187. Minutes of Policy Review Committee Meeting1

SUBJECT

  • Oil Supply Outlook; US Oil Supply to Israel

PARTICIPANTS

  • State
  • Richard Cooper, Under Secretary for Economic Affairs
  • Stephen Bosworth, Deputy Assistant Secretary, International Resources and Food Policy
  • Treasury
  • Anthony Solomon, Under Secretary for Monetary Affairs
  • C. Fred Bergsten, Assistant Secretary for International Affairs
  • OSD
  • Walter Slocombe, Under Secretary for Policy
  • Energy
  • Secretary Schlesinger—Chair
  • Bruce Clarke, Deputy Assistant Secretary for International Affairs
  • Alvin Alm, Assistant Secretary for Policy and Evaluation
  • JCS
  • Lt. Gen. William Smith, Assistant to the Chairman
  • DCI
  • Admiral Turner
  • [name not declassified], Office of Economic Research
  • OMB
  • James McIntyre
  • W. Bowman Cutter
  • Council of Economic Advisers
  • Charles Schultze
  • Robert Litan
  • DPS
  • Stu Eizenstat
  • Kitty Schirmer
  • White House
  • Dr. Brzezinski
  • NSC
  • Amb. Henry Owen
  • Rutherford Poats

MINUTES

Turner—In the short run, stocks are adequate to cover the loss in oil production, but are being drawn down at over twice the normal first quarter rate. The market is reflecting anxiety about the future, with spot prices rising and spot sales broadening. A turnaround will depend on political events in Iran and what Saudi Arabia does. If Iran comes back to 3–4 mmb/d of exports soon and the Saudis stay at 9.5 mmb/d, a real shortage can be averted, although supplies will remain tight through the first quarter of 1980. If the Saudis cut back in the latter half of 1979 to maintain an 8.5 mmb/d annual average, stock recovery will be inadequate for next winter and price pressures will be extreme.

Schlesinger—My understanding is that 9.5 is out of the question for the whole year.

Turner—If we try to force this on Fahd, I’m afraid we may be pushing him into a corner politically with serious consequences for our other interests.2

Schultze—Will we get the full benefit of increased supply when Iran comes back into exporting, or will the others revert to their normal production levels?

Schlesinger—If Iran returns to 3 mmb/d, I expect we will get a net 1.5 mmb/d augmentation.

[Page 597]

Turner—Now, as to the long-run outlook, the prospects have worsened by about 1 mmb/d compared with our predictions before the Iranian crisis. The new Iranian government’s policies on oil production are problematical. An unknown amount of permanent damage to the oil fields has occurred. If they don’t get back about one-fourth of the expatriate technicians, total production may not exceed 3 mmb/d.

The Saudis could reach 12 mmb/d by 1982 if they make the decision to invest, but they are reluctant, realizing that if they have the capacity they will be pressed to use it. The others are a net wash—increase in Mexico and the North Slope offset by declines in net Communist Bloc exports.

Eizenstat—What correlation can be assumed between this decline in oil supply and GNP?

Schultze—We can’t say without defining first the form of demand constraint; for example, a curb on automobile use would have little effect on GNP. Jim, what about deferring SPR procurement?

Schlesinger—We have ceased buying because the response to our last request for offers has been very low. But we ought to have as substantial an SPR as possible next winter.

SchultzeSPR purchases are not in the 500,000 barrel shortfall you’ve mentioned?

Schlesinger—That’s right.

Owen—What could the President announce at his press conference next Monday?

Schlesinger—Administrative action and stand-by mandatory control proposals.

McIntyre—The press will ask him what he is going to do to get oil from Mexico.

Owen—Perhaps he should put off his press conference.3

McIntyre—Agree.

Schlesinger—We are going to have to curtail oil use by 3–5%. We can do it relatively painlessly.

Eizenstat—Jim, your statement yesterday4 on steps you were thinking about involve the interests of a number of agencies—environmental protection, for example. You put us in a difficult position if you [Page 598]scare people but the Administration doesn’t have an agreed program to meet the problem. In order to deal with this problem and develop the necessary responses we need a regular interagency consultative process. I propose an interagency task force meet two or three times a week during this period of world oil supply shortage, go over the figures, define measures, determine what opposition there may be from some of the agencies, and in 10 days or so establish a program of action. We should convene such a group right away.

Brzezinski—Yes, and it should be chaired by your shop, Stu, because the primary difficulty will be in dealing with the domestic programmatic conflicts.5

Alm—I don’t want you to think we have been developing our program in isolation or in the dark. We have been in touch with the interested agencies.

Owen—Let’s form it and have the first meeting on Monday.

Schlesinger—The US supply shortfall (net of SPR imports) is only about 500,000 b/d. Under the IEA sharing formula it would be about 800,000 b/d. We can save 500,000 b/d by reducing use of resid and distillates, using coal rather than oil in coal-capable utility plants, halting the phase-down of lead in gasoline, and using natural gas in boilers now using oil.

We should lean on the Saudis very hard.

Eizenstat—These administrative measures such as lead phase-down should be considered in an inter-agency group.

Owen—I agree, we need to assure review by the interested agencies.

Schlesinger—The gas shift-over is underway. No further action or announcement is required. There are a couple of environmental issues that need interagency review—that’s it. Costle6 is prepared to take these two steps in an emergency situation.

Turner—I don’t think it would be wise to push the Saudis very hard, all for a shortrun benefit of 1 million barrels a day of oil.

Owen—What are you saving them for?

[Page 599]

Turner—To establish a sense by the Saudis that the “special relationship” doesn’t mean our pushing them to get what is not in their best interests. And to get Saudi production when we really need it, next winter.

Cooper—We are aware of the fragility of the Saudi political system. We are trying to strike a balance.

Schlesinger—We should distinguish in our pressure between price and production volume. On price they are very sensitive and think they have a case. On production they are more vulnerable to our arguments.

Turner—Are you pressing them now to keep production up?

Cooper—Encouraging them to, yes.

Eizenstat—The President is thinking about making a statement or speech on energy. To what extent must we get back into the oil price issue in that statement?

Schlesinger—It doesn’t absolutely have to include crude price decontrol.

Solomon—Any energy speech by the President that excludes domestic oil prices is incomplete and would be seen by the financial and political audiences abroad as indecisive.

Schlesinger—We could include in it relief for marginal wells and new-new decontrol. I agree that it would be better to cover the whole price issue, but not essential.

Eizenstat—The Iranian situation has sharpened the arguments on both sides of this issue. It shows the danger of dependence on foreign sources and the need to induce more domestic production. On the other hand, it shows the danger of pegging our oil prices to crazy world prices.

Owen—Stu’s question might be rephrased this way: If we assume that the President will decide to decontrol oil prices, when should he make the announcement or speech?

McIntyre—What would decontrol gain us in supplies six months from now?

Schlesinger—It would slow the decline in our production by about 200,000 barrels or so in the first year.

Solomon—Benefits are greater in the long run. Inaction on this is creating the impression that we are not facing up to our energy problem.

Owen—I wonder whether delaying a decision until after the Teamsters’ negotiation would create a shyster appearance if decontrol follows shortly thereafter.

Schultze—This is not a major issue with them.

[Page 600]

Brzezinski—We need to consult with the Japanese and the Europeans before announcing a decision on decontrol.

Cooper—We will be consulting with them through the IEA on the subject of conservation and supply-sharing when the IEA Governing Board meets March 1–2.

Schultze—We don’t need to let the Iranian problem complicate the decision on domestic oil price decontrol. We could put a ceiling on our definition of world prices.

Owen—Should we put off the speech until that decision is made?

Schlesinger—When to make it depends on the size of the package needed. If it includes deferral of SPR procurement, allocation measures, we are ready to go. Every day we postpone a firm, comprehensive statement past March 15 will be torture.

Eizenstat—Limited action announcements by Jim are fine, but if it appeared that our response to a crisis that may be as grave as 1973–74 is to ask people to turn their thermostats down, we would look foolish.

Owen—Jim can deal with the partial measures, and the Presidential statement could be held until it can include world pricing of oil.

Eizenstat—The President will need to say something at his press conference Monday.

Solomon—We need to show bold action on both the domestic and international fronts. I saw the vice-minister of the Japanese MITI today and he wanted to know what the US is doing about the Iranian oil situation.

Cooper—We should discuss in advance with the IEA members any international action.

Brzezinski—The President also might address in this speech the security of the Middle East region. There is growing apprehension in Europe about this.

Schlesinger—I urge caution on getting into that. It would inject a politically divisive point in a speech that needs to rally American public opinion.

Brzezinski—Domestic measures to reduce oil consumption will be unpopular. If the President is asserting American will and resolve to deal with the whole problem, it will be understood. We must deal with anxiety in the rest of the world.

Owen—Why not say at the press conference that he will have a comprehensive statement within 30 days?

Eizenstat—No more deadlines on energy policy, please.

Schlesinger—He could say he will have a package of measures to announce after consulting with Congress.

[Page 601]

A climate of rising oil prices will increase the need for a windfall tax as oil prices rise.

Eizenstat—If he announced tough conservation measures and limited oil production incentives without general decontrol, what would be the reaction?

Solomon—Critical, by the foreign press and exchange markets.

Schultze—You’ve got to go very strong on the tax side (of a decontrol package). Ask for a sacrifice and be sure it is not profitable for a few.

Eizenstat—Yes, the more you tax the oil companies, the more you blunt the reaction.

Solomon—Would gasoline decontrol be in the package?

Schlesinger—Could be, but the climate is not right now.

Schultze—At a time like this, you sure don’t want decontrol of gasoline. You can move the price up but not turn it loose.

Schlesinger—But we could go ahead with a tilt.

[Omitted here is discussion of U.S. oil supply to Israel.]

Schultze—One other point: Your comparison of the present oil situation with 1973–74 is cockeyed in that the big impact then was the four-fold price increase. That was equivalent to a $12 billion price increase in today’s dollars.

Cooper—Yes, but the big worry now is escalation of prices. This is the bleak scenario we are trying to avoid.

  1. Source: Carter Library, National Security Affairs, Staff Material, International Economics File, Box 44, Rutherford Poats File, Chron, 2/79. Secret. The meeting was held in the White House Situation Room. The agenda paper for this meeting, which Poats attached to a February 7 memorandum to Brzezinski and Owen, is ibid., as is the meeting’s Summary of Conclusions.
  2. See footnote 6, Document 185.
  3. President Carter did hold a press conference on Monday, February 12. For the text, see Public Papers of the Presidents of the United States: Jimmy Carter, 1979, pp. 255–264.
  4. Schlesinger testified before the Senate Energy Committee on February 7 and warned that the prospect of an oil shortage had “grown more serious in recent weeks” because of political turmoil in Iran. The result was that the dollar fell sharply in foreign exchange markets, and stock prices dropped as well. He also appealed again for voluntary conservation measures. (The New York Times, February 8, 1979, p. A1)
  5. On February 8, Poats sent a note to Brzezinski informing him that Eizenstat intended to “propose formation of an interagency working group to assure coordinated review of issues requiring urgent decision during the present oil supply problem.” Poats explained that he or Kitty Schirmer would manage the group and concluded: “Energy won’t like the idea, but our experience is that we cannot count on Energy’s furnishing advance information on Schlesinger’s plans for putting proposals through a proper interagency review process if coordination is left to them. Owen agrees that it is needed. I recommend that you endorse the suggestion.” (Carter Library, National Security Affairs, Staff Material, International Economics File, Box 44, Rutherford Poats File, Chron, 2/79)
  6. Douglas M. Costle, Administrator of the Environmental Protection Agency.