297. Telegram From the Department of State to the Embassies in Kuwait, Qatar, the United Arab Emirates, and Oman1
9189. Subject: Crude Price Increases. Ref: Kuwait 104.2
1. Confidential—entire text.
2. For Ambassador Dickman: This message responds to reftel request for additional points to make in your forthcoming démarche to Ali Khalifa. Septel and other traffic3 copied to you give background for you to respond to Ali Khalifa on issue of the North Sea prices should it arise in your discussion.
3. You may also draw on the following points, as appropriate:
—The reported increase of $4 per barrel for Kuwaiti crude is excessive. With this increase Kuwait appears to have become a price leader for medium crudes. Driving prices higher does not help to limit disruptive effects of the Iraq–Iran war on oil markets and on the economies of developed and developing nations. This increase in prices of course will contribute to inflation in major consuming countries and payments problems of LDCs, both of which we believe are matters of proper concern to Kuwait and other oil producers with stake in welfare of international economy.
—The damage caused by this increase will be made worse if Kuwait continues its past practice of applying large price premia to a portion of its sales, and we urge that this practice be eliminated. If current premia are maintained, a substantial volume of Kuwaiti crude will be priced up to $2 above higher quality and better located African and North Sea crudes and above spot market levels.
—Kuwait’s prices are also far out of line with spot product prices. It is estimated that the net back value of Kuwaiti crude is now $34.50 to $35.00 on the Rotterdam spot market. The net back value of this crude has in fact fallen over the past few months. Kuwaiti crude may prove to be even more overpriced when full production of similar heavy Persian Gulf crude is resumed.
—We believe oil prices are now well above the levels necessary to stimulate the development of alternative sources of energy. The main [Page 938] problem now is capital and lead times. The major industrial economies are capital short and time is needed to redirect capital and human resources into alternative energy industries and to construct new facilities.
In addition, you should as appropriate point out contradictions between reported price increase and Ali Khalifa’s statements to you before and after Bali meeting.
4. For Doha and Abu Dhabi: We believe it important that Embassies convey to host governments our concern about increased official prices in Gulf, drawing as you feel appropriate on points above in making this presentation. Abu Dhabi will of course note that Abu Dhabi’s price increase is more restrained than those of Kuwait, Qatar and perhaps Iraq—but that even this lesser increase is harmful to world economy.
5. For Muscat: While we realize Oman considers itself a price follower, we are concerned that its prices are well above Gulf market. Request you clarify with Government of Oman rationale for present price and express our concern about psychological impact of high Omani price on other Persian Gulf producers.
- Source: National Archives, RG 59, Central Foreign Policy Files, D810019–0043. Confidential; Immediate. Drafted by Patterson; cleared by Knickmeyer, Twinam, and Hecklinger and in NEA/ARP and E; and approved by Morse. Repeated Immediate to Baghdad, Caracas, Dhahran, Jidda, Jakarta, Lagos, London, Manama, Tokyo, Cairo, and USOECD Paris.↩
- See footnote 6, Document 296.↩
- See Documents 295 and 296.↩