IMPACTS OF OIL PRICE DECLINES - PHASE II

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00153R000100050005-1
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 9
• Document Creation Date: December 21, 2016
• Document Release Date: May 6, 2008
• Sequence Number: 5
• Publication Date: March 24, 1983
• Content Type: MEMO

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DATE
TRANSMITTAL SLIP 28 Mar 83
TO:
NIO/E
ROOM NO.
BUILDING
H s.
REMARKS:
FROM:
C/NIC'
ROOM NO.
BUILDING
EXTENSION
FORM NO. 24 1 REPLACES FORM 36-8
1
FED 55 WHICH MAY BE USED.
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THE DEPUTY SECRETARY OF THE TREASURY
WASHINGTON. D.C. 20220
MEMORANDUM TO: aU- ry Rowan
FROM R. T. McNamar .d .
SUBJECT Impacts of Oil Price Declines -- Phase II
As you know, following the Quadriad's breakfast meeting
on Tuesday, we agreed to proceed with the Phase II Analytical
and Policy Issues. Attached are final 'Lists of these issues
and the assignments to various agencies, based on our dis-
cussions Tuesday. Below is a list of issues for which you
have lead responsibility. We will leave it up to you as
leader to contact the other parties interested in the issues
(listed in the attachment) and to convene the group. Also,
as group leader, feel free to adjust the definition of the
issues if they are not properly stated.
By our next full group meeting -- Tuesday, April 5,
4:00 p.m. at Treasury -- we hope that the groups would have
met, agreed on the analysis to be done and be well underway
on the work. With luck, some of the analyses will even be
completed.
We appreciate all the efforts you are making. I will
be away next week, but if there are any questions, please
call Kevin Coyne at 566-5500.
Issues for which you have lead responsibility:
Analytical Issues: I(b), I(c), I(d), III(c)
Policy Issues: 6
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SUMMARY OF ANALYTICAL ISSUES
TO BE ADDRESSED IN PHASE II
Responsibility
I. FUTURE PRICES OF OIL
(a) Current forecasts
-- What do private forecasters Treasury (lead), T-2
currently predict for the long-
term future price of oil?
(b) Production levels
-- What is the likely effect of CIA (lead), State,
various oil prices on the levels Treasury, DOE, OMB
of production by each country?
-- What factors do individual oil
exporting countries face that
force them to increase or de-
crease production from their
preferred levels?
e.g. -- Saudi natural gas
supply contracts
-- Anticipated revenue needs
-- Physical constraints in
North Sea, coupled with
British law requiring
purchase and resale of
51 percent of North Sea
production
(c) Demand/consumption
-- What assumptions should be made CIA, Treasury (joint
about the response of demand to lead), T-2, State, DOE
large declines in oil prices
(e.g. to $20 or $15)? How does
this demand response vary by
country? (This analysis should
be approached by an analysis of
demand for oil in each major
sector of the economy.)
-- What are the appropriate ranges
of elasticities for use in
analysis? Are elasticities the
same for price declines as they
are for price increases?
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2 -
Responsibility
(d) Inventories/Speculation
-- What role does the holding CIA, DOE (joint lead),
of oil inventories for T-2, State
speculation purposes play
in influencing the price
of oil?
-- Is this practice widespread
and/or increasing?
-- What is the current inventory
situation in both producing
and consuming nations?
(e) Integration
-- Based on the above, what DOE (lead), T-2,
appears to be a reasonable CIA, State
range of expectations for
the long-term prices of oil?
-- How does the price outlook DOE (lead), T-2,
change if demand for oil State, CIA
increases due to (an arbi-
trary assumption of) real
free world economic growth
of 5 percent per year?
(a) Macro-economic impacts
-- What are the implications, Treasury (lead),
if any, of lower oil prices Federal Reserve,
for monetary policy? OMB, CEA
-- What other commodity prices Commerce (lead), T-2
tend to move with or against
the price of oil? What impacts
would declines in those prices
cause?
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Responsibility
(b) State and local economies
-- What effect will falling oil Treasury
40 prices have on the economies
and state government budgets
of individual states (e.g.
Texas, Alaska) ?
-- What initiatives are various
state governments taking to
raise oil and/or gasoline
taxes in anticipation of lower
oil prices?
(c) Federal budget
-- What causes the differences OMB (lead), T-2
between Task Force and CBO
estimates of changes in the
federal deficit as a result
of declining oil prices?
(a) Exchange rates
-- How are exchange rates likely Treasury (lead), CEA
to be affected by declines in
oil prices (especially the
Yen/dollar relationship and
the British Pound/dollar
relationship)?
(b) LDC debts/IMF
-- How do lower oil prices, lower NSDD (Treasury-OASIA
inflation, higher world economic lead)
activity levels and lower in-
terest rates interact to affect
the ability of LDCs to repay
international debts?
-- What impacts are these factors
likely to have on demands for
IMF loans?
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Responsibility
--
Is there any likelihood of
State (lead), CIA,
oil price declines directly
or indirectly causing "drastic
Commerce (ITA)
political consequences" in oil
exporting LDCs (e..g. civil
upheaval,'fall of governments,
repudiation of foreign debt)?
(c)
How
do oil price declines affect
CIA
the
for
Soviet Union's ability to pay
foreign purchases?
(a) What impacts might an oil import Treasury (lead), others
fee and/or gasoline tax have on
the macro-economic outlook if all
revenues were devoted to reducing
the federal deficit?
How does this change if the tax is
decremented to flow through to the
public over time?
(b) Could an oil import fee and/or State, Treasury (joint
gasoline taxes influence the lead), Commerce, DOE
world price of oil, and/or the
competitiveness of U.S. industry?
-- If the U.S. alone imposes
such a tax?
-- If our allies (e.g. G-7, OECD)
impose such a tax, but the U.S.
does not? (In addition, what
taxes are they considering?)
-- If the U.S. and its allies
impose such a tax?
(c) At what point (price of oil) do the (Implicit in
above effects begin to move out of issues above)
proportion (i.e. non-linearly) with
further changes in oil prices?
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Issue Responsibility
1
1. ? How are falling oil prices likely CCEA Troubled Industries
to affect the need for bail-outs? group (OMB lead) for
domestic
(i) Oil industry/OPEC borrowings
from commercial Banks? SIG-IEP for international
(ii) IMF/World Bank/Development (Treasury-OASIA lead)
Banks loan requests?
(iii) Direct approaches to the
U.S. Government (e.g.
Mexico, Son-of-Chrysler)?
2. ? Ignoring the issue of whether SIG-IEP (Treasury-OASIA
the U.S. would want to take lead)
such actions, are there market
related actions that the United
States could take to affect the
price and/or pattern of supply
of world oil? For example:
(i) Sale of Alaskan crude to
Japan
(ii) Long-term contracts with
individual nations
(iii) Coordinated oil import
fees by major industrial
countries
3. ? How should the Administration's Cabinet Council on
strategy for the Strategic Petroleum Natural Resources
Reserve be affected by declining oil
prices? In particular, what should
the SPR purchasing strategy be in
the short-term (since purchases
affect the oil price outlook)?
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Issue Responsibility
4. ? How might a general decline in Cabinet Council on
oil prices affect specific Natural Resources
Acministration energy policies?
(i) Natural gas deregulation
(ii) Oil exploration leases
(iii) Synfuels
5. ? How do falling world oil prices NSC (lead), State, CIA, OMB
affect the strategic interests
of the United States?
(i) Is it likely to cause dis-
ruption in the Middle East?
(ii) What actions might the Soviet
Union take in the light of
declining ability to purchase
foreign grain?
(iii) How does it affect the long-
term energy security of the
United States?
(iv) How might it affect overall
East/West relations?
6. ? What impacts/disruptions are likely
to occur if a precipitous price
decline were followed immediately
by an explosive price increase?
(a) Domestic Treasury (lead), T-2
(b) International CIA (lead), State
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Issue Responsibility
7. ? What are the policy options
with respect to the impact of
decline in oil prices on Defense
Department budget*(e.g. defense
deflator, etc.)
8. ? How should the individual country
impacts affect overall East/West
relations (especially those of
Western Europe with the Soviet
Union) ?
OMB (lead), T-2
NSC (lead), State
9. ? How do oil price declines NSC (lead), State,
affect potential alternate CIA, OMB
sources of energy for Europe?
(e.g. --
Soviet natural gas pipeline
-- Development of the Norwegian
Troll field
10. ? What actions should the U.S. be SIG-IEP (Treasury-
willing to take unilaterally, and OASIA lead)
what actions should we undertake
only in concert with other G-7
or OECD members?
11. ? What impact does falling oil prices SIG-IEP (Treasury-
have on bilateral and multilateral OASIA lead)
aid issues?
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