202. Paper Prepared in the Department of State1

PRC Meeting on Saudi Arabia, April 27, 1979

Discussion Paper

We need to determine a strategy for managing our relationship with Saudi Arabia over the next few months in a manner which will further both our short and our long term interests in a number of areas of major importance—the peace process, energy and other economic questions, and regional security including our bilateral military relationship and Saudi financing of US arms sales to other countries.

The last year has witnessed an unprecedentedly intense US-Saudi contact involving frequent high-level discussions on a number of key issues. It has been a period of testing the limits of mutual interest, and in the process we have developed a finer appreciation of where the Saudis feel their basic interests on key issues part company with ours. In furtherance of Middle East peace, we have been willing to place significant strain on the overall relationship, while at the same time we have done much in the security area to strengthen it.

[Omitted here is discussion unrelated to oil.]

Oil and Other Economic Issues: The Saudis have clearly demonstrated their resistance to our persistent urging to increase sustainable production capacity, and recently have brought production back to the self-imposed 8.5 million b/d limit, over a million barrels per day below existing sustainable capacity. In the tight oil market foreseeable for at [Page 636]least the rest of this year and for most of the next decade, the Saudi attitude toward oil pricing, however moderate, becomes less relevant in the absence of greater Saudi production.

While the overall quality of our relationship, particularly the Saudi perception of our pursuit of Middle East peace, does set the environment in which the Saudis listen to our concerns on the oil front, there is increasing evidence that they perceive our interests diverging on energy. Conservationist pressures on Saudi oil policy have intensified. There is no convincing evidence that Saudi Arabia’s income needs in the near future will require producing above the present production level. We have devised no persuasive economic incentives for increasing Saudi productive capacity, and both industrial prospects and social/economic concerns within Saudi Arabia work against the case for increased production.

We have, however, a pressing national need to continue to urge the Saudis to keep production near sustainable capacity and to bring sustainable capacity promptly up to at least 12 million b/d. Absent economic incentives such as protection of financial assets and advantages for Saudi petrochemical industrialization, we have to base our arguments primarily on the substantial Saudi perception of mutual economic interest, an argument which has particular weight because of Saudi interest in protecting the value of their substantial dollar assets, and on the Saudi sense of responsibility toward the international economy. (It can be also argued that it is cheaper for the Saudis to increase capacity now rather than later.) This suggests that we need a sustained and sophisticated bilateral dialogue on the relationship of the energy problem to the overall health of the world economy, and the related impact on the internal security stability. As they approach such a dialogue, however, the Saudis will be looking with increased skepticism at what the consumer nations, and the US in particular, are doing to bring use of energy under control and to assure economic stability in other areas.

[Omitted here is discussion unrelated to oil.]

6. Oil

—How to encourage greater production

We need a sustained low-key and sophisticated dialogue with the Saudis on oil. It should focus convincingly on what we are doing in this country to lessen our dependence on foreign imports. This dialogue should be cast in the broader context of the international economic situation, with emphasis on the sacrifice we are making in this country to strengthen the dollar and to curtail inflation.

The Saudis are well aware that we want them to increase production and productive capacity. What is required in the coming months is not exhortation but a sophisticated exchange of views to set a better [Page 637]context of strong mutuality of economic interests as basis for our long-term persuasive effort on production. We need to engage the Saudis in serious discussion of the long-term supply and demand outlook for crude oil.

In this dialogue we should appear receptive to seriously examining Saudi ideas on financial or industrial incentives we might provide for greater Saudi production. We should also seek wherever possible to draw the Saudis into the international economic dialogue and to exhibit interest in Saudi ideas on the range of North-South issues.

While the main burden of sustaining such a dialogue must fall on the diplomatic channel, it is essential that our diplomatic contacts be supported by sophisticated documentation and the occasional visit to Saudi Arabia of appropriate economic experts. Last year’s visit by a senior economic policymaker to brief the Saudis on the Bonn Summit was quite useful and might be repeated this summer.2

Our tactical goal should be constructive Cabinet level discussions with the Saudis during a Fahd visit to Washington and a subsequent Joint Economic Commission3 meeting here in the fall.

[Omitted here is discussion unrelated to oil.]4

  1. Source: Carter Library, National Security Council, Institutional Files, Box 74, PRC 102, Saudi Arabia, 4/27/79. Confidential.
  2. At the President’s request, Cooper briefed Prince Fahd on the Bonn Summit on July 22, 1978. (Telegram 5680 from Jidda, August 2, 1978; National Archives, RG 59, Central Foreign Policy Files, D780316–0648)
  3. Documentation on the meetings of the U.S.-Saudi joint commissions is scheduled for publication in Foreign Relations, 1969–1976, volume E–9, Documents on Middle East Region; Arabian Peninsula; North Africa, 1973–1976.
  4. At the April 27 PRC meeting, “all agreed that some progress would be necessary on the peace negotiations and/or security issues” before the United States “could weigh in seriously with the Saudis on increasing their long-term production capacity.” The Summary of Conclusions of the meeting also noted: “With regard to current production levels, we probably cannot affect their decision to resume production at the previous level of 8.5 million barrels per day. However, we should be prepared to object if their production drops below this level. We should make clear that it is our understanding that they are reducing production in response to the resumption of a substantial level of Iranian exports, and we would anticipate a reconsideration on their part if Iranian production should again drop off.” (Carter Library, Plains File, Box 10)