289. Memorandum From Secretary of Energy Duncan to President Carter1
SUBJECT
- Further IEA Measures for Dealing with the Continuing Oil Supply Crisis
Summary
On November 19, you approved a two stage U.S. strategy for the upcoming IEA Ministerial in Paris on December 8 and 9.2 This involved a U.S.-led effort to secure informal oil allocations by relatively crude-rich multinational oil companies for those IEA countries most immediately hurt by the Iraq–Iran war, and rapid negotiation within the IEA of politically-binding national oil import ceilings for 1981.
At the November 21 IEA Governing Board meeting,3 the willingness of the U.S. to help correct supply imbalances was well received, but most member countries indicated reluctance to adopt national oil import ceilings at this time. Another meeting was set for December 5, however, to review the country-specific numbers that would be required to establish binding import ceilings for 1981 to bring supply and demand into balance.
In addition, the Reagan transition organization4 has advised me today that it is opposed to the concept of import ceilings, thus implying that efforts by me to persuade the IEA to adopt binding ceilings now would be disavowed by the new administration when it takes office.
My judgment is that market conditions still warrant the adoption of import ceilings now. The spot market has been calmed somewhat by the reopening of the Turkish and Syrian pipelines from Iraq, but the [Page 911] potential for significant supply problems in 1981 if member countries do not take measures to reduce import levels still remains very high. However, given the clear reluctance of other member countries to adopt binding import ceilings now and the views of the Reagan organization on ceilings, it is not realistic to expect that the upcoming Ministerial meeting will adopt import ceilings.
In these circumstances, I request your approval of a strategy that would have the U.S. delegation state at the IEA meeting that:
• It is our view that ceilings should be adopted now;
• If adoption of ceilings is not a realistic alternative at this time, the ministers should agree to a standby mechanism that could be immediately implemented by a Secretariat decision that would result in a Ministerial convocation on 48 hours notice for purposes of quick implementation.
In addition, we would continue to offer U.S. assistance in correcting informally the supply imbalances that currently exist.
The annual IEA import reduction level I would propose for the standby program would be in the range of 1.5 MMB/D. Based on our share of IEA oil consumption, this would imply a U.S. import ceiling no lower than 6.5 MMB/D. (U.S. oil imports will average about 6.6 MMB/D in 1980, but less than that in recent weeks.)
Background
The U.S. delegation at the November 21 meeting of the International Energy Agency made some progress in moving the member countries towards serious consideration of realistic national oil import ceilings for 1981, although several members still have a wait-and-see attitude. The resumption of Iraqi crude exports via pipelines to Turkey and Syria, and the continuing exports of modest quantities of Iranian oil, combined with higher production from Saudi Arabia, Kuwait, Nigeria and a few others, have had a temporary calming effect on the spot market, where prices have recently declined slightly for the first time in ten weeks. This temporary market reaction, however, belies the serious risks which lie ahead. Even with the improved supply picture, world oil production will fall some 2 MMB/D short of projected demand in the first quarter of 1981. Even with a gradual restoration of Iranian and Iraqi export facilities, the shortfall could average 1 MMB/D for the year.
Approach
Under the agreement reached last May in the IEA,5 members have tentatively agreed upon likely levels of pre-war imports for 1981. These [Page 912] yardsticks amount to about 22.5 MMB/D. They have also agreed to convert these yardsticks into binding levels of imports, called ceilings, if market conditions so warrant. Our objective in the upcoming December 5 meeting and the Ministerial on December 8 and 9 will be to agree upon an appropriate aggregate reduction in the yardsticks that will bring supply and demand into balance and secure a commitment from all countries to reduce their yardsticks proportionately to accommodate this shortfall and turn them into binding ceilings. The ceilings would be implemented on a quarterly basis to allow for market tracking and timely review.
The IEA Secretariat, which essentially agrees with our analysis of the situation, assumes that the reduction in imports which each country undertakes should be proportional to that country’s oil consumption, not its level of imports. The Secretariat, backed by most member countries, argues that a consumption-based cutback is most equitable since a nation’s potential for conserving oil is related to its total oil consumption, not just imports. It is argued that countries with a high level of imports would be penalized with a greater conservation requirement by an import-based sharing of the shortfall. It will be most difficult for us to convince either the Secretariat or other countries to allocate the shortfall pursuant to imports.
The table below gives the import ceilings for the U.S. and other IEA countries plus France under varying levels of worldwide shortfall. The figures in parentheses show what the respective import ceilings would be if they were based on imports rather than consumption.
| Estimate of Shortfall | Import Ceilings Based on Consumption and (Imports) | ||||
| Total IEA | U.S.* | Other IEA Countries Plus France | |||
| 0 | 22.5 | 7.18 | (7.18) | 17.47 | (17.47) |
| 1.0 MMB/D | 21.5 | 6.7 | (6.86) | 16.89 | (16.7) |
| 1.5 MMB/D | 21.0 | 6.5 | (6.7) | 16.57 | (16.32) |
| 2.0 MMB/D | 20.5 | 6.27 | (6.54) | 16.45 | (15.94) |
With the recently-reported resumption of Iraqi exports to the Mediterranean via Turkey and Syria and periodic reports of Iranian exports from Kharg Island and the lower Gulf, we could prudently seek to have IEA import demand reduced by 1.0 to 1.5 MMB/D in the first quarter. If the situation does not deteriorate, and if key non-IEA members such as France participate in the reduction of import needs, an effort of this magnitude gives us the prospect of heading off significant price increases.
[Page 913]On a consumption basis, the U.S. would have an import level for 1981 in the range of 6.5–6.7 MMB/D under a 1.0 to 1.5 MMB/D worldwide shortfall. This compares to a projected 1980 import level of 6.6 MMB/D. Without any further price increases, this estimate is at the low end of the range of U.S. oil import requirements for 1981 presented in the latest forecast by DOE’s Energy Information Administration, and could well require additional pricing, demand restraint, or fuel switching measures to fulfill. If new initiatives should prove necessary, either you, or more likely the Reagan Administration, could decontrol gasoline, accelerate the decontrol of crude, impose an import fee or implement mandatory demand restraint or fuel switching measures. In any event, the implementation and full effects of additional measures, should they be needed, would come well after the imposition of ceilings at these recommended levels.
Implementation
In the upcoming meeting leading to the Ministerial, other countries will continue to press us to exert ourselves with those U.S. companies with large inventories to correct short-term imbalances. This, as well as growing concern about the oil market, will give us an opportunity to press for a serious effort to cut back oil import demand in 1981 through negotiation and adoption of binding national oil import ceilings. While we will express our view of the need for adoption of 1981 ceilings now consistent with the 1.0 to 1.5 MMB/D worldwide shortfall we realistically will be in a position only to seek the placement of the appropriate ceilings in a standby status that could be triggered quickly following the December 8 and 9 meeting in the face of rapidly rising spot market prices.
Recommendation
That you authorize us to seek a 1.0 to 1.5 MMB/D reduction in the projected IEA oil import demand of 22.5 MMB/D and seek a procedure to transform this cutback into country-specific, politically-binding national oil import ceilings (6.5 to 6.7 MMB/D for the U.S.) for 1981 at the December 9 meeting or at the earliest required time thereafter.6
- Source: Carter Library, National Security Affairs, Staff Material, International Economics File, Box 49, Rutherford Poats File, Chron, 12/1–8/80. Confidential.↩
- See Document 287.↩
- Telegram 36747 from Paris, November 24, summarizes the meeting. (National Archives, RG 59, Central Foreign Policy Files, D800563–0317)↩
- Republican nominee Ronald Reagan won the November 4 Presidential election.↩
- See Document 273.↩
- Includes U.S. Territories and 100,000 B/D for SPR.↩
- Carter checked the Approve option and wrote: “Make our case publicly as much as possible. J”↩