Foreign Relations of the United States, 1969–1976, Volume XXXVII, Energy Crisis, 1974–1980

234. Telegram From the Department of State to All Diplomatic and Consular Posts¹

Washington, September 15, 1979, 1354Z.

243027. Inform Consuls. Subject: Update on Energy Issues.

1. This cable updates where we stand on a number of energy issues:

—The state of the international oil market for the next year;

—The U.S. energy situation;

—Oil import pledges made by the US; and

—The status of U.S. domestic energy initiatives.

2. International Oil Market Situation. Even with a partial restoration of Iranian oil production to an average level of about 3.5 million barrels per day (MBD) and with production running near capacity in most other OPEC countries, the world oil supply continues to be tight but adequate to meet current demand and rebuild depleted stocks. Given probable trends in supply and demand, this delicate balance is likely to continue through the next six to twelve months, barring a large drop in oil demand precipitated by deep recession, or a sharp reduction in supply for political or other reasons.

A. Demand. An average rise of 59 percent in official crude oil prices in 1979, dampening world economic growth, has been an important contributing factor in an anticipated increase of only 0.8 percent in non-Communist world oil demand from 50.4 MBD in 1978 to 50.8 MBD in 1979, according to Department of Energy (DOE) estimates. World oil demand next year will depend on the severity of projected global economic turndown and efficiency of demand restraints. Assuming 2 percent OECD growth, total demand estimates show a 0.8 percent increase, rising to 51.2 MBD in 1980. Most growth in demand will occur in developing countries, especially in OPEC countries, Mexico and more developed LDC’s. On the other hand, a world economic downturn in 1980 could result in a drop in world demand to below 50.0 MBD.

B. Supply. The most problematic element in a near term market assessment is production levels of key OPEC countries. Current (third quarter 1979) Free World production (52.3 MBD) is at a level permitting significant stock re-building, principally due to Saudi Arabia’s 1 MBD temporary increase in crude oil production from 8.5 to 9.5 MBD. The Saudi Government will review this temporary increase later this month.²

If Saudi Arabian production returns to 8.5 MBD, and other OPEC producers produce at more or less current levels, DOE estimates that Free World oil production will be about the same in 1979 and 1980 (about 51.4 MBD). This scenario assumes a slight increase in non-OPEC production and an off-setting decrease in net exports from Communist countries as Soviet production peaks and begins to decline.

3. Oil Demand and Supply Balance. While the market has eased somewhat during third quarter 1979 owing to the Saudi temporary increase and near maximum output levels elsewhere, excess capacity that existed before the Iranian crisis has disappeared and the market remains very vulnerable to supply disruptions. In addition to those of Saudi Arabia and Iran, production levels from Nigeria, Iraq and Kuwait are also subject to political and/or technical uncertainties. While an unusually cold U.S. or European winter would further increase demand, DOE estimates foresee a slightly improved Free World stock situation at year-end 1979 (a rise of about 220 million barrels, or about 5 percent above December 1978 levels).

4. U.S. Energy Situation. DOE data indicate that U.S. oil consumption for the year to date (through August 24) is running at about 18.7 million barrels per day (MBD), down slightly from 18.8 MBD for the comparable period last year. Significantly, consumption of motor gasoline is 7.1 MBD, 3 percent below last year’s level.

5. Net U.S. petroleum imports for the year to date are 7.7 MBD, a slight increase over the level of 7.1 MBD for the first eight months of 1978. Both figures exclude imports for the Strategic Petroleum Reserve, which averaged 160,000 B/D in 1978 but which declined sharply this spring after purchases were suspended in response to the tight oil market.

6. Stocks of crude oil and products are still somewhat below the optimal levels, but are being rebuilt in a generally satisfactory manner. There is particular concern that we achieve an adequate level of distillate (i.e., diesel fuel and home heating oil). Distillate stocks now total about 190 million barrels, roughly 50 million barrels short of the administration’s goal for this fall. It is expected that continued stockbuilding will result in an adequate level of distillate stocks by the end of October.

7. U.S. Energy Initiatives. There are a number of U.S. energy initiatives which have been adopted since April:

—The phased decontrol of domestic crude oil prices has begun. The price of newly discovered oil was decontrolled on June 1. Other domestic crude oil prices will be gradually raised and by September 30, 1981, all domestic crude oil prices will be decontrolled.

—Mandatory building temperature standards went into effect in July. It is estimated that they will result in oil import savings of 0.2 MBD.

—In August, the administration decontrolled the price of heavy oil, an almost tar-like substance that must be heated to be produced. The President has also proposed that heavy oil be exempted from the windfall profits tax. It is estimated that with these incentives 0.5 MBD of heavy oil can be produced by 1990.

8. In response to a request by the President, the Federal Energy Regulatory Commission is moving to create a special incentive price for natural gas from tight sands (low permeability gas basins primarily in the Rocky Mountain region).

9. There are several administration proposals currently before the Congress:

—An amended version of the windfall profits tax has passed the House and is now being studied by the Senate Finance Committee;

—The Energy Security Corporation (a catalyst for development of synthetic fuels plants) is the subject of hearings in several House and Senate committees;

—The Energy Mobilization Board (which would establish binding schedules for Federal, State and local decision-making on critical, non-nuclear facilities) is being addressed by committees in both Houses;

—A wide variety of proposals to promote residential conservation have been made both by the administration and by various Congressmen, including mandatory programs under which utilities would conduct “energy audits” for residential customers, make recommendations for energy saving investments, and provide long term financing to their customers for conservation improvements;

—Legislation to require utilities to reduce oil use by 50 percent by 1990 is being prepared but has not yet been sent to the Hill;

—Programs to help low income households pay their fuel bills are being examined;

—Proposals for greater Federal spending on mass transit are being examined;

—House and Senate conferees are attempting to work out differences in bills that would give the President authority to develop a standby gasoline rationing plan;

—Request for Presidential authority to set State-by-State targets for energy conservation is included in the gasoline rationing bill which is in conference (If State conservation plans did not result in achievement of their targets, the Federal government would be permitted to impose a plan for that State.);

—Hearings have been held on a bill to grant authority to establish a solar bank;

—Initial hearings have been held on tax credits for investments in solar energy and biomass technologies, e.g. a permanent exemption of gasohol from the 4 cents per gallon Federal excise tax; and

—A tax credit for producers of natural gas from tight sands has been proposed.

10. Oil Import Commitments. At the Tokyo Summit, the U.S. pledged that U.S. oil imports in 1979, 1980 and 1985 will not exceed 1977 levels, i.e., 8.5 MBD. In July the President announced that an oil import quota would be established, and that 1979 oil imports would be held at or below 8.2 MBD.³ The quota level for 1980 has not yet been set.

11. The administration is reviewing alternative oil import quota mechanisms, e.g. quota-auction or the allocation of import rights based on historical patterns or refinery capacity. A notice on oil quota mechanisms will be published in the Federal Register in September and public comments will be solicited. A decision on a quota mechanism might be made within a few months by early 1980. (Implementation should not be required before 1980 since 1979 oil imports are projected to fall short of the 8.2 MBD ceiling without imposition of a quota.)

12. The U.S. will more than meet its IEA goal of reducing demand for oil on world markets to roughly one million barrels per day under what it otherwise would have been. (U.S. oil imports had previously been projected to be as much as 9.5 MBD in 1979. In making comparisions with oil import figures of other countries it is important to note that U.S. import figures include bunkers (about 0.5 MBD), but exclude imports by U.S. territories (about 0.3 MBD)).

13. Tokyo Summit Follow-up. At Tokyo the Summit countries adopted oil import targets and pledged:

—To review programs toward meeting the targets;

—To set up a register of international oil transactions to “bring into the open” the working of oil markets and thereby to moderate the spot market;

—Not to buy oil for government stockpiles when this would place undue pressure on prices and to consult on such decisions;

—To increase as much as possible coal use, production and trade;

—To cooperate on assuring safety in the expanded use of nuclear power;

—To establish an International Energy Technology Group (IETG) linked to the OECD, IEA and other international organizations to review the actions being taken or planned domestically by each Summit country to develop new energy technologies and to report on the need and potential for international collaboration including financing; and

—To place special emphasis on helping developing countries exploit their energy potential.

14. There will be a meeting of Summit Energy Ministers (plus representatives from the EC and possibly the OECD/IEA) on Sept 26 in Paris to discuss implementation of Summit decisions.

Vance

1. Source: National Archives, RG 59, Central Foreign Policy Files, D790421–1109. Limited Official Use. Drafted by Alan P. Larson (EB/ORF/FSE) and D. Dolan (EB/ORF/FSE); cleared by Katz, Rosen, and Calingaert and in DOE/IA, NEA, ARA, EA, AF/EPS, and EUR/RPE; and approved by Cooper.
2. The White House issued a statement on September 26 confirming reports that the Saudi Government would continue production of 9.5 million barrels of oil per day for 3 more months. The statement is printed in Public Papers of the Presidents of the United States: Jimmy Carter, 1979, p. 1766.
3. He announced the goal at Kansas City on July 16. See footnote 2, Document 226.