242. Paper Prepared in the Department of State1
Iranian Oil Contingencies
Iranian oil production in recent months has averaged about 3.7 million barrels per day, with late October production up to 4.1 million b/d. Exports have been about 3.1 million b/d, of which about 700,000 b/d comes to the U.S. This constitutes about 8 percent of U.S. oil imports and about 3.7 percent of total U.S. oil availability.
If Iran decides to embargo oil shipments to the U.S., a basic question is whether Iran also decides to reduce its total exports. We believe this would be the case. As the 1973–74 experience showed, it is very difficult to target an embargo on a single country, and greater impact is achieved if production is cut at the same time. The Iranian regime is presently earning foreign exchange at about twice the rate of its foreign exchange expenditures. Even before the occupation of the American Embassy, the Iranian National Oil Company told us that they would cut back oil production by 300,000 b/d in 1980.
Triggering the IEA Sharing System
Even if no other market adjustments were made to compensate, an Iranian embargo of the U.S. would not trigger the IEA sharing system because the size of the cutback to the U.S. would be below the trigger level. To activate the system, the IEA group or any member country must sustain a cut in available oil to a level at least 7% below base period consumption (roughly the previous year). U.S. oil imports from Iran are only about 3.7% of total oil available to the U.S.; in view of the recent increase in our total oil availability, a complete and uncompensated stoppage of Iranian exports to the U.S. would leave us with expected oil availability about 2.2% below base period.[Page 766]
A larger Iranian cutback (e.g. one million b/d) would have its impact on the consuming world as a whole. Even if it all fell on IEA countries, it would be far below the 2.6 million b/d trigger level for the IEA as a group.
It is possible to activate the IEA sharing system at less than a 7% shortfall by unanimous agreement, but it is doubtful that unanimity would be achieved. Many IEA countries, and the Secretariat, believe that triggering the allocation system—which would inevitably entail domestic allocation—is much less desirable for a shortage below 7% than more informal coordination of policies. However, if something approaching a total shutdown of Iranian production ensues, we would not exclude IEA sharing as a tool for joint action.
Possible Replacement Oil
Major producing countries with spare crude capacity are shown in the attached table.2 A number of them increased production when Iran shut down early this year, and some might do so again. On the other hand, a number are expected to reduce production in early 1980.
Saudi Arabia is now producing 9.5 million b/d from Aramco fields, one million b/d over its ceiling. It may have capacity to produce some additional oil, but analysts doubt whether a substantial increase can be sustained for long.
Kuwait is now producing at about 2.3 million b/d, slightly below capacity; this is scheduled to drop to 2.2 million b/d, and the Kuwaitis are reportedly considering an even steeper cut of up to 500,000 b/d. The Kuwaitis do not need the income and view oil in the ground as potentially more valuable than additional financial investments.
Abu Dhabi has about 500,000 b/d unused capacity due to production ceilings imposed by the Algerian-managed national oil company for “technical reasons”. The technical justification for these limits is questioned by Western oilmen, but their imposition clearly reflects a broadly accepted local desire to maximize long-term field output.
Nigeria raised its output in early 1979 to about 2.4 million b/d in response to the Iranian crisis, but production has since been reduced to about 2.2 million b/d because of technical reasons (falling pressure in small fields) and conservationist sentiment.
Algeria and Libya have 200,000 and 100,000 b/d of spare capacity which they might bring back on the market if they desired the additional income. Iraq also has perhaps 300,000 b/d of spare capacity.[Page 767]
The United Kingdom recently cut output by 85,000 b/d because of the reintroduction of restrictions on flaring gas from the Brent field. The U.K. may be amenable to another relaxation of flaring rules. While Venezuela has announced it would cut production by 150,000 b/d for conservation reasons in 1980, they might be persuaded to maintain production at 2.35 million b/d.
A major argument in urging additional production would be the risk of harm to the world economy from a renewed shortfall. This might well persuade the Saudis to keep their production up to 9.5 million b/d, although whether they would be willing to go beyond that is questionable. Kuwait and Abu Dhabi, however, might be very reluctant to raise their oil production at this point if that were confrontational with Iran, since they have a strong interest in not antagonizing their larger neighbor. We could not expect our argumentation to have any impact on Algeria or Libya. Strong urgings from the world community might well cause Nigeria and Venezuela to resume higher production on a temporary basis. Iraq could conceivably increase production principally for commercial reasons, either secretly or in some way as to be portrayed as benefitting countries other than the U.S.
Informal Efforts with U.S. Companies
If Iran were to embargo the U.S. but maintain its overall production level, we would expect oil companies to readjust supplies among themselves so as to send Iranian oil to non-U.S. destinations, and non-Iranian oil to the U.S. Market changes in the past year (tight market, increased oil sales moving through producer government companies, reduced amounts of oil available to the majors for third-party sales) have made this more difficult but not impossible. However, the average price paid for such oil imports to the U.S. would be higher, since much of the replacement oil would be at spot prices.
While we believe this would happen naturally, it might be accelerated and coordinated through USG persuasion. This would have particular impact on companies active in the U.S., who would see behind it the potential for regulatory action. It would be essential, in pursuing such efforts with the companies, to consult our IEA partners to reassure them that the U.S. was not seeking to overcompensate for a shortfall at their expense.
The more serious problem is that Iran would be likely to reduce total output in conjunction with any embargo on exports to the U.S. We would still expect through normal market action and persuasion to be able to mitigate to some extent the impact on the U.S., but the consequences for price in the U.S. and eventually worldwide would be more severe.[Page 768]
A list of the companies currently importing oil from Iran is attached.3 The top two companies—Amerada Hess and Ashland—are very heavily dependent on Iranian oil. Unless oil were rapidly made available to them from elsewhere, they would very quickly be on the spot market, and would likely feel compelled to pay exceptionally high prices.
While DOE buy/sell orders (which mandate oil transfers to crude-short companies) are normally restricted to small refineries, which generally do not directly import foreign crude, it might be appropriate for DOE to review the possibility of regulatory changes which would permit orders requiring other US companies to make oil available to firms cut off under such circumstances. Alternatively, full domestic crude oil allocation might be considered.4
- Source: National Archives, RG 59, Executive Secretariat Files: Lot 82D85, Box 1, Iran Update, November 1979. Secret. Drafted by Bullen and Dolan and cleared by Rosen, Calingaert, in NEA/IRN and NEA/ARP, and by Poats. The paper is attached to a November 6 memorandum from Katz and Goldman to Vance and Duncan that explained that the paper had been prepared for a November 7 SCC meeting on Iranian oil. The meeting’s Summary of Conclusions indicated that officials at the Departments of Energy and Treasury would meet with oil company executives on November 8 and “raise with them the question of reallocation of supplies” in anticipation of a significant Iranian reduction. (Carter Library, National Security Council, Institutional Files, Box 105, SCC 196: Iran, 11/07/79) On November 4, a group of university students had seized the U.S. Embassy in Tehran and taken most of its staff hostage. Documentation on the Iranian hostage crisis is scheduled for publication in Foreign Relations, 1977–1980, volume XI, Part 1 and Part 2, Iran: Hostage Crisis, November 1979–January 1981.↩
- Attached but not printed.↩
- Attached but not printed.↩
- On November 12, Carter issued Proclamation 4702 ordering the cessation of oil imports from Iran into the United States. In remarks that day, Carter emphasized: “It is necessary to eliminate any suggestion that economic pressures can weaken our stand on basic issues of principle. Our position must be clear.” For text of his remarks and the Presidential Proclamation, see Public Papers of the Presidents of the United States: Jimmy Carter, 1979, pp. 2109–2112.↩