189. Telegram From the Embassy in Belgium to the Department of State1

2699. Subject: Iranian Oil Squeeze: Time for an IEA Maximum Import Passthrough Price? Ref: Abu Dhabi 339.2

1. Confidential—entire text.

2. The spectacle of across the board cutbacks in oil supplies by the international oil majors to firm contract customers and of rising spot prices for crude and petroleum products in world oil markets brings with it an uncomfortable feeling of “deja vu”. When the 1973–74 oil embargo against the US began to pinch, panicky reactions by domestic independents, refiners and public utilities desperate for supplies touched off frantic bidding for non-embargoed crude which at one point reached over $20 a barrel. During those difficult times, some government officials and top oil executives (e.g. Pocock of Shell) pressed [Page 605]for rapid institution by the US, Japan and other important consumer countries, of a maximum import passthrough price to thwart a senseless upward spiralling. This fleeting effort foundered largely for two reasons. First, Congressional sentiment was judged to be unsympathetic to such tampering with the oil market mechanism. Moreover, the availability of substantial US domestic crude raised the overall composite price for a barrel of imported and domestic crude by a comparatively marginal and acceptable amount. In retrospect, more than any other single factor, our failure to even attempt to dampen this willingness to buy at any price demonstrated to OPEC that the sky might be the limit.

3. In the coming oil squeeze of 1979–80 (assuming a continuing Iranian shortfall and unwillingness or inability of the Saudis, et al, to cover it), it would seem pointless to permit a repetition of our earlier experience. Spot prices already are approaching the $20 a barrel figure. Beyond the inflationary impact on our economy of a price scramble, under the International Energy Agency sharing agreement, the US cannot as a country outbid its partners in the hope of gaining a larger share of available supplies. We are prohibited from importing more than our fair share regardless of price. But an individual enterprise could still obtain a larger share of the US national allocation by aggressive price competition—unless the USG adopted a maximum import passthrough price system.

4. The idea is comparatively simple and its enforcement would seem no more difficult than with previous ticket allocation schemes. Any oil importer, including independent oil company, refinery or public utility purchasers, would be inhibited from paying more for imported oil than a specified fair market price to be determined on a periodic basic by the USG or IEA. The allowable price of any further sale of such imported oil, or of goods or services stemming from the use of it, would be limited to an amount based on this maximum passthrough figure. Beyond limiting the sales price of crude or its derivative petroleum products, for example, the price of electricity produced by a public utility from imported oil would also be controlled. To insure equitable domestic distribution of imported oil, an allocation system based on prior consumption needs (instead of price competition) would insure survival of independents and utilities as well as the majors and their long-time customers.

5. Although the US theoretically could implement a maximum passthrough system on its own initiative, prudence and common sense dictate that all IEA countries (and possibly other important consumers such as France and the advanced LDC’s) should be persuaded to adopt a similar scheme. It would be tempting fate to expect the IEA sharing mechanism to [Page 606]function effectively without across the board adherence to buyer discipline. Given common commitments to oil sharing and the same interest in maximizing availability at the lowest possible price, there should be little reluctance by our IEA partners to go along. A more difficult question is what will be the reaction of OPEC. If posed in a way which appears to be a threat to its “sovereign” right to fix world oil prices, we naturally risk a direct confrontation which we can expect to lose. But prior consultation with the Saudis and other moderates pointing out the temporary nature of the passthrough device as a means of avoiding market disruption, speculation and panic during a period of still fragile recovery from economic recession and inflation might very well find a receptive audience.

6. Time is of the essence. Once spot prices skyrocket and the scramble really starts, it will be impossible to put the genie back in the bottle. This time around do we act or react passively on the price side of the supply equation?

Chambers
  1. Source: National Archives, RG 59, Central Foreign Policy Files, D790082–0500. Confidential; Immediate. Repeated to Abu Dhabi, Algiers, Baghdad, Bonn, Caracas, Cairo, Damascus, Dhahran, Jakarta, Jidda, Kuwait, Lagos, Libreville, London, Manama, Ottawa, Paris, Quito, Tehran, Tokyo, Tripoli, Vienna, and Geneva.
  2. Telegram 339 from Abu Dhabi, February 6, reported: “Abu Dhabi Petroleum Department Under Secretary confirms that UAE still reluctant increase its oil production despite approaches by BP, Exxon, CFP, and Japanese oil companies.” (Ibid., D790093–0774)