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

263. Memorandum From Secretary of Energy Duncan to President Carter¹

Washington, March 6, 1980.

SUBJECT

• Saudi Arabia Trip Report, March 1–4, 1980

I travelled to Saudi Arabia at the invitation of Sheik Zaki Yamani, Minister of Petroleum and Mineral Wealth, and held a series of discussions with Minister Yamani and other Saudi officials with economic and finance portfolios, including Crown Prince Fahd; Mohammed Aba Al-Khayl, Minister of Finance and National Economy; Hisham Nazer, Minister of Planning and National Economy; Ghazi al-Gosaibi, Minister of Industry and Electricity; Farouk Akhdar, Secretary General of the Royal Commission on Yanbu/Jubayl; and Abdel Hadi Taher, Governor of Petromin.²

We found in Saudi Arabia a strongly held view that they were managing their oil industry responsibly and with broad international objectives in mind. They alleged that it was at some “sacrifice” that they maintained their production level at 9.5 MMB/D. It is significant to me that the economic officials with whom I spoke gave no discernible weight to the American national security commitment to the region, as expressed in your State of the Union speech.³ Their view seems to be that we had no option but to provide regional security. I believe, however, that ministers with military and foreign affairs responsibilities would take a different position, as did the Crown Prince. The discussions with the Crown Prince were primarily on subjects other than energy and are summarized in a separate memorandum.

Issues Discussed

1. Excise Tax on Gasoline—We mentioned the “possibility” of a tax on gasoline that would be imposed through an import fee on crude oil and allocated to gasoline through the entitlements system. Yamani indicated that would cause him great difficulty with other OPEC members but was supportive of the conservation objective of such a fee. After considerable discussion, it is my view, and also that of Ambassador West, that an import fee would be manageable provided that proposed legislation imposing a gasoline tax was submitted to the Congress simultaneously with the introduction of the import fee and that it is made clear the fee would be terminated if and when legislation were enacted.

2. Strategic Petroleum Reserve—We discussed the filling of the Strategic Petroleum Reserve and Yamani’s reaction was vigorously negative.⁴ Yamani said he was doing everything possible to create a surplus of crude oil in the world market in order to achieve both price discipline and pricing unity among OPEC members.⁵ To add to crude oil demand at a time when he was trying to build a surplus was counter to this objective. It would make it difficult, if not impossible, to hold Saudi production at present levels in view of the belief of many Saudi officials that current production levels are too high. In effect, our action could defeat his program to achieve real progress at the June OPEC meeting. He raised this issue with me on three other occasions and reverted to it in his final comments to me just before my departure. He repeatedly urged, in the strongest possible terms, that we not compromise his program at this time. He indicated in a private conversation that he would have no problem with a U.S. decision to fill the SPR after the market stabilizes and that he understood our national security need.

3. Energy Conservation—I described in some detail both the actions that we have taken and the substantial results we have already achieved. Saudi officials expressed strong and continuing interest in conservation measures, not only in the United States but also in other industrialized countries. They seem to be impressed by recent achievements in the United States, against a background of skepticism concerning the ability of the industrial countries in general and the United States in particular to get energy demand under control. The Saudis see reduced demand for oil by the industrialized countries as a necessary complement to their own policy of high production levels in the effort to reintroduce order into the world oil market. They also see sustained conservation as necessary to avoid future “gaps” between supply and demand and consequent pressure on them to increase production to undesired levels, which they are determined to withstand.

4. Production Policy— Yamani believes that the current level of Saudi production is in excess of that warranted by Saudi revenue needs and reaffirmed the baseline Saudi production target of 8.5 MMB/D. He indicated, again privately, that he favored continuing production at 9.5 MMB/D at least through the next quarter to achieve his objective of pricing unity.

We were told by Dr. Taher, Governor of Petromin, and the Chairman of ARAMCO, John Kelberer, that the Saudis are on an investment course to expand their production capacity to 12 MMB/D. It is my view that this capability is a lever to discipline other OPEC producers, rather than a reflection of a desire to increase actual production.

5. Continuing Dialogue— Yamani believes that a world “dialogue” on energy matters that involved many countries and a broad agenda is bound to fail. He believes constructive results can be achieved if a relatively few countries, using a narrow agenda, work bilaterally or in small groups for the next two years. Only then will it be possible to reach agreement in a broader international arena such as the United Nations.⁶

6. Other Issues— Yamani mentioned the Civil Investigative demand issued by the Department of Justice requiring ARAMCO to provide information respecting Saudi Arabian reserves, production potential, and other prospective activities. He expressed his view that these requests for information had no bearing on an investigation that is directed to past practices and are unacceptable intrusions into high confidential national secrets. We informed him that a team from the Justice Department would be in Saudi Arabia next week to address this issue. I am meeting with Ben Civiletti tomorrow before the team leaves.⁷

Yamani also expressed concern over proposed Internal Revenue regulations “directed at ARAMCO,” that would preclude ARAMCO from realizing a tax credit against U.S. income taxes for taxes paid to Saudi Arabia. He reiterated the point made strongly to Secretary Miller that the end result of this tax action would be the dissolution of ARAMCO to the detriment of American policy. In a separate discussion, Mr. John Kelberer, Chairman of ARAMCO, told me that the $300 million to $1 billion in additional taxes such a regulation would require would destroy ARAMCO’s utility to its American corporate stockholders.

Many in the American business community and the Saudi Government raised the issue of heavy U.S. income taxes on American expatriates, arguing that the effect of these taxes is to render American industry noncompetitive with Europeans and Japanese. In the judgment of these people, shared by Ambassador West, American industry is losing billions in Saudi business as a result.⁸

Saudi Objectives

1. OPEC Discipline—The Saudis are exerting strong pressure and undertaking various initiatives to achieve pricing unity. Yamani thinks there is a possibility of achieving this objective at the June OPEC meeting if continued Saudi production of 9.5 MMB/D results in crude oil surpluses. He thinks that will happen even if Kuwait reduces production, as announced.

The Saudis are also interested in achieving future stability and predictability in pricing and supply. Yamani believes pricing shocks such as those that occurred in the latter part of 1979 could be avoided by having regular quarterly adjustments to compensate for inflation and to share in real economic growth.⁹ Presumably, downward adjustments in real prices could be made during economic down-turns. Yamani did little more than float the concept and indicate he had the approval of several other OPEC countries.

2. Industrialization—The Saudis are concerned about the post-oil era and want to take actions now to plan for that inevitable transition. They are investing billions in an industrial infrastructure (e.g., ports, cities, gas distribution systems, electrical grids, and communications systems). They will be finalizing arrangements with foreign companies for huge industrial facilities in the petro-chemical area during the next several months.

The Saudis mention the need for “technology transfer,” but I suspect they understand they are now purchasing the best foreign technology available in their industrialization projects and other modernization programs.

3. Less Developed Countries—The Saudis seem to have a genuine interest in assisting the oil importing developing countries to expand production of energy alternatives to oil. We mentioned World Bank initiatives in this area and the possibility of this being on the agenda at the Venice Summit. The Saudis also seem to be willing to consider additional development assistance in general but they are chary of extending direct long-term government-to-government credits to the oil importing developing countries.

4. Political Relations in the Region—Progress in Arab/Israeli peace negotiations is an overriding issue with the Saudis. The issue arises constantly, softly but resolutely. They are very concerned about Soviet moves and objectives in Afghanistan, and seem proud that the Islamic population is resisting Soviet aggression strongly.

Conclusion

I view the trip as successful, even though I could not gain Saudi understanding for filling the SPR now. I believe we made some headway on this issue, particularly because they said, for the first time, that they have no objection in principle to our building up the SPR—once the market has stabilized. I also believe a comfortable relationship has been established with Yamani, in which easy, forthright, and constructive communication can be maintained on a regular basis. Finally, I would stress the need to preserve the confidentality of Saudi views and intentions, even though, as a consequence, there will be reverberations from the Hill and the press on the short run issues that have received prominence—the SPR and whether the Saudis are specifically committed to continue production at 9.5 MMB/D. I did a press conference today on the trip, and I think these issues were handled satisfactorily. By preserving confidentiality, we would improve our credibility with Saudis and greatly improve their ability—internally and within OPEC—to come through on the more durable and important issues.

1. Source: Carter Library, National Security Affairs, Brzezinski Material, Agency File, Box 8, Energy Department, 11/79–9/80. Secret. Copies were sent to Brzezinski, Vance, and Brown. Carter initialed the memorandum.
2. A summary record of Duncan’s meetings in Saudi Arabia is in telegram 63912 to Riyadh, March 10. (National Archives, RG 59, Central Foreign Policy Files, D800123–1051) His March 4 discussion with Yamani was reported in telegram 1621 from Jidda, March 10. (Ibid., D800123–0373) A memorandum of his March 2 conversation with Prince Fahd is in the Carter Library, National Security Affairs, Brzezinski Material, Agency File, Box 8, Energy Department, 11/79–9/80. His March 3 discussion with Taher was reported in telegram 1622 from Jidda, March 10. (National Archives, RG 59, Central Foreign Policy Files, D800123–0507)
3. See footnote 4, Document 257.
4. See footnote 2, Document 258.
5. Next to this sentence, Carter wrote: “I agree.”
6. In this paragraph, Carter underlined “world ‘dialogue’” and “bound to fail” and wrote in the margin: “I agree” and “good.”
7. Carter underlined “meeting with Ben Civiletti tomorrow” and wrote in the margin: “OK.” Benjamin R. Civiletti was the Attorney General. Regarding the investigation, see footnote 5, Document 249.
8. Next to this paragraph, Carter wrote a question mark.
9. Carter underlined “to share in real economic growth” and wrote in the margin: “Here’s the problem.”