INTERNATIONAL PETROLEUM PROSPECTS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP10X00001R000100010013-2
• Release Decision: RIFPUB
• Original Classification: C
• Document Page Count: 70
• Document Creation Date: December 22, 2016
• Document Release Date: January 19, 2011
• Sequence Number: 13
• Publication Date: May 11, 1973
• Content Type: REPORT

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INTERNATIONAL PETROLEUM PROSPECTS
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Automatically declassified on
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THIS DOCUMENT IS. SUBMITTED BY THE DIRECTOR OF CENTRAL
INTELLIGENCE AND CONCURRED IN BY THE UNITED STATES
INTELLIGENCE BOARD.
The following intelligence organizations participated in the preparation o
the a--..__
t
men s o State, Defense, the NSA, the Treasury; and the AEC.
Concurring:
The Special Assistant to the Secretary of the Treasury
The Director, National Security Agency
The Director, Defense Intelligence Agency
The Director of intelligence and Research, Department
The Central Intelligence Agency and the intelligence organizations of the Deport-
The
The Deputy Director of Central Intelligence
The Director, Division of International Security Affairs, Atomic
Abstaining:
WARN.ING
This material contains information affecting the National Defense of the United St
t
s
a
e
within the meaning of the espionage laws, Title 18, USC, Secs. 793 and 794, the trans=
mission or revelation of which in any manner to an unauthorized person is prohibited
The Assistant Director, Federal Bureau of Investigation, the subject being outside
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N I AM 3-73
INTERNATIONAL PETROLEUM PROSPECTS
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CONTENTS
Page
PRECIS ............................................................. 1
DISCUSSION ........................................................ 4
I. WORLD ENERGY AND OIL IN 1980 ............................. 4
II. THE PRODUCING STATES: FACTORS AFFECTING RELIABILITY
OF SUPPLY ..................................................... 8
A. General Considerations .................................. ..... 8
B. The Key Producers ............................................ 10
Venezuela .................................................... 10
Iran .......................................................... 11
Saudi Arabia .................................................. 11
Other Producers ............................................... 13
C. Collective Arab Action-A Political Embargo .................... 13
D. The Multiple Roles of the Soviet Union .......................... 16
A. Financial Impact on the Consuming Countries: General Considera-
tions ....................................................... 18
B. Balance of Payments: Current Account Transactions ............... 20
C. Balance of Payments: Capital Transactions ...................... 22
D. Competition or Cooperation Among Consumers ................... 24
E. The Contingency of Limitations on Production .................... 25
IV. CONCLUDING OBSERVATIONS ................................. 26
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Page
TABLE I : ESTIMATED PRIMARY ENERGY DEMAND, 1960-1980 .... 6
TABLE II : WORLD CRUDE OIL PRODUCTION, 1960-1980 .......... 7
TABLE III: ESTIMATED OIL PRODUCTION AND DEMAND IN THE
USSR ................................................... 16
TABLE IV: ILLUSTRATIONS OF POTENTIAL IMPACT OF OIL
TRANSACTIONS ON THE UNITED STATES BALANCE
OF PAYMENTS IN 1980 ................................. 21
Figure 1: World Primary Energy Demand .............................. 5
Figure 2: Oil Production and Demand .................................. 8
Figure 3: Total Oil Produced and Discovered ........................... 9
Figure 4: Oil Revenues of Selected Governments ....... .
Figure 5: Major Oil Trade Routes .............. . follows 26
...............
ANNEX A: THE DEMAND FORECAST: DETAILS, METHODOLOGY,
ASSUMPTIONS AND CAVEATS .......................... 27
ANNEX B: OIL RESERVES, FACILITIES AND OWNERSHIP ......... 33
ANNEX C: AVAILABILITY OF OIL FROM THE SMALLER PRO-
DUCERS OF THE EASTERN HEMISPHERE .............. 41
ANNEX D: APPROXIMATE DIMENSIONS OF AN ARAB EMBARGO
ON OIL SHIPMENTS TO THE UNITED STATES AND
WEST EUROPE ......................................... 49
ANNEX E: NATURAL GAS .......................................... 55
ANNEX F: THE OIL-RELATED CURRENT ACCOUNT TRANSAC-
TIONS OF THE UNITED STATES, WESTERN EUROPE
AND JAPAN ....... . . ... 59
............................... .
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INTERNATIONAL PETROLEUM PROSPECTS
PRECIS
A. Energy requirements will increase by about six percent a year
world-wide through 1980. Demand for oil, which fills half the energy
need, will keep pace, reaching about 88 million barrels per day. One-
third of the non-communist world's oil supply will come from Saudi
Arabia and Iran combined and another third from other members
of the Organization of Petroleum Exporting Countries (OPEC).'
(Paragraphs 2-5)
B. Saudi Arabia has the world's largest reserves of oil, is already
the largest exporter, and soon will be the largest producer. King Faisal
or another member of the Saud family will probably rule through
the decade. While it now seems likely that Saudi oil will remain
available in growing quantity through the decade, internal develop-
ments or a further deterioration of Arab-Western relations could alter
this favorable outlook. (Paragraphs 18-24, 67)
C. Iran will have no interest in interrupting supply. Oil revenue
is necessary to fund the Shah's increasingly expensive industrializa-
tion program. Either he or a successor government will seek maximum
oil revenues. (Paragraphs 16-17)
'Saudi Arabia, Iran, Kuwait, Iraq, Abu Dhabi, Qatar, Indonesia, Venezuela, Nigeria, Algeria
and Libya.
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D. There probably will be some small interruptions of oil supply
during the 1970s. Those most likely to occur involve such states as
Libya and Iraq; each will be producing less than five percent of world
oil supplies. Oil shortages of this magnitude could be managed, albeit
with substantial inconvenience. A major and sustained embargo on
oil shipments by the Arab states working in concert is highly unlikely.
(Paragraphs 25-29)
E. The USSR is not likely to become a key participant in the in-
ternational oil trade. By 1980 total Soviet oil sales-from domestic
production and from foreign procurement-probably will amount to
only three to five percent of that trade. The USSR's interest in extended
economic relations with Western Europe and the US, as well as its
recognition of the risk of confrontation with the US, make a Soviet
attempt to interfere with international oil supplies highly unlikely.
The USSR might in certain circumstances, including support of other
foreign policy objectives, be prepared to play on Western uneasiness
about the security of oil supplies. (Paragraphs 35-46)
F. The cost of oil imports will be huge. Even if prices remained
constant, the world's aggregate oil import bill would reach $55 billion
(in 1973 dollars) 2 in 1980; the US, Western Europe, and Japan com-
bined would be paying $45 billion of this. The cost could be much
more, depending on the increases in oil payments that OPEC states
manage to get and the rate of inflation. If the price reached $5 per
barrel, the 1980 bill would come to $90 billion for the world.
(Paragraph 48)
G. The producers, in the aggregate, will get much more revenue
than they spend or give away to client states. This surplus will mount
to at least $27 billion by 1980 (at today's prices) and two or three times
as much if per barrel revenues rise rapidly. (Paragraphs 54, 59)
H. Most of the accumulation will be in Saudi Arabia, Kuwait,
and Abu Dhabi. They probably will invest the bulk of it abroad. So
far as investment is concerned, the large and flexible markets of the
US will prove very attractive. Oil producing states with large liquid
balances will have considerable potential for aggravating unsettled
'Throughout this paper, 1973 dollars are used. In those instances where the distinction
is relevant, the dollars are post-February 1973 devaluation dollars.
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monetary conditions, but they will also have a strong interest in main-
taining world monetary stability. (Paragraphs 56-60)
1. The oil consuming countries as a group cannot break even on
current account transactions with oil producers. The US, deriving
large profits from overseas oil operations and importing only half its
oil requirements, can-if oil prices do not rise too rapidly and if US
exports maintain or increase their share of producer-country markets.
Western Europe will run a deficit on oil-related transactions, but not
necessarily one of staggering proportions. Japan will have a deficit
on oil transactions that will be a burden even to an otherwise strong
payments position. (Paragraphs 51-53)
J. Intensified rivalry among the US, the West European coun-
tries and Japan for (1) oil, (2) extended export markets to pay for oil
and (3) investments from oil producers will run serious risk of causing
deteriorating terms of trade for all consumers and also of embittering
political relations among major industrial countries. And bad political
relations would in turn intensify economic rivalry. (Paragraphs 62-65)
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DISCUSSION
1. WORLD ENERGY AND OIL IN 1980
1. The world-wide demand for energy has
been growing at an impressive rate, doubling
about every 12 years since the 1940s. Oil be-
came the leading source of energy in the 1960s.
It will maintain that position through the
1970s and beyond. The US relies on oil for
about 45 percent of its energy needs, Western
Europe for over 60 percent and Japan for
about 75 percent. The increasing dependence
of these areas on a few producing countries
and the expected rise in the cost of oil pose
the fundamental political and economic issues
that are the subject of this National Intelli-
gence Analytical Memorandum: (a) the reli-
ability of the oil-rich countries as suppliers,
(b) the huge balance of payments burden
of oil imports and (c) the consequences that
will flow from accumulation of enormous
amounts of money by the oil producers.
2. Table I contains a projection of the
demand for energy in 1980. Forecasting de-
mand this far ahead is hazardous, as the past
record shows; predictions of the particular
energy mix-oil, gas, solid fuels etc.-are
even more hazardous. The Table is based on
a broad survey of expert opinion. It assumes,
inter alia, the continuation of present policies
and practices with regard to energy, as well
as full employment and no major war. It
contains reasonable orders of magnitude, not
precise forecasts. The important point is that
even if the projections are off by 10 percent
or so in either direction, the issues on which
this paper focuses remain.
3. Table II projects world oil production
in 1980 by country. It is, in effect, the geo-
graphic distribution of output that would
result from the current plans of international
oil companies for installing producing ca-
pacity. These plans rest on assumptions con-
cerning a number of determining factors-
technical ones such as the producing capacity
of oil fields and the costs of production and
shipment and politico/ economic determinants
such as the anticipated policies of the pro-
ducing countries in regard to conservation of
resources, desire for revenues and willingness
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WORLD PRIMARY ENERGY DEMAND
(In million barrels per day of crude oil equivalent)
1960
1970
1980
TOTAL = 58.5
TOTAL=98.7
TOTAL=168.7
to do business with Western oil companies.
As indicated by the two tables, the USSR and
the communist countries, taken as a group,
are self-sufficient in oil, and they are expected
to remain so in 1980. The West European
countries and Japan will continue to depend
on imports for most of their oil supplies; col-
lectively they will import about 30 million
barrels per day (bpd) of the 50 million bpd
of oil expected to be moving in world trade
in 1980.3
4. The US was virtually self-sufficient in oil
until recently. By the end of this decade,
however, it will be importing roughly half
of the oil it is expected to consume-about
a Transportation of 50 million bpd in world trade is
not likely to present major difficulties. The existing
tanker fleet, supplemented by ships now building
or on order, is more than adequate to meet trans-
portation requirements for the oil demand forecast for
1975, and the shipyard capacity of the world is
larger than anticipated needs in the years beyond.
11 million bpd out of a total of some 22
million bpd. Canada and Venezuela together
will probably furnish about four million bpd;
most of the rest will have to come from the
Eastern Hemisphere. The 22 million bpd pro-
jection of US oil demand in Table I is what
now appears the most reasonable of a range
of possibilities. Most estimators are in fairly
close agreement on US demand for energy
in 1980, but assessments of the likely mix
of fuels-coal, gas, oil, nuclear and hydro-
electric power-vary. Two major uncertain-
ties are the trend of gas prices and gas import
policies, which can lead to a wide range of
estimates of gas availability, and the effect
of environmental constraints on coal avail-
ability. Estimates that anticipate little growth
in gas or coal availability anticipate large re-
quirements for oil. The figure in Table II for
US oil production might prove high-if ex-
ploitation of Alaskan fields lags-or low-if
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6. Along with this, the historic domination
of the international oil trade by American and
European firms will be further eroded during
the 1970s. Saudi Arabia, Qatar, Abu Dhabi
and Kuwait have made agreements with the
oil companies which awarded them 25 per-
cent ownership of concessions now, and ma-
jority control on 1 January 1982. Similar ar-
rangements are likely to be reached with
other OPEC states. The national oil companies
of the producing countries are making their
initial moves into marketing on a small scale;
for some years, however, most of the world's
oil will be sold by the international oil
companies.5
7. Upwards of $300 billion of investment
will be required during the remainder of
the decade to produce and market the oil
' Oil reserves, facilities and ownership are dis-
cussed at greater length in Annex B.
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TABLE I
ESTIMATED PRIMARY ENERGY DEMAND 1960-1980
Crude Oil Equivalent, Million Barrels Per Day*
Average Annual
Percentage Change
US-Total ...............................
Of which: oil ............................
Western Europe-Total ....................
Of which: oil ............................
Japan-Total .............................
Of which: oil ............................
USSR, China, Eastern Europe-Total .......
Of which: oil ............................
Others-Total ............................
Of which: oil ............................
World-Total .............................
Of which: oil ............................
21.5 32.7 48 4 4
9.7 14.4 22 4 4
12.3 21.1 35 6 5
4.1 12.7 22 12 6
1.7 5.6 14 13 10
0.6 4.1 11 21 10
15.2 24.9 41 5 5
2.8 6.6 13 9 7
7.8 14.4 32 6 8
4.5 9.1 19 7 8
58.5 98.7 169 5 6
21.7 46.9 88 8 6
* Totals for 1980 do not add because of rounding. For sources, and a fuller discussion of the as-
sumptions, caveats and methodology underlying these demand forecasts, see Annex A, which also
gives projections of demand for the main types of energy.
rising oil prices result in additional output.
Since oil is the swing fuel and oil imports are
the residual source of oil supply, any variation
of demand or supply from the projection
would be reflected in oil imports.
5. The world has 600 billion barrels of
proved oil reserves, more than enough to meet
the demand through 1980 and well beyond.
The 11 states comprising the Organization
of Petroleum Exporting Countries (OPEC) 4
now control more than 75 percent of these
reserves. Half of the total is in the countries
around the Persian Gulf; Saudi Arabia alone
possesses a quarter of the total. Hence, the
share of world oil production provided by the
Persian Gulf states will rise dramatically in
the years ahead.
'The OPEC members are: Saudi Arabia, Iran, Ku-
wait, Iraq, Abu Dhabi, Qatar, Indonesia, Venezuela,
Nigeria, Algeria and Libya.
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TABLE II
Million Barrels Per Day
Average Annual
Percentage Change
1980
1971-1980
1960
1970
Projected
1961-1970
Projected
Western Hemisphere ......................
12.3
18.1
21.5
3.9
1.7
United States .........................
8.0
11.3
11.5
3.5
0.2
Canada ...............................
0.5
1.5
3.0
11.6
7.2
Venezuela ............................
2.8
3.8
3.5
3.1
-0.8
Others ...............................
1.0
1.5
3.5
4.1
8.8
Eastern Hemisphere ......................
6.3
21 .8
54.5
13.2
9.6
Middle East ..........................
5.2
13.8
37.5
10.3
10.5
Abu Dhabi .........................
0.7
4.0
19.90
19.0
Iran ...............................
1.1
3.8
9.0
13.2
9.0
Iraq ...............................
1.0
1.6
3.0
4.8
6.5
Kuwaitb ...........................
1.7
3.0
4.0
5.8
2.9
Saudi Arabiab ......................
1.3
3.8
15.0
11.3
14.7
Others .............................
0.1
0.9
2.5
24.6
10.8
Africa ................................
0.3
6.2
10.5
35.4
5.4
Algeria .............................
0.2
1.0
2.0
17.5
7.2
Libya ..............................
-
3.3
3.0
22.00
-1.0
Nigeria .............................
Negl.
1.1
4.0
31.00
13.8
Others .............................
0.1
0.8
1.5
23.1
6.5
Indonesia .............................
0.4
0.9
2.5
8.4
10.8
Other (including North Sea) ............
0.4
1.0
4.0
11.6
12.8
Communist Countries .....................
3.4
7 .7
13.0
8.5
5.4
USSR ................................
3.0
7.0
11.0
8.8
4.6
Eastern Europe .......................
0.2
0.3
0.5
4.1
5.2
China ................................
0.2
0.4
1.5
7.2
14.1
WORLD ...............................
22.0
47.7
89.0
8.0
6.4
OPEC .................................
8.6
23.3
52.0
10.5
8.4
9.4
Based on oil industry projections, with 1980 production data rounded to the nearest 500,000
bpd. Totals may not add due to rounding.
b Including half of output from the Saudi-Kuwait Neutral Zone.
C For the period 1966-1970.
a Organization of Arab Petroleum Exporting Countries: Arab members of OPEC, plus Egypt,
Syria and Bahrain.
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OIL PRODUCTION AND DEMAND
Western Europe
Japan
Communist Countries
Middle East
Africa
Other
I-
40
_L _____L
30 20
l l I I I
10 0 10 20 30 40
needed in 1980. Most will be spent in con-
suming countries. The industry will generate
some of its requirements from internal sources,
but the trend of the past decade toward bor-
rowing will continue. An important new de-
velopment will be the use of funds provided
by the producing states, which will be ac-
cumulating from the sale of oil more money
than they can use.
II. THE PRODUCING STATES: FACTORS
AFFECTING RELIABILITY OF SUPPLY
A. General Considerations
8. The bulk of the world's oil reserves are
found in underdeveloped states. All were very
poor until oil production started; some still
are. Wealthy or not, they retain the mind-
set of the underdeveloped, agricultural poor
facing the modern, industrialized rich. Most
OPEC countries were formerly under Western
domination. The citizens of these countries
believe, with varying degrees of intensity,
that international oil companies, with govern-
ment backing, have in the past milked the
producing states of profits that belonged to
them. They have won both increased revenues
and greater control in the course of years of
confrontation with the Western oil companies.
Enjoying a seller's market, they could curtail
the flow of oil to get higher prices, to conserve
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TOTAL OIL PRODUCED AND DISCOVERED
BILLION BARRELS
200r- PRODUCTION 1859-1972
400L PROVED RESERVES END 1972
*Excluding reserves in People's Republic of China.
their principal natural resource, to enforce
political demands or-in a few special cases-
to avoid piling up excess financial reserves.
9. All OPEC countries rely heavily on oil
revenues; some have more compelling reasons
for producing ever greater quantities of oil
than others. Countries such as Iran and
Algeria are deeply committed to massive de-
velopment programs that will require large-
and growing-sums of money over an ex-
tended period of time. For others (Abu Dhabi
and Kuwait are examples), doing without a
large part or even all oil revenues for a year
or two would be more of an inconvenience
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COMMUNIST EASTERN
COUNTRIES* HEMISPHERE
than a disaster. Saudi Arabia-which will in-
creasingly be the key oil producer-will be
in this position before the end of the decade.
10. The political makeup of the regimes
governing OPEC countries will also loom
large in producer country decisions about oil.
Typically, an OPEC government is ruled by
one man or a small clique and has no pro-
vision for the orderly transfer of power except
in the case of a dynastic succession. Military
governments such as Iraq or Libya lack even
that. Such concentration of power makes for
effective authority during the lifespan of a
regime, but it also carries a large chance of
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major change without warning. As it happens,
the states that will collectively produce the
bulk of Eastern Hemisphere oil-Iran, Saudi
Arabia, Kuwait and Abu Dhabi-are led by
traditional heads of established ruling families.
These rulers have, on the whole, seen political
benefits for themselves as well as economic
benefits for their countries in staying on good
terms with the US and Western Europe, even
though bargaining hard for greater oil revenue
from Western-owned oil companies. Iraq and
Libya, on the other hand, have tended toward
an adversary relationship with the West since
ousting their respective monarchs.
B. The Key Producers
11. The policies of three states are of par-
ticular importance. Venezuela has special sig-
nificance to the US as a major supplier of
oil. Iran and Saudi Arabia together will pro-
duce about a third of the non-communist
world's oil supply and will have a substantial
share of spare producing capacity. If produc-
tion ceased in either, there would be extensive
disruption of supply. Though any forecast that
depends on political developments as far
ahead as 1980 is hazardous, a major interrup-
tion of supplies from any one of these three
countries does not now appear likely.
12. Venezuela.6 Although in many respects
not a typical OPEC country-Venezuela has
political parties, elections and popular par-
ticipation in government-this largest West-
ern Hemisphere oil exporter does share many
of the attitudes of its sisters in the organiza-
tion. Venezuela considers that foreign oil com-
panies exploited the country for years; its
strong pressure on the oil companies over
the past decade has stemmed in large part
from a desire to redress what it regards as
earlier wrongs. Caracas has succeeded in rais-
' See NIE 98-72, "Venezuela: The Politics of Oil",
dated 19 October 1972, SECRET, for a more de-
tailed analysis of that country's oil situation.
ing its per barrel and overall revenues con-
siderably, but its tactics have caused the oil
companies to curtail new investment. Explora-
tion has dropped off and the discovery of new
reserves has lagged.
13. The Venezuelan Government is aware
that reserves will not support production at
current levels for more than a dozen years
or so, that more oil must be found if the coun-
try's economic health is to be maintained
beyond the 1970s. It has been receptive to
US suggestions that the two countries enter
into a long-term comprehensive energy treaty,
designed to promote development of the
heavy oil 4 of the Orinoco tar belt, to provide
a dependable source of oil imports into the
US, and to give Venezuela increased finan-
cial benefits and secure markets. The US
wants any treaty to be formally ratified by
the Venezuelan Congress and to include firm
guarantees both for investment and for a rea-
sonable profit. The Caldera government is
planning a detailed survey of the tar belt's
potential, to be conducted under the aegis of
the government-owned Venezuelan Petroleum
Corporation. Assuming confirmation of ade-
quate recoverable reserves,8 the US is con-
sidering some form of preferential import
treatment for this heavy oil if and when it
becomes available.
14. The Venezuelans are likely to press
hard for preferential treatment in the US
market for their existing production as well
as for future production of heavy oil from
the tar belt. The Venezuelan Government will
seek provisions for generous periodic price
' So called because it has a high specific gravity
and is too viscous to be produced or handled by
normal methods.
'Estimates of the size of reserves run from a few
billion to many tens of billions of barrels. This oil
is not included in the Table, Proved Oil Reserves,
in Annex B, page 36, or Table II, World Crude Oil
Production, 1960-1980, page 7.
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and tax increases. It is likely to resist pressures
for greatly expanded production from existing
fields until it is clear that production from
new fields can provide for Venezuela's finan-
cial needs well beyond the present decade.
It will want to influence production levels
from new fields and will probably press for
joint venture arrangements.
15. As the continuing need for sizable in-
come in the years ahead has become more
apparent to Venezuela's political leaders, oil
has become less of an issue between the two
major parties. It will, however, continue to
be a target for nationalistic and opportunistic
politicians. An energy agreement probably
will not be concluded before the presidential
elections of December 1973. But an adminis-
tration headed by either major party would
be likely to push for completion of an agree-
ment during 1974. If an agreement is reached,
there would almost certainly be periodic na-
tionalist pressure for revising some terms in
Venezuela's favor. Demands for a complete
revision of a US-Venezuelan energy treaty and
even a rupture of the treaty ties are possible
in the years ahead. But the benefits of an
agreement in terms of increased foreign in-
vestment, employment and the like tend to
work against such a contingency.
16. Iran. A continuing and growing supply
of oil from Iran, up to the limits on pro-
duction imposed by field capacity, appears as
certain as anything can be in an uncertain
world. The Shah has striven consistently, over
the many years he has dominated Iran, to
establish his country as a reliable supplier; at
every opportunity, he has emphasized what
he perceives as the contrast between his own
attitude and the intemperate actions and words
of his mercurial Arab neighbors. At the same
time, he has been extremely demanding in
financial terms; one of his driving objectives
is to maximize Iranian revenues over the next
decade or two, in order to maintain and ac-
celerate Iran's impressive economic develop-
ment program and to pay for the sizable
military forces he believes Iran must have to
carry out its declared mission of guardian
power in the Persian Gulf. Under the new
arrangements being worked out with the Con-
sortium, Iranian oil revenues-which have
doubled in the past two years-will continue
to expand at a healthy rate. Iran will have
no trouble spending its oil income, even if
it grows at 20 percent a year (through dou-
bling of per barrel revenues) through the
1970s.
17. The Shah's death or deposition might
lead to turmoil in Iran, but it probably would
not interfere significantly with oil output. The
overthrow of the monarchy, combined with a
complete change of Iranian goals and political
orientation, is highly unlikely in the near term.
The succession might involve a struggle for
power, either among supporters of the mon-
archy or between royalists and revolutionaries.
In any event, central government control prob-
ably would be somewhat weakened, since no
successor government is likely to have any-
thing like the vast personal power of the Shah.
But political struggles are likely to be centered
in Tehran, 300 miles or more from the oil
producing areas; unless the country were
racked by civil war, oil production facilities
probably would not be endangered. And any
successor government almost certainly would
be anxious to continue receiving oil revenue,
which has become central to the Iranian
economy and which is likely to be even more
crucial as ambitious industrialization programs
are pursued. Thus, the odds will continue to
favor a sustained flow of oil.
18. Saudi Arabia is the key country in the
international oil future. It has a quarter of
all proved reserves and is now the world's
largest oil exporter. In all likelihood, it will
become the world's largest producer before
the end of the 1970s, with output of at least
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15 million bpd by 1980. Saudi Arabia is gov-
erned by a regime which has been willing to
see oil production expand at a dramatic rate
and so far has been able to spend most of the
income this production generates.
19. King Faisal is both the major strength
of the Saudi political, system and its principal
weakness. Under his leadership, both the
family and the country have a clear sense of
direction, factionalism is minimal, and progress
along certain-mostly economic-lines is
steady and substantial. The government's posi-
tion has been strengthened by its enlistment
of comparatively young and well-educated
Saudis-both princes and commoners. But
Faisal is slow to delegate authority and very
hesitant to make detailed provisions for his
own death or incapacity. Faisal is in his late
60s, and the nature of successor governments
is problematical. If he rules in full possession
of his faculties and then dies suddenly, the
Saud family would probably unite behind an
agreed successor. The succession is less likely
to go smoothly if Faisal should undergo an
extended decline in health and mental ca-
pacity. Such circumstances would raise the
chances of intrafamily dispute over the shar-
ing of power and present opportunities for
antimonarchical elements to strike at the
family's supremacy.
20. All things considered, the chances seem
reasonably good that another King of Saudi
Arabia will follow Faisal and will rule for
some years at least. Over the longer run, how-
ever, the problems of the monarchy are likely
to increase. The Saudi royal family has many
weaknesses that could become far more
troublesome when Faisal's strong hand is gone.
And Saudi society already exhibits signs of
deepening schisms and problems. A young,
educated Saudi can expect generous financial
rewards and high status if he cooperates with
the regime. But cooperation entails rigid pub-
lic conformity to the appearances required
by an especially strict form of the Muslim
religion-a form that a great many Saudis
do not personally espouse. Cooperation also
requires acquiescence to the dictum that all
forms of political organization are subversive
and that almost any criticism of the social
system verges on the treasonable. Any Saudi
with a substantial formal education has been
exposed to very different concepts acquired
during schooling abroad or from foreigners.
The result is a great deal of pretense and
hypocrisy and an atmosphere of repressed
desires and clandestine dealings that breeds
contempt for the law and for the authorities
that impose it.
21. Saudis have plotted the overthrow of
the regime in the past; they will no doubt
try again. There simply is no way of estimating
whether a coup might succeed and bring to
power a vastly different set of people-a
group prepared to manipulate oil production
in pursuit of political goals. Such people can-
not always be spotted in advance, as Libya's
Qadhafi was not. Sandia Arabia is less vulner-
able than many countries to the sort of po-
litical turmoil that would cast doubt on the
availability of oil; the Saudis have no bitter
memories of imperial proconsuls or of oil
company presidents threatening to "ask my
government for troops;" they do have the
record of having led the Middle Eastern oil
countries to their most famous victories-the
50-50 profit split of 20 years ago and partici-
pation today.
22. The Saudis realize that their growing
wealth from rising oil output may to an in-
creasing degree attract the attention of cove-
tous neighbors. To protect his regime from
interference by other Arabs, Faisal relies more
on financial outlays than on strictly military
defenses. Since 1967, he has paid out $150
million annually to certain Arab states-
notably Egypt ($100 million) and Jordan ($40
million). As Saudi income rises, so will Saudi
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generosity. Egypt will be the principal bene-
ficiary; it will have great need for foreign
exchange and the means to apply military or
subversive pressure on the Saudis. But Cairo
will prefer to remain on good terms with
Riyad. It would be aware that the success of
an Egyptian military attempt to seize control
of Saudi Arabia or its oil fields would be
highly dubious, even against the Saudis alone.
And it would recognize that the attempt would
risk provoking counteraction from Iran or a
Western power, while depriving Cairo, of
Saudi subsidies.
23. A number of interrelated economic and
political issues will affect the future course
of Saudi oil policy. The Saudis must decide
if they wish Saudi Arabia to accumulate
steadily growing amounts of money-sums
which are virtually certain to outrun the coun-
try's ability to spend by a wide margin. The
Saudis are convinced that continued close co-
operation with the US is in the best interest
of their country. But they believe that the im-
portance of Saudi oil and of a responsible
Saudi oil policy have not been adequately rec-
ognized even by the US. They are troubled
by the lack of a US response to the Saudi sug-
gestion of last September for a special relation-
ship with the US on oil matters. They have
expressed their displeasure at stories that the
oil consuming states intend to band together to
deal with the producing countries.
24. King Faisal has repeatedly said that he
would not use oil as a political weapon. But
Saudis are not isolated from the stresses of
the Arab-Israeli situation. They believe that
the US continues to favor the Israeli side;
and they want to display a strong position
alongside their fellow Arabs. In this circum-
stance, Saudi Arabia will use public re-
minders of the growing US need for Middle
Eastern oil as a means of pressing the US
to modify its policy. Over time, if the Saudis
perceive no change in US policy-and espe-
cially if the Arabs were gravely humiliated
by Israeli blows or if the Saudis suffered
from extensive fedayeen sabotage of oil in-
stallations-they would consider moving be-
yond words to action. Such action might even-
tually include limitations on production or
threats to suspend oil shipments to the US.
25. Other Producers. There are seven other
oil producing states which each contribute
over a million bpd or will do so in the near
future-Algeria, Kuwait, Indonesia, Nigeria,
Abu Dhabi, Libya and Iraq. As a group, they
will provide about 22 million of the 50 million
bpd expected to be moving in international
trade in 1980. Most of them rely heavily on oil
revenues to run their governments and to de-
velop their economies. They range in reliabil-
ity as suppliers from Algeria, which is eager
to develop economically and likely to continue
to make its oil policy decisions on commercial
grounds, to Iraq, where governments have at
times impeded the growth of oil production
and which has a record of political instability.
During the 1970s, interruptions of oil flow
from one or another of these lesser suppliers
are almost certain to occur, but most stoppages
are likely to be of short duration. No one of
these states alone is in a position to cause a
disruption in oil supply that would create un-
manageable problems for consuming coun-
tries.9
C. Collective Arab Action-A Political
Embargo
26. The Arab countries have long been
aware that their collective importance to world
oil supplies is a potential source of leverage
over the industrialized West. Arab leaders, in-
cluding Sadat of Egypt and Qadhafi of Libya,
frequently discuss the possibility of collective
action designed to deprive the West of oil in
These states are discussed in greater detail in
Annex C.
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order to bring pressure on Israel. In years to
come, threats of embargo no doubt will be re-
peated frequently. The fact remains, however,
that the Arab world has never undertaken an
embargo on all oil shipments or a sustained
embargo on any large share of them.
27. In the absence of renewed or imminent
Arab-Israeli hostilities, a collective Arab em-
bargo aimed at forcing the Great Powers to
impose a settlement is highly improbable.
Saudi participation, vital to an effective em-
bargo, would be virtually out of the question
in this set of circumstances certainly while
Faisal is actively in charge, and probably
under his designated successor. (In the event
of a more radical regime, the prospects would
be more uncertain.) The mutual trust neces-
sary to bring about an embargo does not exist
among the Arab states; nor would they be able
to agree on the objectives of any such action.
28. However, the Arab-Israeli situation is
volatile, subject to change because of develop-
ments in Israel, in Egypt, in Jordan, in Saudi
Arabia, or in the policies of the Great Powers.
It would be imprudent to assume that the
decade will pass without some kind of crisis,
involving hostilities or a level of tensions so
high that some Arab governments would seek
ways to strike at the US. It is possible that the
cycle of terrorism and reprisal, sustained over
time, could lead to interruptions of the flow of
Arab oil. And in circumstances of Arab-Israeli
hostility, certain governments would almost
certainly act unilaterally to suspend shipments
to the US and in addition attempt to organize
an Arab-wide embargo. Only as the 1980s ap-
proach, and non-Arab exporting countries
reach their limits of producing capability,
would an Arab boycott of the US alone,
coupled with an equivalent decrease in out-
put, be sustainable. In these circumstances, the
oil withheld from the market could not be
readily replaced and not only would the Arabs
have substantial financial reserves, but they
would continue to export enough oil to cover
their current expenditures.
29. Before then, an Arab-wide embargo of
oil shipments extensive enough to bring effec-
tive pressure on consuming countries, even in
highly charged circumstances, is unlikely. To
mount an effective embargo, the Arabs would
have to suspend shipments to Europe as well
as the US, harming many countries that have
helped the Arabs with political support, arms
sales, and economic aid and injuring their
own economic interest. Many Arab leaders
would be reluctant to do this. Despite the
ability of the Arab oil producing states to con-
tinue paying the import bills of the entire
Arab world, while doing without oil income
in whole or in part for an extended period,
the Arab states would fear that consumers
could freeze their assets and deny them needed
imports. Finally, although the animosities and
suspicions that hamper joint Arab action in
normal times tend to subside when the Arabs
believe that they are being humiliated by-
or on behalf of-the Israelis, they do not dis-
appear. In sum, an Arab-wide embargo of oil
shipments to Western Europe and the US
could happen, but it is only a slim possibility.
30. Were all the necessary triggering events
to occur and bring on an Arab-wide embargo
of all oil shipments, the impact on consuming
countries would be serious. A total Arab sus-
pension of shipments would cut off roughly
half of the oil normally moving in world trade
at present and about 60 percent of what is
expected to be moving in 1980. The effects
would vary widely, depending on timing (year
and season), tanker availability, stockpiles in
consuming countries, ability to increase pro-
duction in non-Arab producing countries and
the rapidity with which Arab unanimity began
eroding. In a purely theoretical worst case-
complete embargo of all Arab exports and a
poor stockpile situation-the industrialized
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to spread the impact. To cope with the re-
maining shortfall (amounting to about 10 mil-
lion bpd of oil in 1980), the US and West
Europe would have other options-notably
rationing-and stocks of about 3.6 billion bar-
rels of oil to draw on. The consequences in
unemployment, pollution, money costs and
other disruptions of normal life-would be
very severe, but they would be manageable.
(If Western Hemisphere oil were not made
available to Europe or if the US alone were
embargoed, the US would at worst retain
about 90 percent of its normal energy sup-
plies before making any of the adjustments
in production, consumption, or fuel sources
cited in paragraph 31.11)
33. The support of non-Arab producers for
any Arab-led embargo designed to punish the
West for its policies toward Israel is virtually
inconceivable. Each producing country has its
own interests and desires; the Shah of Iran,
for example, has in the past been eager to
increase Iranian oil production in order to
make up for shortfalls in Arab oil caused by
politically inspired cutbacks. Venezuela, Indo-
nesia, Nigeria and other West African states
are not at all likely to sacrifice vitally needed
oil revenues to promote the political goals of
Arab governments. In short, non-Arab pro-
ducers would see considerable opportunity
in such circumstances both for increasing their
income and for enhancing their position as
suppliers.
34. In sum, the producing countries' ap-
preciation of the need for revenue to run their
governments and develop their economies will
insure that most oil will flow to market most
of the time. But there can be no guarantee
that all oil needed will flow all the time.
Interruptions to the flow of oil from the
smaller suppliers are almost certain to occur-
they are quite likely in some (e.g., Libya
countries as a group would be able to main-
tain normal oil consumption for only about
three months.
31. But an Arab decision to treat Japan and
the smaller consumers on the same footing
with the US appears very unlikely; if the
Arabs were stung into declaring a sweeping
embargo, they would at most cut off ship-
ments to the US and West Europe. And, when
realistic -assumptions about US, West Euro-
pean and oil company reactions to an embargo
are taken into account, it becomes clear that
energy consumption can be reduced and oil
supplies can be stretched out, although not
without severe dislocations in some embargoed
countries and very considerable difficulties in
all of them. Output of operating oil fields can
almost always be increased by five to 10 per-
cent by making adjustments in techniques and
in maintenance schedules. Certain steps to re-
duce oil consumption and increase the energy
produced from other fuels can be taken fairly
quickly. The US, for example, probably could
save a million barrels a day by cutting oil-
fueled transportation by 10 percent. A portion
of US generating and industrial facilities are
equipped to burn either oil or other fuels or
can be converted readily; a million bpd or so
could be saved over a few months by switch-
ing them from oil. Relaxation of pollution con-
trols would yield more final energy from in-
puts of either oil or coal.
32. After taking such initial measures, the
embargoed nations as a group would find
themselves with about 85 to 90 percent of
the energy needed to maintain their essential
activities, and they could do somewhat better
if oil shipments were diverted from other
customers.1? The US, with greater flexibility
in its choice of energy sources, would be
somewhat better off than Europe, even while
sharing Western Hemisphere oil with Europe
10 The details of this calculation are shown in
Annex D.
11 These cases are discussed in greater detail in
Paragraph 4 of Annex D, page 52.
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and Iraq) and possible in all. Hence those
who produce, market and transport oil will
probably have to cope with shortfalls of some-
thing like two to four million bpd (up to five
percent of normal world demand) on a few
occasions in the 1970s. The system can cope
with shortfalls of this magnitude, albeit with
considerable inconvenience.
D. The Multiple Roles of the
Soviet Union
35. The USSR has so far had a marginal
involvement in the international oil trade. The
political and economic changes affecting this
trade and the USSR's current pretensions to
play a role as a world power raise new ques-
tions about its future involvement. Will Mos-
cow become a substantial importer and there-
fore a competitor for the available supply?
Will it compete with the international oil
companies either in international marketing
or in oil exploration and production? Will its
role as a power factor in the Middle East
permit it to interfere politically or militarily
with Western access to oil?
36. The Soviet Union ranks second only to
the US in both production and consumption of
oil, though it consumes only about one-third
as much as the US. Crude production is
planned to rise from seven million bpd in 1970
to nearly 10 million bpd in 1975, with most
of the increase coming from West Siberia. (See
Table III.) During 1976-1980, output should
rise less rapidly, probably reaching about 11
million bpd. Present planning in the Soviet
economy does not suggest that consumption
will increase rapidly enough to catch up with
production; the USSR will, therefore, continue
to have an export surplus.
37. If, in the longer run, Soviet oil produc-
tion lags and domestic requirements grow, the
Middle East could provide an alternative
source of oil. A decision to rely extensively
on external supplies fora vital commodity
ESTIMATED OIL PRODUCTION AND DEMAND
IN THE USSR
Crude Oil Equivalent, Million Barrels Per Day
1970
1975
Production .................... 7.0
9.7
Consumption .................. 5.2
7.2
Available for Export from Do-
mestic Production a........ 1.8
2.5
To: Communist Countries b... .9
1 .5
To: Non-Communist Coun-
tries ...................... . 9
1.0
1980
11.0
9.2-9.5
1.5-1.8
1.5-1.8
a Excludes an additional 100,000 bpd (procured on a
barter basis from non-Communist countries) which the
USSR delivered to other Communist countries in 1970.
b includes Cuba.
would, however, be a major policy change and
one that seems improbable in the light of past
doctrine and practice. In any event, potential
Soviet needs for oil would be small relative
to world demand in 1980, and Soviet oil pro-
curement would not infringe much on oil sup-
plies to the West.
38. The Soviets have exported increasing
quantities of oil since the mid-1950s. In 1970,
the USSR exported 900,000 bpd to other com-
munist countries and another 900,000 bpd to
the West-primarily Europe, where Soviet
oil constituted around six percent of supply.
Oil exports are the Soviets' largest single
source of hard currency earnings-some $570
million in 1971. The export surplus is expected
to grow to 2.5 million bpd by 1975, as produc-
tion far outstrips consumption, and then shrink
as the growth rate of production falls off.12
.The main constraint on Soviet output is the
country's technology, which is inadequate for exploit-
ing reserves in inhospitable areas of Siberia. This
deficiency will eventually be overcome; sooner if deals
with the US or Japanese firms to develop West
Siberia (Tyumen fields) and offshore areas in the
Soviet Far East are signed in the next year or so,
later if the Soviets act alone.
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Just how the USSR will choose to divide the
1.5 million bpd or so it will have to export
in 1980 is far from clear, but need for hard
currency could cause it to sell the larger por-
tion to the West. Thus, after 1975, the growth
in East European requirements will probably
have to be met increasingly from non-Soviet
sources; the Soviet Union has already advised
Eastern Europe to seek more oil from other
sources, particularly the Middle East.
39. In recent years the Soviet Union itself
has used Middle East and North African oil
both to earn foreign exchange and to meet
its export commitments to communist coun-
tries. In 1970 and 1971 the USSR obtained
about 100,000 bpd, primarily from Algeria
and Egypt; most was delivered directly to
Cuba and to communist countries in Eastern
Europe. Since the nationalization of IPC in
1972, about 150,000 bpd of Iraqi oil from
the nationalized Kirkuk fields has gone to
Eastern Europe on Soviet account. The oil
was procured on a barter basis or as debt re-
payment and made additional Soviet domestic
oil available for export to non-communist
states. The Soviet Union will undoubtedly
take advantage of such opportunities to in-
crease its hard currency earnings in the future.
40. Transport constrictions and hard cur-
rency shortages limit the USSR's ability to
procure and resell foreign oil. Although the
USSR continues to build tankers-three of
150,000 DWT each are under construction-
its tanker fleet remains small: 185 ships
making up only 2.5 percent of world tonnage.
The Soviets must charter additional tonnage
to move the small amounts of oil they cur-
rently export and procure from abroad. To the
extent that the USSR can get oil on barter
arrangements and sell it in the West, it stands
to gain in foreign exchange. But the oil pro-
ducing states, preferring to purchase Western
goods, want to be paid in convertible cur-
rencies. In order to broker any sizable quan-
tities of oil, the Soviets would have to borrow
hard currency to buy oil and to charter
tankers; in competition with large and ex-
perienced oil companies, the Soviets are un-
likely to make much profit on such trans-
actions.
41. The Soviets probably will continue to
play only a limited role in oil operations in
the Middle East. The USSR has, in the course
of its efforts to establish a position of power
and influence in the area, forged fairly close
ties with only one major oil exporter, Iraq.
The Soviet Union extends technical assistance
for exploration and development of oil fields
to some other producers, e.g., Libya and
Algeria. But the Soviets cannot compete with
the Western oil industry in exploration and
production techniques, or in drilling and pro-
duction equipment. Arab governments and
petroleum technicians have consistently shown
a preference for Western over Soviet methods
and will probably continue to do so. The gov-
ernments of the Middle East now in power
(or likely to gain power) would resist any
Soviet effort to acquire a measure of control
over the production and distribution of their
oil, and the transport facilities for moving
the 37 million bpd that the Middle East will
be producing in 1980 will be owned or con-
trolled by the producers and their primary
customers.
42. The USSR has a strong general interest
in maintaining the reputation it has pains-
takingly built for itself as a reliable trading
partner of the industrial West. In a variety
of relatively small oil deals, Moscow acts
like a good capitalist company, selling its oil
at competitive prices. It is tied into dealings
with at least one of the major international
companies, providing oil to British Petroleum
(BP) in Eastern Europe, getting BP oil east
of Suez and reducing transportation costs for
both parties. It also has a gasoline marketing
operation in the UK, sells oil in conjunction
with two Belgian companies in the Benelux
region, and is showing interest in other Euro-
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pean countries. It is involved in deals with
Iran and Afghanistan to import low cost gas
from them for the Soviet market, which makes
Soviet natural gas available for sale to Europe
at high prices.
43. Thus, the USSR is not a key participant
in international oil trade, nor is it likely to
become one. It will have only relatively small
quantities of its own oil to export. While the
quantity of foreign oil that the Soviets pro-
cure is likely to grow in the years ahead, it
will not be very large-probably on the order
of one to two percent of oil moving in world
trade in 1980. Total Soviet oil sales, from
domestic production and foreign procurement,
thus might amount in 1980 to three to five
percent of the total moving internationally.
44. The USSR is nonetheless a force to be
reckoned with in the Middle East, deriving
influence from the political position it has
established and from its substantial military
presence. Moscow is aware of the concerns
frequently expressed by oil consuming states
about access to oil supplies and might in cer-
tain circumstances be prepared to play on
this Western uneasiness-e.g., by dropping
hints about oil in the course of negotiations
with the US or with European countries on
unrelated subjects. But at present and prob-
ably for some time to come, anything much
along this line is unlikely because it would
clearly jeopardize interests far more impor-
tant to the USSR. Over the past year or two
Moscow has given growing evidence that it
regards extended economic relations with
Europe and the US as a desirable political
as well as economic goal. This is likely to be
a major Soviet interest for some time.
45. The Soviets will remain in a position
to lend political and propaganda support to
the Arab oil-producing states if any of the
latter should undertake moves to limit or stop
oil production. In these circumstances, Mos-
cow probably would not expect such support
to damage fundamentally its important rela-
tions with other countries. The Soviets would
expect their military presence in the area to
be a deterrent to any Western action to secure
oil by military means. And they are without
doubt keenly aware of the political and stra-
tegic advantages that could accrue to them
from their growing capability to interfere
physically with the flow of oil to NATO or
Japan in a changed climate of international
relations.
46. A change in Soviet policy toward the
West from detente to antagonism, for what-
ever reason, would remove only one of the
inhibitions-albeit an important one-on So-
viet attempts to interfere with Western access
to oil. The resource constraints, the risk to
Soviet relations with the oil producing coun-
tries and the risk to its reputation as a reliable
trading partner in the international commer-
cial community would remain. Most impor-
tant, the USSR would recognize that moves
toward physical interference with interna-
tional oil supplies would bring a major con-
frontation with the West.
III. THE CONSUMING SIDE
47. For the industrialized West, growing
dependence on imported oil is certain to be
the source of very substantial financial prob-
lems; it may also become the source of new
and bitter difficulties in international rela-
tions. The economic problems lie both in pay-
ing for oil and in attracting capital invest-
ments from the oil producing countries. The
potential political ones are more complex,
stemming largely from an inescapable conflict
of economic interest among the consumers.
A. Financial Impact on the Consuming
Countries: General Considerations
48. Imports of more and more oil will be
costly. Even if the price of oil moving in world
trade remained fixed at the 1973 level of about
$3 per barrel, world imports in 1980 would
cost $55 billion-including $12 billion each
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OIL REVENUES OF SELECTED GOVERNMENTS
Cost.,
$1.15
Delivered Price of a Representative Barrel of Oil
1960: About $2.501BbI 1973: About $3.001BbI
*Production costs, depreciation, transportation, etc..
r BILLION US $
1972 (Est.)
from the US and Japan and nearly $21 billion
from Western Europe.la (The world total for
1970 was $20 billion.) But the price is unlikely
"Throughout this Memorandum, with the excep-
tion of the end of this paragraph, 1973 dollars are
used. In those instances where the distinction is rele-
vant, the dollars are post-February 1973 devaluation
dollars. References to the 1973 price of oil are to
the price of oil likely to prevail in mid-J973, after
an OPEC-wide approach to shifting currency values
has been applied to the payments to producing coun-
try revenues per barrel of oil produced. For further
details see paragraphs 5 and 6 of Annex F, page 62.
to remain steady, either in constant or in cur-
rent dollars. The OPEC countries expect to
extract ever higher revenues per barrel from
increasingly dependent consumers. Moreover,
the cost of energy of all kinds, as well as the
general price level, will probably continue
rising. An estimate of the 1980 price in 1980
dollars is not possible, but the actual dollar
figure certainly will differ from the 1973 price.
A figure of $5 per barrel is frequently cited
as one possibility. It could be reached in a
number of ways-for example, through a com-
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bination of a 50 percent increase in per barrel
payments to producing countries and a gen-
eral inflation rate of four percent a year. At
$5 per barrel, world oil imports in 1980 would
cost some $90 billion; the US, Western
Europe, and Japan collectively would pay
over $70 billion.
49. The US has for a long time had certain
advantages over other major consumers, but
these are diminishing in importance. As late
as 1970, oil company profit remittances ex-
ceeded the combined cost of oil imports and
new investment in overseas oil operations, and
the oil business constituted a plus factor in the
overall payments balance. As the oil import
bill grows, profit remittances will also grow,
but they will cover less and less of the total.
As the producing countries' share of owner-
ship increases and their revenues per barrel
rise, the oil companies will find it ever more
difficult to maintain profits per barrel. More-
over, the US has been importing oil prin-
cipally from Venezuela and Canada, which
normally get more than half their total im-
ports from the US. In the future it will buy
more and more oil from Saudi Arabia, Iran,
and the other Persian Gulf producers-which
import principally from Europe.
B. Balance of Payments: Current
Account Transactions
50. Because of the many variables involved,
it is not possible to make a confident estimate
of the balance of payments impact of oil trans-
actions for a period as far ahead as 1980,
either for the consuming countries as a whole
or for the US alone. It is, however, possible
to illustrate the way in which the impact will
vary in response to changes in key variables.
Table IV isolates the two key factors in a
postulated current account balance for the US
in 1980-the cost of oil and export perform-
ance-and illustrates the magnitudes that will
be involved for various combinations of the
two. It treats the quantity of imports, deter-
mined by demand and supply projections
above, as fixed. It makes a number of assump-
tions, about other variables-including the
total imports of the oil producing countries
and of the clients to whom they transfer funds,
the size and distribution of oil company profits,
and the ownership of oil tankers. The illustra-
tive range of current account balances at-
tributed in the Table to price variations and
exports alone is, however, large enough to en-
compass most effects that changes in the other
variables are likely to have.14
51. The US could expect to spend (in 1973
dollars) some $12 billion for the 11 million bpd
of oil it is likely to be importing in 1980 if
there is no increase in the price of oil and $19
billion if the price is forced up rapidly by a
doubling of per barrel revenues. (All other
components of the cost are assumed to be
fixed.) After crediting the US with transport
receipts and company profit remittances total-
ing some $7 billion in 1980, a figure somewhat
more likely to prove high than low, the direct
effect of oil transactions on the current ac-
count balance of the US in that year amounts
to an outflow of from $5 billion to $11 billion.
52. If the US, in these favorable circum-
stances, can maintain its present share of the
markets created by oil revenues (i.e., the im-
port markets of the oil countries and of the
clients to whom the oil countries transfer
money) it can cover most or all of the cost
of importing 11 million bpd of oil at any of the
prices postulated.15 If it can expand its share
of these markets by 25 percent, it can earn
a surplus of as much as $2 billion (1973 dol-
lars) on these oil-related transactions. (The
14 A detailed explanation of assumptions and calcu-
lations underlying the analysis in this Section appears
in Annex F.
1' A change of one million bpd in imports, along
with a stable market share, would change the results
shown in Part III of Table IV by $800-$1,300 million.
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TABLE IV
ILLUSTRATIONS OF POTENTIAL IMPACT OF OIL TRANSACTIONS ON THE CURRENT ACCOUNT
IN THE UNITED STATES BALANCE OF PAYMENTS IN 1980 a
1970 Actual
(Billion 1970
Dollars)
Price of Oilb $2.14/
Bbl.
1. OIL TRANSACTIONS
Oil Imports, c.i.f ............................... -3
Less: Transport Charges e .................... d
Equals: Oil Imports, f.o.b ...................... -3
Less: Company Profit Remittances e ........... 3
Equals: Direct Effect of Oil Transactions......... 0
GENERATED BY OIL REVENUES
US Market Share 1
1 -Up 25% ...................................
2-Stable ..................................... 2
3 -Down 25% ................................
PAYMENTS (Current Account) g
2-Stable Market Share ........................ 2
3-Smaller Market Share .......................
1980 Potential
(Billion 1973 Dollars)
$3.00/
$3.41/
$3.82/
$4.64/
Bbl.
Bbl.
Bbl.
Bbl.
12
14
15
19
2
2
2
2
- 10
-11
- 13
-16
5
5
5
5
-5
-7
7 8 10 11
6 7 8 9
4 5 6 7
1 0 -1 -2
1 -2 -3 -5
a Because of rounding, components may not add to totals shown.
b 1970 price in 1970 dollars; all other prices in post-devaluation 1973 dollars. $2.14/barrel was the average c.i.f. price
of oil moving in world trade in 1970. Averages for importers were: US-$2.83, West Europe-$2.23, Japan-$1.78. $3.00 is
the price of Arabian Light crude oil of 34 API gravity, c.i.f. Rotterdam, which is expected to prevail in mid-1973. It is
used to represent the average 1973 price of oil. A price of $3.41/barrel would result from a 25 percent rise in revenues
per barrel to producers in the Persian Gulf and adjustments in the revenue payments to other producers that would make
the final price of their oil competitive with Persian Gulf oil. The $3.82/barrel price reflects a 50 percent rise in per barrel
revenues in the Gulf and the $4.64/barrel price a 100 percent rise in per barrel revenues in the Gulf-both with suitable
adjustments for other producers. All other cost elements are assumed to remain constant.
c Assumes that transport payments accruing to the subject country are in the same proportion as that country's share
of world oil imports (for the US, 22 percent in 1980).
The Department of the Treasury believes this assumption of a zero net impact on the balance of payments from
the total complex of transportation account transactions associated with the projected large increases in oil
imports is too optimistic in the case of the US.
d Less than $500 million.
e Assumes that profits per barrel handled remain at recent levels (about $0.35/barrel) and that US companies receive
and remit about 60 percent of the oil industry's world-wide total profits, West European companies about 30 percent,
and Japanese companies about five percent.
1 The "market," for this purpose, is the import potential of the oil producing states-and recipients of gifts and loans
from them-directly attributable to the oil revenues. The figures for US earnings from exports are based upon: (1) a
US share of these markets 25 percent larger than the share the US enjoyed in 1971; (2) a US share identical to that of
1971; and (3) a US share 25 percent smaller than that of 1971. Figures for Western Europe and Japan in Annex F Tables
F-V and F-VI, are based on stable shares or on sharing equally in the market share lost or gained by the US.
g This Table does not take into account investment flows, which are completely unpredictable and might be a very
large factor, either positive or negative. It does not reflect the impact on the US balance of payments of either investment
by oil producing states in the US or the outflow of profits resulting from these investments. Nor does it reflect new out-
flows of capital from the US for investment in the petroleum industry, which amounted to about $635 million in 1970.
The Department of the Treasury concurs in the omission from the Table of the capital-account flows associated
with the projected oil trade, because it feels that these flows are likely to be largely offsetting. The Department
of the Treasury feels, however, that the current account estimates should include, along with the estimated
receipts of oil company profits, some reasonable allowance for US payments of "investment income" on the
rather large long-term investments which the paper anticipates the oil countries will make in the US. If as much
as 75 percent of the $27-$81 of accrued oil country holdings-projected for 1980 in paragraph 59-were to be
invested in the US at an assumed stock yield of 31/2 percent, this would involve a dividend outflow of some $750
to $2,250 million.
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actual 1970 surplus was about $2 billion.) If
its share slips 25 percent, it cannot break even
under any of the assumptions about oil prices
and might run a deficit of as much as $5 billion
(in 1973 dollars). The sort of export perform-
ance that would cause the US share of pro-
ducer country markets to fall 25 percent would
imply either that the US was at a severe dis-
advantage-for political or economic rea-
sons-in the specific markets of producing
countries or that the total US balance of trade
was in dismal shape. The kind of export per-
formance required to bring about a 25 percent
increase in the US share of producer markets
would almost certainly reflect a very strong
overall US balance of trade position-one in
which the deficit or surplus with the oil coun-
tries would be small.
53. The US is the only major consumer of
oil that appears to have any prospect for main-
taining a current account balance so far as oil-
related transactions alone are concerned. Out-
lines of the effects of alternative price and
market share assumptions on balance of pay-
ments accounts for Western Europe and Japan
can be constructed; the arithmetic involved is
provided in Annex F. For Japan and West-
ern Europe, oil will represent a sizable bal-
ance of payments outflow, which sales to oil
countries will not offset. Japan, in particular,
will be hard pressed by rising oil bills. Japan's
current account on oil transactions in 1970
was in deficit by about $1 billion, which was
very comfortably covered by Japan's overall
export surplus. But the deficit on oil trans-
actions in 1980 could run from $6 billion to
$13 billion (1973 dollars)-sums that would
be a burden even to an otherwise strong pay-
ments picture. European goods now capture
almost half the import markets of the oil pro-
ducing countries; if that position is maintained
as oil-financed imports grow, Europe can keep
the size of its oil deficit close to recent levels
except at the highest of the prices postulated.
C. Balance of Payments: Capital
Transactions
54. As a group, however, the consumer
countries cannot break even on current ac-
count transactions with the oil producers and
the beneficiaries of their largesse, because the
producing countries as a group will be unable
to spend all of their income, and they are un-
likely to give away all of their surpluses. Even
without any increase in revenues per barrel
the producing countries would receive oil rev-
enues of about $32 billion (1973 dollars) in
1980. Of this, they could spend perhaps no
more than $24 billion in imported goods and
services.16 They might give or loan as much
as $3 billion-mostly transfers from rich Arab
countries to poor Arab countries-though this
assumes a very high level of generosity. Under
these very conservative assumptions they
would accumulate about $5 billion in the year
1980 alone, and the more revenues rise, the
farther spending will lag behind revenues in
certain countries and the larger the surplus
will be. If per barrel revenues double, the
funds remaining to the producers after imports
and gifts would reach $20 billion for the year
1980.
55. Most of this accumulation will be held
by Saudi Arabia, Kuwait, and Abu Dhabi;
they probably will choose to put much of it
in longer-term portfolio and direct invest-
ments. If they invest heavily in the consum-
ing countries, links between the two. groups
would be strengthened. To the extent such in-
vestments are profitable, they would in time
add to producer country income, but in the
first instance they would contribute to bal-
ancing the accounts of the major consuming
countries.
16 This figure represents maximum import levels
and, like that for transport receipts and company
profits, is more likely to be too high than too low.
Annex F discusses the subject more fully.
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56. Although the oil countries with surplus
funds will be interested in geographic diversi-
fication, they will make portfolio investment
decisions mainly on the basis of the receptivity
and attractiveness of the various world finan-
cial centers. The US has a huge and flexible
capital market in which foreign investors are
free to buy stocks, bonds and notes. The finan-
cial markets of Europe and Japan. are, much
smaller in size and scope.17 And they are
hemmed in by a variety of restrictions and
controls, which are frequently changed. For
these reasons, the US is likely to receive a
la
large share of long-term portfolio, investment.
57. Direct investment (e.g., in downstream
oil operations) in Europe and Japan probably
will also be small, relative to direct investment
in the US, at least for some years. Direct in-
vestment will be drawn to the US by market
size, ease of access, and an opportunity to par-
ticipate in advanced oil technology. Tradi-
tionally, Japan has severely restricted foreign
investment, though it has begun to relax these
curbs. West European countries also will prob-
ably become more willing to permit direct
investment by the oil producing countries. In
time, the size and distribution of direct invest-
ments will be determined not only by ques-
n At the end of 1971, total US corporate and gov-
ernment debt of all types amounted to $1.6 trillion
and the market value of all equities outstanding
totaled $1.1 trillion. Government and corporate bonds
and stocks newly issued in the US in 1971 absorbed
over $150 billion. In contrast, international bonds
(ones sold outside the country of the borrower)
newly issued outside the US in 1972 totaled some $8
billion, of which $6 billion were Euro-bond issues.
Syndicated Euro-currency bank credits in 1972
amounted to $6 billion. The UK stock market-the
largest outside the US-accounted for some $1.5 bil-
lion in new equity issues in 1972. In money markets
of small size, transfer of very large sums from one
form of investment to another can be difficult.
'e For investors taking a portfolio ownership posi-
tion, rates of return and ease of entry and exit, rather
than fluctuations in currency values, are the key
considerations.
tions of profitability and safety but also by
other inducements-particularly pledges of
equal or preferred treatment for the oil of the
investor/ producer in the markets of the con-
sumer seeking investment funds. Consumer
countries without large domestic oil industries
will be in, the best position to offer such in-
centives.
58. A host of Less Developed Countries
(LDCs) around the world would be eager for
investment by oil-rich Persian Gulf states.
These LDCs are short of foreign exchange
and will be very hard hit by rising oil prices.
For a country such as India, which in 1969
spent nearly $200 million (about nine percent
of total import costs) on. foreign oil, any rise
in the price of oil will constitute a consider-
able additional burden. The same would be
true for dozens of other LDCs, from Afghani-
stan to Zambia. Yet these LDCs are likely,
with a few notable exceptions, to be most un-
attractive as places to invest surplus cash,
though even a relatively small investment
could buy consderable good will and influ-
ence. If the oil-producing states provide nei-
ther investment funds nor cheap oil to the
LDCs, the latter may grow increasingly an-
tagonistic toward the producers.
59. It is unlikely that the major oil pro-
ducers will put all their surplus into long-term
investments, however, since the sums will
grow very rapidly. Overall, their combined
holdings of investments and foreign exchange
are likely to rise to at least $27 billion (in
1973 dollars) by 1980, and could be three
times as high at the highest per barrel reve-
nue assumption. Even if 80 percent of the sur-
plus funds of the oil countries were devoted
to direct and portfolio investments, the re-
mainder would total $5-$15 billion. These
sums would be kept in liquid form-cash and
short-term certificates of indebtedness.
60. Thus, a few oil-rich countries-some
potentially unstable-would have consider-
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able capacity for creating or aggravating un-
settled conditions in money markets by shift-
ing large sums about. Indeed, the money man-
agers of the oil-rich states, acting to conserve
the value of their assets, have contributed to
recent financial crises. They will keep their
money geographically dispersed in normal
times, but they will be reluctant to maintain
large liquid balances in any currency threat-
ened with devaluation or the imposition of
curbs on captial movements. On the whole,
they probably will desire monetary stability
and cooperate to maintain it-but not at great
risks to the value of their own holdings.
61. Moreover, if confidence in the dollar
or the pound were further eroded over time,
by influences independent of oil matters, the
major producing countries might decide that
they no longer wanted to conduct the bulk
of the oil business in one or both of these
currencies. If they succeeded in shifting into
some other currency or combination of cur-
rencies, the demand for dollars or pounds-
now used widely to pay taxes and royalties to
the producers, to pay for oil imports, and
as an investment medium-would fall. This
could, in turn, reduce the relative value of
the currency and produce a corresponding
increase in the cost to the US or UK of oil
imports.
D. Competition or Cooperation Among
Consumers
62. As oil imports grow, each consuming
country will strive to minimize its own deficit
on current account, and this could lead to
self-defeating rivalries among the consuming
countries. The difficulty is that although a
single consuming country might hope to escape
a deficit, consuming countries as a group can-
not, because the oil-producing states as a
group will be unable to spend all of their
income or give it away to client states. Thus,
a single country can expand its exports to the
oil-producing countries only at the expense
of other consuming countries-in effect, by
shifting its deficits to them. Under these cir-
cumstances, a trade war could result, involving
competitive cuts in the price of exports, com-
petitive devaluations, and the like, which
would leave the consuming countries worse
off than before.
63. As indicated above, the US is well posi-
tioned to balance its oil-related current ac-
count in the 1970s, and-in competition with
other major money markets-it is likely to
attract a disproportionately large share of the
money invested by the oil producers. If the
investment flow, combined with US export
earnings, greatly strengthens the dollar and
begins to create severe difficulties for West-
ern Europe and Japan, they will feel com-
pelled to take countermeasures. These might
be restricted to the encouragement of invest-
ment from the oil-producing countries, but
they would probably also entail attempts to
increase their own exports at the expense of
the US. Japan, with a postulated deficit in
1980 on oil-related transactions of $6 billion
to $13 billion (1973 dollars) would likely be
even more aggressive in promoting its exports.
64. Fears of oil shortages run the risk of
intensifying rivalries among consumers seek-
ing assured access to oil. When oil scarcities
have come about abruptly in the past, con-
sumers have cooperated. The oil companies,
with diversified sources and a variety of cus-
tomers, have spread the impact so that no
one country was badly damaged. If consumers
cooperate in the future, producers' oppor-
tunities to force up prices will be minimized.
Should fears of scarcity engender intense com-
petition for guaranteed long-term supplies, oil
prices would be driven up rapidly. Euro-
peans, accepting a special US interest in
Venezuelan oil, have already hinted that Eu-
rope should have first call on Middle East and
North African oil. Should the US respond
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favorably to Saudi Arabia's proposal for spe-
cial access to the US market, European con-
sumers would probably attempt to conclude
preclusive arrangements with other oil pro-
ducers. Japan will continue to make long-term
deals with Persian Gulf states. Its willingness
to pay heavily will offer the oil producers
new opportunities to play off the consumers
against one another, as Iraq has in the past
played off the French member of its major
concessionaire against the US and British
members and as the Shah has played off US
companies against British ones.
65. The consuming countries recognize that
the competition for exports, investment and
oil supplies could be highly injurious. They
are already talking among themselves about
arrangements for sharing oil in times of scar-
city and for taking a concerted position against
OPEC. Such endeavors may prove useful, par-
ticularly in crises of short duration. But in a
prolonged and increasingly tight sellers' mar-
ket, the strong drive of each major consuming
country to protect its own position will put
a severe strain on cooperation. In the end,
the forces making for competition are likely to
outweigh those working for cooperation. And
such rivalry will spill over into the political
relationships among consuming countries.
E. The Contingency of Limitations on
Production
66. If such states as Saudi Arabia, Kuwait
and Abu Dhabi cannot find ways to employ
their excess revenue usefully, say in portfolio
investments or in building tanker fleets, they
would consider limiting oil output. Kuwait
has already imposed a modest limitation, al-
though it will probably relax it in the years
ahead. Saudi Arabia, which is more or less
committed to vast increases in oil production,
will eventually reconsider this policy. And
in view of its great reserves and importance
as a supplier, it will be the key country to
oil availability.
67. Saudi Arabia-and almost any other
producing country- would approach the issue
of limiting production very cautiously. The
Saudi Government's decision would reflect the
weight it gave to retaining the good will of
consuming states, especially the US. It would
be reluctant to risk political or economic
retaliation by consuming countries in response
to oil shortages. It will probably be able to
find attractive investment opportunities for a
number of years. As revenues continue to
mount rapidly, the Saudis will become more
inclined to place significant limits on produc-
tion; eventually they will do so. Whether this
decision comes sooner or later will depend
not only on calculations of economic advan-
tage, but probably also on political develop-
ments, those internal to the Saudi kingdom
and those arising from the general state of
Arab-Western relations.
68. If production slowdowns or shutdowns
did occur, some consuming states might be
tempted to try to ensure access to oil by
establishing physical control over one or more
producing regions. But consuming countries
will probably not move beyond consideration
to action of this kind, at least within this
decade. Consumers would have to be in des-
perate need of energy supplies for military
action to have much appeal. And there would
be formidable difficulties involved in putting
such an idea into practice. The European
countries-for whom an acute shortage is at
least a theoretical possibility-have only very
limited capabilities for carrying out this kind
of military operation as far away as the Persian
Gulf (though they probably could success-
fully occupy Libya), They could not acquire
a substantially increased capability in short
order without direct support from the US.
And even a successful action would have po-
tential costs that would require careful con-
sideration-e.g., extensive destruction of oil
facilities, reactions of other producing coun-
tries and the response of the USSR. Depend-
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ing on the circumstances of such an attempt,
the USSR might be in a position to impede
it, to gain considerable political advantage or
merely to make propaganda points.
IV. CONCLUDING OBSERVATIONS
69. The major consuming states have a
strong interest in seeking ways now to reduce
future dependence on imported oil. Western
Europe, the US and Japan are precisely the
regions possessing the technological innova-
tiveness to devise substitute sources of energy.
(The US has, in addition, the potential to sus-
tain a very high level of conventional pe-
troleum output if it chooses to pay the finan-
cial and environmental costs.) And, in fact,
these regions have moved ahead in developing
new technology, for example, in nuclear
power generation and in converting coal to
liquid and gas fuels. The USSR is now putting
into operation the world's first breeder reactor.
Western Europe and the US are not far be-
hind. More exotic processes for obtaining
energy are being explored.
70. But the big decisions in energy tech-
nology are yet to be taken. The potential con-
sequences of exponential growth in energy
use in terms of balance of payments, fouling
of air, water and landscape, dependence on
foreign suppliers and the like have only at-
tracted the attention of decision-makers in
the big industrial countries within the last
few years. What they decide, within the next
four to five years, to do in regard to such
matters as offshore oil exploration, research
on new energy sources and stimulating
discouraging the growth of energy dem
will have enormous impact for many ye
ahead.
71. The choices consuming states make oil
the next several years will have an impact
the OPEC states. If the major consumers p
teed as if they expect to import increase
quantities of oil for decades, OPEC sta`t
would probably reason that their own po
tion as suppliers and their ability to kee
raising prices could not be seriously eha
lenged. At the other extreme, an all-out effo
by consuming states to reduce dependence o
external sources of energy as far and, a
quickly as possible would tend to erode
confidence of OPEC governments in thei
own economic power.
72. In practice, developments are not likely
to reflect either extreme. While depending oA
oil as their major energy source, the industrial
nations-impelled by rising cost, by real o
feared unreliability of suppliers and by th`
physical problems of handling increasingi
massive quantities of oil-will seek ne
energy sources. And the pace at which con?
suming states do move in this direction wi
inevitably be affected by the manner in whisk
OPEC states conduct themselves. Few dex
velopments would do more to increase the at-'
tention given to research on unconventional=
energy than recurrent interruptions of oil flow
which seemed to consumers to stem from a ;
producer's capriciousness or excessive greed
and which caused hardship.
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ing on the circumstances of such an attempt,
the USSR might be in a position to impede
it, to gain considerable political advantage or
merely to make propaganda points.
IV. CONCLUDING OBSERVATIONS
69. The major consuming states have a
strong interest in seeking ways now to reduce
future dependence on imported oil. Western
Europe, the US and Japan are precisely the
regions possessing the technological innova-
tiveness to devise substitute sources of energy.
(The US has, in addition, the potential to sus-
tain a very high level of conventional pe-
troleum output if it chooses to pay the finan-
cial and environmental costs.) And, in fact,
these regions have moved ahead in developing
new technology, for example, in nuclear
power generation and in converting coal to
liquid and gas fuels. The USSR is now putting
into operation the world's first breeder reactor.
Western Europe and the US are not far be-
hind. More exotic processes for obtaining
energy are being explored.
70. But the big decisions in energy tech-
nology are yet to be taken. The potential con-
sequences of exponential growth in energy
use in terms of balance of payments, fouling
of air, water and landscape, dependence on
foreign suppliers and the like have only at-
tracted the attention of decision-makers in
the big industrial countries within the last
few years. What they decide, within the next
four to five years, to do in regard to such
matters as offshore oil exploration, research
on new energy sources and stimulating or
discouraging the growth of energy demand
will have enormous impact for many years
ahead.
71. The choices consuming states make over
the next several years will have an impact on
the OPEC states. If the major consumers pro-
ceed as if they expect to import increasing
quantities of oil for decades, OPEC states
would probably reason that their own posi-
tion as suppliers and their ability to keep
raising prices could not be seriously chal-
lenged. At the other extreme, an all-out effort
by consuming states to reduce dependence on
external sources of energy as far and as
quickly as possible would tend to erode the
confidence of OPEC governments in their
own economic power.
72. In practice, developments are not likely
to reflect either extreme. While depending on
oil as their major energy source, the industrial
nations-impelled by rising cost, by real or
feared unreliability of suppliers and by the
physical problems of handling increasingly
massive quantities of oil-will seek new
energy sources. And the pace at which con-
suming states do move in this direction will
inevitably be affected by the manner in which
OPEC states conduct themselves. Few de-
velopments would do more to increase the at-
tention given to research on unconventional
energy than recurrent interruptions of oil flow
which seemed to consumers to stem from a
producer's capriciousness or excessive greed
and which caused hardship.
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ANNEX A
THE DEMAND FORECAST: DETAILS, METHODOLOGY, ASSUMPTIONS
AND CAVEATS
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1. The projected demand for energy in 1980
reflected in Table I of the text and the ex-
panded Table A-I here is based on estimates
of demand in the major consuming areas
drawn up by national officials. Because of
the diversity of authorship, efforts at stand-
ardizing the basic assumptions underlying the
projection may have been less than completely
successful. In any event the internal consist-
ency of the projections is open to some ques-
tions which cannot be resolved. Prior conver-
sions of differing factors from other units used
in primary sources, e.g., BTUs, kilocalories,
hard coal equivalents, and metric tons, appear
to be another potential source of inaccuracy.
Those components which appear most open
to question have been adjusted as described
in the note to Table A-I.
Assumptions and Caveats
2. Events between now and 1980 will, in
all likelihood, vary from those assumed in
making these forecasts of energy demand. We
think it important therefore to be explicit
about the main factors that may cause the
actual 1980 energy requirements to differ
noticeably from present projections. Each of
the major assumptions, and the factors likely
to affect them, will be discussed in turn.
3. Full Employment. Projected demand for
1980 is in each case based on the assumption
of full employment as defined by the gov-
ernment or governments in question. All
major industrial countries today are committed
to the pursuit of rising living standards and
full employment, and we have no reason to
expect such goals to change within the period
of the estimate. If, however, at any particular
point in time, one or a number of major con-
suming countries are operating at less than
full employment, together with the equivalent
level in national income that this implies, then
the demand for energy in that year is likely
to fall below that projected.
4. Government Energy Policies. Govern-
ment policies affecting the demand for
energy directly (rather than indirectly through
income growth) have varied somewhat in
scope among different consuming countries
but in general most governments have not
attempted, except through the price system,19
to manipulate the demand for energy either in
the aggregate or among primary energy
sources. Projections of demand to 1980 assume
that the governments of the major consuming
countries will not adopt policies that will suc-
ceed in slowing down the rate of growth of
energy use.
5. If the governments of major industrial
countries do undertake policies of energy con-
servation, they would almost certainly be suc-
cessful over time. So far, however, there are
few indications that governments of industrial
nations have begun to question the validity of
the policy of perpetual growth. As the magni-
tudes of exponential growth (twice as much
of everything every decade or two), are more
and more thrust before government leaders-
e.g., a single year's oil import bill of at least
$45 billion and perhaps much more for the
industrialized West in 1980, and one growing
by several billion with each succeeding year-
some countries may decide to curb the growth
of energy consumption. It is conceivable that
such policy changes could lower the energy
demand for 1980.
6. Consumer Preferences. The projections
assume no major changes in consumer prefer-
" Taxes and tax preferences might well be the tools
chosen by governments for implementing a conserva-
tion policy. Because taxes and subsidies exert their
effect on prices their impact is encompassed in the
following discussion of the constant price assumption.
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WORLD: PRIMARY ENERGY REQUIREMENTS
1960-1980
Crude Oil Equivalent, Million Barrels Per Day
Average Annual
Percentage Change
1960 1970 1980 1961-1970 1971-1980
United States .............................. 21 .5 32.7 47.5 4.3 3.8
Solid Fuels ............................. 4.8 6.3 8.0 2.8 2.4
Oil .................................... 9.7 14.4 22.4 4.0 4.5
Gas .................................... 6.3 10.7 11.8 5.4 1.0
Hydroelectric/ Nuclear .................... 0.7 1.3 5.3 6.4 15.1
Western Europe ........................... 12.3 21.1 34.8 5.5 5.1
Solid Fuels ............................. 7.5 6.1 4.8 -2.0 -2.4
Oil .................................... 4.1 12.7 21.9 12.0 5.6
Gas .................................... 0.2 1.4 4.6 21.5 12.6
Hydroelectric/ Nuclear .................... 0.5 0.9 3.5 6.1 12.5
Japan .................................... 1.7 5.6 14.1 12.7 9.7
Solid Fuels ............................. 0.9 1.2 2.1 2.9 5.8
Oil .................................... 0.6 4.1 10.7 21.2 10.1
Gas .................................... 0.1 0.1 0.3 0.0 11.6
Hydroelectric/ Nuclear .................... 0.1 0.2 1.0 7.2 17.5
USSR, China, Eastern Europe ............... 15.2 24.9 /r0 .8 5.1 5.1
Solid Fuels ............................. 10.9 13.6 17.7 2.2 2.7
Oil .................................... 2.8 6.6 13.2 9.0 7.2
Gas .................................... 1.0 3.9 8.0 14.6 7.4
Hydroelectric/ Nuclear .................... 0.5 0.8 1.9 4.8 9.0
Others ........ .. .......................... 7.8 14.4 31.5 6.3 8.1
Solid Fuels ............................. 2.5 3.9 7.4 4.5 6.6
Oil .................................... 4.5 9.1 19.4 7.3 .7.9
Gas .................................... 0.7 1.1 4.0 4.6 13.8
Hydroelectric/Nuclear .................... 0.1 0.3 0.7 11.6 8.8
World .................................... 58.5 98.7 168.7 5.4 5.5
Solid Fuels .............................. 26.6 31.1 40.0 1.6 2.5
Oil .................................... 21.7 46.9 87.6 8.0 6.4
Gas .................................... 8.3 17.2 28.7 7.6 5.3
Hydroelectric/ Nuclear .................... 1.9 3.5 12.4 6.3 13.5
30
NOTE:
Demand for the communist countries has been derived from CIA analysis. Other data are based
primarily on OECD's New Oil Report, Chapter 1, May 1972, and on the US Department of the
Interior's United States Energy Through the Year 2000, with the projections for 1980 modified to
reflect events that have transpired since the basic source documents were prepared.
In the US, actual consumption of oil in the late 1972-early 1973 period was running ahead of
amounts for that period implicit in the Department of Interior projections for 1980. The effect of
the adjustment of US figures is a projection in this Table of US oil consumption in 1980 of about 1.5
million bpd more than the figure for oil consumption projected by Interior, and a corresponding
decrease of 1.5 million bpd in the figure for US gas consumption in 1980.
Projections of US oil demand in 1980 by experts in public and private institutions vary widely,
because of the use of different assumptions. Most lie in the range of 20 to 25 million bpd. Major
differences in oil consumption figures are generally matched, in large part or entirely, by offsetting
differences in gas consumption figures.
In any given year, oil production usually exceeds demand. Demand is growing constantly, and
production at any point in time is geared to the larger demand of future months.
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ences for type of energy or for energy in com-
parison with other goods and services. A re-
duction in demand for energy might occur,
even if conservation measures were not insti-
tuted by government bodies, in reaction to
environmental concerns that are already in
evidence. It could produce either a slowdown
in the growth of total energy consumption, or
shifts among primary energy sources, e.g.,
away from petroleum and toward nuclear or
solar power. Such shifts in consumer prefer-
ences would cause our projections to be either
too high in toto or too high in one component
while too low in another. On the other hand,
environmental concerns could produce an op-
posite result. An effort to reduce or clean up
pollution without curtailing the activity doing
the polluting is likely to raise energy require-
ments. On balance it is impossible to say
whether likely shifts in consumer preferences
will cause our projections to be too high or
too low.
7. Constant Relative Price of Energy. Poten-
tial shifts in relative prices, while highly likely
over the period of the estimate, play havoc
with the process of forecasting. Thus, to make
the problem manageable, almost every esti-
mate of future energy demand assumes con-
stant prices relative to other goods and serv-
ices. This is not only because analytical
complexity multiplies when price changes are
included but also because too little is known
about the effect of price changes on demand
for energy.
8. It is generally agreed that demand for
energy is price inelastic (i.e., that the quan-
tity purchased will change less than propor-
tionately to a change in its price). Consumers
are slow to, change habits, industry and utili-
ties are stuck, at least for a while, with exist-
ing plant and equipment, and the cost of
energy is a relatively small factor in. overall
spending. In the longer run, however, large
users of energy can adopt energy-saving tech-
nology and can, even more easily, switch from
one form of energy to another less expensive
one.
9. In the case of oil, informed industry
sources have suggested that if, between now
and 1980, the price of crude oil (in constant
dollars) should increase by 100 percent, pur-
chases would decline by 10 percent below
what they would otherwise have been (assum-
ing other prices and especially the prices of
other fuels remain unchanged). A doubling
of petroleum prices between now and 1980 is
not out of the question. Indeed, a substantial
rise is likely, but it is also likely to be accom-
panied, not by general price stability, but by
rising prices for other kinds of energy and also
by a general price rise. Such relative price
shifts would cause our 1980 projections for
world energy requirements to be somewhat
too high in the aggregate, and especially for
oil. The impact of these price changes on our
forecast, however, is not likely to be as much
as 10 percent.
10. Technological Breakthrough. The pro-
jections assume no major technological change
in energy production or consumption, although
this is a highly unrealistic assumption for so
technologically vibrant an industry. Some ad-
vances clearly will be made in methods of
extraction, processing, transporting and con-
verting energy sources. Stimulated by rising
energy prices, private industry and govern-
ments are sponsoring research (and will in-
creasingly do so), some of which is virtually
certain to result in cost-saving techniques; gasi-
fication of coal is already being intensely
explored. Thus, in time, we expect that new
methods will make economically available
sources of energy which are now not used or
only insignificantly tapped-geothermal, solar,
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nuclear fusion are potentials. Conceivably
some of these changes could come by 1980,
but it is highly unlikely that they would be
employed widely enough by then to have a
great impact on our forecast.
11. Contingencies. Finally, the projections
for nuclear power as an energy source to meet
1980 demand involve very large annual in-
creases in nuclear generating facilities. Simi-
larly, the growth in gas demand assumes ex-
tensive increases in production. Any shortfalls
in these two energy sources would have to be
made up from other types, specifically oil and
coal, raising the relative and absolute share of
both. Oil for this purpose would be imported,
since domestic resources in the US and West-
ern Europe would be fully employed.
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ANNEX B
OIL RESERVES, FACILITIES AND OWNERSHIP
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pensive. Alaskan offshore potential also ap-
pears to be considerable, although operating
conditions, which are even more difficult than
the North Sea, will make exploration and de-
velopment even slower and more expensive.
While the Asian continental shelf seems geo-
logically promising, so far little actual explora-
tion has been undertaken. Neither oil nor gas
has been discovered in the East China or Yel-
low Seas, although the Chinese Communists
have found some oil just northwest of the
Yellow Sea in the Gulf of Pohai.
3. Recent significant onshore discoveries
have been limited to the North American
Arctic, Ecuador and Peru east of the Andes
and Siberia; these areas have additional poten-
tial and are likely to be the main centers of
further onshore exploration and development
through the late 1970s. Elsewhere, explora-
tion is just beginning in the Black and Baltic
Seas and off the east coast of North America.
Exploration of such areas as the western coast
of Africa, that of the Indian subcontinent, and
the Indonesian archipelago will probably re-
sult in discoveries of at least local importance.
Even if major finds are made, however, pro-
duction in the 1970s would be relatively lim-
ited due to the time needed to develop facili-
ties. In sun, it is highly unlikely that large
deposits of oil will be found in locations that
would substantially reduce the world's de-
pendence on present suppliers in the period
before 1980.
A. Reserves
1. The world's proved oil reserves are more
than adequate to meet the huge and growing
demands expected through 1980 and even
well beyond. Cumulative demand for 1971-1980
amounts to 250 billion barrels as against
proved reserves of about 600 billion barrels.
(See Table: B-I.) But this oil is not evenly
distributed nor equally accessible. The 11
states comprising the Organization of Petro-
leum Exporting Countries (OPEC ) 20 now con-
trol more than 75 percent of the world's proved
reserves and produce most of the oil enter-
ing world trade. There is nothing to indicate
that this situation will alter to any significant
degree in the years up to 1980. The 25 percent
of proved reserves lying outside of OPEC in-
cludes 37 billion barrels in the Soviet Union
and Eastern Europe and 104 billion barrels
in non-communist countries, of which 44 bil-
lion are in the US.
2. While new discoveries continue to add to
reserves, such additions are not likely to be
large enough to influence the present geo-
graphic distribution to any considerable de-
gree by 1980. (The rate of discovery of new
reserves in recent years has been declining
outside of the OPEC countries and the Soviet
Union.) The best prospects for the discovery
of new deposits lie in offshore areas, especially
in water up to 200-250 meters deep. Areas be-
yond this depth look geologically promising
and no, doubt will be tested as technology per-
mits. Within the 200 meter depth in the North
Sea, substantial oil and gas deposits have been
proved and production has begun, even though
exploitation of this petroleum is relatively ex-
"The OPEC members are: Saudi Arabia, Iran, Ku-
wait, Iraq, Abu Dhabi, Qatar, Indonesia, Venezuela,
Nigeria, Algeria and Libya.
4. Hence, the vast bulk of the world's re-
serves will continue to lie in OPEC countries,
particularly those around the Persian Gulf.
Saudi Arabia, Kuwait and Iran possess nearly
half of the entire world's current proved oil
reserves. Large additions to the world's proved
reserves are likely to come from technological
advances that will increase the amount of oil
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TABLE 13. 1
Billion Percent
Barrels of Total
TOTAL (Excluding Peoples Re-
public of China) ............... 613 100
Middle East ................... 356 58
Abu Dhabi .................. 21 3
Iran ........................ 65 11
Iraq ........................ 29 5
Kuwait b .................... 73 12
Saudi Arabia b .............. 146 24
Others ...................... 22 4
Africa ........................ 106 17
Libya ...................... 30 5
Algeria c .................... 47 8
Nigeria ..................... 15 2
Egypt ...................... 5 1
Congo ...................... 5 1
Others (including Angola, Ga-
bon, and Tunisia) .......... 4 1
Asia-Pacific ................... 15 2
Indonesia ................... 10 2
Others ...................... 5 1
Western Europe ................ 12 2
Norway .................... 2 N egl .
United Kingdom ............ 5 1
Others ...................... 5 1
Communist Countries ........... 37 6
USSR d ..................... 36 6
Eastern Europe .............. 1 N egl.
Peoples Republic of China.... nay no
North America ................. 57 9
United States ............... 44 7
Canada ..................... 10 2
Mexico ..................... 3 Negl.
South and Central America...... 30 5
Venezuela ................... 14 2
Equador .................... 6 1
Others ...................... 10 2
a The data in this 'T'able, with one exception, were
taken from the 25 December 1972 issue of the Oil and
Gas Journal, rounded to the nearest billion barrels and
the nearest full percentage, USSR data were provided by
CIA. Because of rounding, components may not add to
the totals shown. Any estimate of "proved" oil reserves
must be treated as a rough approximation. No country
publishes official oil reserve estimates nor is there a con-
sistent rigorous definition of oil reserves. In the US,
proved reserves include only the crude oil and natural
gas liquids recoverable from known deposits under
existing economic and operating conditions. Moreover,
the volume of oil in place even in a well-delineated field
can never be precisely measured; estimates of com-
mercially recoverable oil are usually made not by refer-
ence to existing methods of technology but to the pro-
duction system currently in use, and even this can pro-
vide only an approximation. Assessments of proved
reserves therefore do not mean absolute world availa-
bility; their value is in giving an indication of the lo-
cation of known oil reserves at a particular point in
time and in giving an estimate of the quantity of oil
available with present techniques and at current costs
and prices. Estimates of reserves called "probable"
would add very substantially to "proved" reserves as
given in this Table.
b Reserves in the Saudi-Kuwait Neutral Zone are
apportioned half to each country.
o This figure is highly questionable; the Algerian
national oil company claims reserves of only 10 billion
barrels-a much more realistic number.
d There is a substantial body of opinion which be-
lieves that Soviet reserves are considerably larger.
Exxon, e.g., recently estimated Soviet proved and
probable reserves as 80 billion barrels. The USSR's own
method of calculating reserves is not identical with the
US "proved" reserves concept, and direct comparisons
are impossible.
e There are no reliable figures for reserves for China.
A.A. Meyerhoff, in the Bulletin of the American Associ-
ation of Petroleum Geologists, vol. 54, no. 8, p. 1573,
has estimated proved and probable reserves in known
fields at seven billion barrels. In addition, he has esti-
mated potential reserves in known but untested structures
at 5.6 billion barrels and possible reserves in partly
explored basins at seven billion barrels. The sum of
proved plus probable plus potential plus possible gives
reserves of 19.5 billion barrels. His is the only study of
the subject available.
Includes natural gas liquids of seven billion barrels.
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that can be recovered from the presently dis-
covered fields in the Gulf region, where to-
day's proved reserves allow for the recovery
of only 25-30 percent of the oil underground.
Because of this, the share of the world oil pro-
duction provided by the Persian Gulf states
will rise dramatically in the years ahead. The
oil production needed to meet the demand
forecast for 1980 will come from fields already
producing oil or in the process of being
developed.
5. A very large increase in physical infra-
structure will be required to produce, trans-
port, process and sell all this oil. Facilities
are being built to permit vastly increased
production and export of oil in both Saudi
Arabia and Iran; by 1980, the two are ex-
pected to supply half of the 50 million bpd
of oil moving in international trade, as against
the third they produced in 1970. The two will
probably also have considerable spare produc-
ing and loading capacity. Smaller Persian Gulf
states such as Abu Dhabi are also increasing
their capacities. In the consuming countries,
very large unloading, transshipment, and
storage facilities will be needed.
8. An unprecedented level of investment
will be required during the remainder of this
decade to produce and market the oil. Esti-
mates of the amount range between $285
billion and $365 billion-a world-wide re-
quirement that will be heavily concentrated in
consuming rather than producing countries.
During the 1960s, oil company capital expend-
itures totaled about $150 billion, mostly in con-
suming countries for refining and distribution
facilities. For example, almost one-half of oil
company capital investment during the 1960s
was in the US. During that time, total invest-
ment in the Middle East-mostly for produc-
tion facilities-was only about $6 billion, or
four percent of the total.
7. The industry has normally generated
most of its capital requirements from internal
sources-in 1960, the industry borrowed only
18 percent of its capital requirements. By
1970 the share of borrowing had risen to
around 30 percent. The trend toward this
type of financing is likely to continue and
the companies will almost certainly look to
money markets in the US, Western Europe and
Japan for the bulk of the financing they need,
although they will continue to generate as
much of their own capital requirements as
possible. Under the recently signed participa-
tion agreements, the producing countries have
investment obligations commensurate with
their equities in producing facilities. The sub-
stantial increase in producing facilities in the
Persian Gulf area will, therefore, be financed
partly by the host governments. Some of the
producing countries will decide to invest in
downstream operations as well-that is, in
refining and distribution.
8. The existing tanker fleet, supplemented
by ships now building or on order, is more
than adequate to meet transportation require-
ments for the oil demand forecast for 1975.
Beyond the mid-1970s, the tanker fleet's size
will depend on policy and investment deci-
sions made in the next few years by oil com-
panies, governments and independent ship-
owners. It may be that the tanker market
will become tight at some point, but such a
development would very likely be temporary;
the shipyard capacity of the world is larger
than anticipated needs. An enormous growth
in tanker tonnage is in prospect. To take
but one example, moving 35 million bpd of
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oil (projected exports from the Persian Gulf
in 1980) around Africa to Europe and/or the
US would require the equivalent of full time
use of about 1,000 tankers of 300,000 dead-
weight tons (DWT) each. Vessels of this size
are now coming into use in appreciable num-
bers.
9. Even if the Suez Canal is reopened in
the course of the 1970s, this would not affect
oil transport much.21 Before its closing in mid-
1967, one-third of the world tanker fleet could
transit the Canal fully loaded at the 38-foot
depth then available. While the volume of oil
traffic through the Canal in 1966 corresponded
to about 45 percent of Persian Gulf produc-
tion in that year, that same volume of traffic
would correspond to only about 20 percent
of Gulf production in 1972 and only about
10 percent of the production forecast for 1980.
C. Ownership of Producing Facilities
10. Historically, most oil entering world
trade has been produced, shipped and mar-
keted by American and European firms,
which produced it from wholly-owned con-
cessions in oil-rich countries. Indeed, in the
late 1950s, seven international oil companies
controlled 90 percent of the oil moving in
international trade. In the past dozen years,
smaller Western firms have taken over nearly
a third of the international oil trade. Over
the same time, oil producing states have in-
creased their own role in the production of
oil. Virtually all concession agreements made
"I The role of the Suez Canal was treated compre-
hensively in CIA Intelligence Memorandum No. 1265-
71, "The Suez Canal Reopened: Prospects and Im-
plications", dated 16 February 1971, secret/No For-
eign Dissem. That part of NIE 20/30-70, "Security of
Oil Supply to NATO and Japan", dated 14 November
1970, SECRET, that treats the prospects for reopen-
ing the Suez Canal is still valid.
in recent years between an oil producing
country and a Western firm have provided
for the former to own up to half of the pro-
ducing field and its installations. In addition,
service contracts make the expertise of West-
ern oil companies available to producing
countries. In the past year, the OPEC coun-
tries have turned their efforts to getting a
share of the older concessions still wholly
owned by foreign companies.
11. The agreement negotiated by Saudi
Arabia in late 1972 for participation in the
ownership and operation of the older conces-
sions held by the international oil companies
is a step on the way to majority ownership.
The bulk of oil from OPEC countries is pro-
duced from concessions of this sort. The
Aramco 22-Saudi Agreement set the pattern
for Abu Dhabi, Kuwait and Qatar. It awards
the countries a 25 percent interest now and
control of the concessions (51 percent) on 1
January 1982.23 Each state has agreed to pay
compensation for the 25 percent equity based
on "updated book value" to allow for infla-
tion since the investments were made. Saudi
Arabia will pay about $500 million for its
initial 25 percent share, Kuwait $150 million,
Abu Dhabi $156 million, and Qatar $72 mil-
lion. Compensation for the following incre-
ments of participation may be proportionately
more costly.
12. The several oil companies also agreed
to repurchase a portion of the producing coun-
tries' share of the oil produced which come
E2 A corporation of Standard Oil Company of New
Jersey (Exxon), Standard of California and Texaco
with a 30 percent share each, and Mobil with a 10
percent share.
The schedule for increasing the participation in-
terests is: 25 percent through 1977, 30 percent on I
January 1978, 35 percent on 1 January 1979, 40 per-
cent on 1 January 1980, 45 percent on 1 January
1981, and 51 percent on 1 January 1982.
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to them as part owners.24 Many national oil
companies in the producing states do not
now have large markets, but as participation
proceeds, very large quantities of oil will ac-
crue to them as part owners. The "buy back"
price lies between the tax paid cost of the
oil and the posted price upon which royalties
to the producing countries are paid;25 it is
designed to permit the companies to make
a profit for marketing, but a much smaller
one than on their own oil.
13. The participation agreements will result
in a general rise in the cost of oil to the con-
sumer. Each OPEC country will get about
as much income per barrel as those making
participation agreements, though the mech-
anisms will be different. The companies, which
will continue to market most of the oil, will
attempt to maintain their preparticipation per
barrel profits (now about 30-35 cents on the
average), but this will be difficult, especially
as the countries approach majority ownership
through the participation agreements. The
companies will probably have considerable
success in raising their overall income as the
volume of oil they handle rises year by year.
The cost increase attributable to the initial
25 percent participation will probably be in
'This repurchasing falls into two categories. The
first, "bridging crude" is that portion of the gov-
ernments' oil which the governments are obligated
to sell back to the companies so that the latter can
meet existing supply commitments. "Bridging crude"
is of only three years duration. The second, "phase-
in" crude, is that portion of the governments' oil that
the companies are obligated to buy back from the
governments if the governments desire it. The per-
centage to which the companies are so obligated de-
clines at about 10 percent a year.
"The posted price originally was the market price
at export points for crude oil moving in international
trade. In recent years, it has almost always exceeded
actual market prices and is more or less arbitrarily
fixed for calculating taxes and royalties due to the
producing country.
the neighborhood of 10 cents per barrel
handled, which the companies will endeavor
to pass on to the consumer.
14. Two other OPEC countries will seek
to follow the participation route; at least in
part; Nigeria will insist that benefits granted
by the companies to other OPEC members
be extended to it in some form. Iraq has in-
dicated that it wishes to arrange for participa-
tion in its southern fields. But Iraqi oil coin-
pany negotiations have recently concentrated
on the northern concessions, which Baghdad
nationalized in June 1972.26 After months of
hard bargaining, an accord was reached 28
February 1973. Under the agreement, the Iraq
Petroleum Company (IPC) will receive oil
worth about $300 million as compensation for
all its claims against the government, includ-
ing those stemming from nationalization of
certain concession areas 10 years ago. IPC
will, in turn, pay Iraq about $350 million to
settle Iraq's back tax claims, which had ac-
cumulated as a result of Iraq not winning the
tax increases achieved by other producers in
the mid-1960s. The parent oil companies also
agreed to make every effort to more than
double production from their southern (BPC)
Iraqi oil fields by 1976. Negotiations on Iraqi
participation in BPC operations have been
postponed until October 1973. The govern-
ment reportedly has agreed in principle to
the participation accord reached by other
Arab Persian Gulf countries, but is balking
at some of its provisions.
15. Libya has announced that it wants 51
percent participation in all wholly-owned con-
cessions; it is actively negotiating with the oil
companies. Due in large part to the tempera-
'Both concessions belonged to the same group of
oil companies (Exxon, Mobil, British Petroleum,
Shell and CFP), but under two names; the northern
is Iraq Petroleum Company (IPC) and the southern
Basrah Petroleum Company (BPC).
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ment of its leader, Libya probably will not
tamely follow any other oil producer's ex-
ample in reaching agreements with the com-
panies or necessarily act consistently. Although
in a strong financial position, Libya is no
longer able seriously to disrupt oil supply to
Western Europe (as it could in 1970 when a
shortage of tankers made short-haul oil espe-
cially useful). Although the low-sulphur con-
tent of Libyan oil makes it particularly de-
sirable, at least half of Libya's current 2.2
million bpd production could in most circum-
stances be replaced from spare capacity else-
where. The Libyans are aware of this; their
hasty nationalization of British Petroleum's
concession in 1971 has proved awkward for
them, and they have not managed to operate
it with much success.
16. Not all of the OPEC countries will push
for participation in the way the Arab group
of Persian Gulf countries has done. The Shah
elected to make a separate agreement, which
he views as better fitted to his goals, with the
Iranian Oil Consortium.27 Before the partici-
pation negotiations began, the Shah and the
Consortium had reached a tentative agree-
ment that would have extended the Con-
sortium's tenure to 1994. That agreement in-
fluenced the participation negotiations; once
announced, it set a floor for OPEC demands.
E' Shareholders are British Petroleum (40 percent),
Royal Dutch Shell (14 percent), Compagnie Fran-
caise des Petroles (6 percent), Exxon, Mobil, Gulf,
Texaco and Standard Oil of California (7 percent
each) and a group of small US companies (5 per-
cent).
17. But the Shah reopened negotiations in
December 1972 because he did not wish to
have Iran seem to lag behind the Arabs in
gaining control over the domestic oil industry.
He offered the companies a choice of an im-
mediate change to a long-term contract ar-
rangement with continued preferential access
to the oil or continuation of the existing rela-
tionship until its expiration in 1979, with no
special privileges thereafter. Although final
details of the ensuing agreement have yet to
be worked out, the Shah and the companies
have settled on a five-year operating contract
(which is renewable) and a 20-year sales con-
tract. Under the operating contract, the com-
panies retain a degree of management au-
thority and initiative, but its extent is unclear.
Under the sales contract, the companies will
buy oil for a price designed to give Iran the
financial equivalent of the Persian Gulf par-
ticipation agreement.
18. Algeria already controls about 80 per-
cent of its own oil production and has a ma-
jority interest in each company operating
there. Venezuela will gain entire ownership
and control when the concessions run out,
beginning in 1983. It will, however, probably
make service contracts or other new arrange-
ments with a number of oil companies to ex-
ploit its existing fields after the concessions
expire. Indonesia already holds majority
ownership in all concessions negotiated during
the past few years, and future government
participation with CALTEX-the largest con-
cession holder-already has been agreed on.
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ANNEX C
AVAILABILITY OF OIL FROM THE SMALLER PRODUCERS OF THE
EASTERN HEMISPHERE
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1. Aside from Iran and Saudi Arabia, seven
Eastern Hemisphere countries can be classed
as major oil producers-Kuwait, Libya, Ni-
geria, Iraq, Algeria, Abu Dhabi and Indonesia.
Taken together these seven are vital to an
adequate supply of oil on world markets, pro-
ducing at the end of 1972 about 17 percent of
the world's normal oil supply (compared to
25 percent in 1970). No one of them, however,
currently produces more than 5 percent of
the total, and the vast increases of output ex-
pected from Iran and Saudi Arabia in the
1970s will further diminish the role played
by each of the smaller producers in the total
world picture. Of the group, Kuwait is the
largest producer; it, and Abu Dhabi, are small,
weak states, which will of necessity give con-
siderable weight to the desires of their larger
Persian Gulf neighbors. Libya's geographic
position near European markets is such that
a cut off of Libyan oil would temporarily at
least be about as disruptive to world normal
supply and shipping patterns as a cut off of
larger quantities from the Persian Gulf. By
the end of the decade, if production proceeds
roughly as anticipated in these countries,
Nigeria will be as important as Kuwait in
quantity terms and somewhat more important
than Libya when both quantity and location
are taken into account.
2. The production forecasts for 1980 are
based principally on the expectation of West-
ern companies currently producing in the
countries cited. As such, they are a netting out
by the companies of a number of factors-
technical ones such as the known availability
of oil in the ground and the cost of producing
it and shipping it to market, and politico/
economic ones such as the anticipated policies
of the host governments with regard to con-
servation of resources, desire for revenues,
willingness to continue doing business with
OUTPUT OF SMALLER EASTERN HEMISPHERE
PRODUCERS 1960-1980
1980*
1960
1970
Projected
Iraq .......................
1.0
1.6
3.0
Kuwait ....................
1.7
3.0
4.0
SUBTOTAL .............
2.7
5.3
11.0
Algeria ....................
0.2
1.0
2.0
Libya .....................
-
3.3
3.0
Nigeria ....................
Negl.
1.1
4.0
SUBTOTAL .............
0.2
5.4
9.0
Indonesia ..................
0.4
0.9
2.5
TOTAL .................
3.3
11.6
22.5
* Rounded to nearest 500,000 barrels per day.
Western oil companies and ability to main-
tain internal security. The latter two matters,
which are essentially political, are impossible
to forecast with confidence-they depend
heavily on reactions-emotional or rational-
to unforeseeable contingencies. Our judgments
take into account what we can foresee in the
way of change in this decade; inevitably, how-
ever, they assume a continuity that almost
certainly will not prevail in all cases.
3. Sabotage against oil installations by a dis-
sident group-e.g., the Palestinian terrorists-
can occur virtually anywhere at almost any
time. The facilities for producing and trans-
porting crude oil are, however, fairly simple.
The damage that can be done by an explosive
charge or a handful of disaffected workers is
usually small; repairs can normally be effected
quickly, so long as the host government is
anxious or willing to see the damage repaired.
Serious damage to oil installations would re-
quire well-trained, well-organized personnel,
knowledgeable about oil facilities and able to
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gain access to them. Hence, we believe it
highly unlikely that sabotage alone (i.e., with-
out international complications) will be re-
sponsible for any significant interruption of
the normal flow of oil to consumers from
producers.
4. Algeria produces only a moderate amount
of oil, but its output may about double by the
end of the decade. Moreover, Algeria is slated
to become a major source of natural gas for
export to the US and to Europe. It is a rela-
tively large country, with a population that is
well-educated by area standards and a wide
variety of resources-minerals, arable land
and tourist attractions-that can, with time
and money, be developed. Its leadership has
chosen to exploit moderate oil reserves and
huge gas reserves as rapidly as possible and to
use oil and gas revenues to finance develop-
ment of the rest of the economy. Having made
that choice, the regime has consistently pur-
sued it. The government has moved in a
gradual but determined manner to take over
operation of almost all industrial facilities
formerly controlled by foreigners; the Algerian
state oil company now controls more than
three-quarters of the oil produced. Gas pro-
duction is and will be carried out entirely by
Algerian entities, with foreign involvement
confined to transporting and marketing a por-
tion of the liquefied gas sold abroad. All the
producing and transporting equipment in Al-
geria will be Algerian-owned. In these circum-
stances, there is no reason to anticipate a crisis
between Algeria and foreign commercial in-
terests; if and when the Algerians desire, they
can nationalize the remnants of foreign owner-
ship of oil facilities without meeting any effec-
tive opposition.
5. As a matter of principle, Algeria supports
and encourages anti-imperialist revolutionary
movements of many hues. Generally speaking,
however, the Algerian Government does not
involve itself directly in the internal affairs
of other countries; from the Algerian point of
view, revolution is supposed to be carried out
by natives of the country concerned. The Al-
gerians are, in fact, intent on doing the best
they can for those who live within the borders
of present-day Algeria and they are not about
to risk their own security and prosperity in the
interests of foreigners. Even on the Israeli
issue, their active assistance (as opposed to
their propaganda line) is extremely limited;
they train some fedayeen and ship small
amounts of equipment to, fedayeen units on
occasion, but they are adamant in their con-
viction that the Palestine issue should be ad-
dressed and solved principally by Palestinians.
6. Yet the Algerian situation has its uncer-
tainties. The present political system. is highly
dependent on the continued personal leader-
ship of President Boumedienne; the country
has no institutional provision for choosing a
successor. The official political party is so in-
herently weak and subordinate to the govern-
ment as to make it a negligible political force.
Marginal living standards and little popular
participation in government add up to a po-
tential for expressions of mass public unrest.
We believe, however, that there is little chance
that political' upheaval would result in an
extended interruption of shipments of fuels
from Algeria. For the next several years, the
Algerians will not be a significant enough
source of supply to any one market to be able
to do any real damage to a consumer country
by withholding supplies. By 1976 or so, they
could become very important to the US as a
gas supplier, providing about 15 percent of
East Coast requirements; but they will also
have much of their own money and attention
invested in the sale of gas. Another major
Arab-Israeli crisis resulting in a decision on
the part of the Algerian regime to withhold
gas shipments cannot be ruled out, but we con-
sider this unlikely.
7. In sum, we are quite confident that the
Boumedienne government will continue pro-
ducing oil and making its oil sales decisions on
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mount a full scale invasion of Kuwait, output
of Kuwaiti oil probably would be suspended
for a brief period. We expect, however, that
Iraq would be able to overpower Kuwait in
a matter of days-so long as there was no out-
side interference-and that oil production
would resume shortly. The major motive for
any such Iraqi move would be to seize Ku-
wait's oil and sell it for Iraqi benefit, not to
hold it off the market.
10. In Indonesia, too, we see very little
prospect of an extended interruption of oil
exports through the end of this decade. The
Suharto government-or something very simi-
lar to it-is likely to hold power; it will con-
tinue to need oil money to meet its debts,
stabilize the economy and finance develop-
ment. Suharto has clearly focused on eco-
nomic betterment as the primary national
goal and has decided on economic coopera-
tion with Japan and the West as the best
means to accomplish this goal. Operations of
foreign oil companies earned Djakarta about
$200 million in 1972 (20 percent of its total
foreign exchange earnings) ; this amount may
double in 1973 and will be much larger by
1980, as oil production climbs to about 2.5
million barrels per day (bpd). Indonesia
already holds majority ownership in all of the
concessions issued in recent years, and it has
renegotiated the long-standing agreement with
its major concessionaire to provide for similar
government ownership participation in the
future. Thus, a crisis over ownership of pro-
ducing facilities can be ruled out. A dispute
with Japan-which will become more de-
pendent on Indonesia as a source of oil-
cannot be excluded, but the relative strengths
of the two countries are such that an Indo-
nesian decision to pressure Japan by with-
holding oil seems highly unlikely. Oil export
problems and occasional work stoppages could
occur in periods of domestic stress, but the
Indonesian Army could and would move
quickly to protect the nation's oil installations.
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commercial grounds. Though we cannot be as
categorical about some other subsequent gov-
ernment or about gas shipments to the US
in the event of a major Arab-Israeli crisis in
the late 1970s, we believe the chances are very
good that both oil and gas will continue to be
shipped to all customers by any Algerian
government.
8. Kuwait is so dependent on the inter-
national oil business that a unilateral decision
by any Kuwaiti government to cease all oil
production and exports for more than a short
period is virtually inconceivable. It has ac-
cumulated very substantial financial reserves
and could live off its savings for at least a year
or two, so far as import needs are concerned.
It cannot spend its current revenues and has
recently decided to conserve oil in the ground
by limiting production-which accounts for
the small growth forecast for Kuwait produc-
tion. Without oil production, however, eco-
nomic activity would be drastically curtailed.
Indeed, the almost entirely urban population
would face grave difficulties if oil produc-
tion were shut down completely for an ex-
tended period. Kuwait must keep extracting
oil at 20 percent or so of current production
in order to obtain associated natural gas, which
provides almost all the small country's power,
including the fuel for making the national
drinking water supply from seawater. Kuwait
has no quarrels-internal or external-of a
magnitude, to cause any Kuwaiti deliberately
to bring on such drastic circumstances.
9. The Kuwaitis are concerned with Iraq's
sporadically-voiced claim to sovereignty over
Kuwait; they fear aggression from Iraq. The
latter's recent occupation of a Kuwaiti border
post and demand for control over two unin-
habited islands fronting on the access channel
to the Iraqi port of Um Qasr have reinforced
these fears. Iraq does not, however, currently
seem intent on taking over all of Kuwait. It
has a wide assortment of more pressing prob-
lems of its own. Should Iraq at some time
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11. Even the unexpected emergence of
a new military leadership inclined toward
Sukarnoist-style and anti-imperialist attitudes
probably would not result in an extended in-
terruption of the flow of oil. In such cir-
cumstances, we would expect foreign firms
to experience harassment and irresistible de-
mands for renegotiation of contracts on terms
more favorable to Djakarta. We would not
expect foreign companies to be expelled or oil
shipments to cease.
12. Nigeria's policies designed to increase
its control over its petroleum assets will con-
tinue. Participation by the Nigerian Govern-
ment will be extended to the major producing
companies, and any new concessions will
probably be explored and developed by the
Nigerian National Oil Company through con-
tracts with various oil companies. The govern-
ment will insist upon receiving any new bene-
fits granted by companies to other OPEC
members, whether or not it takes a leading
role in confrontations with the companies.
Nigeria will depend on oil for more than half
of its foreign exchange earnings and govern-
ment revenues for a long time to come. Al-
though ethnic friction within Nigeria will con-
tinue, the military government is managing
well enough-both in terms of control and in
terms of spreading what resources there are
to various tribes and areas-so that another
major civil war is unlikely.
13. The biggest question mark in oil policy
is a political one. Nationalist sentiment and
distrust, even hostility, toward all things for-
eign have grown in the post-civil war period.
Antiforeign sentiment could reach an explosive
peak over time. A unilateral move by some
Nigerian government against foreign oil in-
terests is possible, especially in retaliation
against the policies of a particular company
or foreign country. On the other hand, Ni-
geria's economic dependence upon oil reve-
nues will tend to increase along with increases
in oil production. Thus, while a unilateral
move by a Nigerian government against for-
eign oil interests or against one or another
oil customer will remain possible, on balance,
we consider it unlikely.
14. Abu Dhabi, the leading member of the
Union of Arab Amirates (UAA), is the only
one of the smaller southern Persian Gulf states
that currently produces a substantial quantity
of oil; its current output is expected to triple
by 1980. Production began in Dubai, another
UAA member, in 1969; to date, however,
known reserves are small. The UAA's two little
western neighbors-Bahrain and Qatar-have
been small-scale producers for some time, but
neither has large reserves. Oil has been dis-
covered in commercial quantities in Sharjah.
Oman, to the immediate east, may prove to
be another story-production began in 1967
and increased rapidly. On the basis of known
reserves, however, production is unlikely to
go beyond half a million barrels per day.
15. The future of the small Gulf states is
an uncertain one. Independence is new, the
UAA, to which some belong, is new, access
to money in large sums is new. Hostile feel-
ings-between religious sects, between mini-
states, between and among the Gulf princi-
palities and their large Saudi and Iranian
neighbors-are old. A small civil war has
dragged on for years in the hinterland of
Oman; oil revenues have made control of the
government a more appealing and valuable
prize than in the past, but they have given
the government more means to resist. It is
virtually inconceivable that oil production
can continue in an orderly fashion from
each of the Gulf producers over an eight year
period, but it is impossible to say which state
is the most likely or most imminent subject
for trouble. So far as the world oil picture
is concerned, however, Abu Dhabi's output is
all that will matter in the 1970s. And Abu
Dhabi is much like Kuwait in being attractive
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for its oil revenues-and for little else. It is
also small enough to be cowed by a larger
neighbor such as Iran. We doubt that oil pro-
duction would be stopped for an extended
period by any regime which might turn up
in power there.
16. Libya-like Kuwait and Abu Dhabi-
is well-supplied with money and short of
virtually every other asset necessary for de-
velopment. Its people are few in number and
generally backward by the standards of the
region. It differs, however, in having a gov-
ernment that is fervent about causes and
somewhat uncaring about the money spent or
lost in the pursuit of its own particular ends.
In the immediate aftermath of the September
1969 revolution, the Revolutionary Command
Council (RCC) demanded and got the rapid
removal of US and British military installa-
tions; in late 1970 and early 1971, it took ad-
vantage of its position as an important sup-
plier close to the markets in a tight transport
situation to wring two rapid increases in oil
revenue payments from the oil companies. It
is now preparing to confront the oil companies
on the participation issue, believing that it can
gain more for itself than the Gulf producers
17. The President of the RCC, Colonel
Qadhafi, is a 30-year old with a messianic com-
plex looking for new worlds to conquer and
bumping frustratedly against immovable ob-
stacles to his cherished objectives of Arab
unity, Islamic purity and the recovery of
Palestine. With huge foreign exchange re-
serves, a strong bent toward conservation of
known oil reserves and a leadership that alter-
nates between frequent quarrels in camera
and dramatic confrontations with one or
another external antagonist, Libya could be
in for a substantial amount of turmoil and
trouble. Although. Libya will probably find
increasing uses for revenue and permit oil
output to rise during the decade, the odds
appear high that some event-coup or na-
tionalization head the list of possibilities-
will lead to curtailment or cessation of Libyan
oil production at some point between now
and 1980. There is no necessary reason, in the
case of Libya, to expect an oil crisis to be of
short duration. The oil companies clearly are
hedging their bets; their projections show oil
production from Libya in 1980 below the peak
18. Egyptian-Libyan relations are in a state
of flux that could-in two or three years-
make Libyan fields a more reliable source of
supply. The two states have formally agreed to
merge in September 1973. On balance, we are
inclined to doubt that a meaningful merger-
vesting substantial authority over oil produc-
tion, disposition of funds, and foreign affairs,
in a single government-will occur. Such an
outcome is, however, distinctly possible and it
would create a new set of circumstances. There
is very little doubt that Egypt would come to
dominate such a merged entity in fairly short
order. Cairo regimes have been, are now and
will remain far more practical about goals and
far more interested in money than the Qadhafi
government. Should Egypt actually come to
control Libyan oil, we would expect output
from Libya to increase substantially beyond
current projections and to be available to the
world on normal commercial terms in most
circumstances.
19. As to Iraq, no government has ever shut
down oil production entirely, even though
relations between the various Baghdad re-
gimes and the internationally owned Iraqi Pe-
troleum Company (IPC) have been at or near
crisis level for over a decade. But production
has repeatedly been curtailed, or production
increases foregone, in the course of their run-
ning battle. Their chronic quarrel reached a
new extreme with the 1 June 1972 announce-
ment by Iraq of nationalization of the northern
fields of IPC. Subsequently, vituperation les-
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sened and all parties began yet another search
for yet another modus vivendi. In February
1973, an agreement was reached under which
companies and government will compensate
one another for past claims and Iraq will op-
erate the nationalized northern fields; an IPC
affiliate is anxious to continue operating the
southern fields under some form of participa-
tion arrangement, but the companies and the
government have been unable to agree on the
details. Further talks have been scheduled for
October.
20. A deal permitting smooth operation of
the nationalized fields, however, will only
serve to put to rest-perhaps temporarily-
one of the many problems that could interfere
with the flow of oil from Iraq. The chronically
restive Kurds of northern Iraq live alongside
the oil facilities in that area; they could sabo-
tage the pipeline from the northern fields to
the Mediterranean. The Syrians could close
down the pipeline on their own territory as
they have in the past. Israel might have oc-
casion to strike directly at Iraqi oil facilities
or to attack the terminal facilities at the Syrian
end of the pipeline from Iraq. Iraqi facilities
also are vulnerable to direct action from Iran.
Moreover, Iraqi governments are not notable
for longevity, and a new regime might feel
impelled to reinforce its nationalist credentials
with some new punitive action against West-
ern oil interests. All things considered, some
politically-inspired disruption of oil shipments
from Iraq during the next few years appears
likely. Baghdad's acute need for money, how-
ever, leads us to believe that such disruptions
would be of comparatively short duration-a
matter, say, of three to six months.
21. Taken together, the various probabilities
and uncertainties in the preceding paragraphs
lead to a moderately reassuring assessment
so far as world oil supplies are concerned.
During the 1970s, interruptions to the flow of
oil from the smaller suppliers are almost cer-
tain to occur-they are quite likely in some
(e.g., Libya and Iraq), and possible in all.
Most stoppages, however, are likely to be of
short duration, and would probably not occur
simultaneously. Those who produce, market,
and transport oil probably will have to cope
with sudden shortfalls of something like two
to four million barrels a day (up to five per-
cent of normal world demand) at various
times; they are not likely to be faced with
crises involving shortfalls of 10 or 15 percent
of normal supplies for a period of months as
a result of happenings in the smaller producing
states alone. In short, the system can cope
with supply problems the minor producers
are likely to cause, although repeated or par-
ticularly troublesome shortfalls could have an
impact on the oil import and consumption
policies of consuming countries much greater
than the absolute size of the disruption would
seem to warrant.
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ANNEX D
APPROXIMATE DIMENSIONS OF AN ARAB EMBARGO ON OIL
SHIPMENTS TO THE UNITED STATES AND WEST EUROPE
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1. The following tabulation sketches out in
a general way the calculations underlying the
discussion in paragraphs 31-32 of the text.
The situation postulated is that in 1980, all
Arab countries declare an embargo on oil
exports to the US and West Europe while con-
tinuing to ship oil to Japan and other cus-
tomers. Because the Arabs will be providing
roughly 60 percent of the oil moving in world
trade at that time, and the US and West
Europe will be importing about 60 percent of
the oil moving in world trade, the calculations
allow for a 60 percent reduction in Arab ex-
ports-from about 31 million barrels per day
(bpd) to about 12 million bpd-with the US
and West Europe sharing the 19 million bpd
short-fall about equally.211 The effect is to leave
the US with oil availability immediately after
the crisis approximately equal to US domestic
production plus one million bpd of imports
and to assume that most Western Hemisphere
exports, as well as the available non-Arab
Eastern Hemisphere oil, would be provided to
Europe.
2. The calculations do not attempt to re-
flect the many factors that might vary with
only small effects on the totals or with inde-
terminate net effects. The situation could be
made somewhat less serious for the embargoed
countries than indicated in Table D-I through:
- Diversion of oil to the US and Europe
from other destinations listed on ship
manifests.
- Steps by other consuming countries (e.g.,
Japan) to curtail oil consumption and
"The effects on the US and West Europe of a
total cessation of Arab production and exports would
not be markedly different from those indicated in
Table D-I, but a total Arab embargo would have
very severe repercussions for Japan and the poor
countries of the Eastern Hemisphere.
to free some additional oil for US and
West European use.
- Conversion from oil to other fuels of
facilities in sectors other than power
generation and industry.
- The possible existence at the time of a
crisis of more spare oil producing ca-
pacity in Iran, West Africa, Venezuela
or elsewhere outside the Arab world
than is postulated.
- Soviet willingness and ability to increase
oil sales to West Europe.
The situation could be made more serious for
the embargoed countries than indicated in
Table D-I through:
- A tendency on the part of oil importing
nations other than those embargoed to
try to maximize their own imports and
stocks as insurance against an energy
crisis.
- Time lags inherent in decision-making,
in conversion to greater use of coal and
to increased coal mining and shipment,
in curtailing transportation uses of oil,
and in producing energy with methods
that save fuel but are more environment-
polluting.
- The occurrence of a crisis at a time
which was particularly awkward with
regard to spare producing capacity and
tanker availability.
- Soviet moves to aggravate the situation
by cutting off oil sales to West Europe,
which could be running in the neighbor-
hood of one million bpd.
3. The shortfall indicated in Section III of
the Table is what would remain to be covered
after the earliest and least disruptive adjust-
ments to supply and demand were made. The
figure for oil that the US could save by con-
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TABLE D-I
ILLUSTRATIVE MODEL OF AN OIL IMPORT CRISIS IN 1980
Crude Oil Equivalent, Million Barrels Per Day
I. SUPPLY (Excluding Stock)
Total Normal (pre-crisis) Energy ........................ 48 35
Of Which: From Domestic Oil ......................... 11.5 3
From Imported Oil ......................... 10.5 19
From Other Fuels .......................... 26 13
Less: Arab Oil ....................................... 10
Plus: Increase in oil imports obtained from 5% increase in
oil output of non-Arab producers ................. 1
Plus: Energy obtained by converting from oil to coal where
suitable equipment exists in electric generating and
industry uses ................................... 1 1
Equals: Energy Availability in Postulated Crisis.......... 40 28
From Oil .................................... 13 14
From Other .................................. 27 14
II. REQUIREMENTS
Total Normal (pre-crisis) Demand ....................... 48 35
Equals: Remaining requirements ........................ 45 33
III. BALANCE AFTER ADJUSTMENTS
Total Demand after Adjustments ........................ 45 33
Total Supply after Adjustments ......................... 40 28
Shortfall ........................................... 5 5
(As % of Demand after Adjustments) ................ (11%) (15%)
verting from oil to coal is roughly the daily
saving that could be attained within three
months. The possible saving grows with time;
for 1980, it probably would range from a few
hundred thousand bpd almost immediately to
1.5 million bpd or more after six months. A
10 percent curtailment of use in the transport
sector is about half of the reduction of oil
consumption possible through a comprehensive
program of voluntary curtailment of use in
all sectors of the economy. The further major
mechanisms that would be available for han-
dling the shortfall would be (a) strict ration-
ing of gasoline (which could save 3-4 million
bpd of oil in the US and West Europe com-
bined) and other fuels and (b) drawdown of
fuel supplies on hand. At the beginning of a
crisis, the US and West Europe could expect to
have about 3.65 billion barrels of oil available
for use (to meet a combined daily shortfall
of 10 million bpd).
Million
barrels
US stocks-about six weeks consumption ... 950
West European stocks-80 days consumption 1,800
30 days of normal imports already enroute to
the US .............................. 300
30 days of normal imports already enroute to
West Europe ......................... 600
3,650
4. A number of alternative assumptions
could be made about the timing or the extent
of an embargo and about the sharing arrang-
ments among the consuming nations. Those
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made in constructing Table D-I produce re-
sults for the US at least as serious as any other
set of assumptions, and more serious than
most. By 1980 the US will be more dependent
on imports and on Arab oil than in any prior
year. Any embargo that was not accompanied
by a decrease of oil production and shipment
would have only minor and temporary effects
for consuming countries because shipments
could be diverted. An Arab embargo aimed
solely at the US would deprive the US of
perhaps four or five million bpd of oil if
totally effective-and less if embargo avoid-
ance arrangements were undertaken. If 19
million bpd (60 percent of Arab output) were
taken out of world trade and the US continued
to import all available Western Hemisphere
oil, the US would have available some 16-17
million bpd of oil before any increase in output
of non-Arab producers. If the same 19 million
bpd shortfall were shared between the US
and Western Europe in proportion to their
normal imports, the US would continue to re-
ceive about 3-4 million bpd of imports and
have total oil availability of some 15 million
bpd-again, before any adjustments. Either
of the latter two assumptions would, of course,
make the situation for Western Europe far
more serious than indicated in Table D-I, and
over time probably would not hold-the Euro-
peans' need for oil would be so great that
they would almost certainly outbid the US
for significant quantities of oil.
CONFIDENTIAL 53
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ANNEX E
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1. Natural gas is an energy source of grow-
ing importance. Both the US and the USSR are
endowed with large gas reserves. Elsewhere
important gas reserves for the most part he
far from consumers, but no one area has a
dominant position as the Persian Gulf does
with oil. In the past, much gas, which fre-
quently comes mixed with oil (termed "asso-
ciated gas"), has been separated and burned
as waste because the cost of handling it made
marketing uneconomic. More recently, grow-
ing energy consumption, rising prices and en-
vironmental concern (gas is virtually non-
polluting when burned) have greatly increased
the demand for gas, despite the high cost of
transportation and distance from consuming
markets.
2. The US accounts for 60 percent of the
world's natural gas consumption, which now
meets one-third of US energy needs, almost
entirely from domestic resources. US gas re-
serves have declined and now equal only about
12 times annual consumption as opposed to a
ratio of 26 to one in 1960. Despite the likeli-
hood that new local discoveries will be made
over the next decade, the US will import sub-
stantial quantities of gas in the coming years.
A large part of this gas will probably come
from Algeria and by 1980 it is likely that im-
ports from there will supply about three per-
cent of US demand. The Soviet Union has
large quantities of gas that could and prob-
ably will be exported. The US has shown an
interest in gaining access to this gas. Dis-
cussions are underway, and if agreement is
reached Soviet gas could begin to reach US
markets about 1980. Nigeria, Venezuela and
Iran are among other potential sources.
3. During the 1960s, Soviet gas production
and consumption grew rapidly. A small volume
of gas has been exported to Eastern Europe
and to Austria in recent years, but these have
been offset by imports from Iran and Afghani-
stan. By 1975, however, the Soviet Union
should become a net exporter of some 300
billion cubic feet of gas annually. Soviet net
exports could approach 1 trillion cubic feet by
1980.
TABLE E-I
SOVIET GAS PRODUCTION, TRADE
AND CONSUMPTION
Trillion Cubic Feet
Estimated
1970 1975 1980
Production .............. 7.0 10.0 13.5
Imports ................. 0.1 0.5 0.5- 0.9
Exports ................. 0.1 0.8 1.4- 1.7
Apparent Consumption ... 7.0 9.7 12.3-13.0
4. In Western Europe natural gas fills only
seven percent of energy needs; however, this
share will rise to about 13 percent by the end
of the decade. Western Europe's gas reserves
are far short of meeting present and prospec-
tive demand. Western Europe now imports
a small amount of Soviet natural gas, but this
will grow by 1980. Contracts already con-
cluded indicate that the Soviets will divide
their gas exports about equally between East
and West Europe. Europe now imports small
quantities of gas from North Africa, especially
Algeria, and these imports probably will in-
crease substantially in the years ahead. Japan,
too, will increase its use of gas by 1980, but
not very much; gas imported from a variety
of sources accounts for about two percent of
its energy requirements.
5. The balance of payments implications
for countries importing gas are likely to be
less serious than are those from importing
oil. The quantities and values involved are
far smaller. Also, the principal exporters of
gas-Algeria and the USSR-are countries
with a substantial appetite for goods and
services obtainable only for hard currency.
Neither is likely to pile up foreign exchange
reserves for lack of ways to spend.
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CONFIDENTIAL
ANNEX F
THE OIL-RELATED CURRENT ACCOUNT TRANSACTIONS OF THE
UNITED STATES, WESTERN EUROPE AND JAPAN
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1. This Annex describes in more detail the
assumptions and calculations set forth in the
text in the Section entitled "Financial Impact
on the Consuming Countries: Balance of Pay-
ments-Current Account Transactions," para-
graphs 50 to 53 inclusive. It first establishes
a range for the delivered cost, including freight
and insurance, of the volume of world and
area oil imports projected for 1980 in Section I.
It next discusses the revenues that will accrue
to oil producing countries under alternative
price assumptions and attempts to determine
how the revenues will be used. The ulti-
mate objective is to ascertain, under assump-
tions to be discussed below, the possible bal-
ance of payments impact of oil related trans-
actions on the US, Western Europe and Japan.
2. Table F-I shows the quantity and value of
world oil imports in 1970 and 1980. Four sets
of value figures are presented for 1980, re-
flecting different assumptions about the reve-
nues per barrel (in the form of taxes, royalties
and other fees) accruing to the oil producing
countries: no increase over the levels of Spring
1973, and increases of 25 percent, 50 percent
and 100 percent. All other components of the
final price are assumed to remain unchanged,
including freight and insurance costs per unit
and average profits per barrel to the oil com-
panies. Transportation charges can be very
volatile, but available data suggest that tank-
erage on order is ample to meet anticipated
demand at decreasing cost per barrel. Per
barrel profits are somewhat more likely to fall
as volume increases than to rise. Any bias in-
troduced by holding these components fixed
is, therefore, more likely to result in an over-
statement of the final oil price derived by
the stated variations in host government reve-
nue than in an understatement.
Million
Barrels
Per Day
Billion
1970
Dollars
United States ...............
3.4
3.3
Japan ......................
4.3
2.8
Western Europe (excluding
intra-European trade) ......
13.0
10.6
Rest of World ...............
4.7
3.1
Million
Barrels
Per Day
11.0
11.0
Per Barrel Price of Oil
$3.00 $3.41 $3.82 $4.64
12.0 13.7 15.3 18.6
12.0 13.7 15.3 18.6
19.0 20.8 23.6 26.5 32.2
9.0 9.9 11.2 12.5 15.2
* Values on c.i.f. basis. Totals may not add because of rounding.
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3. For purposes of price and value projec-
tions, we use only constant 1973 dollars. Any
other approach involves assumptions about
price trends throughout the world and price
trends for particular goods and services. Most
important, the use of 1973 prices serves to
isolate the balance of payments impacts of
rising volumes of oil moving in international
trade. The increases agreed to under the Te-
hran agreement reached in February 1971 will
add about $0.15 per barrel to producing coun-
tries' revenues-and hence to oil prices-
during 1974 and 1975 combined. And, a
further round of price negotiations upon the
expiration of the Tehran agreement seems
likely. However, an increase of $0.15 per
barrel would be an increase of only about 5
percent over two years-which might not be
an increase in the real price of oil relative
to other goods. Thus a constant real price-
or something close to it is possible.
4. A doubling of producer government reve-
nues-per-barrel produces a very high 1980
price. In the past, the price of crude oil on
world markets has remained well below the
well-head price in the US (about $3.75-$3.85
per barrel today) and the cost of alternative
forms of energy. Producer governments have
been concerned about possible consumer re-
sistance to large and frequent price increases
and about the effects that rapidly escalating
prices might have on the overall energy poli-
cies of consumer governments. For the future,
however, the speed with which producer gov-
ernments press their bargaining advantage
could conceivably result in a 10 percent annual
rise in their real per barrel revenues-which
is the rise implicit in a doubling of revenue
per barrel by 1980.
5. Each assumption about the trend of reve-
nues per barrel to producer governments leads
to a specific average price for a barrel of oil-
from $3.00 per barrel to $4.64 per barrel. Oil
moving in world trade comes from many loca-
tions, is produced under different cost condi-
tions, and varies greatly in the characteris-
tics- weight, sulphur content, wax content,
etc.-that make one variety particularly de-
sirable and another particularly difficult to
sell. We have followed industry practice of
using the delivered price in Rotterdam of
Arabian Light crude oil of 34 API gravity to
represent the average price of oil.
6. The average price at the beginning of
1973 was about $2.87 per barrel, including
revenue payments to the government of about
$1.51 per barrel. When the dollar was de-
valued in 1971, the OPEC countries demanded,
and got, a compensating increase in their per
barrel revenues calculated in dollars. At that
time, they insisted on automatic adjustment
of their revenues in the event of future realign-
ments of major currency values. As part of
this arrangement, currency values are calcu-
lated quarterly, on the first of March, June,
September, and December of each year. Sig-
nificant fluctuations result in an increase in
revenue payments to the government on the
first of April, July, October, and January.
According to the adjustment formula, the
change in per barrel revenues resulting from
the devaluation of the dollar in February
1973 probably will be about $0.13 per barrel.
Hence, $3.00 or so per barrel is the price of
Arabian Light oil delivered to Rotterdam that
is expected to prevail in mid-1973. The $3.41,
$3.82, and $4.64 per barrel prices assume re-
spectively 25 percent, 50 percent and 100 per-
cent increases by 1980 in the per barrel pay-
ments to Gulf producers for Arabian Light
crude, or annual rates of increase of 3.2 per-
cent, 6.0 percent and 10.4 percent.
7. To derive the revenues of major produc-
ers under various price assumptions, we cal-
62 CONFIDENTIAL
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culated the revenue for each country on a per
barrel basis, working back from the figures for
Arabian Light. Market forces work to main-
tain a differential in payments to various gov-
ernments, reflecting differences in specific
conditions of production, transportation costs
and characteristics of the oil, and these were
taken into account.
8. Table F-II shows the revenues that each
major producer would receive at each illus-
trative price. It also calculates possible spend-
ing out of oil income on imports and gifts, for
each country for each level of income. For
some countries, the demand for imports is large
relative to total earnings from oil. In such
cases-Iran, Venezuela, Nigeria and "other"
countries-we have assumed that all oil pro-
duction revenues will be spent for imports
(except in the cases of Venezuela and Nigeria
at the highest level of income) ; the import
data for these countries are, therefore, not
maximum total imports but maximum imports
financed from oil income. For Saudi Arabia,
Kuwait, Libya and the group of smaller Per-
sian Gulf producers, imports are projected
on a basis of the past rate of increase (in
real terms) adjusted for likely improvements
in their ability to spend for development, con-
sumption and/or military hardware. These are
total imports and represent probable maxi-
mums, rather than minimum or mid-point
levels.
9. Revenues minus imports represent the
surplus the oil producing countries may realize
in 1980 from the oil trade. The surplus after
imports could be as low as $7.6 billion under
the lowest price assumption or as high as
$25 billion under the highest price assumption.
It will be reduced, however, by whatever
shares of their surplus the oil producers give
or lend to their needier neighbors. In Table
F-II, we assume that the richer Arab countries
are very generous indeed to the poorer Arab
states. It is likely that donors will increase
their gifts and loans as their revenues rise, but
they may not be as generous as the Table in-
dicates.
10. Table F-III, derived from. Table F-II,
summarizes for those countries with surplus
income, the funds available from oil revenues
for investment or addition to reserves in the
single year 1980 under the various price al-
ternatives.
11. Illustrating the potential impact of these
surpluses on the balances of payments of con-
sumer countries involves an additional set of
variables and many more assumptions. We
make no attempt to calculate all possible com-
binations-varying only one major assumption
is sufficient to illustrate the fact that, for any
given consumer, the overall balance of pay-
ments impact of oil related transactions varies
widely and depends to a great extent on the
consuming country's export performance.
12. The delivered price of oil includes ship-
ping and insurance charges, oil company
profits and costs of production, as well as pay-
ments to producer governments. In a balance
of payments sense, the consuming countries as
a group get back most of what they spend for
the first two categories of payments, as is
shown in the balance of payments tables that
follow. In the absence of any reliable informa-
tion on either the beneficial ownership or the
"banking home" of tanker owners in general,
we have distributed receipts for transport
charges among the major consumers-the US,
Western Europe and Japan-in proportion to
their oil imports in 1980. This calculation gives
22 percent of world tanker receipts to the US,
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OIL REVENUES AND FOREIGN EXPENDITURES OF OIL PRODUCING
COUNTRIES IN 1980
Used For
Difference
Oil
Revenue
Imports of
Civilian and
Military Goods
and Services
Used For
Gifts and Loans
To Other
Countries
(Available for
Addition to
Reserves or
Investments)
Oil Price: 83.00/Barrel
Saudi Arabia ................
8.9
4.5
1.5
Kuwait ....................
2.3
2.0
.3
Iran .......................
5.1
5.1
-
Other Persian Gulf ..........
4.8
3.0
.6
1.2
Libya* .....................
2.5
1.4
.5
.6
Nigeria .....................
3.1
3.1
-
Venezuela ..................
2.3
2.3
-
-
Other ......................
3.0
3.0
-
Oil Price: 83..41 /Barrel
Saudi Arabia ................
11.1
4.5
2.0
4.6
Kuwait ....................
2.9
2.0
.5
.4
Iran .......................
6.4
6.4
Other Persian Gulf ..........
5.9
3.3
.7
1.9
Libya* .....................
2.9
1.4
.5
1.0
Nigeria .....................
3.6
3.6
Venezuela ..................
2.8
2.8
-
Other ......................
3.7
3.7
Total ....................
39.3
Oil Price: 83.82/ Barrel
Saudi Arabia ................
13.3
4.5
2.5
6.3
Kuwait ....................
3.4
2.0
.6
.8
Iran .......................
7.6
7.6
-
-
Other Persian Gulf ..........
7.1
3.5
.8
2.8
Libya* .....................
3.4
1.5
.6
1.3
Nigeria ......... :...........
4.2
4.2
Venezuela ..................
3.3
3.3
-
Other ......................
4.4
4.4
Total ....................
46.7
31.0
Oil Price: 84.64IBarrel
Saudi Arabia ................
17.7
4.5
2.8
10.4
Kuwait ....................
4.6
2.0
.8
1.8
Iran .......................
10.2
10.2
Other Persian Gulf ..........
9.5
4.0
1.0
4.5
Libya* .....................
3.9
1.5
.7
1.7
Nigeria .....................
5.3
4.3
-
1.0
Venezuela ..................
4.2
3.9
.3
Other ......................
5.9
5.9
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NET FUNDS ACCRUING TO KEY OIL PRO-
DUCERS IN 1980*
Billion 1973 Dollars
Per Barrel Price of Oil
-------------
$3.00 $3.41 $3.82 $4.64
Saudi Arabia ........... 2.9 4.6 6.3 10.4
Kuwait ................ .0 .4 .8 1.8
Iran ................... .0 .0 .0 .0
Other Persian Gulf...... 1.2 1.9 2.8 4.5
Libya ................. .6 1.0 1.3 1.7
Nigeria ................ .0 .0 .0 1.0
Venezuela .............. .0 .0 .0 0.3
* Revenues, less imports, less gifts and loans to other
countries.
38 percent to Europe and 22 percent to Japan
(the remainder is accounted for by the "rest
of the world," which we do not discuss in this
Annex). This methodology may somewhat
overstate European transport earnings and
understate those of Japan, but probably not by
any large amount.
13. We have allocated oil company profits
(assumed, as noted above, constant at $.35
per barrel) geographically on the basis of
shares in oil production in the major producing
states-60 percent to the US, 30 percent to
Europe and 5 percent to Japan, leaving 5
percent for the rest of the world. The alloca-
tion reflects present ownership with allowance
for a small shift of the ownership and opera-
tion of world oil producing and marketing
facilities away from the US and Europe to-
ward Japan and the producer countries. (In
considering the question of profits, we have
treated any additional income accruing to the
host governments from "participation" as rev-
enue to the producer government rather than
as oil company profits.)
14. Production costs of the companies, aver-
aging $0.30 per barrel under our constant
price assumption, are included in the price
of oil imports; in the 1980 figures, they
total $1.2 billion for the US, $1.2 billion for
Japan and $2.1 billion for Western Europe.
They are not further accounted for in the
balance of payments tables. They include
many things, such as depreciation charges,
salaries, payments for contractors' services,
equipment maintenance and daily running
costs; we have no basis for determining what
portion of these costs returns as a credit to
the balance of payments accounts of the con-
suming countries or how to allocate produc-
tion costs among balance of payments cate-
gories and countries. Production costs also
have an indirect effect on balances of pay-
ments; e.g., that portion spent in the pro-
ducing countries increases the receipts of the
oil producers and thus the money available
for imports. Accounting for this factor would
probably serve both to make the oil-related
current account balances somewhat less un-
favorable to the consuming countries and to
provide for a somewhat larger increase in the
reserves of some producing countries.
15. In Tables F-IV, F-V and F-VI, for the
US, West Europe and Japan respectively, we
have calculated in Part I a balance of pay-
ments resulting from the direct effect of oil
transactions. As can be seen in Table F-IV,
oil company profit remittances to the US offset
a substantial part of the oil import bill, and
the direct effect of oil transactions on the US
in 1980 varies from a deficit of $4.9 billion to
a deficit of $11.5 billion, depending on the
assumed price of oil. The West European
deficit varies from $14.4 billion to $25.8 bil-
lion (Table F-V) and that of Japan from $9.2
billion to $15.8 billion (Table F-VI).
16. There is, however, a very substantial
indirect offset, which we show in Part II of
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CONFIDENTIAL
TABLE F-IV
ILLUSTRATIONS OF POTENTIAL IMPACT OF OIL TRANSACTIONS ON THE CURRENT
ACCOUNT IN THE US BALANCE OF PAYMENTS IN 1980
1970 Actual
(Billion 1970
Dollars) 1980 Potential (Billion 1973 Dollars)
Price of Oilr $2.14 $3.00! $3.41/ $3.82 $Bb4'
Bbl. Bbl. Bbl. Bbl.
1. OIL TRANSACTIONS
Oil Imports, c.i.f ............................. .
Less: Transport Charges c ......................
Equals: Oil Imports, f.o.b ......................
Less: Company Profit Remittances 2 ..... ...... . .
Equals: Direct Effect of Oil Transactions.........
II. POTENTIAL ADDITIONAL US EXPORTS TO
OIL PRODUCING COUNTRIES GENER-
ATED BY OIL REVENUES
US Market Share f ............................
1-Up 25% ...................................
2-Stable .....................................
3-Down 25% .......... .
III. RESULTANT EFFECT ON BALANCE OF
PAYMENTS (Current Account)9
I-Expanded Market Share ....................
2-Stable Market Share ........................
3-Smaller Market Share .......................
-3.3 -12.0 -13.7 -15.3 -18.6
.5 2.4 2.4 2.4 2.4
-2.8 -9.6 -11.3 -12.9 -16.2
3.0 4.7 4.7 4.7 4.7
0.2 -4.9 -6.6 -8.2 -11.5
7.1
1.7 5.7
4.3
8.4 9.5 11.4
6.7 7.7 9.2
5.0 5.7 (i.9
1.8
1.3 -0.1
-0.5 -2.3
-0.6 -1.6 -2.5
- - - - --- - - - - - - - - - - - - - - - - - --
*Footnotes correspond to those on Table IV in the text, which appears on page 21.
each Table, i.e., the expenditures of the oil
producers out of oil income on imports from
the US, Western Europe and Japan. Also in-
cluded are the imports generated by the
money which the producers give away; re-
cipients of their largesse are likely to spend
all they receive for imports on their own
account. The industrialized countries will have
an opportunity to earn back much of what
they spend for oil by selling their own goods.
.17. To indicate what sort of effects ex-
ports to oil-financed markets might have on
the balance of payments of the industrialized
countries, we calculated the shares of the
markets in the producing countries that were
accounted for by US, West European and
Japanese goods in 1971. (The US share of the
group of markets was 21 percent, the West
European share 46 percent and the Japanese
share 9.5 percent.) We went on to calculate.
in Table F-IV for the US, three possibilities:
that the US share of the market of each coun-
try in 1980 remained the same as its 1971
share, or that the US share either rose 25
percent or fell 25 percent. The calculated
change is illustrative only, but it does not
appear out of the question under the par-
ticular conditions we are considering. Some
of the Arab producers, for example, will be
receiving rapidly increasing amounts of money
and spending on many sorts of goods for which
a change of suppliers is not difficult-e.g.,
limousines and air conditioners and even
military equipment. Moreover, the Arabs have
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ILLUSTRATIONS OF POTENTIAL
ACCOUNT IN THE BALANCE
IMPACT OF OIL TRANSACTIONS ON THE CURRENT
OF PAYMENTS OF WESTERN EUROPE IN 1980 a*
1970 Actual
(Billion 1970
Dollars)
1980 Potential (Billion 1973 Dollars)
Price of Oil'
$2.14/
$3.00/
$3.41/
$3.82/
$4.64/
Bbl.
Bbl.
Bbl.
Bbl.
Bbl.
1. OIL TRANSACTIONS
Oil Imports, c.i.f ............................
-10.6
-20.8
-23.6
- 26 .5
-32.2
Less: Transport Charges c ....................
2.5
4.0
4.0
4.0
4.0
Equals: Oil Imports, f.o.b ....................
-8.1
-16.8
-19.6
-22.5
28.2
Less: Company Profit Remittances e...........
1.4
2.4
2.4
2.4
2.4
Equals: Direct Effect of Oil Transactions.......
-6.7
- 14.4
-17.2
-20.1
-25.8
II. POTENTIAL ADDITIONAL EXPORTS FROM
WESTERN EUROPE TO OIL PRODUC-
ING COUNTRIES GENERATED BY OIL
REVENUES:
European Market Share f:
1-Down 6% (US Share Up 25%) ...........
11.9
13.6
15.4
18.1
2 -Stable .................................
12.6
14.5
16.4
19.2
3 -Up 6% (US Share Down 25%) ...........
13.3
5.3
17.3
20.4
III. RESULTANT EFFECT ON BALANCE
OF
PAYMENTS (Current Account) 9:
1-Smaller Market Share .....................
-2.5
-3.6
-4.7
-7.7
2 -Stable Market Share ......................
-3.4
-1.8
-2.7
-3.7
-6.6
3-Expanded Market Share ..................
-1.1
-1.9
-2.8
-5.4
*Excludes intra-European transactions. Footnotes correspond to those on Table IV, which appears on page 21 in
the text.
in the past been known to exclude non-essen-
tial goods from their countries for political,
rather than commercial, reasons.
18. The various figures for the US all as-
sume oil imports of 11 million bpd, and a
change in oil volume would change the bal-
ance figures-though not by the full cost of
the oil involved. Imports of an additional 1
million bpd would cost $1.09 billion at $3.00/
barrel and $1.69 billion at $4.64/barrel. Of
this, under the assumptions used in this Annex,
the US balance of payments would recover
$230 million (transportation receipts and the
US share of profits on additional oil produc-
tion). The "direct effect" therefore would
amount to $860-$1,460 million, of which $90-
$150 million would return as export earnings
if the US market share remained stable. Thus,
adding 1 million bpd of imports would add
further foreign exchange costs, after the - off-
set provided by a stable market share, of $770-
$1,310 million; reducing oil imports would
reduce foreign exchange costs by a similar
amount.
19. In Tables F-V and F-VI, we have cal-
culated data for Western Europe and Japan
to match those for the US. In each case, we
calculated their export earnings from oil-re-
lated markets if their shares of these markets
remained stable at 1971 levels. For the varia-
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ILLUSTRATIONS OF POTENTIAL IMPACT OF OIL TRANSACTIONS ON THE CURRENT
ACCOUNT IN THE BALANCE OF PAYMENTS OF JAPAN IN 1980 a*
1970 Actual
(Billion 1970
Dollars)
1980 Potential (Billion 1973 Dollars)
Price of Oil?
$2.14/
$3.00/
$3.41/
$3.82/
$4.64/
Bbl.
Bbl.
Bbl.
Bbl.
Bbl.
I. OIL TRANSACTIONS:
Oil Imports, c.i.f .............................
-2.8
-12.0
-13.7
-15.3
-18.6
Less: Transport Charges e . . .. .. .. .. .. .. .. .. . .
0.8
2.4
2.4
2.4
2.4
Equals: Oil Imports, f.o.b .....................
-2.0
-9.6
-11.3
-12.9
-16.2
Less: Company Profit Remittances e...........
0.1
0.4
0.4
0.4
0.4
Equals: Direct Effect of Oil Transactions...... .
-1.9
-9.2
-10.9
-12.5
-15.8
II. POTENTIAL ADDITIONAL JAPANESE EX-
PORTS TO OIL PRODUCING COUNTRIES
GENERATED BY OIL REVENUES:
Japanese Market Share `:
-
--
-
I -Down 27-28% (US Share Up 25%) .......
1.9
2.1
2.4
2.9
2-Stable .................................
0.7
2.6
3.0
3.4
4.0
3 -Up 27-30% (US Share Down 25%) .......
3.3
3.8
4.3
5.1
III. RESULTANT EFFECT ON BALANCE OF
PAYMENTS (Current Account) 9:
-7.3
-8.8
-10.1
-12.9
2-Stable Market Share ......................
-1.2
-6.6
-7.9
-9.1
-11.8
3-Expanded Market Share ..................
-5.9
-7.1
-8.2
-10.7
tions, we assumed that Europe and Japan
would share equally in that part of the market
lost by the US or would lose equally if the
US market share rose 25 percent.
20. Clearly, any number of tables can be
constructed, using any number of alternative
assumptions about price or market shares or
carrying the investigation of trade flows into
second and third stages. On the basis of Tables
F-IV, F-V and F-VI, however, some general-
izations can be made. The US is the only
major consumer of oil that appears to have
any prospect for maintaining a positive cur-
rent account balance, so far as oil transactions
alone are concerned, and that chance depends
upon maintaining or improving its export per-
formance in the oil producing countries as well
as upon the price of oil. It also depends very
much on the level of profit remittances-here
assumed to be constant-which the US ac-
tually receives from the oil companies' foreign
operations. But oil transactions themselves
will be only a small factor in the overall US
payments balance; a trade surplus from other
goods could cover the oil deficit fairly readily.
On the other hand, a trade deficit on other
goods could be greatly aggravated by the oil
account.
21. For Japan and Western Europe, oil will
represent a sizable balance of payments out-
flow, which sales to oil countries will not
offset. To pay for oil, the Europeans and
Japanese will have to sell their goods else-
where-to each other, to the US and to the
world at large. Japan, in particular, will be
challenged to new export efforts. Japan's bal-
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ance on oil transactions in 1970 was a deficit
of about $1 billion, which was very comfort-
ably covered by Japan's overall export surplus.
But the deficit on oil transactions in 1980
could run from $6 billion to $13 billion-
sums that would be a burden even to an other-
wise strong payments picture.
22. However, the markets of the oil pro-
ducers will be important enough to make a
very substantial difference to the industrial
countries in general and to the Europeans in
particular. European goods now capture al-
most half the oil-related market; if that posi-
tion is maintained as the markets grow, and
if oil prices do not escalate too sharply, Europe
will still be confronted with an oil deficit,
but not one of staggering proportions in re-
lation to the overall European trade balance.
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