231. Memorandum From Henry Owen of the National Security Council Staff to President Carter 1

SUBJECT

  • Publication of CIA’s World Oil Outlook

Stan Turner has sent to you a copy (Tab A) of the unclassified CIA assessment of the world oil market in 1979–82.2 NSC, State and Energy worked with the authors to sanitize and clarify the classified original version for publication.3 We believe publication of this excellent study will help to instill realism in public debate on energy issues.

The introductory summary highlights the conclusions. Pages 2–3 of the main report reveal and explain CIA’s tentative preference for the oil industry’s estimate of a 1 million barrel per day decline in US oil production between now and 1982, as compared with the Energy Department’s belief that domestic production will not fall significantly in this period. Pages 11–12 carry the main policy implications, which are consistent with the positions you took at the Tokyo Economic Summit and in your April and July energy speeches.4

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Attachment 5

The World Oil Market in the Years Ahead

A Research Paper

Summary and Conclusions

The gas lines and rapid increases in oil prices during the first half of 1979 are but symptoms of the underlying oil supply problem—that is, we can no longer count on increases in oil production to meet our energy needs. Although the current oil shortages may disappear when economic activity slows, they are likely to recur during the upswing of the next business cycle. Thus, contrary to the view that had become popular during the temporary supposed “oil glut” of 1977–78, the world does not have years in which to make a smooth transition to alternative energy sources. Consumers are already being forced to make adjustments, not only through higher prices and shortages but also through slower economic growth.

In its broadest scope, the world energy problem reflects the limited nature of world oil resources. Although the world is not running out of oil, current consumption is greatly exceeding new discoveries of oil. If this trend continues, as most experts expect it will, output must fall within the decade ahead. Limited oil reserves have already forced a fall in US production and we expect soon will do so in the USSR. Together these two countries account for one-third of world oil production, and the number of discovered reserves in both countries has fallen sharply in recent years.

Some countries with oil reserves that are large relative to production are increasing their production capacity only slowly or not at all. These cautious policies reflect both a strong preference for production profiles that stretch out reserves over longer periods and an aversion to even a small risk of impairing ultimate oil recovery. Among key Persian Gulf countries—Saudi Arabia, Iran, Iraq, Kuwait, and the United Arab Emirates (UAE)—financial, social, and political factors also influence capacity and production decisions. These nations are extremely reluctant, partly because of past experience, to keep a large share of their wealth in the form of financial assets, and they are also worried about the disruptive social effects of an excessive inflow of oil money.

The number of countries that have imposed policy constraints on production has grown markedly over the past several years and now [Page 737] includes countries with roughly 60 percent of total world reserves. Some of these are outside the Organization of Petroleum Exporting Countries (OPEC). Norway, for example, has established rigid policies regarding the rate of reserve development and capacity expansion. The Mexican Government also has conservative views on the kind of reserve-to-production ratios it wishes to maintain in the years ahead.

Many major producers not only are restricting development of new capacity but also are holding production below capacity. Saudi Arabia has had a production ceiling of 8.5 million barrels a day6 since 1974. Kuwait’s production ceiling of 2.0 million b/d reflects its strong conservationist views. The UAE limits output to 80 percent of capacity for similar reasons. Iran and Iraq are the most recent OPEC countries to formulate production ceilings. For Iraq, the goal seems to be a limit of 2.4 million b/d, and the Iranian Government has talked of a ceiling of 3.5–4.0 million b/d.

These production limits are not rigid; they have been and can be relaxed. During the first three months of 1979, Saudi Arabia and Kuwait boosted output temporarily to help offset some of the shortfall caused by the Iranian disruptions, although Saudi Arabia cut back production to its ceiling of 8.5 million b/d when Iranian output partially recovered. Saudi Arabia again announced its intention to increase temporarily output beyond the ceiling shortly after the June OPEC meeting. The ceilings may also be changed in the future, although revisions are more likely to be downward than upward, in view of the basic motivations behind the oil policies of most of these countries.

Oil production in OPEC countries outside the Persian Gulf is limited by productive capacity, which is unlikely to expand during the next few years. Consequently, if the Gulf countries’ production stays at announced ceilings, total output will remain nearly constant. Although OPEC production could rise if ceilings are lifted, it could also fall, either because of a lowering of ceilings or because of disruptions of a political or technical nature.

Outside OPEC, the likely changes in production and capacity will tend to offset each other. In particular, we expect:

• A marked increase in North Sea oil production, to a probable peak in 1982–83.

• A decline in US production.

• An increase in production in less developed countries (LDCs) outside OPEC, especially Mexico and Egypt; most of the increase, however, will be offset by a rise in LDC consumption.

• A decline in the net exports of oil from Communist countries, as Soviet production peaks and begins to drop.

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On balance, industrial nations of the West cannot count on any increase in oil supply in the foreseeable future; indeed, it is prudent to plan on some decline in the next few years.

With traditional oil supplies thus restricted, the importance of alternative energy sources—tar sands, shale oil, natural gas, coal, and nuclear energy—will increase. Except for natural gas, the resource base for these energy sources is sufficient to allow a large expansion of output, but there are severe cost and environmental constraints. Moreover, even with the enhanced profitability resulting from higher real oil prices, large-scale development of these resources would take many years. During the next three to four years, even an optimistic projection of production of nonoil energy sources in the member countries of OECD (Organization for Economic Cooperation and Development), which assumes an increase of 2 million b/d oil equivalent in coal supplies and no further delays in the nuclear power programs, would result in only a 1.0- to 1.5-percent annual rate of growth in the total energy supplies of the OECD countries.

The consuming countries will find it very difficult to adjust to such a slow growth of energy supply. Holding energy demand to projected supply levels without lowering economic growth targets of OECD countries below the 3- to 3.5-percent rates generally considered acceptable would require unprecedented rates of conservation. Although government policies can help, most conservation is likely to be imposed by market forces. The interaction between consumer-country policies supporting economic growth and producer-country policies limiting oil production will operate to push up the price of oil. Higher oil prices in turn will slowly stimulate energy production and conservation. During the next few years at least, the higher oil prices will work to cut demand by holding down the economic growth of the OECD countries—to perhaps 2.5 percent annually or less on the average.

Oil price increases are likely to come in spurts, such as that of January–June 1979. The average OPEC price will reach more than $20 a barrel in July, or some 60 percent above the 1978 level. These higher oil prices will have a depressive impact on economic activity in the next two years, and, in turn, real oil prices could stabilize or even decline slightly. Thus, weak demand may mask the worsening energy situation, as was the case during 1975–78. The problem of public perception is complicated by the fact that very small swings in production and/or consumption can create enough slack in the oil market to create the illusion of ample oil supplies.

The oil market may, of course, be either tightened or eased by the policy reactions of both oil exporters and oil importers to these events. At the same time, other contingencies would almost certainly make [Page 739] things worse rather than better. For example, a major lesson from the Iranian revolution is that the United States and other major consuming countries are highly vulnerable to unpredictable supply interruptions. The political situation in Iran remains extremely unstable, and exports from that country could fall or even cease. Unexpected supply interruptions could occur elsewhere as well. In a basically tight energy market, even such common events as a harsh winter or a coal strike could create disruptive energy shortages and higher prices. Use of oil as a political weapon by one or more producers, of course, would also cause economic dislocations.

In the longer term, the oil supply problem is likely to get worse later in the 1980s. Although higher prices will stimulate oil exploration and development, enhanced recovery, and production of heavy and shale oil, progress in these areas will take time. The predominant view among geologists is that the chances of discovering enough quickly exploitable oil to offset declines in the known fields are slim. If the Persian Gulf countries and some non-OPEC producers continue to limit production, as we expect, world oil production probably will begin to decline in the mid-1980s. As time goes by, the possibilities for energy conservation and substitution of other energy sources multiply, but in the decade of the 1980s the required adjustment will be extremely difficult.

[Omitted here is the remainder of the paper.]

  1. Source: Carter Library, National Security Affairs, Brzezinski Material, Subject File, Box 48, Oil, 8–12/79. No classification marking. Sent for information.
  2. Turner sent the study, prepared in the National Foreign Assessment Center, under a covering memorandum to the President on August 22. (Ibid.) A classified draft of it, July 1979, is ibid., 7/79. The unclassified version was published in August 1979.
  3. On July 12, Brzezinski sent Turner a memorandum about the study in which he wrote: “With regard to publication of the paper in an unclassified form, I have no doubt it would make a useful contribution to greater public realism about the energy problem, both here and abroad. Nevertheless, I believe the paper should not be published in an unclassified form without major revisions that would affect its tone and attempt to avoid possible interpretations adverse to our short-term national interests.” Among the examples he cited were: 1) “The study could be used by OPEC to justify further substantial price increases”; and 2) “Its objective view of production restrictions by OPEC countries and rising prices could be characterized as ‘soft on OPEC.’” (Ibid., Agency File, Box 3, Central Intelligence Agency, 5–8/79) Ambassador West, after having seen the study in July, argued against publishing it in an unclassified form. [3 lines not declassified] (Telegram 35915 from Jidda, July 10; ibid., Subject File, Box 48, Oil, 7/79) West delivered the “pertinent parts” of the study to Yamani on August 12, explained to him the “background of the report,” and stated that, in his judgment, “the references to Saudi Arabia were favorable and did not make public any classified or proprietary information which had not already been divulged.” (Telegram 5910 from Jidda, August 13; National Archives, RG 59, Central Foreign Policy Files, P850036–2651)
  4. See footnote 2, Document 196, and footnote 2, Document 226.
  5. No classification marking. A typed note at the top of the title page indicates that this copy of the study was a confidential draft not yet approved for release. Another note identifies the paper as ER 79–10327 of July 1979.
  6. An unknown hand circled “8.5” and wrote “update” in the margin.