3. Telegram From the Embassy in Saudi Arabia to the Department of State1

5074. Subject: Yamani’s Displeasure at Lack of U.S. Action on Oil Auction. Ref: (A) Jidda 4431; (B) State 182093.2

Summary: Minister of Petroleum Yamani believes it would be worthwhile for Ambassador to visit Fahd in London or Cannes and make a final appeal that oil auction be held. Yamani feels USG has not tried hard to support Saudi Arabia’s efforts for a reduction in oil prices. He wonders if we are in fact trying to provoke a consumer/producer confrontation to better organize consumers against OPEC. Ambassador believes he should make approach to Fahd as recommended by Yamani. Approach will probably not succeed and even if an auction should be held its long-term effects might not be very significant. A strong démarche to Fahd, however, would at least harden Saudi resolve to keep oil prices constant, which would be of considerable help in face of present inflation. End summary.

1. Ahmad Zaki Yamani, Saudi Minister of Petroleum, asked me why I had not gone to London to try to convince Prince Fahd (Saudi Minister of the Interior and Chairman of the Supreme Oil Council) to hold the oil auction. He said he thought there was still a chance that the decision to cancel the auction could be reversed and indicated I was the only one Fahd would listen to (Ref A).

2. I told him Fahd was expected back from London vacation soon and I would talk with him then. He replied that the decision on the auction must be made before the OPEC meeting September 8 and Fahd

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will not be back in the Kingdom before the middle of the month. He asked that we reconsider and that I make a special trip to London or Cannes to see Fahd.

3. He then asked about our approaches to the King. I said I intended to see His Majesty. I had briefed Congressman Wyatt3 on the subject; Wyatt had raised it with the King, but the King did not respond. I will raise it with the King when I see him—I hope during the coming week. Yamani was pleased and asked if we had coordinated this with Britain, France and Germany; would their Ambassadors be making similar démarches? I said the Europeans could, of course, do what they wanted, but we had decided that it was probably premature to make a strong joint approach (Ref B).

4. Yamani blew up. He said Saudi Arabia and he in particular had done everything they could to reduce oil prices. He had asked me repeatedly for assistance and he had gotten very little. He had asked that the USG make approaches to the other OPEC countries; he now had full reports of these meetings. All the Americans did, he said, was to say mildly to the governments how nice it would be if prices were to be decreased; there were no threats, no intimations of affecting relations; nothing, in short, that could convince any OPEC government, except Saudi Arabia, that we were serious about prices. He referred to my elaborate presentations and detailed analyses of what the oil costs would do to the U.S. and other countries, and asked why we had not made such presentations in “Iran or anyplace else”.

5. He said that in Quito the consensus was to raise oil prices by $3.00/barrel, and only Saudi Arabia’s efforts frustrated this.4 There had been, indeed, several official U.S. expressions of gratitude to Saudi Arabia for its work, but there had been no recognition in the U.S. press.

6. Now, he said, he was forced to conclude that we did not want any decrease; we probably really wanted a further increase in prices in order to provoke a confrontation between consumers and producers. If prices jumped sharply again, he said, it would make it much easier for us to organize the consumers in a bloc against OPEC.

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7. I told him he had flipped. We might not have handled the price question as smoothly as he would have liked. And we certainly hadn’t been as successful in other OPEC capitals as either of us would have liked. But we did try and we would continue trying. And what possible purpose could we have in provoking confrontation? The high oil prices were ruining much of the world; this could scarcely benefit us. He said he was sorry, but in light of the information I had just given him, he doubted if we had tried or would try very hard to reduce prices. As for our motives, he said, they had been suggested before; he hadn’t believed them then, but was forced to wonder. (He did not specify but was referring to reports last winter that we were preparing US-European invasion force to occupy the oil fields of Arabia.)

8. Comment: Yamani is obviously disappointed that his plan to reduce oil prices has been frustrated by Prince Fahd and probably others in the Saudi Government. And he is angry that we appear not to be giving him the support he thinks he deserves. But I do not believe that the auction would really establish a new world market price for oil. It would indeed have an important psychological effect; it would enable us to tell other oil producers that a “correct” price for oil had been established, but it wouldn’t have been effective very long.

9. I am inclined to believe Saudi Arabia is bluffing regarding the auction. If it had its auction and if the new price is $8.00/barrel, I am sure all other OPEC countries will say fine, we will continue selling ours for $11.00/barrel. There is no doubt what would then happen; the world would continue paying $11.00; Saudi Arabia could not increase its production fast enough to take away markets (even if it wanted to) and Yamani’s enemies in the country would point out that Saudi Arabia had lost billions; the consumers had not profited and the buyers of Saudi oil had seen their profits multiplied. There would not be a second auction.

10. Nonetheless, bluffs frequently work; OPEC is quite clearly still frightened of the Saudi potential. The rulers of Iran, Algeria and Kuwait and others would not have appealed to King Faisal not to hold the auction, if they had been sure it would fail. Accordingly, I think we must give Yamani as much support as we can.

11. Action Requested: (A) That I be instructed to see Fahd immediately; review the world’s financial problems, and ask him to do what he can to hold the oil auction. A special trip to him would demonstrate the depth of our concern.

(B) That we reconsider our position on asking the British, French, and Germans to make supportive démarches to the King.

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(C) That we make a very strong approach to the Shah—not a lesser official—and that I be authorized to give the details of this démarche to the Saudis.5

12. Conclusion: Assuming that all these efforts fail (and I would estimate their chances of success as small) we would have demonstrated more fully our determination to reduce prices, and we could at least hope that the compromise proposed by the Saudis of freezing oil prices for a “long time” would be more generally acceptable to OPEC. In a period when the cost of OPEC’s imports are increasing by 10–20 percent per year, constant oil prices would be a considerable achievement.

  1. Source: National Archives, RG 59, Central Foreign Policy Files, D740243–0333. Secret; Niact; Immediate; Exdis. Repeated to London and Dhahran.
  2. In telegram 4431 from Jidda, July 30, the Embassy reported that Yamani “was having great difficulties” in getting an oil auction organized. He had hoped that the competitive bidding process of an auction would lower the price of oil without reducing the rents paid to producers but instead cutting into the profit margins of the major oil companies. Yamani was opposed by the Abu Dhabi Minister of Petroleum, the Shah, and Fahd, who wanted to sell oil directly to individual companies so that they could, as Yamani phrased it, “get their hands on vast quantities of oil and cream off substantial commissions for themselves.” (Ibid.) Telegram 182093 to Geneva and London, August 20, noted that Yamani would probably soon unveil a proposal for a “‘mini-conference’ of oil producers and consumers” and instructed the Mission in Geneva not to “solicit or encourage discussion of such a conference, but rather remain entirely in a reactive posture.” (Ibid.)
  3. Representative Wendell Wyatt (R–OR).
  4. At the 40th OPEC conference, held in Quito June 15–17, the participants agreed to raise the royalty rate on oil sales from 12.5 to 14.5 percent but not the price of petroleum itself for the next 3 months. Those who advocated an increase in the royalty rate wanted to prevent inflation from eroding the purchasing power of their revenues. (Skeet, OPEC: Twenty-Five Years of Prices and Politics, p. 112) The communiqué issued at the conclusion of the conference was transmitted in telegram 4044 from Quito, June 17. (National Archives, RG 59, Central Foreign Policy Files, D740157–0952)
  5. The Department ruled against meeting Fahd in London, noting: “it could well be embarrassing to SAG to be seen to have American Ambassador make such an unusual visit against the background of current controversy over prices and the forthcoming OPEC meeting.” Akins was also reminded that Ford had “recently written to King Faisal and in course of that letter made certain remarks on the ramifications of the high level of petroleum prices,” as Yamani had asked. (Telegram 193332 to Jidda, September 4; ibid.) The August 29 letter from Ford to Faisal is in telegram 192483 to Jidda, September 1; Ford Library, National Security Adviser, Presidential Correspondence with Foreign Leaders, Box 4, Saudi Arabia—King Faisal.