188. Telegram From the Department of State to the Embassy in Saudi Arabia1

33924. For the Ambassador. Subject: Meeting with Crown Prince Fahd: Oil Matters. Ref: Jidda 1010 and 1104.2

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1. Please seek meeting with Crown Prince Fahd at next appropriate opportunity for discussion of need for coordinated response to situation caused by loss of Iranian oil exports. You should draw on points contained in para 2 and indicate that you are conveying this message at the request of the President.3 Our objective is to obtain insofar as feasible: (1) assurance SAG will not impose any production ceiling below full capacity levels which, subject to possible temporary fluctuations for maintenance reasons, we believe is from 10.0 to 10.5 MBD; (2) assurances SAG will oppose any effort by OPEC to respond to current oil market situation through a formal price increase; (3) also we wish to prepare the ground for active discussion with SAG on need to expand capacity above current levels. In conversation you should draw on the following:

2. USG regards Fahd’s visit to Washington in March as a most important point in our relationship. It will be a time for extensive consultations on the range of major issues which impact upon our common interests.

—We share Crown Prince’s sensitivity to the importance of dealing with issues of common concern in a way that will provide an ever stronger basis of public support both in the U.S. and Saudi Arabia for the deepening of our relationship in all its aspects.

—On the security side we will be pursuing an important dialogue during Secretary Brown’s visit which we view in part as preliminary to Crown Prince’s Washington visit.

—The USG has conducted an intensive review of the current status of the world oil market and its implications for shared US-Saudi interests. We would like to share our conclusions from this review and our views as to how we should deal with the situation with the SAG.

—Thus far, the loss of Iranian supplies has not caused serious economic dislocation. Increased production by Saudi Arabia and a few other producers with spare capacity has covered part of the supply gap.

—However, if, as now seems possible, Iran has not resumed exports of at least 3–4 million barrels per day on a steady basis by the end of March, we will begin to experience growing product shortages, the risk of sharply rising prices, and increasing economic disruption. The longer the Iranian situation persists, the greater the risk of serious damage to the already fragile world economic and financial systems.

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—We believe that the US and Saudi Arabia have a particular responsibility to provide strong leadership to meet this situation and minimize its effects.

USG has begun in the International Energy Agency and in direct contacts with other major industrialized countries to establish a coordinated program to respond to the current situation. We will aim through an intensification of voluntary conservation measures, supplemented if necessary by mandatory government programs, to reduce demand by a significant amount. We will have the framework of this program in place by early March. We will also be working with other consuming countries to assure that any shortfall in normal supplies is being apportioned equitably among all countries and that existing stocks are being used in a rational manner.

—However, if we are to succeed in minimizing the disruptive effects of a prolonged loss of Iranian exports, we must assure that the maximum amount of oil is made available to the market. Saudi Arabia has responded promptly to the Iranian situation by expanding its production to a maximum sustainable level of more than 10 million barrels per day. Saudi production at this level is important, not only because of its critical contribution to meeting essential world needs for oil but also because it serves as an example to other oil producers to do likewise. The Saudi action has been noted with appreciation by the administration and the American public. We hope that Saudi Arabia will continue to use its influence with other producers to ensure that they too respond to the current crisis by producing at maximum levels.

—We recognize that the current tight market situation is causing upward price pressures as reflected by recent spot price quotations. However, these abnormal “distress” prices should not be used to justify a formalized or general OPEC price increase. We hope that Saudi Arabia can exercise leadership to dissuade others from revising OPEC price decisions adopted at Abu Dhabi last December.4 Even reports of such an OPEC Ministerial meeting to consider a price increase would add major pressures on the dollar to those which we are already experiencing because of Iranian developments.

—The Iranian situation indicates the need both for consumers to take further steps to conserve and to develop alternate sources and for producers to take steps to expand existing capacity. This is particularly significant in the case of Saudi Arabia and we hope that Crown Prince will give some thought to this question in anticipation of discussions during his Washington visit.

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USG intends to be in touch with other governments as appropriate on how we can work together to deal with the several aspects of the oil and economic problems created by the Iranian production cutback, but we look to continued Saudi leadership among the producers in serving our broad common interests in international economic health and related political stability.

3. If the Crown Prince agrees with the foregoing you should add that a public clarification of Saudi production policy would be very helpful to the dollar in the foreign exchange markets as well as reassure American public opinion.

4. With respect to the points noted above (particularly that relating to Saudi production levels) you might at your discretion seek Fahd’s concurrence in your going over them carefully with Yamani.

  1. Source: National Archives, RG 59, Central Foreign Policy Files, D790063–0770. Secret; Nodis. Drafted by Twinam and Bosworth; cleared by Cooper, Katz, Saunders, Solomon, Schlesinger, and Brzezinski; and approved by Vance. Repeated to Dhahran and the White House.
  2. For telegram 1010 from Jidda, February 1, see footnote 6, Document 185. Telegram 1104 from Jidda, February 5, reported that the Saudi Foreign Minister presented a detailed explanation of the Kingdom’s decision to increase prices on incremental oil production. (National Archives, RG 59, Central Foreign Policy Files, P850027–2594)
  3. According to telegram 1398 from Jidda, February 15, West delivered the message to the Crown Prince on February 14. (Ibid., P850027–2619)
  4. See footnote 2, Document 176.