165. Telegram From the Department of State to Selected Diplomatic Posts1
266410. Subject: OPEC Price Deliberations.
1) At an early opportunity, Embassies except Abu Dhabi, Jidda, Kuwait, and Tehran should make informal approaches to key officials to convey U.S. concern about upcoming OPEC oil price decision. You should not describe your approach as a formal démarche made under instructions, but you may draw from points below in your dialogue. (For Abu Dhabi, Jidda, Kuwait, and Tehran: Secretary Blumenthal will visit all four posts in mid-November while Under Secretary Cooper will visit all but Jidda next week. Suggest you defer your approach at the highest level until after conclusion of these visits, since combined impact is likely to be greater in this sequence. We would appreciate your assessment of this proposed procedure.)
2) The U.S. is concerned that the pressures within OPEC may result in a decision for a price increase which would have adverse effects on the global economic and financial systems.
3) Current oil market supply and demand conditions do not warrant a price increase. Demand for OPEC oil has been in the 29.5–31 million barrels per day range for over 18 months—below projections, and for most OPEC members below desired production levels. Recent tightening of the market has been caused by inventory build-ups in anticipation of future price hikes and by Saudi restraints on production of [Page 523] Arabian light. Neither of these reasons reflect a shortage of oil which could justify a price increase.
4) While exchange market developments have been the subject of concern in OPEC countries, there is no reason to anticipate a long run decline of the dollar relative to other currencies. On the contrary, we believe that the dollar will be strengthened as a result of measures being implemented by the U.S. and several other countries: (A) At the Bonn Summit in July President Carter reaffirmed the U.S. commitment to reduce its dependence on imported oil.2 The recent passage of U.S. energy legislation should produce an oil import savings of over 2.5 million barrels per day by 1985. (B) Reduced deficit spending and tighter monetary policy measures by the U.S. will help reduce the U.S. inflation rate, as will a strong anti-inflation program to be announced later this month.3 (C) There is a convergence of growth rates among OECD countries which will help the trade balance. U.S. growth is slowing somewhat, while Japan and Europe will achieve real growth in excess of the U.S. for the first time since 1975. (D) The dollar depreciation which has already occurred, coupled with an intensive export promotion program, should stimulate U.S. exports next year. (E) Japan and West Germany have both taken fiscal measures to stimulate their economies. The Japanese Government has proposed a supplemental budget increase of about 13 billion dollars to achieve its growth target of 7 percent for 1978. Germany has also increased its fiscal expenditures by 5.6 billion dollars in 1979 and 1.6 billion dollars in 1980.
5) The U.S. trade and current account deficits are now expected to improve substantially next year. As these movements become more obvious to exchange markets, we expect exchange market conditions will improve. An oil price increase at this time would tend to offset part of these favorable developments and could put downward pressure on the dollar.
6) FYI: As Embassies are aware, projections of changes in economic growth, international trade, and inflation owing to oil price changes vary considerably, depending upon model used and assumptions made about fiscal and monetary policy responses. Thus, figures cited in following paragraphs may vary in differing analyses, but substance of basic argument remains unchanged. End FYI. Our analysis shows that for every 5 percent increase in oil prices, real GNP growth for the seven largest OECD economies as a group would decline by about 0.25 percent or some 10 billion dollars. Consumer prices in these seven coun [Page 524] tries would increase also by about 0.25 percent for each 5 percent price increase. The level of GNP losses and overall price increases would vary from country to country, but according to our estimates, none of the big seven would be immune. In addition, the climate for capital investment decisions would be more uncertain, and governments with increased oil bills would face protectionist pressures to reduce non-oil imports and would have to slow economic growth to reduce energy consumption. OPEC countries should be aware that these responses could under present conditions come about from a relatively small price hike in percentage terms.
7) A 5 percent price hike would increase the import bills of the big seven OECD countries by 5 billion dollars. Even though the impact of this would be softened by increased exports to OPEC of about 1.2 billion dollars and decreased non-oil imports of about the same amount, exports to non-OPEC countries would decrease by nearly 1 billion dollars resulting in an overall increased trade deficit of around 3.5 billion dollars. Forty percent of this deficit would accrue to the U.S. Our estimate is that the smaller industrial countries would experience a 1.2 billion dollar deterioration in their overall trade balances from a 5 percent oil price increase because of a 1 billion dollar increase in their oil import bills and reduced exports to other developed countries.
8) For non-OPEC developing countries, an oil price increase would worsen their external debt positions and current account deficits by increasing import costs and reducing exports. A 5 percent price increase would add about 700 million dollars in 1979 to their oil import bill. Price increases in developed countries induced by a 5 percent oil price increase would add 500 million dollars to the cost to developing countries of non-fuel imports. The demand for non-OPEC LDC exports in the developed countries would be reduced as well, with the revenue loss offset only in part by higher export prices. A number of developing countries would be hit particularly hard.
9) FYI: Some projections indicate that the Japanese surplus on current account in 1978 will exceed that of OPEC as a group. Should OPEC officials raise the matter of surpluses within the OECD, you should indicate that we have consistently expressed our concern to the Japanese about their current account surplus and have received their assurance that actions will be taken to reduce the surplus. The Japanese commitment at the Bonn Summit to increase growth rates was in part a response to such pressure from the U.S. and other Summit countries. End FYI.
10) For OECD Embassies: You should add that U.S. believes that in any approaches to OPEC or public comments on OPEC oil prices, our governments should point out the adverse consequences of any price [Page 525] increase at all at this time, as the best means to encourage restraint in OPEC’s ultimate decision.
11) If asked about reports of estimate by Secretary Schlesinger of U.S. oil import level of 9–10 million B/D in 1985,4 Embassies may point out (A) that the energy measures on which Congress has completed action will effectively fulfill President Carter’s commitment at the Bonn Summit to have measures in effect by the end of this year that will result in oil import savings of approximately 2.5 million B/D by 1985; and (B) that the U.S. will continue to strengthen its energy efforts in the fields of both conservation and accelerated production of alternative energy sources, including through the adoption of new measures when needed. If asked about Secretary Schlesinger’s statement that demand for OPEC oil would approach the upper limit of current OPEC availability in the last quarter of this year, Embassies may point out that this would be a reflection of high seasonal and anticipatory buying in advance of any OPEC price increase, and not a permanent market condition. While demand for OPEC oil will undoubtedly rise in the early 1980’s, we would in fact anticipate a drop in demand in the first quarter of 1979 as compared to the fourth quarter of 1978.
- Source: National Archives, RG 59, Central Foreign Policy Files, D780431–0447. Confidential; Immediate. Drafted by Moore and Hart; cleared by Bosworth, Rosen, Katz, Solomon, Bergold, and in NEA/RA and EUR/RPE; and approved by Cooper. Sent to Jidda, Kuwait, Tripoli, Abu Dhabi, Algiers, Doha, Tehran, Caracas, Lagos, Jakarta, Libreville, Quito, Ankara, Athens, Bern, Bonn, Brussels for the Embassy and USEEC, Copenhagen, Dublin, London, Luxembourg, Madrid, Oslo, Ottawa, Paris for the Embassy and USOECD, Rome, Stockholm, the Hague, Tokyo, Vienna, Wellington, Baghdad, and Dhahran.↩
- See footnote 3, Document 157.↩
- Carter introduced his anti-inflation program in an address to the nation on October 24. For the text of his speech and a fact sheet issued by the White House, see Public Papers of the Presidents of the United States: Jimmy Carter, 1978, pp. 1839–1848.↩
- Not further identified.↩