MIDDLE EAST OIL POLICY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R002000010037-5
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 14
• Document Creation Date: December 12, 2016
• Document Release Date: May 15, 2000
• Sequence Number: 37
• Publication Date: December 5, 1974
• Content Type: MFR

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MEMORANDUM FOR THE RECORD
SUBJECT: Middle East Oil Policy
The attached briefing paper was prepared for the
D/OER briefing of the President's Foreign Intelligence
Advisory Board (PFI'B). The briefing was given on 5 December.
The responsible analysts are
25X1A
Attachment:
As stated
OER/I/IE /mvw/5321 (5 Dec 74)
Chief,
International Energy Branch
Industrial Nations Division
Office of Economic Research
Distribution: (S-6661)
Original - I/IE
1 - DD/OER,. D/OER,.' SA/ER
1 - D/I
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Middle East Oil Policy
1. Current Middle East oil policy is determined by
the desire of all the producing nations to maximize per
barrel oil revenues and of the Arab producers to settle the
Arab-Israeli question on their terms.
A. These countries want to maximize their per
barrel revenues.
1. The producers believe that maximizing per
barrel revenues is the most efficient
method of maximizing total revenues over
the long run.
2. Most producers already have more money than
they now can spend effectively.
3. Oil is an exhaustable resource which should
be conserved for future generations.
I,
B. Most Arab oil producers wish to take oil pricing
out of the political arena.
1. Most Arab oil producers would not lower
the price of their oil significantly if an
Arab-Israeli peace settlement were reached.
2. Oil prices probably would go up even higher
if a high level of fighting commenced and
production cuts were' introduce(?;.
3. Iran would not go along with any political
decision made by the Arabs, but would
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II. The desire for maximum per barrellrevenues is
reflected by the recent price decisions made at the Abu
Dhabi. Oil ^ieeting.
A. In early November Saudi Arabia, Abu Dhabi and
Qatar agreed on a proposal which would result
in an increase of 40-50 cents per barrel in
the average price of Saudi Benchmark crude.
1. "This was accomplished by:
a. A 40 cent per barrel cut in posted
prices.
b. An increase of royalty payments from
16 2/3% to 20%.
c. An increase in the taxes on profits
from 65 3/4% to 85%.
2. Since January the average price per barrel
of benchmark Saudi crude has been raised
nearly $1.00 per barrel -- from about
$9.34 to a $10.25-$10.37 range.
B. Iran, who with Iraq and Kuwait originally
did not back the Saudi proposal, has recently
notified the consortium of a similar price
increase of about 50 cents in average costs per
barrel on its crude.
1. Iran acted under the auspices of its most
favored ration agreement which it has with
the international oil companies.
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2. Consortium costs per barrel have been
increased from ;19.38 in January to $9.86
in October. The latest price move has
raised it to $10.58 effective 1 November.
C. This new agreement is subject to change pending
the outcome of the next OPEC ministerial
meeting on 12 December. Other producers will
readjust their-prices in compliance with
decisions made by OPEC.
111. The Middle East countries have the ability of
supporting prices by production cutbacks.
A. Table 1 shows annual oil revenues and the
resulting surpluses after import expenditures
are made.
1. Total Middle East revenues in 1974 are
into account $22 billion of import expen-
ditures, surplus revenues of $62 billion
nearly three-quarters of
total revenues.
2. Surpluses vary from country to country.
Saudi Arabia has the greatest ability to
influence pricing policies as its 7 million
b/d surplus is nearly one-half of total
surplus. Algeria, on the other hand, is
just barely-'holding its own with 70,000
b/d of surplus. The remaining countries
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have excesses ranging from As little as
nearly one-half million to 3.5 million b/d.
B. Iran, the only non-Arab Middle East country,
would be willing to cut production to maintain
the current price level.
IV. Bilateral negotiations between major oil producing
and consuming countries have been highly publicized during
the last year.
A. So far bilateral oil deals have not played a
very significant role in the international
oil market.
B. These deals have involved relatively small
volumes of oil. None of the larger deals reported
so far has resulted in sales prices significantly
lower than those prevailing in the market.
C. Of these bilateral deals currently under
negotiation, only that between Saudi Arabia and
France appears significant.
1. The Saudi-French deal started as'a deal
for 800,000 b/d of oil over the next 20
years.
2. It has now been scaled down to 400,000
b/d over the next ten years.
3. Saudi Arabia apparently was reluctant to
commit itself for a longer period. The
future of this deal is still uncertain,
but the French hope to sign early next
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D. There are three fairly large bilateral deals
currently in effect.
1. The UK concluded a one year deal in
January with Iran for 100,000 b/d.
2. France signed a three year agr%ement in
January with Saudi Arabia for 300,000 b/d.
3. Japan signed a 10 year agreement in August
with Iraq for 180,000 - 200,000 b/d.
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I. In the absence of a new Middle Eastern war, it
is unlikely that a new embargo will be instituted. It
is possible, however, that the Arab nations might respond
to continued frustrations in negotiations with a non-dis-
criminatory production cutback.
A. Such acutback would put pressure on Europe
and Japan without appearing to be directed
at countries in those areas -- most of which
now accept the Arab position in most respects.
Europe and Japan would in turn pressure the US.
B. Such a program could be adjusted to reflect
progress in negotiations.
C. It would not be opposed by non-Arab producers.
II. If war does break out, the Arabs' use of the oil
weapon will be deternined largely by the way the outbreak
originates', its timing, and the positions of the consuming
nations. It is unlikely that all the Arab procucers will
adopt the same position.
A. if war begins with an Israeli preemptive strike
and the consuming nations strongly condemn
the Israeli action, most of the Arab states
would probably not embargo Europe and Japan.
1. The United States would probably be
embargoed unless its denunciations of
Israel were accompanied by a cutback in
military aid to Israel. The Arab states
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would recognize that such a one-country
embargo would be more symbolic than
effective.
2. If the war drags on, the Arab states might
adopt a non-discriminatory cutback in
production.
B. If, on the other hand, the next Middle East War
were to.begin with an Arab attack on Israel,
the oil weapon probably not be used-immediately.
1. Saudi Arabia would probably hold off the
reimposition of an embargo until it became
clear that the US or other consuming countries
were heavily resupplying Israel.
a. Most of the other Arab Persian Gulf
oil producers would be likely to fallow
b. Some countries,. such as Iraw, might
institute a symbolic embargo against
the United States, but probably would
not cut back production.
III. Any embargo that was more than symbolic would
have to be accomplisred, as it was last year, by Arab oil
produc'i.on cutbacks.
The Arab states currently produce about 17.5
million b/d of oil -- about 38% of the Free
World's oil supply.
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1. By reducing the amount of oil they produced,
the Arab states could redu..e the total
amount of oil available to all the consuming
countries, and offset oil sharing arrangements
and oil swapping by the international oil
companies..
In the short run the Arab states have
surplus oil revenues large enough to permit
them to reduce their production substantially
without suffering setbacks to their economic
development programs.
a. For example, Saudi Arabia could reduce
.ts oil production from the current
level of about 9 million b/d down to
about 2 million b/d and still nave extra
money.
B. Unfortunately the Arab states'power to cut oil
production is not offset by the ability of
other nations to increase their oil output.
1. Indeed most of the world's excess productive
capacity is now located in the Arab states.
2. The major non-Arab oil producers who might
be able to increase production in the
short run are: the US, Venezuela, Canada,
Norway, Iran, and Indonesia.
3. We estimate-that all Free World non-Arab
producers could increase their production
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by only a total of 3 million b/d -- less
than 20% of current Arab production.
4. It is unlikely that the non-Arab Free
World producers would increase production
by the full 3 million b/d that is technically
possible. Legal, environmental, and
political considerations would inhibit such
a response even in the United States.
IV. The International Energy Program (IEP) -- an
emergency oil sharing plan agreed to by most 4mportant consuming
nations except France -- has by its existence raised the
stakes for both the consumers and producers.
A. The belief is widespread among both consumers
and producers that the system would not work
if put to the test.
B. If the plan is tried and fails, talk of effective
consumer ~_:ooperation will have been shown to
be hollow.
C. If the plan is tried and is successful, a strong
and effective consumer group will have been
created. This consumer group would then be
in a stronger position to work on prices and
other non-embargo issues.
1. It will spread the burden more evenly over
the consr Ling countries.
2. It will provide a mechanism for coordinating
oil conservation thereby limiting non-crisis
dependence on Arab oil.
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D. Both consumers and producers have ample reasons
to fear such a test. The response of both
groups to a new Arab-Israeli war will be
influenced -- but probably not determined --
by a desire to avoid such a test.
V. The timing and expected duration of a new war is
also important.
A. At present there is sufficient oil in tankers
at sea and in storage to delay the impact of an
oil embargo for two to three months. This
knowledge might induce the Arabs to impose
only a symbolic embargo.
VI. If the embargo and cutLacks were to be maintained
for more than three months, the effects on the consuming
countries would be quite serious.
The consuming countries would be forced to
introduce more drastic oil conservation measures
which would inevitably depress economic activity.
B. After several months the situation could become
politically unacceptable in some countries
and might bring about economic retaliation
against the producers.
VII. The Hrabs would probably not let things go
that far, however.
A. Last year they monitored the effects of their
embargo on the consuming countries rather
carefully. When the going looked like it
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 increase its oil production.
B. In a future embargo the Saudis are likely to
try to set their production at a level that they
judge the consuming countries will just be
able to tolerate. The Saudis might, however,
step up the pressure if they were strongly
convinced-of the necessity of jbtaining a
political settlement in the near term. The
other Arab Persian Gulf producers would probably
follow Saudi Arabia's lead.
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