136. Telegram From the Department of State to Selected Diplomatic Posts1

264256. Subject: US Démarche on Oil Price Question; OPEC Meeting December 20 in Caracas.

1. From now until a decision is made by OPEC, the highest objective of American international economic policy must be to obtain a freeze on oil prices at least through 1978. In June, President Carter stated his hope, shared by Crown Prince Fahd, that the end of the two-tier system would be followed by such a price freeze.2 Subsequent economic and political developments have made price stability even more critical. The world and the US economy would be damaged by even a seemingly modest price increase such as 5 percent.

2. For the next two months, the primary concern in our relationship with all OPEC countries, especially Venezuela and Iran, will be their behavior on oil prices. (With Saudi Arabia, this concern will be secondary only to the achievement of a durable Mideast peace.) We will not hesitate to point out that the action OPEC members take on prices affects their overall relationships with Congress and the American public as well as the executive branch. Secretary Blumenthal has raised the oil price issue during his Middle East trip.3 It was discussed with Prince Saud in Washington on October 25.4 The Shah’s visit to the US in November5 and the President’s visit to key OPEC countries later in the month will provide additional opportunities to make our views known. We are also informing key industrialized countries and LDCs of our analysis of the impact of an oil price increase next year in an effort to encourage them to make approaches of their own to those OPEC members with which they have especially close relationships.6

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3. Chiefs of Mission of action addressees should, unless they inform the Department that it would be counterproductive, present the US case against an oil price increase at the highest appropriate level as soon as possible, drawing on the following paragraphs. Our estimates of the effects of a 5 percent increase in oil prices in 1978 are included primarily for your information. If in the course of discussion it should appear appropriate to cite them, you should make clear that 5 percent was chosen for analytical purposes only. We would not find any price increase appropriate or acceptable.

4. The US would consider any oil price increase at the December meeting as unwarranted by market conditions and harmful to the world economy.

5. The world economy is fragile. While efforts to reduce them are beginning to pay off, inflation rates remain unacceptably high at over 8.0 percent for the OECD as a whole and 6.5 percent in the US. Unemployment in the OECD is now at 15 million and the prospect is dim for any significant reduction soon. US growth, which was running at 5.5 percent earlier this year, has fallen to under 4 percent. In addition, we are experiencing a very large current account deficit which restricts our ability to engage in stimulative action.

6. Under these conditions, any oil price increase in 1978—however small in percentage terms—would have a large adverse effect on the growth of both the US and world economies and on world financial stability.

7. An oil price increase would fuel inflation, increase unemployment, and add significantly to our balance of payments difficulties. These effects would be magnified for the other OECD countries and would severely constrain both the growth prospects of the developing countries and our ability to assist them (FYI: We estimate that a 5 percent increase in oil prices in 1978 would raise the collective trade deficit of the seven major industrial countries by over $3.5 billion, add over one-third of 1 percent to their average rate of inflation, and in the absence of offsetting fiscal and/or monetary policies, reduce their collective GNP by over $10 billion. By 1985 the cumulative GNP loss of this one-time price rise would be almost $150 billion. Certain developed and developing countries would bear a disproportionate share of these effects. For the LDCs as a group, a 5 percent oil price rise would result in a $1.2 billion increase in import costs in 1978.)

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8. The US has accepted a large deterioration on trade and current account, to which past oil price increases have heavily contributed. This has significantly eased strains on the international payments mechanism. However, the increased deficit resulting from an oil price increase would make it considerably more difficult for the US and other countries to resist public pressures for protectionist trade measures, and could prejudice the stability of the international financial system.

9. If US ability to continue to lead world economic recovery and financial stability is severely hampered by an oil price increase, there is no other country capable of assuming this role.

10. The stake OPEC countries generally have in a stable world economy is clear; increasing balance of payments imbalances and inflationary pressures would threaten the future profitability of their cumulated assets and reduce longer term demand for non-oil exports.

11. (If the argument is made that an oil price increase is justified by world inflation rates and currency fluctuations, you should respond along the following lines.) Arbitrary linkage of the prices of different goods and services only serves to increase inflationary pressures and misallocation of resources. Moreover, given the strong influence of oil price increases on world economic health, it is clear that oil price decisions must be made on much broader considerations than OPEC perceptions of the current world inflation rate and recent currency fluctuations. Even on narrow grounds, however, a price increase is not justified. Our analysis indicates that the terms of trade of OPEC countries as a group have not deteriorated from the levels resulting from the 1974 oil price increases. Between the beginning of 1974 and mid-1977 export prices for US goods imported by OPEC countries rose by 22 percent while the export price of OPEC oil, as measured by Saudi benchmark crude, rose by 27 percent, not counting the 5 percent increase last July.

12. For Abu Dhabi: We assume you will wish to preface any comments to UAE leaders with acknowledgment of their responsible stand on oil prices. You should also stress that in preparation for Caracas, the US is making strong representations for a price freeze in other OPEC capitals.

13. For Jakarta (and Lagos pending receipt of further instructions): Some key OPEC countries seem open to possibility of a freeze and aware of the effect of a price rise on world economic recovery and thus on their own well-being as well as that of the developing world. We should make the case to these middle size OPEC producers that they can exercise an independent and effective influence for restraint in OPEC councils, and that we hope they will use this opportunity to act in the common interest by supporting a freeze for 1978.

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14. For Caracas, Jidda, Tehran, Lagos and Algiers: No action should be taken at this time. Instructions will follow when status of Presidential visit clarified and, in case of Algeria, decision made on possible approaches in Washington.

  1. Source: National Archives, RG 59, Central Foreign Policy Files, D770406–0164. Secret; Immediate; Limdis. Drafted by Milam, Hart, and Rosen; cleared by Katz and Bosworth and in NEA, EA, ARA, AF, and the Treasury and Energy Departments; and approved by Cooper. Sent to Abu Dhabi, Baghdad, Doha, Jakarta, Libreville, Quito, Tripoli, Kuwait, Algiers, Caracas, Jidda, Tehran, Vienna, Lagos, and USUN.
  2. Fahd’s visit was in May. See footnote 2, Document 124.
  3. See Document 134.
  4. Excerpts of the minutes of the meetings with Prince Saud are in telegram 258396 to Dhahran, October 28. (National Archives, RG 59, Central Foreign Policy Files, [no film number])
  5. See Document 139.
  6. The message to the LDCs, to be conveyed by Chiefs of Mission to the “highest appropriate level as soon as possible,” is in telegram 264258 to Buenos Aires and other posts, November 4. (National Archives, RG 59, Central Foreign Policy Files, D770406–0390) Vance sent a letter directly to the Foreign Ministers of the industrialized countries on November 9 outlining the major arguments in favor of freezing oil prices, most of which are contained in this telegram, that the United States would make to the OPEC countries before the December 20 meeting in Caracas. (Telegram 267884 to London and other posts; ibid., D770413–0990)