132. Memorandum for the Record1
- Meeting on Oil Price Strategy
- Secretary Vance
- Richard Cooper
- Robert Hormats
- Stephen Bosworth
- Secretary Blumenthal
- Anthony Solomon
- Fred Bergsten
- Dr. Brzezinski
- David Aaron
- Timothy Deal
Blumenthal said he had asked for the meeting to consider several questions: (1) Was the oil price issue a priority item in our relations [Page 448] with the Middle Eastern countries? (2) To what extent should the President become involved in our efforts to avert a price hike? And (3) should we attempt to handle the matter bilaterally or multilaterally?
Vance affirmed that the oil price issue should be near the top of the agenda. On the other hand, if, for example, we would have to approve the sale of F–15s to induce the Saudis to be moderate on oil prices, we would have to give greater weight to political considerations since such sales could affect overall Arab-Israeli relations.
Cooper stressed that political concerns were key in the Middle East. In the case of Venezuela, the President has twice raised the oil price issue with Perez.2 We should push harder with Venezuela.
Brzezinski said that oil would be an important item on the President’s trip. We intend to stress the oil issue in Venezuela, but put less emphasis on it in Nigeria, because of our ongoing initiatives in Africa, and in Saudi Arabia, because of Arab-Israeli concerns. It would be an important issue with the Shah.
Blumenthal asked for practical suggestions. Reportedly, many OPEC members favor a 10–15% price hike. The Saudis, for tactical purposes, may propose a price freeze but in the end support a moderate (5%) increase. He said that, if we make only a low-key approach to OPEC, the likely outcome will be a 6–8% increase. Would that be bad? Or should we do more now? In his view, the outcome would be serious. The US trade deficit would probably increase by $3–4 billion. Thus, we might face a trade deficit of $40 billion in 1978. That would have serious economic as well as political ramifications. Consequently, we may have to exert greater pressure to prevent even a “moderate” price increase.
Solomon said that [less than 1 line not declassified] indicate that the Saudis cannot increase production over the short-term. Iran, Venezuela, and possibly Kuwait were thus the real movers at this time. If we emphasize oil in our dealings with these countries and present our case in terms of a special political relationship, we might have some success in holding the line on prices.
Brzezinski said these suggestions fit well into the overall scheme.
Blumenthal pointed out that we need a series of talking points tailored to each country. In some cases, we might want to emphasize bilateral issues; in others, multilateral topics. He asked whether in view of former Secretary Simon’s past difficulties with the Shah he should be tough in Tehran.
Vance said Blumenthal should certainly raise the issue but not press it.[Page 449]
Brzezinski said a low-key approach would be odd considering the importance of the issue to the US. A sotto voce presentation would have little value. Blumenthal should base our argument against a price rise on economic grounds. The President could then weave together the political and economic considerations when he meets with foreign leaders on his trip. Blumenthal’s meetings should lay the groundwork for the President’s trip.
Blumenthal again reiterated that we needed an orchestrated approach to the OPEC countries.
Solomon said that the talking points proposed by State were inadequate and must be strengthened.3
Vance said he would discuss oil prices with Saudi Foreign Minister Saud and follow up later with Crown Prince Fahd.
Brzezinski noted that, in any event, the President should not “play the heavy”. He should assume a statesman-like role pulling together a compromise after some softening up by Blumenthal, Vance and others. The President may, however, have to weigh in with Venezuela.
Vance added that Venezuela was the villain on oil.
Solomon said that our arguments will carry little weight if we only talk in terms of price moderation. As he pointed out in a recent speech, OPEC’s terms of trade have improved since 1974. The world monetary system and the US dollar are under strain; our national interests are at stake. Thus, the President cannot talk with OPEC leaders about moderation; on the contrary, we must stress the importance of a freeze on prices. He then reviewed the positions of individual OPEC members on the price issue.
Vance said the Iranians might propose some sort of barter arrangement involving arms for oil.
Solomon said we should not reject that proposal out of hand. We might be able to build up our petroleum reserve in this manner.
Vance noted that a barter arrangement with Iran would cause problems with Saudi Arabia.
Blumenthal added that barter deals can lead to trouble. In any case, they were phony arrangements.
Brzezinski asked what are our realistic objectives with respect to prices? Do we want to hold the line or are we prepared to accept a moderate increase? Is a freeze attainable?
Cooper said he thought a freeze was definitely in order in view of weak oil demand. Of course, the Saudis must maintain current production levels.[Page 450]
Solomon said that technically this may be difficult because of reduced pressure in the oil fields. In any event, considering the demand/supply picture and the present world economic situation, there was really no valid reason for a price hike.
Blumenthal underscored the political effects in Italy and France of another round of price increases.
Bergsten noted that in July the Saudis came out publicly for a freeze; their position now was not clear.
Solomon stressed that we have moved towards the Arabs on a number of issues, more so than in the case of Israel. Some effort on their part was necessary. Perhaps we should try to link these issues more explicitly.
Vance asked about Mexican oil production possibilities. Solomon said they were limited; the prospects for natural gas are better.
Brzezinski said he had not focused on oil strategy previously but agreed now that this issue was a crucial element in our Middle Eastern relations.
Vance said we must get moving. We should let the Shah know that we are serious about oil. He asked if we had given thought to an approach to non-oil producers. Perhaps, Mexico could take a leading role. Jamaica, as head of the G–77, was also a candidate. We need a strategy here.
Bosworth questioned whether these countries could take the lead on price issues. In any event, we do intend to approach India, other key consumers, IEA members, etc.
The group agreed that we should move now to get the message across that the US favors a price freeze. A message from Vance to his counterparts in IEA capitals should be sent. State will draft it.4 We could also try to work with third countries (e.g., Italy) to approach the more radical OPEC states (e.g., Libya). In the meantime, Treasury would rewrite the economic talking points on oil strategy; State would supply political/security talking points.