378. Memorandum From Secretary of State Muskie to President Carter1


  • Oil Supply Agreement to Israel

At your request, the Israelis were told on May 2 that we wanted to defer talks scheduled for May 4–6 on the U.S.-Israeli Memorandum of Agreement on oil supply so that you and I could have a chance to discuss this problem. I have now reviewed the issue and have examined the memorandum of May 1 sent to you by Charles Duncan and Warren Christopher.2 I think we should move quickly to resume discussion of this issue with the Israelis. As Ambassador Lewis explained in your meeting on May 1,3 further delay on our part in discussing the terms for activation of the Agreement is likely to introduce an unnecessary irritant into our relationship with the Israelis. If you agree, I would like to send a negotiating team to Israel sometime in June. Before we approach the Israelis to propose specific dates, we need your approval for our position.

The two basic principles which our negotiators will convey to the Israelis are: (1) that the MOA is a supply unavailability agreement, and [Page 1258] we are working from that; and (2) the price charged for any oil supplied to Israel must be full replacement cost; it cannot contain any hidden subsidy.

My Recommendation:

We stay with the basic position contained in the May 1 memorandum (attached) with one change: increasing the requirement for short-term, indirect purchases from two-thirds to three-quarters. Our negotiators would have to seek additional instructions before changing this position. The position has the following main provisions:

When there is no physical shortage of oil available to Israel, the Agreement could be activated, subject to the concurrence of each of the governments at the time, if Israel:

(1) is paying for all its imported oil an average price higher than the average cost of the most expensive 10% of crude oil imported into the United States ($38.61 per barrel in March) and;

(2) has to buy at least three-quarters of its oil through short-term, indirect purchases.

As to the matter of the price of oil that we would provide if the Agreement were activated:

(1) if the U.S. provides foreign oil to Israel, we would charge our acquisition cost plus any handling charges; and

(2) if the U.S. provides domestic oil to Israel, the price charged would be acquisition cost or the replacement cost whichever is higher. Replacement cost means the actual cost to U.S. refiners of replacing oil sold to Israel; if this cannot be precisely determined, replacement cost will be considered to be equivalent to the average cost to U.S. refiners of the most expensive 10% of crude oil imported into the United States.

This is a sound, tough negotiating position. We may have to authorize adjustments in the future, but I recommend that we not do so in advance.

I recommend, and Charles Duncan concurs, that we send a team to Israel in June, to proceed on the basis described above.4

  1. Source: National Archives, RG 59, Central Foreign Policy File, P860146–1165. Secret; Nodis Attachment. Carter wrote “Ed. C.” in the upper right-hand corner of the memorandum. Brzezinski returned the approved memorandum to Muskie under a May 27 covering memorandum. (National Archives, RG 59, Central Foreign Policy File, P860146–1164)
  2. Attached but not printed. The memorandum recommended a threshold formula for the activation of the U.S.-Israel oil agreement and recommended that if the United States provided foreign oil to Israel it would charge Israel the acquisitive cost plus handling charges.
  3. See Document 366.
  4. Carter initialed his approval of the recommendation. Also attached but not printed is an update on Israel’s oil supply situation.