192. Telegram From the Department of State to Selected Diplomatic Posts1

44863. Subject: U.S. Proposals for Meeting of IEA Governing Board, March 1–2. Ref: Paris 5576.2

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1) (C—entire text)

2) Posts are requested to convey on Saturday3 if appropriate, if not, as soon as possible, the following points concerning the world oil situation and the March 1–2 meeting of the IEA Governing Board to high-level host government officials. OECD please pass to IEA (Lantzke).4

—The U.S. believes strongly that the IEA countries must take coordinated action to meet the problems posed by the current shortfall in global oil supplies. We are sharing our thoughts with IEA governments in advance of the meeting of the Governing Board on March 1 and 2 and urge that all delegations come to that meeting prepared to join in a strong and effective Governing Board decision.

—Events in Iran have resulted in 5 million barrels of oil per day (MMB/D) being taken off the world market. Increased production by other countries has reduced the cumulative loss to about 2 MMB/D.

—The situation in Iran remains uncertain. We cannot predict when Iran will resume oil exports. Even when production is resumed, it could again be reduced or terminated. Other producers may not exceed current production levels. And as Iran resumes exports, other nations could decide to lower their production before stocks are at satisfactory levels.

—We thus face a serious situation requiring effective, coordinated action by all countries, consumers and producers. While we must take care not to stimulate panic and hoarding of oil, we must act prudently to minimize the economic disruption which could result from a protracted shortage of oil supplies.

—The U.S. believes that since we cannot be assured that oil production prospects will improve considerably within a short period of time, the oil-consuming countries will have to take effective steps to reduce their demand for oil through use of a variety of measures, mainly conservation and fuel switching. This could entail some political, social, and possibly economic costs, but these are of a far smaller magnitude than the potential costs of other alternatives.

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—Relying on accelerated stock drawdowns to cover the shortfall in the hope that Iranian production will soon return to pre-crisis levels simply will not work. Those holding stocks will not be willing to draw them down substantially. And if they were, this would only result in inadequate stocks to take us through the next winter and in serious spot shortages by the summer and possibly well before.

—Relying on oil price rises to balance supply and demand would have serious economic costs, including increased inflation and international monetary instability, severe disruptions in certain industries and sectors, a likely recession, and inordinate transfers of resources to producing countries. Another very disturbing consequence is that this is likely to result in a permanent increase in the OPEC price.

—The U.S. administration has called for voluntary conservation by all users, including governments at the Federal, State, and local level, industry, the driving public, and the residential sector, and we are currently preparing a major public program to maximize the effect of voluntary measures. We are also preparing a series of mandatory conservation and fuel switching measures and are prepared to impose them if the savings from voluntary actions are not sufficient. Other nations are also considering or are taking such measures. However, in order to have the desired effect on the oil market, the oil-consuming nations must act together. A carefully coordinated international effort in the IEA will enable us to have the maximum effect on the oil market—both by reducing demand and establishing a positive psychological climate—and will assist each government to gain the support of its Parliament and public for strong and effective domestic measures.

—The U.S. therefore believes that the Governing Board in its March 1–2 meeting should call on IEA countries to implement measures in whatever way is appropriate to their individual circumstances, voluntary to the extent feasible and mandatory to the extent needed, to achieve a substantial reduction in oil demand to be shared equitably by all IEA countries. We do not believe it would be feasible to attempt to dictate what specific measures should be taken by individual governments, rather each government would commit itself to take whatever measures would be necessary to achieve a common reduction in demand. The exact amount of the reduction will have to be decided at the GB meeting in light of the current IEA analysis of the oil market. But we believe it must be at least equal to the IEA countries’ group share, based on projected 1979 demand, of the current shortfall in world production. (FYI—While we will not be prepared to propose a specific reduced demand target until we have completed our review of the U.S. contingency plans, we believe a common IEA percentage target of 4–5 percent will be required to produce the necessary reduction in projected demand.)

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—The purpose of this initiative is twofold: to achieve a significant improvement in the world energy market, and to demonstrate, particularly to key producer countries, that the major oil-consuming nations are taking this situation seriously and are willing to do their share to improve it.

—The U.S. would suggest that the GB also recommend that strong measures be taken to increase IEA oil production to the extent possible.

—The GB should also recognize the efforts of some OPEC nations to increase production of oil in response to the cut-off of exports from Iran. We should stress the shared responsibility of oil producers and consumers to meet such a situation in a way that will maintain the health of the world economy.

—In order to make credible this demand restraint effort, the GB should establish a system to monitor the progress of IEA members toward reaching the collective target. The Standing Group on Emergency Questions (SEQ) should be charged with meeting periodically over the next 30 to 150 days to review member country demand restraint programs in terms of effectiveness and equivalence of efforts.

—The GB action would constitute an important commitment for its members. The U.S., as the largest energy consumer in the IEA, would take such a commitment very seriously. We are developing a series of demand restraint measures that we believe will enable us to do our part. We will explain them in some detail during the meeting.

—We would appreciate any comments on these proposals member countries might wish to make in advance of as well as during the meeting.5 Embassies may note that they are broadly consistent with the approach suggested by IEA Executive Director Lantzke at the SEQ meeting February 19 (reftel).6

  1. Source: National Archives, RG 59, Central Foreign Policy Files, D790084–0923. Confidential; Immediate. Drafted by Bosworth and Richard E. Hecklinger (EB/ORF); cleared by Bergold, Poats, Eizenstat, and Hormats and in EUR/RPE and the Treasury Department; and approved by Cooper. Sent to Athens, Bern, Bonn, Brussels for the Embassy and USEC, Copenhagen, Dublin, London, Luxembourg, Ankara, Madrid, Oslo, Ottawa, Rome, Stockholm, The Hague, Tokyo, Vienna, Wellington, and Canberra. Repeated Immediate to Paris for the Embassy and USOECD and Priority to Caracas, Kuwait, Jidda, and Abu Dhabi. In a February 21 memorandum, Poats informed Owen and Brzezinski that this telegram was being sent. (Carter Library, National Security Affairs, Staff Material, Special Projects File, Box 9, Henry Owen, Chron: 2/10–28/79)
  2. Telegram 5576 from Paris, February 20, reported that the IEA Standing Group on Emergency Questions (SEQ) had accepted the IEA Secretariat’s estimate that the world oil shortfall was likely to average 2 million barrels per day in 1979. As a result, a majority of the IEA members supported the idea of restraining oil demand by an amount to be agreed upon, a decision that the Governing Board would make at its March 1–2 meeting. (National Archives, RG 59, Central Foreign Policy Files, D790079–0089)
  3. February 24.
  4. Christopher informed the President about the U.S. proposal to be presented at the March 1–2 meeting in a February 23 memorandum. After explaining the proposal’s objectives, Christopher concluded: “The strongest resistance to our proposal will probably come from the Germans and the Japanese. The Germans prefer to avoid demand restraint measures and instead rely on a rise in oil prices to balance supply and demand. The Germans are, of course, more able than most other IEA nations to manage the economic consequences of such a course of action. The Japanese are wary of demand restraint measures, claiming that in their case the only alternative would be to cut oil supplies to industry which would slow economic growth.” (Carter Library, National Security Affairs, Staff Material, Special Projects File, Box 9, Henry Owen, Chron, 2/10–28/79)
  5. On March 9, the Embassy in Brussels wrote: “our suggestion made a month ago [see Document 189] for placing a ceiling on spot market petroleum prices probably came too late to be acted on at the March 1–2 IEA Governing Board meeting. Demand restraint measures undoubtedly were more readily acceptable to IEA and possibly OPEC governments as well. But the recent moves of Iran, Libya, etc. to divert into the spot market increasingly substantial amounts of crude produced ordinarily for shipment under longterm contracts impels us to raise the ceiling price issue once again.” (Telegram 4564 from Brussels, March 9; National Archives, RG 59, Central Foreign Policy Files, D790109–0075)
  6. Telegram 57501, March 8, reported that the IEA Governing Board agreed IEA member countries should reduce their demand for oil by some 2 million barrels per day, equivalent to about 5 percent of IEA consumption. (Ibid., D790107–0810) The Governing Board decision, “Action on the Oil Market Situation in 1979,” is printed in Scott, The History of the International Energy Agency, vol. III, pp. 110–113.