Foreign Relations of the United States, 1969–1976, Volume XXXVII, Energy Crisis, 1974–1980

168. Summary of Conclusions and Minutes of Policy Review Committee Meeting¹

Washington, November 9, 1978, 3–4:23 p.m.

SUBJECT

• Secretary Blumenthal’s Trip to the Middle East²

PARTICIPANTS

• State
• Deputy Secretary Warren Christopher
• Mr. Richard Cooper, Under Secretary for Economic Affairs
• Mr. Harold Saunders, Assistant Secretary for Near East and South Asian Affairs
• Treasury
• Secretary W. Michael Blumenthal
• Mr. Anthony Solomon, Under Secretary for Monetary Affairs
• Mr. C. Fred Bergsten, Assistant Secretary for International Affairs
• Defense
• Deputy Secretary Charles Duncan
• Ms. Ellen Frost, Deputy Assistant Secretary for International Economic Affairs
• Commerce
• Mr. Stanley Marcuss, Deputy Assistant Secretary for Domestic Commerce
• Energy
• Mr. Walter MacDonald, Deputy Assistant Secretary for Intl Affairs
• OMB
• Mr. Randy Jayne, Associate Director for National Security and Intl Affairs
• JCS
• Lt. Gen. William Smith
• CIA
• Admiral Stansfield Turner
• Mr. Robert Bowie, Dir., Ntl Foreign Ass. Cntr.
• Mr. Maurice Ernst, Dir., Economic Research
• White House
• Mr. Stuart Eizenstat
• Amb. Henry Owen
• Domestic Policy Staff
• Ms. Kitty Schirmer
• NSC
• Capt. Gary Sick (Notetaker)
• Mr. Rutherford Poats

SUMMARY OF CONCLUSIONS

1. The group discussed the possible danger of a high-level visit to Iran at this moment. It was agreed that it was difficult to predict what the situation would be in ten days, and it was decided to maintain the closest possible watch on the security situation, with this information to be passed to the Secretary’s party prior to arrival in Tehran.

2. Prior to Secretary Blumenthal’s departure, an interagency group will examine possible areas of economic cooperation and technical assistance where the United States might be helpful to Iran.

3. The possibility of offering U.S. technical assistance to Iran to open up the oil fields once again and get production started was examined. It was decided that this point would be checked with Ambassador Sullivan; if he approved, Secretary Blumenthal could make a low-key offer of U.S. assistance when he saw the Shah.

4. On oil prices, all agreed that an increase in oil prices of some size was probably inevitable in December at the OPEC pricing meeting. Discussion focused on what U.S. strategy should be to minimize that price increase. Specifically, should the U.S. continue to argue for a zero price increase, or should we direct our efforts toward minimizing and spreading out the price increase that we anticipated? It was agreed that Secretary Blumenthal in his meetings with Middle East leaders would make all of the arguments against a price increase and counsel extreme moderation. Mr. Eizenstat added that any indication that the United States was supporting a price increase by OPEC would undercut anti-inflation efforts in this country. He therefore suggested that “extreme moderation” should publicly be interpreted to mean no increase at all.

5. If asked about the President’s pledge at Bonn to bring domestic oil prices in line with world levels by 1980,³ Secretary Blumenthal will take the line that the President has not changed his commitment, but has not decided when and how it would be implemented.

6. The oil situation would be monitored very closely in the coming days. If it appears that the Iranian strike is going to be prolonged, Secretary Blumenthal should press Kuwait, the UAE and the Saudis to increase their production as much as possible.

Mr. Christopher opened the meeting with a general overview of the situation in the four countries to be visited by Secretary Blumenthal. He proposed that rather than going country-by-country, the group focus on Iran first, then the oil pricing question, thirdly, a review of the current status of the peace process by Assistant Secretary Saunders, and finally, Mr. Cooper would give his impressions based on his own recent trip to many of these countries.

[Omitted here is discussion unrelated to oil prices.]

He [Mr. Christopher] then turned to the oil price question, noting that he expected a very strong pitch in December to increase prices. The improved status of the dollar will help minimize the increase, but the Iranian shortfall will soon be felt in the oil market. He wondered how much could be done to minimize this.

Mr. Cooper said that we were in a condition of typical pre-OPEC jockeying for position and that in fact the calls for a price increase were more moderate than they had been in past years.

Secretary Blumenthal disagreed, recalling that a year ago we estimated that there was a 50–50 chance of no increase at all. Today no one is estimating that no increase is impossible. However, he agreed that OPEC members are being moderate, considering the provocation involved. He wondered if it still made sense for us to call for no increase in prices and whether this was the best tactical position we could take to in fact get no increase or a minimum increase in prices.

Mr. Cooper said that during his recent trip they had not dismissed his arguments about no price increase. The UAE had been not unsympathetic to the arguments. Iran recognized the importance of a price increase on the world economy; but, of course, oil price policy itself has become the subject of political demonstrations. Kuwait favors at least a 10% increase; however, the improved position of the dollar has taken some of the wind out of their sails on this argument.

Secretary Blumenthal noted that he had talked recently to Aba al-Khayl, the Finance Minister of Saudi Arabia, who had said that a price increase was inevitable. He wondered about our credibility in continuing to maintain the position of no price increase.

Mr. MacDonald noted that we had anticipated a five to seven percent increase even before the Iranian events. Now it’s going to be at least that high.

Mr. Eizenstat said one reason for the painful steps that we took on the dollar was to give ourselves more leverage with regard to oil prices. Our position calling for no price increase was not unreasonable.

Mr. Bowie said that we have to try to bring on additional supply and that in order to gain leverage to convince the oil-producing states to increase their production, we will need to recognize the problem and thereby recognize that some increase in price is probably essential.

Mr. Cooper noted that the Government of Kuwait is concerned about taxes, not about prices. They have refused to raise production if they can’t be sure of their earnings on investments in this country.

Ambassador Owen said the question is not whether or not there will be an increase—he felt that everyone agreed that there would be—or admit that there will be some. It was a tactical decision.

Secretary Blumenthal thought that it might be better to acquiesce reluctantly on some price increase and tie that to an increase in production, knowing that the price increase is probably unavoidable, and the other is critical.

Mr. Eizenstat suggested that we take the line of outlining the reasons why there should be no price increase, recognizing that we cannot determine OPEC policy, and if they insist on having a price increase they should keep it as small as possible.

Secretary Blumenthal wondered in that line whether he could let himself be drawn into a discussion of the nature of the increase; i.e., whether it should be split and spread out over an entire year rather than all at once, and so forth.

Mr. Christopher said that as soon as there is any public mention of an increase, that will become the working floor for OPEC and they will simply negotiate on from there.

Secretary Blumenthal said that as far as public position is concerned, he would intend to explain all the reasons why there should be no increase. If the question was posed to him that an increase appeared to be inevitable, he would say that if that in fact comes, he would prefer to see as little as late as possible. He felt the real issue is what gives us the best leverage to get the lowest price and that should be our strategy even if it doesn’t play well in the United States. Last year we knew the Saudis were prepared to support a zero price increase, and the Shah was leaning in that direction. This year we know the Saudis feel that some increase is inevitable.

Mr. Cooper wondered if we could counsel “extreme moderation.”

Secretary Blumenthal noted that that is different from calling for no price increase.

Mr. Christopher said that a possible line would be to use all arguments against any price increase and counsel extreme moderation. There were no objections to that formulation.

Mr. Eizenstat said that with regard to public opinion in this country, “extreme moderation” should be interpreted to mean a zero price increase. We should not be seen as favoring an increase, however small. On another issue, Mr. Eizenstat noted that the President had pledged in Bonn to reduce imports by 2.5 million bpd by 1985. That we can say is all right in view of the Energy Bill. Secondly, he had pledged to bring domestic oil prices up to world levels by 1980. A decision on this will be required in May of 1979. It is going to be extremely difficult in view of the inflationary nature of the decision. If asked about the U.S. pledge, what would Secretary Blumenthal say?

Secretary Blumenthal said that he would say that the President had not decided to change his commitment he made in Bonn, but when and how to implement that decision had not yet been decided, including actions in 1979.

Mr. Cooper said that within the next week we will have to decide how much Secretary Blumenthal should push the Governments of Kuwait and the UAE and potentially the Saudis to increase production. If the situation in Iran is bleak, we should push hard.⁴

Admiral Turner wondered whether it would be better to get the Saudis to put the pressure on these countries, or whether we should do so. If the Saudis take the position that a price rise is acceptable, then Kuwait might be prepared to cooperate on production.

Mr. Poats observed that a technical meeting that day had reviewed the supply situation and concluded that Kuwait and the UAE together had only 600,000 bpd of excess production capacity and in the entire world there was only 1.7 million bpd in excess capacity, which meant that even under the best of circumstances we could not hope to overcome the entire Iranian shortfall.⁵

[Omitted here is discussion unrelated to oil prices.]

1. Source: Carter Library, National Security Affairs, Staff Material, Special Projects File, Box 8, Henry Owen, Chron, 11/1–13/78. Secret. The meeting was held in the White House Situation Room.
2. Blumenthal visited Saudi Arabia, the United Arab Emirates, Iran, and Kuwait November 16–22. Detailed reports of Blumenthal’s meetings are in telegrams 8212 from Jidda, November 19; 6258 from Kuwait, November 22; 8352 from Jidda, November 26; and 3162 from Abu Dhabi, November 30. (All in National Archives, RG 59, Central Foreign Policy Files, P850040–2681, P850070–1906, P850040–2687, D780495–0142)
3. See footnote 3, Document 157.
4. In a November 24 memorandum to the President, Blumenthal reported on his trip and commented, among other things, on the oil price issue: “Each country’s position on this complicated matter differs somewhat. In each case, attitudes are shaped by a complex interplay of individual perceptions as to political interests (vis-à-vis the U.S., other OPEC members, LDCs, domestic pressures) and economic considerations (budget requirements, cash flow, external asset position, amount of reserves, etc.). Saudi Arabia and the UAE will be the most moderate. Iran will be passive (but probably wouldn’t mind a pretty good increase). Kuwait will support those arguing for at least 10–15%. The final outcome is uncertain.” (Carter Library, National Security Affairs, Staff Material, Special Projects File, Box 8, Henry Owen, Chron, 11/1–13/78)
5. Telegram 304969 to the Embassies in OPEC countries, December 2, instructed them to “approach key officials on forthcoming OPEC price decision, using as point of departure report on Secretary Blumenthal’s trip to the Middle East and the presentation he made in regard to the upcoming OPEC oil price decision.” (National Archives, RG 59, Central Foreign Policy Files, D780497–0160)