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

273. Memorandum From Secretary of Energy Duncan to President Carter ¹

Washington, May 23, 1980.

SUBJECT

• International Energy Agency (IEA) Ministerial Meeting and Visit with French Industry Minister Giraud, May 18–22, 1980, 1980

I returned last night from a five day trip to Europe during which I attended a Ministerial Meeting of the International Energy Agency (IEA),² held bilateral meetings with the energy ministers of the UK, Germany, Italy, Canada and Japan and the Executive Director of the IEA and visited several French nuclear facilities with French Industry Minister Giraud.

IEA Meeting

Since the December 1979 IEA Ministerial Meeting,³ we have maintained pressure on our allies to follow through on the commitments to establish and adjust targets to reflect our short, medium and long-term expectations for the world oil market.

The December Ministerial decision to establish annual national oil import ceilings for 1980 was taken in recognition of our failure to deal effectively with the market disruptions of 1979 and of the need to plan our oil strategy in anticipation of lowered OPEC supplies. While the initial U.S. proposal in December was directed primarily at establishing a system that provided an allocation mechanism for use in those circumstances short of triggering the formal IEA emergency oil sharing mechanism, we have refined this system to serve both as a flexible planning tool to achieve a smooth transition from our short-term (1981) to our medium-term (1985) and long-term (1990) objectives and as a means to deal with abrupt deterioration of the oil market. Our efforts initially were strenously opposed by the British and the Germans, who sought to postpone action and avoid commitments to reduced oil imports, even though they agreed with our pessimistic outlook for future world oil supplies.

A System of Yardsticks and Ceilings

Our principal accomplishment at this Ministerial meeting was to establish a system for continuous IEA monitoring of national energy performance. Here is how the system will work:

—The IEA Secretariat will prepare annual estimates of each country’s oil requirements, which will serve as yardsticks for IEA monitoring of national progress in implementing needed measures to reduce oil imports and consumption.

—If Ministers conclude that tight oil market conditions exist, they will make a decision on the use of individual oil import ceilings, based in part on these estimates—i.e., a decision to convert the yardsticks into import ceilings. We felt that this decision should follow automatically on the finding of a tight market; but the British and Germans were intransigent.

—In fixing its annual yardsticks or ceilings, the IEA will take account not only of estimated oil availabilities for the coming year but also of the need to undershoot substantially the previously agreed 1985 oil import targets. The Ministers noted that the IEA Secretariat estimates this required reduction at 4 million b/d below the previously agreed 1985 IEA group oil import objective of 26.2. The Secretariat will thus use a 1985 target of 22 in making its annual country-by-country estimates and in its monitoring operations. This gives us most—but not all—of what we wanted in this respect. The Germans and most others wanted to avoid any mention of a figure for 1985, only after considerable debate did we get agreement to this formulation. This resulted in the 4 million b/d demand reduction estimate being mentioned in the communiqué.⁴

The IEA Secretariat reported to the Ministers its assessment of national policies. In the case of the U.S., it called for more action to increase coal production and to accomplish projected nuclear progress; it indicated that we should continue our progress toward decontrolling oil prices. The Secretariat’s report is a balanced one; the comments on other countries were pointed and, in some cases, critical.

I took the occasion to explain our recent progress on oil decontrol, the Windfall Profits Tax, the Synthetic Fuels Corporation, the Energy Mobilization Board, your recent oil displacement initiative, and the Coal Export Task Force.

When the Ministers meet again this fall, they will continue this monitoring of national performance and, based on the yardsticks referred to above, they will decide whether the 1981 oil market seems likely to be tight enough to justify transforming the yardsticks into oil import ceilings. On the basis of present trends, this does not seem likely, but these conditions could change very quickly.

It was also agreed that IEA imports should be even lower in 1990. This agreement, combined with the annual yardsticks, ensures a gradual decline in IEA oil imports during this decade, from 23 million b/d last year to 18–21 million b/d in 1990, depending on economic growth rates.

Alternative energy sources

Ministers also agreed on actions to increase production of alternative energy sources, however this was not treated in great detail; we expect the Venice Summit will focus heavily on this area, while endorsing the other IEA actions described above.

Consultations on Stock Policies

There was considerable discussion of recent price increases, in what seems to be a soft market. This led to agreement that the Secretariat should urgently propose guidelines regarding use of stocks for consideration by the IEA Governing Board. If the Board approves these guidelines, this could lead to coordinated efforts by national governments to influence the use of stocks in such a way as to try to mitigate short-term price increases. The potential effectiveness of this action is limited sharply by the fact that most oil stocks are in private hands.

OPEC Dialogue

There was an unstructured discussion respecting the advisability of a dialogue with OPEC which clearly showed that there is a lack of consensus among the IEA countries on how best to proceed. As a result, the communiqué’s reference to dialogue restates the group’s willingness to discuss with producers economic development issues flowing from our policy decision. We also stated our desire to assist developing countries in exploiting their indigenous resources in partnership with OPEC. This latter issue will receive fuller attention at the Summit. Finally we reaffirmed our intention to be constructive participants in UN global negotiations and to support the UN Conference on New and Renewable Resources.

With these decisions, we have made some progress toward a solid foundation for future IEA action and have begun the move from targetry to meaningful measures to reduce imports. Coupled with rigorous monitoring, the yardsticks can serve as a catalyst for policy action and help move us toward an orderly evolution of the world oil market. They will also respond to the call by OPEC moderates for a system of demand restraint by the industrialized countries. The standby ceiling arrangement will add a new tool which may help manage sudden supply interruptions that do not reach the 7 percent threshold necessary for triggering the formal emergency sharing system. This decision also dovetails with the actions under development for the Venice Economic Summit.

Key Bilateral Meetings

While my conversations with my counterparts covered a wide range of issues, the most critical were:

—Iranian Oil Prices. Both the British and the Japanese express concern over Iranian demands of $35/b for cargoes delivered to UK and Japanese companies against their April allotment, before such sales were suspended on April 21. Although both governments agree that the $35 price is unwarranted in current market conditions, they both cited legal problems which made it difficult to prevent private companies from paying the higher price, because their contracts, they said, clearly gave the Iranians the right to set the price. Each government sought our assurances that the other would “hold the line.” The Japanese in particular hedged their commitment by indicating they could only “suspend” payment of the $35 price temporarily. The British also sought additional supply assurances from the U.S., raising especially the desire of Shell and British Petroleum for greater access to Saudi oil that now goes to ARAMCO. I reiterated our strong belief that both governments should resist all Iranian price increases and simply took note of the British interest in Saudi oil.

I believe that we will have to give way on the oil already shipped, but we should do so only in exchange for firm commitments against taking any additional oil at the high asking price.

—Libya. The British also requested that the U.S. Government look into the question of pressuring U.S. oil companies to resist the latest round of Libyan price increases. UK Energy Secretary Howell observed the Libyan price rises were increasing the pressure to raise North Sea prices. I made no commitments, but agreed to consider his request.

— SPR. I took the occasion of my meeting with our Summit partners to advise them that we were thinking about placing Elk Hills oil into the SPR to avoid an auction which could result in embarrassingly high prices. Our allies are hesitent to endorse our desire to resume purchases for the SPR and the general reaction during the IEA meeting to my statement was non-committal.

Discussions with French Minister Giraud

My discussions on energy with French Minister of Industry Giraud were cordial, covering the full range of energy issues facing our two countries. At his invitation I toured the French vitrification plant for processing of high level fission waste at Marcoule and the Eurodif enrichment plant at Tricastin. On nuclear topics, Giraud emphasized his view that our non-proliferation objectives were driving potential nuclear customers away from the U.S., thereby increasing the proliferation risk. I responded that this was only a problem if other nuclear suppliers failed to act in concert with us in minimizing the risks of proliferation. On the IEA, he was generally supportive of our efforts to set meaningful oil targets although he prefers that the targets be supported by accelerated and stronger policy measures. On LNG, he confirmed the French intention to hold firm at the current $3.00 per million Btu for LNG in the face of Algerian demands for a doubling of the contract price. I am optimistic that the consensus among the U.S., France and Germany which we have carefully constructed over the past few weeks will hold. Giraud expressed strong reservations however about our desire to begin purchases for the SPR, noting that he thought this action would have a severe impact on the international oil market. He repeated the French desire to invest funds in U.S. facilities for export of coal from the U.S.

1. Source: Carter Library, Staff Office Files, Council on Economic Advisers File, Box 28, Energy Department 1. No classification marking. Copies were sent to Muskie and Owen. Carter initialed the memorandum.
2. The Department of State’s summary of the May 21–22 Ministerial meeting is in telegram 137327 to all OECD capitals, May 24. (National Archives, RG 59, Central Foreign Policy File, D800255–0512) The final text of the IEA Ministerial paper, “Measures To Ensure That Structural Change Occurs,” redrafted after the May 8–9 Governing Board meeting, is in telegram 15282 from Paris, May 12. (Ibid., D800235–0657) The final text of the IEA Ministerial paper, “Draft Conclusions,” also redrafted after the May 8–9 Governing Board meeting, is in telegram 15362 from Paris, May 13. (Ibid., D800236–1090)
3. See Document 251.
4. The communiqué of the meeting of the Governing Board at the Ministerial level is printed in Scott, The History of the International Energy Agency, vol. III, pp. 368–376. The portion of the paper, “Ministerial Actions on Short-term Energy Measures, May 21–22, 1980, on “Yardsticks and Ceilings, and Stock Policies,” which includes annexes on “A System for Adjusting National Import Ceilings and Goals” and “Consultations on Stock Policies,” is ibid., pp. 114–121.