I WELCOME THE OPPORTUNITY TODAY TO APPEAR BEFORE YOUR COMMITTEE TO DISCUSS TEH OUTLOOK FOR WORLD OIL SUPPLIES IN 1984

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86B00337R000100050014-4
• Release Decision: RIFPUB
• Original Classification: C
• Document Page Count: 8
• Document Creation Date: December 22, 2016
• Document Release Date: November 18, 2010
• Sequence Number: 14
• Content Type: REPORT

Declassified and Approved For Release 2012/01/13: CIA-RDP86B00337R000100050014-4
I WELCOME THE OPPORTUNITY TODAY TO APPEAR BEFORE YOUR
COMMITTEE TO DISCUSS THE OUTLOOK FOR WORLD OIL SUPPLIES IN 1984
AND THE POTENTIAL IMPACT A DISRUPTION MIGHT HAVE ON THOSE
SUPPLIES. OTHER WITNESSES HAVE ALREADY OUTLINED THE FRAGILE
NATURE OF THE VITAL OIL SUPPLY LINES THAT PASS THOUGH THE
PERSIAN GULF. THIS SITUATION, WHICH WE HAVE HAD TO LIVE WITH
FOR MORE THAN 10 YEARS NOW. HAS BECOME EVEN MORE SERIOUS AS A
RESULT OF THE WELL PUBLICIZED THREATS IRAN HAS MADE TO STOP ALL
OIL FROM LEAVING THE GULF. I WANT TO EMPHASIZE TODAY. HOWEVER.
THAT WE ARE MUCH BETTER PREPARED THAN WE WERE TEN YEARS AGO TO
DEAL WITH SUCH A SITUATION. I ALSO WANT TO OUTLINE OUR
CONTINUING EFFORT TO FINE TUNE OUR ENERGY EMERGENCY
PREPAREDNESS.
IN ANY ASSESSMENT OF THE CURRENT PERSIAN GULF SITUATION. IT
IS IMPORTANT TO BEAR IN MIND THAT THERE ARE MANY DIFFERENT
TYPES OF INTERRUPTIONS THAT CAN OCCUR. THE 1080181 IRAN-IRAQ
WAR. FOR EXAMPLE. RESULTED IN LESS PRODUCTION BY THE TWO
COUNTRIES BUT HAD VIRTUALLY NO IMPACT ON WORLD OIL PRICES
BECAUSE PRODUCTION INCREASED ELSEWHERE AND STOCKS WERE HIGH. A
r_t nSME OL
MORE SERIOUS INTERRUPTION WOULD INVOLVE THE PARTIAL
THE STRAIT OF HORMUZ. SUCH INTERRUPTION COULD OCCUR THROUGH A
PHYSICAL BLOCKAGE, SUCH AS MINING OF THE STRAIT; THROUGH A
REFUSAL OF TANKERS OR INSURERS TO ACCEPT THE RISK OF PASSAGE
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INTO THE GULF; OR THROUGH A COMBINATION OF THESE TWO FACTORS.
AT THE EXTREME, IF A COMPLETE CLOSURE WERE TO OCCUR. AN OIL
FLOW OF UP TO ABOUT NINE MILLION BARRELS PER DAY (MMBD) WOULD
BE INTERRUPTED. THE IMPACT OF ANY INTERRUPTION WOULD DEPEND ON
THE AMOUNT OF OIL DISRUPTED, THE DURATION OF THE DISRUPTION,
AND THE EXTENT TO WHICH OTHER PRODUCERS INCREASED PRODUCTION
AND STOCKS WERE AVAILABLE. SUCH A CLOSURE. ALTHOUGH SERIOUS.
IS STILL SUSCEPTIBLE TO RELATIVELY QUICK RESOLUTION.
INTERNATIONAL PRESSURE OR ACTION COULD RESTORE FREEDOM OF
NAVIGATION IN THE GULF.
THE MOST SERIOUS CASE WOULD INVOLVE PREMEDITATED AND
CONCERTED DESTRUCTION OF OIL PRODUCTION AND HANDLING FACILITIES
IN THE PERSIAN GULF REGION THROUGH. FOR EXAMPLE. SUICIDE AIR OR
GROUND COMMANDO ATTACKS AIMED AT KEY CHOKE POINTS. SUCH AS THE
HUGE RAS TANURA OIL STORAGE AND LOADING FACILITY-IN SAUDI
ARABIA.
ALTHOUGH SOME SPARE CAPACITY - PERHAPS 3 MMBD - COULD BE
BROUGHT ON STREAM OUTSIDE THE GULF AND PRODUCTION OF OTHER
FUELS SUCH AS NATURAL GAS COULD INCREASE. THIS LATTER CASE
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COULD STILL RESULT IN A SHORTFALL OF ABOUT 17% OF FREE WORLD
CONSUMPTION -- CLEARLY A MAJOR THREAT TO THE WORLD ECONOMY
OIL
IT IS THIS
IF THE DISRUPTIONS LASTED FOR AN EXTENDED PERIOD.
EXTREME CASE;, --INVOLVING THE LOSS OF SO MUCH EXISTING AND
SPARE CAPACITY--THAT IS SO WORRISOME IN THE MIDDLE EAST TODAY.
IN ANY SUCH CRISIS. INITIALLY SUPPLIES TO EUROPE AND JAPAN
BE MORE DIRECTLY AFFECTED THAN OUR OWN. IN THE FIRST NINE
WILL
MONTHS OF 1983. FOR EXAMPLE.. 28% OF EUROPE'S IMPORTS AND 58% OF
JAPAN'S CAME FROM THE MIDDLE EAST. A MINISCULE 3% OF U.S.
IMPORTS CAME FROM THIS AREA ACCORDING TO THE LATEST IEA
STATISTICS. WHILE A DISRUPTION WOULD CLEARLY ALTER THIS
PATTERN SOMEWHAT AS EUROPE AND JAPAN SWITCHED TO OTHER SOURCES,
OUR STRATEGIC PETROLEUM RESERVE ALONE COULD STILL PROVIDE US
WITH 90 DAYS OF IMPORTS AT CURRENT LEVELS.
ALL OF THIS MEANS THAT THE CONSEQUENCES FOR EUROPE AND
JAPAN WOULD INITALLY BE MORE SEVERE THAN FOR THE U.S. BECAUSE
THEY HAVE LESS DOMESTIC PRODUCTION. GENERALLY LOWER STOCK
LEVELS AND GREATER DEPENDENCE ON MIDDLE EAST SOURCES. DUE TO
THE EXTENSIVE INTER-DEPENDENCE AMONG OUR ECONOMIES. HOWEVER.
THE DISRUPTIONS SUFFERED BY EUROPE AND JAPAN COULD STRONG
SIGNIFICANTLY AFFECT OUR OWN ECONOMY. IN THE ABSENCE OF STR
COUNTER-t1EASURES. SUCH AS THE RELEASE OF THE SPR. TRADE AND
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MONETARY RELATIONS WOULD BE AFFECTED; OUR BASE RIGHTS COULD
WELL BE AFFECTED AT CRITICAL TIMES; WE WOULD ALL BE FORCED TO
COMPETE'FOR WHATEVER SUPPLIES WERE AVAILABLE; AND PRICE RUN-UPS
CAUSED BY PANIC-BUYING IN SUCH A SITUATION COULD BE DAMAGING,
HIGHER INTERNATIONAL OIL PRICES WOULD QUICKLY TRANSLATE INTO
HIGHER DOMESTIC PRICES. INDEED. IN THE ABSENCE OF CONCERTED
INTERNATIONAL EFFORT. THE FOREIGN POLICY CONSEQUENCES FOR THE
U.S. OF SUCH A MAJOR CRISIS COULD BE SEVERE.
EVEN A BRIEF LOOK AT THIS PICTURE IS ENOUGH TO SHOW THAT WE
MUST MAKE EVERY EFFORT NOW TO PREPARE OURSELVES TO COPE WITH A
DISRUPTION AND MITIGATE ITS EFFECTS. FORTUNATELY, WE HAVE A
LARGE QUANTITY OF OIL IN THE SPR. ALSO. THE ADMINISTRATION IS
CONTINUING ITS REVIEW OF PREPAREDNESS TO DEAL WITH ENERGY
EMERGENCIES. THE INTERNATIONAL ASPECTS OF THIS REVIEW ARE.
BEING DEALT WITH BY THE INTERNATIONAL ENERGY SECURITY GROUP.
WHICH WAS CREATED IN 1982 TO DEAL WITH A RANGE OF ENERGY
SECURITY ISSUES AND IS CHAIRED BY UNDER SECRETARY OF STATE
ALLEN WALLIS. A SIMILAR EFFORT IS BEING LED BY THE DEPARTMENT
OF ENERGY. BOTH DEPARTMENTS PARTICIPATE IN EACH GROUP TO
INSURE COORDINATION.
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I WANT TO ADD ONE SPECIAL NOTE ABOUT THIS EXERCISE. WE ARE
AIMING FOR AN OPERATIONAL PRODUCT. ALTHOUGH OBVIOUSLY SOME
POLICY AREAS WILL HAVE TO BE REVIEWED TO REACH THAT POINT.
THOUGH WE ARE REVIEWING AND FINE TUNING OUR PLANS.IN A
NUMBER OF AREAS. GENERALLY SPEAKING THE TOOLS WE HAVE TO WORK
WITH IN DEALING WITH AN ENERGY CRISIS ARE CLEAR. IF. DESPITE
OUR EFFORTS TO CALM THE SITUATION IN THE GULF, A DISRUPTION
WITH SIGNIFICANT IMPACT SHOULD OCCUR, WE WOULD LOOK TO THE
INTERNATIONAL ENERGY AGENCY (IEA) AS THE FOCUS OF-OUR -
INTERNATIONAL EFFORT WITH OTHER INDUSTRIALIZED CONSUMERS TO
DEAL WITH ANY DISRUPTION. EQUALLY,
WE LOOK TO CLOSE BILATERAL CONTACTS WITH KEY PRODUCERS TO
PROMOTE ADEQUATE OVERALL PRODUCTION LEVELS. THE BACKDROP OF
THIS ACTIVITY. OF COURSE. WOULD BE THE CONTINUED FUNCTIONING OF
THE MARKET TO. ALLOCATE SUPPLIES.
WE WOULD EXPECT TO CONSULT WITH LEADING IEA MEMBERS TO
DETERMINE AS ACCURATELY AS POSSIBLE THE NATURE AND SCOPE OF THE
DISRUPTION AND TO DECIDE WHAT. IF ANY. ACTION IS APPROPRIATE.
SHOULD A SIGNIFICANT DISRUPTION OCCUR. WE MAY THEN SUGGEST
CONVENING AN EMERGENCY MEETING OF THE AGENCY'S GOVERNING BOARD
TO CONSIDER STEPS TO MITIGATE ADVERSE EFFECTS. COOPERATION
AMONG INDUSTRIAL NATIONS WOULD BE IMPORTANT IN THIS RESPECT. IN
PARTICULAR. SALES FROM STRATEGIC STOCKS
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MAY BE APPROPRIATE. A LACK OF PREPAREDNESS AND TIGHT MARKET
CONDITIONS CONTRIBUTED SUBSTANTIALLY TO THE RAPID RISE OF OIL
PRICES IN 1973-74 AND AGAIN IN 1978-79. WE ARE FAR BETTER
PREPARED TODAY TO AVOID REPETITION OF THOSE EXPERIENCES.
WE WILL ALSO CONSULT WITH OUR IEA PARTNERS ON A RANGE OF
ISSUES, INCLUDING SURGE PRODUCTION, STOCK POLICIES AND OTHER
RELATED MATTERS.
FINALLY, WE WILL WANT TO DO WHAT WE CAN TO ASSURE THAT
WORLD OIL SUPPLIES AND OTHER SUBSTITUTABLE FUELS ARE
MAXIMIZED.. POSSIBLE STEPS TO BE CONSIDERED INCLUDE 1) IN CASE
OF CLOSURE OF THE STRAIT OF HORMUZ, APPROACHES TO STATES WITH
PIPELINES LEADING FROM THE GULF TO TRY TO ENSURE THAT THESE
PIPELINES ARE UTILIZED TO FULL CAPACITY; 2) IN CASE OF PHYSICAL
DAMAGE TO OIL FACILITIES, APPROACHES TO PERSIAN GULF PRODUCER
COUNTRIES TO CONSIDER WAYS TO REPAIR THE DAMAGE; AND 3)
APPROACHES TO OIL EXPORTING STATES OUTSIDE THE GULF TO SEE HOW
MUCH OF THE ESTIMATED 3.0 MMBD IN IDLE PRODUCTION CAPACITY CAN
BE BROUGHT ON STREAM SO AS TO SERVE THE NEEDS OF THE WORLD
MARKET.
ACTIVATION OF THE IEA EMERGENCY SHARING MECHANISM COULD
BECOME NECESSARY AS A LAST RESORT. THERE IS CONSIDERABLE
FLEXIBILITY HERE BUT IN GENERAL TERMS DEMAND RESTRAINT FEATURES
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LOSS. A#D
OF THE SHARING SYSTEM ARE INTRODUCED AT A 7%.
WE WOULD MUCH' PREFER TO
AVOID SUCH AN INTRUSION INTO THE MARKET BUT IF THE NET LOSS OF
SUPPLIES TO IEA COUNTRIES EXCEEDS ABOUT 3 MILLION BARRELS (OR A
7% LOSS). WE WOULD CONSIDER WHETHER RECOURSE TO THE EMERGENCY
SHARING SYSTEM IS NECESSARY. SIMILARLY. IF ANY ONE IEA MEMBER
SUFFERS A 7% OR GREATER LOSS, THERE WOULD BE CONSIDERATION OF
WHETHER ACTIVATION OF THE SYSTEM OR SOME OTHER APPROACH SHOULD
BE TAKEN.
IN THIS CONNECTION, I WOULD LIKE TO EMPHASIZE THAT OUR
ABILITY TO WORK THROUGH THE IEA IS SEVERELY HINDERED BY THE
ABSENCE OF EPCA 252 ANTI-TRUST EXEMPTION AUTHORITY. OUR
ABILITY TO MEET OUR COMMITMENTS, WHICH IS SO IMPORTANT IN OUR
LEADERSHIP ROLE WITHIN THE IEA. IS CURRENTLY SERIOUSLY
QUESTIONED AMONG OUR ALLIES. ALL OF THEM BELIEVE THE IEA
SYSTEM CANNOT FUNCTION AS DESIGNED IN THE ABSENCE OF THIS=
AUTHORITY.
IN SUM. MR. CHAIRMAN. THE GULF SITUATION IS VOLATILE AND WE
ARE TREATING IT AS SUCH. BASICALLY. WE ARE PREPARED --
DOMESTICALLY WITH MARKET-RELIANCE POLICIES. SUPPLEMENTED BY THE
SPR. AND INTERNATIONALLY WITH THE IEA. AND WE ARE FORTUNATE TO
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HAVE A SUBSTANTIAL AMOUNT OF SURPLUS CAPACITY IN THE WORLD
MARKET. THE CURRENT EFFORT IS THUS TO BE SURE THAT OUR
DOMESTIC AND INTERNATIONAL POLICIES ARE CLEAR AND CONSISTENT
AND OUR PLANS ARE READY.
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