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

95864. Subject: Saudi Production Ceiling.

1. Embassy is instructed to approach SAG soon at an appropriate level to inform them of USG concern over reimposition of 8.5 million barrels per day production ceiling on Aramco, to stress the oil market’s continuing need for incremental output, and to urge SAG to continue to permit production at 9.5 MMBD level throughout this quarter. You should make it clear you are making this approach under instructions, and it may be made written or orally at your discretion. You should draw upon the following points:

—We appreciate the fact that the Saudi Government has permitted Aramco to produce at near-maximum capacity levels since late last year in order to help offset the shortfall in world oil supplies owing to the interruption in Iranian oil exports.

—Despite the recent resumption of Iranian oil exports (at a level still far below previous years),2 there is a continuing need for increased production by other OPEC countries in order to permit orderly oil market conditions and the rebuilding of working stocks. In any event, Iranian production levels are uncertain and Iran cannot be firmly counted upon for 3.5–4.0 MMBD output levels for some time.

—World oil stocks were drawn down during the December–March period by about 2 MMBD more than otherwise would have occurred. These stocks must be rebuilt prior to the heavy demand period of the 1979–80 winter in order to meet the essential energy needs of all oil consuming nations.

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—Market is very unsettled and a “shortage psychology” is developing. Production cutbacks now will reinforce shortage psychology and will help sustain high spot oil prices, which will both further unsettle the world market and undermine the agreed OPEC price decisions.

—The industrialized oil consumers are attempting to help offset the effects of the Iranian situation by reducing their collective demand on the world oil market by 2 MMBD by year-end. The President has just announced the steps the US will take to meet our share of the demand restraint commitment. It will take time to implement demand restraint and other measures, however, and the greatest impact will likely not occur until the fourth quarter.

—At a time when there are differences on some issues between our two countries, we should seek to reinforce our longstanding history of mutually beneficial relations through cooperation wherever possible.

—We believe that the steps the USG is taking to restrain demand for imported oil provide ample evidence of our good intentions and the seriousness with which we view the current oil situation; we urge continued cooperation by the SAG in permitting maximum feasible output in order to help meet the world’s essential demand for oil and re-establish stability in the world oil market.

2. Ambassador West will discuss the production ceiling and other issues more generally when he returns, but Dept. believes it important that our views be made known to SAG very soon. Chargé should therefore proceed to target most appropriate SAG official for making above approach, keeping in mind likely Yamani sensitivity to recently released SFRC Subcommittee staff report on Saudi oil3 and possible need to let dust settle a few days before making above approach.4

  1. Source: National Archives, RG 59, Central Foreign Policy Files, D790175–0949. Confidential; Immediate; Exdis. Drafted by Todd; cleared by Rosen, Katz, Twinam, Bergold, Owen, and Helen B. Junz (Treasury Department) and in EB/ORF; and approved by Cooper. Repeated Immediate to Riyadh and Dhahran.
  2. Iranian oil production had reportedly recently risen to its highest level since December 1978. (The New York Times, April 11, 1979, p. D7)
  3. The report by the Subcommittee on International Economic Policy noted that the future output of Saudi oil would be “far less than predicted.” (Ibid., April 15, 1979, p. A1)
  4. Chargé Daniels met with Deputy Foreign Minister Abd al-Rahman Mansuri on May 6 and made his presentation as instructed. Daniels reported: “Mansuri was quick to the point and said that, in sum, our message was that we wanted increased production pari passu with Iranian shortfall. He promised to pass the information on to the appropriate authorities.” (Telegram 3544 from Jidda, May 7; National Archives, RG 59, Central Foreign Policy Files, D790206–1126)