An oil price increase will be harmful to the world economic recovery and will seriously threaten progress in reducing inflation and unemployment; it would place particular burdens on the oil-importing developing countries. These outcomes would not serve the OPEC countries’ own interests in trade, investments, and development.

OPEC appreciation of the impact of oil prices on the world economy has increased since 1974, but there is a strong belief in OPEC that we exaggerate the danger of “moderate” increases on the order of 10 percent. We must make clear that the marginal impact of any increase at this time could set off a downward spiral in the world economy from whose effects OPEC would not be immune.

The US and world economic recovery are at a critical juncture. Particularly worrisome is the uneven sharing of the world deficit which matches the oil producers current account surplus, with the United States carrying the lion’s share. This is already placing the international trading and financial system under significant strain, encouraging protectionism and creating international financial uncertainty. A price increase of 10 percent would raise the global bill for oil imports by more than $15 billion and the initial impact would be to aggravate the problem of the unevenly shared international deficit. This would in turn heighten investor uncertainty and tighten the constraint on public expansionary policies. Thus, the impact of a marginal increase in the OPEC price could set in motion an unravelling of the faltering world economic recovery.

Key OPEC countries must be made to understand the magnified repercussions another price increase could have. At the same time, we must be careful not to implant doubts about the ultimate strength of the [Page 442] dollar in the minds of OPEC leaders, particularly of those countries with large dollar-denominated holdings.

Market conditions do not justify any price increase. The oil market has slumped since early this year, and this condition will continue for some time.

The impact of new oil supplies from the North Sea, Alaska, and Mexico began to be felt in the oil market in the second half of this year. The addition of 3 million b/d of new supply from these sources between mid-77 and mid-79 will meet most of the increased need for oil in this period, assuming moderate economic growth. Current supply and demand lend no market justification for an OPEC price rise at this time.

—Oil prices are at this point a sensitive issue among the American people. A hike now would generate a negative reaction among Americans toward countries supporting the increase.

The Administration believes and is trying to put across to the public that the energy problem is a global one requiring a longterm transition to other energy sources than oil and gas and that this can only be achieved successfully through the cooperation of oil producing and consuming countries during the difficult transition period. Under present circumstances, a price increase would be viewed as irresponsible and this will increase the difficulties of building support for bilateral and regional initiatives of high interest to individual oil producing countries.

—Oil price decisions must be made on broader considerations than OPEC perceptions of world inflation and currency exchange fluctuations. However, even accounting for such factors, our analysis is that the terms of trade of the OPEC countries are still better than they were in 1974, itself a very favorable year for oil exporters.

World inflation has slowed markedly since January 1, 1974, and the oil producers have taken actions to increase government per-barrel oil take by one-third since that date. Although we have been careful not to concede that there is economic justification for basing oil price increases on world inflation rates, we have had to track this issue to be able to counter OPEC claims of substantial erosion of oil purchasing power. CIA’s conclusion is that the terms of trade, denominated in dollars, between OPEC and the leading industrialized countries place OPEC ahead by about 5 percent over 1974. It would not be useful to state that precise figure with OPEC but we can make the general point and emphasize that a further price rise would be self-defeating as it would contribute to world inflation and currency problems. The requirement now is for a period of stability in oil prices.

Implementation

We want to approach all the OPEC countries bilaterally and involve other oil importing countries to the extent this is not counterpro[Page 443]ductive. Our bilateral efforts should be concentrated on the three key players: Saudi Arabia, Iran and Venezuela.

Saudi Arabia—The visits of Prince Saud to Washington and Secretary Blumenthal to Riyadh provide our best opportunities to:

—verify that the Saudis are still willing to press for a freeze, since without their cooperation our campaign cannot succeed;

—impress upon them that economic and political considerations require a freeze; and

—reassure them that we are trying to help them persuade the other producers.

We understand that the President and Crown Prince Fahd talked in terms of a 1978 price freeze during the successful state visit in May.2 For Prince Saud’s visit, we have prepared talking points for the President to flag the importance of a price freeze and to elicit Saud’s response. Saud was personally uncomfortable with the decision of Prince Fahd and Abdullah to split with OPEC last year,3 but we trust he will reflect current official Saudi views during his visit to Washington. We recommend that you and Secretary Schlesinger follow up with Saud as necessary after he and the President meet.4

After these talks, we plan to consider the desirability of recommending that the President send a letter to King Khalid. The content would depend upon what we learn from Saud.

Meanwhile, Secretary Blumenthal will have spoken for the Administration with the key oil price decision-makers in Saudi Arabia (suggested talking points attached).5 If all goes well in the Washington and Riyadh meetings, we and the Saudis will be on the same wave length and no further high level representations to them will be needed.

Iran—Secretary Blumenthal has a rare opportunity to influence Iran because, for once, Iran has not locked itself into a public position favoring another price increase. If the Shah, who will decide the Iranian position, has made up his mind, he has not revealed it. Moreover, the Iranians now acknowledge for the first time since 1974 that the state of the global economy and world-wide unemployment are factors to be taken into account in price decisions. At the same time, the Iranians assert that world inflation and currency exchange fluctuations should be factors in oil pricing. Secretary Blumenthal can be helpful in guiding [Page 444] the Shah as he weighs the respective merits of these various considerations (suggested talking points attached).

As noted, Tehran’s silence on the upcoming OPEC meeting is unusual, and we do not know whether its position will be open when the Shah arrives here for his state visit.6 It is possible that the visit is a factor in the Shah’s silence on oil prices, and we are preparing talking points for the President’s use. We do not believe that generalized talking points on the world economy will be as effective as hard-hitting points on the state of the dollar and U.S. world strength. (We should be aware, however, that the Iranians have in earlier periods of dollar weakness favored the denomination of oil prices according to a basket of currencies or in SDR’s and that they could revive such proposals within OPEC.) We have not recommended a letter to the Shah because previous formal communications on the subject of oil prices have appeared to bring out the Shah at his most extreme for the record. An exchange now could reduce the chance to influence his decision.

Venezuela—The President has already raised the oil price question with President Perez twice—in June and September.7 But Venezuela is still in the forefront seeking to build an OPEC consensus around a price increase at the December 20 meeting in Caracas. We intend to raise the issue during our November 10–11 bilateral working level meeting in Washington with GOV energy policy advisors. It is possible that Secretary Schlesinger and the Venezuelan Energy Minister will also meet before the OPEC meeting. However, it would be desirable for the President to make one more major effort during his November 22 visit to Venezuela to present our case to President Perez,8 with whom he has established a close rapport on regional and other political issues.

Other Approaches

Secretary Blumenthal will have an opportunity to talk about oil prices on his trip to Kuwait (suggested talking points attached). The President has already raised the price issue with Nigerian President Obasanjo9 and will be advised to do so again in Lagos. We have also made our views known to visiting high Indonesian officials. We are expecting at the end of this week CIA’s detailed analysis of the potential impact on the world economy of an oil price rise in 1978. This, along with Treasury analyses, will form the basis for:

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—démarches by our ambassadors to the OPEC governments with which high-level meetings are not in prospect;

—instructions to embassies in key LDC capitals to present our views to appropriate officials on the consequences of a price increase;

—guidance to embassies in IEA capitals to encourage host governments to approach OPEC members and to use mutually consistent arguments for an oil price freeze.

In addition, we are preparing talking points for the President’s use in the oil-importing LDCs and industrialized countries he will visit in November (Brazil, India, Belgium and France). Under Secretary Cooper will have an opportunity to raise the price issue with Jamaica in his bilateral on North/South issues. We cannot count on oil-importing LDCs to make approaches to OPEC; but Brazil, India and Jamaica are among the most suitable targets for efforts to encourage involvement.

  1. Source: National Archives, RG 59, Central Foreign Policy Files, P770173–1821. Confidential. Drafted by Hart and cleared by Sober.
  2. See Document 124.
  3. See Document 113.
  4. See footnote 4, Document 136.
  5. Talking points for Blumenthal’s meetings in Saudi Arabia, Iran, and Kuwait are attached but not printed.
  6. November 15–16. See Document 139. The OPEC meeting was held December 20. See Document 136.
  7. See footnotes 2 and 4, Document 128.
  8. Carter did not travel to Venezuela, but see footnote 7, Document 138.
  9. President Obasanjo visited the United States October 10–13. Documentation is scheduled for publication in Foreign Relations, 1977–1980, volume XVII, Africa.