MEETING WITH SECRETARY OF INTERIOR, 16 JUNE 1986

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP88G01116R000600610003-6
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 12
• Document Creation Date: December 22, 2016
• Document Release Date: February 24, 2011
• Sequence Number: 3
• Publication Date: June 13, 1986
• Content Type: MEMO

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ATTACHED: PLEASE TRY NOT TO
REMQVE FROM DOCUMENTS THANKS...
73/
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Central Intelligence Agency
Washington, D.C. 20505
NOTE FOR: Mr. Casey
SUBJECT: Meeting with Secretary of Interior,
16 June 1986
and two of his oil experts,
will join you for
your meeting with Secretary Hodel on Monday
at 1300. Afterward, Dave will take the
Secretary off to a conference room for amore
detailed briefing.
Attached you will find a short memo from
~utlining Hodel's interests and some talking
points on the world oil situation.
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25X1
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SEC NOFORN
12 JUN 1986
MEMORANDUM FOR: Director of Central Intelligence
SUBJECT: Background Information for 16 June Meeting
with Secretary Hodel
1. Action: None. This memorandum transmits an agenda for
the Secretary of the Interior's visit to Headquarters on 16 June
and background information on the world oil market situation to
prepare you for your meeting with Secretary Hodel.
2. Issues to be Discussed: Interior informs us that
Secretary Hodel wants to spend up to two hours being briefed on
the CIA world oil supply and demand outlook and price projec-
tions. His increased interest in this topic is the result of
pressure from the Hill and oil producing interests to do
something to encourage outer continental shelf leasing and US
exploration activity in an environment of falling oil prices.
We believe that underlying market conditions remain weak. Conse-
quently, oil prices are likely to be volatile over the summer
months unless OPEC can reach a new production-sharing agreement
at its 25 June meeting in Yugoslavia. The probability that the
organization will reach an agreement is increasing. Even without
an agreement, prices will likely rise toward yearend with the
onset of winter. Over the long-run, oil consumers will become
increasingly dependent on OPEC as lower prices stimulate consump-
tion and slow development of non-OPEC oil.
3. After your meeting with Secretary Hodel, OGI will
provide a detailed briefing on these issues, as well as a
demonstration of our computer work on oil facility modelling.
All portions classified SECRET
NOFORN.
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SECRET NOFORN
Background for 16 June DCI Meeting with
Secretary Donald Hodel
on the World Oil Market Outlook
Oil Market Background
o The current oil market situation--characterized by low
prices and high production--came about as a result of
higher oil prices in the 1970s. Oil consumption fell
dramatically in response to conservation and
substitution away from oil, non-OPEC supplies increased,
and oil inventories fell.
o This year's oil price collapse, however, was touched off
by OPEC.
oo Saudi Arabia's decision late last year to abandon
its role as swing oil supplier and move to
aggressively recapture market share sent oil prices
plummeting. Prices are now about 50 percent below
1985 levels.
oo Saudi production doubled between September and
December 1985 as a result of Riyadh's switch to a
market related pricing scheme--so-called netback
prices which guarantee refiners a healthy profit
margin.
oo Although no other producer was willing to cut
production to make room for higher Saudi output,
competitive forces and marketing problems lowered
oil production in several non-OPEC countries, like
Mexico and Egypt. High cost producers, like the US,
Canada, and Australia, squeezed by lower prices,
also suffered involuntary production cuts.
Near-Term Outlook
o Falling oil prices will have a limited impact on short-
term oil consumption.
oo According to our estimates, consumption in the first
quarter of 1986 was slightly higher than in the same
period of 1985, due mainly to increased gasoline
consumption in the US.
All portions classified SECRET
NOFORN.
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 Sanitized Copy Approved for Release 2011/02/24: CIA-RDP88GO1116R000600610003-6
SECRET NOFORN
oo We project that consumption over the rest of 1986
will average 1-2 percent higher than 1985 levels.
Although demand has been even higher in both the US
and Europe during the past month or two, a large
part of the increase is probably the result of
higher than expected stock-building.
oo Because oil consumption varies seasonally, demand in
the summer will be lower than in the first
quarter. Consequently, we expect this seasonal
decline in demand to keep downward pressure on
prices during the next several months, unless
producers agree on a workable method to cut
production.
o OPEC will meet on 25 June in Brioni, Yugoslavia to try
to hammer out a new production ceiling and a way to
allocate that quota among its members.
0o If members agree to a production level that is
approximately 1-2 million barrels per day (b/d)
below current output of 18 million b/d, the market
would balance. Under these circumstances, we would
expect prices to stabilize this summer and then
begin rising, perhaps reaching $17-20 per barrel by
the end of the year.
oo Although progress toward a new accord is being made,
a consensus has not yet been reached. Without an
agreement, we expect prices to remain volatile
throughout the summer, with some upward price
movement when seasonal factors increase demand in
the fall.
0 OPEC producers have actively sought non-OPEC assistance
in restraining production. To date, Angola, Egypt,
Mexico, Malaysia, Oman, Brunei, the Soviet Union, and
China have all indicated a willingness to cooperate with
OPEC, but are unlikely to reduce their own sales without
solid evidence that OPEC has established a realistic
quota and that members are adhering to it.
oo Norway, in what would be a major policy-turnaround,
has also said it would consider ways to aid OPEC
efforts to firm prices. A meeting is being
scheduled between Norway's new energy minister and
representatives from OPEC.
2
SECRET NOFORN
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 Sanitized Copy Approved for Release 2011/02/24: CIA-RDP88G01116R000600610003-6
SECRET NOFORN
oo Despite these promises, we doubt that countries
whose production has already dropped well below last
year's levels because of marketing and pricing
problems will make further cutbacks. Others would
probably make only token reductions.
Long-Term Outlook
o Low oil prices will have a major impact on the long-term
oil market, raising demand, slowing supply development,
and hastening a return to a tight market situation.
oo We expect high cost non-OPEC supply--from the US,
Canada, Norway and the UK, for example--to decline
over the longer-term.
oo Although OPEC available oil production capacity has
declined by over 25 percent from peak levels
achieved in the 1970s, the organization still has
ample surplus production capacity and low cost oil
reserves. Indeed, the combination of lower non-OPEC
supply and higher demand could raise the demand for
OPEC oil by about 7 million b/d by 1990.
o The net result will be increased dependence by the US
and other OECD countries on imported oil, particularly
from OPEC countries.
3
SECRET NOFORN
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E11ctir. ResP
86. QW Z-73 /
MEMORANDUM FOR: Director of Central Intelligence
SUBJECT: Background Information for 16 June Meeting
with Secretary Hodel
1. Action: None. This memorandum transmits an agenda for
the Secretary of the Interior's visit to Headquarters on 16 June
and background information on the world oil market situation to
prepare you for your meeting with Secretary Hodel.
2. Issues to be Discussed: Interior informs us that
Secretary Hodel wants to spend up to two hours being briefed on
the CIA world oil supply and demand outlook and price projec-
tions. His increased interest in this topic is the result of
pressure from the Hill and oil producing interests to do
something to encourage outer continental shelf leasing and US
exploration activity in an environment of falling oil prices.
We believe that underlying market conditions remain weak. Conse-
quently, oil prices are likely to be volatile over the summer
months unless OPEC can reach a new production-sharing agreement
at its 25 June meeting in Yugoslavia. The probability that the
organization will reach an agreement is increasing. Even without
an agreement, prices will likely rise toward yearend with the
onset of winter. Over the long-run, oil consumers will become
increasingly dependent on OPEC as lower prices stimulate consump-
tion and slow development of non-OPEC oil.
3. After your meeting with Secretary Hodel, OGI will
provide a detailed briefing on these issues, as well as a
demonstration of our computer work on oil facility modelling.
All portions classified SECRET
NOFORN.
JUN 1986
B o7-)f
25X1
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SECRET NOFORN
Agenda for the
Honorable Donald Hodel
Secretary of the Interior
16 June 1986
Time
1400-1430
1430-1530
Meeting with the DCI
World Oil Market Briefing
I.
World Oil Supply
o
OPEC/Saudi Production Offensive
o
Non-OPEC Supply
II.
World Oil Demand
o
Impact of Falling Prices
III.
Short Run Price Outlook
IV.
World Oil Productive Capacity
o Impact of Iran-Iraq War
o Persian Gulf Pipelines
o Impact of Declining Prices
1530-1545 Facility Modelling Demonstration
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 Sanitized Copy Approved for Release 2011/02/24: CIA-RDP88GO1116R000600610003-6
SECRET NOFORN
Background for 16 June DCI Meeting with
Secretary Donald Hodel
on the World Oil Market Outlook
Oil Market Background
o The current oil market situation--characterized by low
prices and high production--came about as a result of
higher oil prices in the 1970s. Oil consumption fell
dramatically in response to conservation and
substitution away from oil, non-OPEC supplies increased,
and oil inventories fell.
o This year's oil price collapse, however, was touched off
by OPEC.
oo Saudi Arabia's decision late last year to abandon
its role as swing oil supplier and move to
aggressively recapture market share sent oil prices
plummeting. Prices are now about 50 percent below
1985 levels.
oo Saudi production doubled between September and
December 1985 as a result of Riyadh's switch to a
market related pricing scheme--so-called netback
prices which guarantee refiners a healthy profit
margin.
0o Although no other producer was willing to cut
production to make room for higher Saudi output,
competitive forces and marketing problems lowered
oil production in several non-OPEC countries, like
Mexico and Egypt. High cost producers, like the US,
Canada, and Australia, squeezed by lower prices,
also suffered involuntary production cuts.
Near-Term Outlook
o Falling oil prices will have a limited impact on short-
term oil consumption.
oo According to our estimates, consumption in the first
quarter of 1986 was slightly higher than in the same
period of 1985, due mainly to increased gasoline
consumption in the US.
All portions classified SECRET
NOFORN.
Sanitized Copy Approved for Release 2011/02/24: CIA-RDP88GO1116R000600610003-6
 Sanitized Copy Approved for Release 2011/02/24: CIA-RDP88GO1116R000600610003-6
SECRET NOFORN
0o We project that consumption over the rest of 1986
will average 1-2 percent higher than 1985 levels.
Although demand has been even higher in both the US
and Europe during the past month or two, a large
part of the increase is probably the result of
higher than expected stock-building.
00 Because oil consumption varies seasonally, demand in
the summer will be lower than in the first
quarter. Consequently, we expect this seasonal
decline in demand to keep downward pressure on
prices during the next several months, unless
producers agree on a workable method to cut
product ion.
o OPEC will meet on 25 June in Brioni, Yugoslavia to try
to hammer out a new production ceiling and a way to
allocate that quota among its members.
00 If members agree to a production level that is
approximately 1-2 million barrels per day (b/d)
below current output of 18 million b/d, the market
would balance. Under these circumstances, we would
expect prices to stabilize this summer and then
begin rising, perhaps reaching $17-20 per barrel by
the end of the year.
0o Although progress toward a new accord is being made,
a consensus has not yet been reached. Without an
agreement, we expect prices to remain volatile
throughout the summer, with some upward price
movement when seasonal factors increase demand in
the fall.
0 OPEC producers have actively sought non-OPEC assistance
in restraining production. To date, Angola, Egypt,
Mexico, Malaysia, Oman, Brunei, the Soviet Union, and
China have all indicated a willingness to cooperate with
OPEC, but are unlikely to reduce their own sales without
solid evidence that OPEC has established a realistic
quota and that members are adhering to it.
00 Norway, in what would be a major policy-turnaround,
has also said it would consider ways to aid OPEC
efforts to firm prices. A meeting is being
scheduled between Norway's new energy minister and
representatives from OPEC.
2
SECRET NOFORN
Sanitized Copy Approved for Release 2011/02/24: CIA-RDP88GO1116R000600610003-6
 Sanitized Copy Approved for Release 2011/02/24: CIA-RDP88GO1116R000600610003-6
SECRET NOFORN
oo Despite these promises, we doubt that countries
whose production has already dropped well below last
year's levels because of marketing and pricing
problems will make further cutbacks. Others would
probably make only token reductions.
Long-Term Outlook
o Low oil prices will have a major impact on the long-term
oil market, raising demand, slowing supply development,
and hastening a return to a tight market situation.
0o We expect high cost non-OPEC supply--from the US,
Canada, Norway and the UK, for example--to decline
over the longer-term.
oo Although OPEC available oil production capacity has
declined by over 25 percent from peak levels
achieved in the 1970s, the organization still has
ample surplus production capacity and low cost oil
reserves. Indeed, the combination of lower non-OPEC
supply and higher demand could raise the demand for
OPEC oil by about 7 million b/d by 1990.
o The net result will be increased dependence by the US
and other OECD countries on imported oil, particularly
from OPEC countries.
3
SECRET NOFORN
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 Sanitized Copy Approved for Release 2011/02/24: CIA-RDP88G01116R000600610003-6
SUBJECT: Background Information for 16 June Meeting
with Secretary Hodel
OGI/SRD
Distribution:
Orig -
Addressee
1
-
DDCI
1
-
Ex. Reg
1
-
DDI
1
-
DDI Reg.
1
-
D/OGI
1
-
C/SRD
1
-
SRD/EMB (Chrono)
(11 June 1986) 25X1
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