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

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

Jidda, January 2, 1979, 0606Z.

13. Subject: Potential Impact of OPEC Price Increase—Saudi Arabia. Ref: Jidda 8880 and 9044.² The following message represents a consensus of the Embassy’s Oil Committee members including USLO Riyadh and Consulate Dhahran.

1. The 14.5 percent price increase decided at the OPEC Ministerial conference in Abu Dhabi possibly represents the over-riding decision of Saudi Arabia to maintain OPEC unity over its somewhat weaker wish to be responsive to Western, and especially US, pleas for price moderation. The desire to maintain OPEC unity was exemplified by the intensive bilateral consultations that preceded the conference. These began in early fall, with Saudi Oil Minister Yamani leading off with his first visit to Venezuela in several years. This was followed by a series of visits by Abu Dhabi’s Oil Minister, Mani al Utayba, to virtually all the Midle East OPEC capitals. In the final days before the conference, the Oil and Finance Ministers of Qatar and Abu Dhabi, as well as Kuwaiti Oil Minister Ali Khalifa and Iranian NIOC official Parviz Mina all visited the Kingdom. These visits are believed to have set the stage for the price decision taken at Abu Dhabi.

2. At the same time, external factors contributed pressure for a price increase. Most significant was the early December drop in Iranian production occasioned by renewed internal difficulties. This, combined with pre-conference liftings by oil companies in anticipation of a price increase, and usually high fall demand in Europe combined to soak up surplus production. At the same time, the renewed strength of the dollar in response to the U.S. support program had only limited impact on Saudi thinking. Saudi officials commented that it was still too early to base oil price judgments on this strengthening, and stated that several months would be necessary to tell if the program was indeed working.

3. In contrast, the West’s efforts to contain a price increase were primarily intensive high-level representations by the United States, and relatively mild public statements by EC Energy Commissioner, the FRG’s Brunner. These were obviously not enough to convince the Saudis to take a hardline stand against the concerted pressure of the other OPEC members. The end result was the decision to boost prices an average of 10 percent for all of 1979, with the overall increase totaling 14.5 percent to be applicable in the whole of calendar year 1980, in the absence of any further increases. These figures contain something for both the moderates and the price hawks. Both can quote the figure that serves them best.

4. Initial local reaction has been reported in reftel. In his press conference immediately following the conference, Zaki Yamani indicated that Saudi objectives had been a smaller price-hike³ but Crown Prince Fahd’s statement of following day, while emphasizing the 10 percent average, called the price hike “logical and objective” and blamed the deterioration of the dollar and high inflation in the West which made such a hike necessary.

5. An initial calculation indicates that the Saudis will receive roughly an additional $3.8 billion in 1979 as a result of the price hike if a production level of 8.5 billion B/day is maintained. Obviously, this will assist the Saudis in meeting any further short-fall in the current fiscal year budget and provide something of a cushion for next year’s expenditures if production falls. It will not provide sufficient funds to undertake any ambitious new plans beyond those already projected, but, with the recent emphasis on cost cutting and tighter control of expenditure, together with the maintenance of a domestic inflation rate of 10 to 12 percent, well below earlier levels, further cuts in current project spending are unlikely.

6. To the extent that the dollar deteriorates as a result of this price hike, so will the over 80 percent of Saudi assets and reserves denominated in dollars. However, this loss in dollar values will actually be applicable only when the Saudis need to exchange them for other currencies to pay for imports or services. On the other hand, to the extent that this price increase fuels U.S. inflation, Saudi purchases of U.S. goods and services will be directly affected.

7. We do not expect this price increase to have any major effect on Saudi foreign aid. Aid will probably be sustained at current levels, with Arab and Islamic political considerations continuing to be the overriding factors in aid decisions. There may be some aid given in the form of oil grants as claimed by Mobutu of Zaire⁴ after a recent visit to the Kingdom.

8. In the longer range, the new base for possible OPEC price increases for 1980, will be 14.5 percent higher than the current price. The Saudi third five year plan is scheduled to begin in April, 1980. This plan is expected to be more costly than the second plan, and there is a growing sophisticated realization among Saudi planners to match revenues with expenditures. What impact this will have on long-term pricing policy is uncertain, but will become more apparent as precise outlines of the third plan emerge.

9. Another interesting, but as yet unresolved, question is what impact this price increase will have on maintenance and expansion of oil productive capacity. The possibility that some of this additional profit be diverted to maintenance and expansion of oil facilities will, in some measure, be determined by how sales and budgeting procedures of the to-be-nationalized ARAMCO are organized.

10. One of the most significant effects of the Abu Dhabi conference, from the Saudi point of view, was the restoration of OPEC unity which was badly shaken by the Saudi break and the resultant two-tiered price in 1977. The willingness of Saudi Arabia to accept the majority decision has redeemed Saudi Arabia and banished, at least temporarily, lingering doubts as to its pro-OPEC stance towards the other members. The Saudis see this as a positive good, and this accounts for the spirited defense of the price increase now appearing in the local press.

11. Some element of Arab unity may also be involved. Perhaps more concretely, the Saudi action has played a major role in the significant improvement of relations with both Kuwait and Iraq. Here, the Saudi posture can be interpreted as pro-Arab following on the results of the Baghdad conference,⁵ as well as pro-OPEC.

12. It is still too early to say how the Saudis evaluate the impact of the price increase on Saudi-U.S. relations. The instant defensive reaction leads us to believe that they are perhaps nervous over what the impact will be, especially if they are singled out for blame by the U.S. press as they were praised after the 1977 price split. Certainly, there are no current indications that they will respond positively to President Carter’s request for reconsideration of the step increases later next year.⁶ If anything, the general tenor of remarks is that the Saudis will stand by their OPEC brethren for 1979, and closely watch the progress of the dollar before committing themselves to any course of action for 1980.

13. They have and will continue to argue both publicly and privately that the price increase would have been even greater if not for Saudi moderation, and will point to the OPEC decision to continue use of the dollar as a pricing mechanism to be the result of their defense of U.S. interests. What other steps they may take to alleviate U.S. disappointment over the price increase are not clear, but may include stepped up dollar purchases from the United States.

14. The biggest danger arising from this most recent OPEC decision is that OPEC and Saudi Arabia may find themselves locked into a continuation of the system of quarterly phased increases. Yamani much earlier publicly advocated such a system, and this is probably one of the questions being studied by the OPEC Ministerial Long-Range Strategy Committee. Since OPEC pricing decisions are in the last analysis more political than economic, such a procedure, once institutionalized, may be very hard to undo. As a result, another inflationary factor will be built into the world economic system. Significantly, although potential future price increases are stated to be hinged to the fate of the dollar, there is no assurance that the dollar’s strengthening will lead to any price decrease.

West

1. Source: National Archives, RG 59, Central Foreign Policy Files, D790001–0551. Limited Official Use. Repeated to Abu Dhabi, Caracas, Algiers, Doha, Jakarta, Kuwait, Lagos, Libreville, Manama, Muscat, Quito, Tehran, Tripoli, Vienna, Baghdad, Dhahran, Riyadh, Bonn, London, Mexico City, Paris, and Oslo.
2. In telegram 8880 from Jidda, December 19, the Embassy informed the Department that the Saudi and English press “reported extensive comments by Crown Prince Fahd defending the OPEC decision to increase the world oil price.” (Ibid., D780524–0707) Telegram 9044 from Jidda is Document 179.
3. See footnote 7, Document 179.
4. Mobutu Sese Seko, President of Zaire.
5. Leaders from 20 Arab states and the Palestine Liberation Organization met at the Arab League summit in Baghdad November 2–5. In a show of Arab solidarity, the leaders rejected the Camp David Accords and ejected Egypt from the Arab League.
6. See Document 176.