THE CURRENT STATE OF THE ARAB OIL EMBARGO

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001500190017-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 13
• Document Creation Date: December 19, 2016
• Document Release Date: May 26, 2005
• Sequence Number: 17
• Publication Date: November 5, 1973
• Content Type: REPORT

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? Secret
The Current State of the Arab Oil Embargo
State Department review completed
Secret
ER IB 73-17
5 November 1973
Copy No.
124
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The Current State of the Arab Oil Embargo
Summary
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I. Arab oil ministers meeting in Kuwait last night announced a 25'% production
cutback based on September's production figures. Saudi Arabia and Kuwait, with the 10'A
limitation announced in mid-October and the additional embargoes of shipments to the
United States and the Netherlands, had already reached the 251/, 1 'vel, and the new
formulation appears to strengthen King Faysal's leadership role by committing the other
producers to match his cutback. The move may be designed to bring countries such as
Libya, Algeria, and Iraq, which have not been rigorously enforcing the earlier limitation,
into line. If adhered to, it will increase the overall Arab cutback in November by 51A
over that already in effect. Saudi Arabia and Kuwait, which account for 60'% of Arab
oil exports, had been holding firm. Thcre had been some shippage in Algeria, Libya, Abu
Dhabi, and possibly Iraq. The rest of the world's oil-producing countries are expanding
their production at normal rates.
2. Arab o'.1 exports have been cut from a mid-October level of 19.5 million barrels
per day (b/d) to about 15 million b/d. By the end of November, the net loss of Arab
oil exports to the United States, Western Europe, and Japan will be (in million b/d) 2.1,
1.4, and 0.5, respectively. This would amount to 12% of US consumption, 8% of Western
Europe's, and 9% of Japan's. Because of the vast amounts of oil already on the high
seas, however, the full impact on the consumers will be delayed several weeks.
3. Prior to the 4 November announcement, some Arab countries were not
implementing the cutbacks rigorously. We cannot be certain how the announcement will
change their implementation.
? Abu Dhabi is enforcing an embargo against the United States and the
Netherlands, but hat, not cut production.
? Algeria's cutbacks appear to have been forced by technical problems
in the producing fields, rather than by political decisions.
? Iraq, the only major Arab producer not signing the Kuwait agreement
to reduce production, has cut back only because of pipeline problems.
? Libya is loosely interpreting the 5% cut and is not ri,orously enforcing
the embargo.
4. Although the major oil companies are taking measures to spread the impact
of the Arab actions, all consuming nations will be hard hit it the cutbacks continue for
some months and especially if they are increased beyond the present schedule.
Note: Comments and queries regarding this publication are welcomed. They may be
directed to f the Office of Economic Research,
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The United States and the Netherlands have been embargoed by most Arab
producers, and will - at least in theory - receive no Arab oil once the
shipments already at sea are delivered. A number of nations, mostly in
the Third World but also including France, Spain, and the United Kingdom,
are considered friends of the Arabs and have been promised supplies equal
to their average imports during the first nine months of this year. No
mechanism has been set up to implement this po,icy, however, and these
countries apparently will have to forgo any increases in imports to meet
growing consumption needs. Most other countries, including such important
consumers as West Germany, Italy, Japan, and Canada, will have their Arab
oil imports cut by roughly the amount of Arab production cutbacks.
5. The reaction of most of the major consuming countries has been
to assume a low profile and try to cut their losses without alienating either
the Arabs or the United States.
? West Germany is preparing an emergency rationing bill and
is pressing for measures to share the shortage among
members of the European Community.
? The Netherlands is restricting oil exports and limiting
nonessential use of automobiles. The Hague is also pushing
for a Europe-wide oil-sht'.ring plan.
? France, presently favored by some Arab producers, is
resisting most moves toward intra-European sharing of
available oil.
? The United Kingdom, also favored by some Arabs, hopes
to obtain a degree of consumer country cooperation while
expanding diplomatic contacts with the Arab producers.
? Japan hopes to improve its position by making cautious
moves toward the Arab camp.
6. The chances of an early end to the embargo are slight. Kin,; Faysal
is continuing to take a very tough stand, and Kuwait will likely follow
his lead. Most countries of Western Europe as well as Japan and Canada
are under increasing pressure to take pronounced pro-Arab stands. The
United States, because of its domestic production and its potential for
obtaining savings from its relatively large amount of nonessential energy
consumption, is in a somewhat better position than most other major
consumers. Nevertheless, the US import shortfall could reach
2.5 million b/d - 13% of consumption - by mid-winter.
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Implementing the Cutbacks
7. While no Arab oil producer will ignore the decisions by the
Organization of Arab Petroleum Exporting Countries (OAPEC) to reduce
prodi:dion progressively, some are more committed than others to making
the cutback work. For various reasons, the vocally radical states - Libya,
Iraq, and Algeria - are supporting the pro am with much less energy than
states such ac, Saudi Arabia and Kuwait
Worldwide Impact
The United States
9. We estimate that by mid-winter the US oil import deficit will
be running at about 2.5 million b/d if the cutbacks and embargoes are
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reasonably strictly enforced. The United States will be short about
I million b/d of crude oil and 1.5 million b/d of products, mostly heating
oil. Even if the United States were able to obtain enough non-Arab crude
oil to keep its domestic refineries running at capacity, it is highly unlikely
that anything like the volume of products needed to make up the deficit
could be imported. Western Europe not only will be unable to supply us
with products, but also will be competing vigorously with the United States
for the output of Caribbean refineries.
10. Recent Canadian actions are worrisome because the United States
can no longer depend on Canau, for the full amount of its usual imports
of 1.2 million b/d of crude oil. Even before the Arab-Israeli war, Canada
feared an energy shortfall and had restricted exports of certain petroleum
products. Now, Ottawa apparently plans to make up east Canadian supply
shortfalls caused by the Arab-Israeli war and its aftermath by diverting some
west Canadian oil that would normally be exported to the US market.
Canadian plans, however, will be hampered by a lack of a transcontinental
pipeline, a shortage of railroad tankcars, and the winter freezeup of the
Great Lakes and the Saint Lawrence. Given all of these difficulties, Canada
probably will not be able to divert more than 200,000 b/d of crude to
its eastern provinces. The estimates in Table I assume that the United States
loses all of its inputs of products from eastern Canada - nearly
200,000 b/d.
11. The United States can offst,, some of the effects of the shortfall
by opening up the Elk Hills naval reserve and encouraging surge production
elsewhere, by drawing down stocks at a faster than normal winter rate,
and by taking measures to reduce demand. Elk Hills and surge production
would soon yield 250,000 b/d and eventually 500,000 b/d. Although the
country has 500 million barrels of available stocksl - the equivalent of
United States: Estimate i Oil Supply and Demand
Winter 1973/7;
Million Barrels per Day
Demand
19.0
Total supply
16.5
Domestic production
11.1
Crude oil
9.3
Natural gas liquids
1.8
Non-Arab imports
4.4
Normal winter stock drawdown
1.0
Potential supply deficit
2.5
1. According to the American Petroleum Institute, which receives per_odic reports from all US
oil companies, US crude oil and product stocks were 850 million barrels on 5 October. We !wive
adjusted this figure downwad to 500 million barrels to arrive at an estimate of usable stocks.
[~4R FT
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80 days of imports from all sources and 240 days of imports from Arab
sources - the product breakdown and geographical distribution of these
stocks will prevent their full utilization. During a normal winter, stocks
are drawn down at a rate of about I million b/d. Doubtless this rate could
be increased substantially, but we have no basis on which to make an
estimate. There are a variety of ways of reducing energy demand, which
if very rigorously enforced, some US officials believe might save the
equivalent of 2 million b/d or more. Despite demand reduction and stock
drawdowns, the Northeast and Midwest will probably be moderately hard
hit this winter. Local shortages around the country could be severe.
12. Unlike the United States, which has already lost all of its Arab
oil supply, West, i Europe and Japan will continue to be hurt by additional
Arab cutbacks. ',he timing of the Arab cutback hit Europe and Japan at
a most inopportune time. Western Europe consumes about 30% more oil
in winter than in summer. Japan's seasonal boost in demand is about 15/0.
This swing in demand is more pronounced than in the United States. Western
Europe and Japan normally meet their high winter demand by stock
drawdowns as well as increased imports.
Western Europe
13. By mid-winter the West European deficit will be on the order
of 3 million b/d - about 15% of consumption. Individual countries will
be affected differently, with the Netherlands likely to be hardest hit if
the selective embargo is not circumvented. West Germany, which receives
nearly 20% of its oil supply through Rotterdam, will also be seriously
affected. The Europeans can lessen the impact by drawing down stocks
built up earlier for just such a contingency and by reducing demand. We
estimate that Western Europe has about 880 million barrels of available
stocks which we calculate are the equivalent of 55 days of imports from
all sources and about 80 days of imports from Arab sources. Europe's stock
drawdown in a normal winter is probably larger than in the United States,
perhaps 1.5 million b/d. However, Western Europe's capability for reducing
demand is probably much less than that of the United States. Western
Europe consumes only 20% of its oil as gasoline, compared with 45% in
the United States. Despite demand reduction and extra large stock
drawdowns, Western Europe probably will have shortages this winter - some
of which will doubtless be severe.
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Western Europe: Estimated Oil Supply and Demand
Winter 1973/74
Million Barrels per Day
Demand
19.5
Total supply
16.5
Domestic production
0.4
Imports
Arab
10.1
Non-Arab
4.5
Normal winter stock drawdowr.
1.5
Potential supply deficit
3.0
Japan
14. Japan stands to lose roughly 500,000 b/d of oil imports, or about
9% of consumption, as a result of the initial Arab cutback. The major
international oil firms, which supply most of Japan's oil, have already
notified Tokyo of impending delivery cuts, and Gulf Oil, which supplies
about 10% of Japan's imports, will reduce shipments from Kuwait by 35%
retroactive to 1 October. We believe that Japan's Import losses by
mid-winter will be nearly 15% of consumption, assuming further Arab
cutbacks of 5% per month after November.
15. For the moment, Japan's supply situtation is good, and refineries
are operating normally. Stocks are now about 280 million barrels - a
50-day supply. Partly because of the 20 days it takes to move Persian Gulf
oil to Japan, the flow of crude oil has not yet been affected.
16. Japan can stave off any serious impact on economic activity for
many months by drawing on stocks. Even with continuing Arab cutbacks,
present consumption levels could be maintained well into early summer
before stocks would be depleted. If consumption were constrained 10%
by rationing, the Japanese could maintain this reduced rate of consumption
for several additional months However, severe shortages could occur in
coming months in some areas and in some sectors of the economy because
of the mix of stocks and distribution problems.
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Japan: Estimated Oil Supply and Demand
Winter 1973/74
Million Barrels per Day
Demand
6.2
Total supply
5.4
Imports
Arab
1.8
Non-Arab
3.3
Normal winter stock drawdown
0.3
Potential supply deficit
0.8
Foreign Consumer Country Reactions
European Community
17. The Arab policy of hitting some EC countries harder than others
works against an early and effective EC effort to combat the oil crisis.
There are signs, however, that pressures for a more united response are
building. Thus far the EC has agreed only to establish a unified reporting
system covering exports and stock levels. The Netherlands, singled out for
an embargo by some Arab states, has requested urgent consideration of
its oil situation at this week's Council of Ministers meeting and is pressing
for Community-wide action on oil sharing and demand reduction. Because
of their dependence on Dutch refineries, West Germany and Belgium may
side with The Hague on pooling supplies. However, the French and British
who have been singled out by the Arabs for favorable treatment, plus the
Italians who would like to be, will resist such action, fearing that it might
spark new Arab cutbacks.
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19. An emergency rationing bill had already been prepared and will
probably soon be submitted to the Bundestag for priority treatment. With
about 65 days of stocks on hand, the country will probably impose at
least limited rationing, but will be able to make it through a normal winter
without great difficulty.
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United Kingdom
20. The Unite.i Kingdom has been given assurances by some Arab
producing countries that it will continue to receive oil in the same quantities
as during the first nine months of 1973. Even so, London is preparing
contingency plans and implementing regulations designed to prevent or to
limit the effects of shortages. For example, a set of controls on exports
of crude oil and oil products to non- EC countries, effective 12 November,
will limit export volume to the November-December levels of 1972. If,
within this limitation, UK companies continue to supply regular customers
in Scandinavia, little will be left for export to the United States.
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22. An Arab embargo of the Netherlands threatens to reduce Dutch
crude oil imports by 70%. State Secretary Kooijmans told the US Embassy
that Arab threats and pressures on the Dutch would be counter-productive
and that the Netherlands would not change its Middle East policy even
if it meant doing without oil.
23. Exports to EC countries have continued thus far, but exports
to the United States, Norway, and Sweden have been curtailed. The
government has also been given powers to introduce rationing. The
petroleum industry has been instructed to reduce the distribution of
kerosine, heating oil, and fuel oil by about 10%. Pleasure driving on Sundays
is now prohibited. The government has also called on the public to exercise
econot.ny in its use of gasoline and electricity. The Netherlands, with 65
days of oil stocks on hand, should be able to weather the oil embargo
for several months.
Japan
24. Tokyo is under increasing pressure to abandon its neutral stance
on the Middle East in favor of open support for the Arabs. Vice Foreign
Minister Hogen, hoping that a political settlement can be arranged before
the country's oil supply situation becomes tight, has thus far held to the
line that Japan should not go beyond supporting Security Council
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Resolution 242. The goverment may face a major policy decision by late
November, however, in view of the Arab's announced intention to make
further cuts in the oil supply.
25. Japanese diplomats have already offered to underwrite previously
rejected aid projects in Arab countries, and a new soft line on Egyptian
debt rescheduling is being considered. A Japanese Foreign Ministry official
has told the US Embassy, however, that working-level officials do not believe
such representations will be sufficient to restore oil deliveries to previous
levels. Consideration is now being given to sending International Trade
Minister Nakasone, or even Prime Minister Tanaka, to visit Arab capitals.
if the Middle East situation has not improved by December. The
working-level officials envision that such a trip might be accompanied by
a drastic change in Japan's Middle East policy, possibly including a break
in diplomatic relations with Israel. Thus far, senior Foreign Ministry officials
have talked to the US Embassy only about Arab demands that Japan support
them on the territorial issue.
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