179. Telegram From the Embassy in Saudi Arabia to the Department of State1

9044. Subject: Aftermath of OPEC Price Increase. Ref: Jidda 8735.2

1. We have attempted to reconstruct both the political and economic happenings which led to the higher than expected OPEC price increase at Abu Dhabi.3 In this connection we have talked informally with numerous Saudi officials as well as private sector Saudi business persons who are generally knowledgeable about SAG policy matters.

2. We conclude that the following factors were primarily determinative of the final action taken at Abu Dhabi:

A) A conclusion reached early on that Saudi Arabia could not withstand another split in OPEC ranks, and would at all costs avoid the two-tier system which resulted from the Saudi action at Doha in 1976.4 The Saudis were determined because of the 1976–77 experience to prevent a recurrence.

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B) The Saudis, therefore, were unwilling to face their OPEC colleagues alone; at the 1977 December meeting5 they had the support, which was essential to the ultimate action taken, of Iran. This year they recognized that they would have no support from Iran and, in fact, the Iranian situation undercut their influence and leverage at the OPEC meeting.

C) Accordingly, in looking for other substantial support, they turned to Kuwait. The general outline of the agreement was reached during the visit of Kuwait’s Crown Prince approximately ten days prior to the OPEC meeting. The Saudis gained what they considered to be a major concession from Kuwait in having them agree to a phased-in series of small increases rather than a single large increase at the beginning of the year.

3. The agreement reached with Kuwait was essentially that there be a phased-in price rise which would average 10 percent over the year. This agreement was discussed and probably approved by the Oil Minister of the UAE during a visit to Saudi Arabia immediately after the Kuwaiti delegation departed.

4. The Saudis feel that the price increase as finally adopted was a creditable achievement for them and the interests of the U.S., and point out the following arguments which were being advanced by the other OPEC countries as a reason for a much larger increase:

A) The report of the Economic Commission Board of OPEC reportedly showed that the purchasing power of oil had declined 38 percent since the last price increase (I have requested a copy of this report and have been told that one would be made available).

B) All of the OPEC countries with the exception of Kuwait and Libya, but specifically including Saudi Arabia, had negative cash flow positions for 1978, and even with the projected increase there will probably be a similar situation existing in 1979.

5. There is some resentment being expressed by Saudi officials on two points in connection with the increase:

A) The price characterization by the press of the increase as a 14.5 percent increase. At least two high Saudi officials have expressed resentment at such characterization, pointing out that the increase for 1979 is only 10 percent (overlooking of course that the ultimate price increase is the higher figure).

B) A feeling that the U.S. does not appreciate the efforts made by the Saudis in holding the increase to what the Saudis consider to be an acceptable level.

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6. Comment:

A) The visits of Secretary Blumenthal and Senator Byrd6 were, in my judgement, most helpful in strengthening the Saudis’ resolve to hold for a moderate increase. The principal reason assigned by the Saudis for not keeping the increase at or below the 10 percent level is the situation in Iran which continued to deteriorate rapidly in the days just before the OPEC meeting.

B) Whether or not this was in fact the controlling reason for the Saudis’ ultimate decision to compromise at a higher figure, we can use this happening as an argument to the Saudis that they should make a commitment now to increase substantially their productive capacity. As long as they do not have productive capacity to compensate for a sudden reduction in the world supply, then their influence on OPEC measures is diminished as well as their leadership position in the Arab world.

C) In my judgement the chances of any favorable change in the decision reached at Abu Dhabi is small. If the Iranian situation stabilizes and production returns to pre-crisis levels, and if the dollar strengthens, we would then have some basis to ask Saudi Arabia to take a lead position in postponing some of the proposed quarterly increases. Even with these two favorable developments, however, it would be difficult for Saudi Arabia to take this action in view of their stated position, including the post-OPEC statement by Oil Minister Yamani at Geneva.7 The loss of face and the appearance of responding to U.S. pressure are difficult to overcome.8

  1. Source: National Archives, RG 59, Central Foreign Policy Files, D790001–0049. Confidential. Repeated to Riyadh and Dhahran.
  2. In telegram 8735 from Jidda, December 13, West reported that Yamani told him that “the Saudi ultimate compromise position at the December 16 OPEC meeting would be for a 5 percent increase on January 1 with subsequent periodic increases so that the total cost of oil for 1979 would be no more than 10 percent above that of 1978.” Yamani also noted that “the feeling of most OPEC countries was strong and beginning to be bitter toward Saudi Arabia for its stance for a freeze or modest increase” and pointed out “conditions in Iran as substantially weakening the Saudi argument for a minimal increase.” (Ibid., D780518–0104)
  3. See footnote 2, Document 176.
  4. See Document 113.
  5. See footnote 2, Document 142.
  6. See Document 168. Senator Byrd visited the Middle East in early December.
  7. In a press conference at Abu Dhabi on December 17, Yamani commented that he had wanted a lesser price increase, “but when you look at what happens in the market, and particularly at the shortage caused by the Iranian situation, it is very difficult to hold the prices down under such circumstances.” (The New York Times, December 18, 1978, p. A1)
  8. A January 5, 1979, intelligence memorandum, much of which was characterized as “speculative” reads: “Saudi Arabia’s participation in OPEC’s decision last week to raise oil prices was not in itself a specific ‘message’ to the United States. The Saudis believe there are valid economic reasons for the price hike. In addition, they were subject to intense pressure at the Abu Dhabi meeting from other OPEC members, and their ability to enforce a lower price in the market by expanding production was virtually nonexistent.” The memorandum continues: “There may well be, however, a broader message in the Saudi support of the price hike that goes beyond just the issue of oil. The Saudis could be demonstrating to the United States their willingness to pursue policies—on issues ranging from Middle East peace efforts to future oil production and pricing rates—that risk strains in ties with Washington.” (Carter Library, National Security Affairs, Brzezinski Material, Country File, Box 67, Saudi Arabia, 1–3/79)