POSSIBILITIES OF DISRUPTION OF WORLD OIL SUPPLIES THROUGH 1975

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79R00967A000500020010-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 51
• Document Creation Date: December 20, 2016
• Document Release Date: March 31, 2006
• Sequence Number: 10
• Publication Date: August 17, 1972
• Content Type: MEMO

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OFFICE OF
NATIONAL ESTIMATES
Secret
MEMORANDUM
Possibilities of Disruption of World Oil Supplies Through 1975
Secret
17 August 1972
Copy No.
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CENTRAL INTELLIGENCE AGENCY
OFFICE OF NATIONAL ESTIMATES
17 August 1972
MEMORANDUM
SUBJECT: Possibilities of Disruption of World Oil
Supplies Through 1975
NOTE
This paper, prepared in response to a request from the
Department of State, is limited in scope. It addresses the
question of whether for any reason the principal oil-producing
countries will interrupt supply to consuming countries over
the next three years or so. It does not consider changes in
the commercial terms on which oil will be supplied.
The paper was written by the Office of National Estimates
and coordinated within the Central Intelligence Agency. Its
principal judgments on future contingencies have been discussed
with representatives of the Department of State and the Defense
Intelligence Agency, who are in general agreement with them,
but the paper has not been formally coordinated with the Intel-
ligence community.
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TABLE OF CONTENTS
Page
PRINCIPAL CONCLUSIONS
I. SUPPLY, REQUIREMENTS, AND TRANSPORTATION 1
II. PROSPECTS FOR UNILATERAL ACTION TO
CUT OFF OIL 9
III. PROSPECTS FOR MULTINATIONAL ACTIONS
TO CUT OFF OIL 23
A. A "Participation" Crisis 23
B. Arab Use of Oil as a Weapon in the
Arab-Israeli Context 30
IV. SUPPLY EFFECTS OF VARIOUS CRISES 35
Tables:
Table 1, Oil Consumption in the Non-
Communist World 3
Table 2, Production of Oil for Consumption
in Non-Communist Countries 5,6
Table 3, Official Reserve Position of
Major Oil Exporting Countries 10
Table 4, Official Gold and Foreign
Exchange Holdings 34
Table 5, Approximate Dimensions of Various
Oil Crisis Alternatives 40,41
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PRINCIPAL CONCLUSIONS
A. During 1972-3975, world facilities for producing and
transporting oil will be adequate to meet anticipated consumption
requirements with enough spare capacity for comfort.
B. Interruptions to the flow of oil from suppliers to con-
sumers probably will occur, but these are likely to be of limited
dimensions. For example, production from Iraq and Libya, and the
relatively small amounts of oil shipped through pipelines from
Iraq and Saudi Arabia to the Mediterranean, are especially sus-
ceptible to interruption for political reasons. However, no one
of these sources alone provides more than 5 percent of the oil
normally consumed in the non-communist countries. Even if all
were simultaneously disrupted, at least 90 percent of the usual
flow of oil would continue.
C. Oil will almost certainly continue to be exported by
Iran, Algeria, Indonesia, and Venezuela throughout the period.
So long as supplies from Saudi Arabia -- now the world's largest
exporter -- also are available, a major oil shortage is highly
unlikely. Although there is a possibility of an interruption
of supplies from Saudi Arabia during a period of domestic upheaval,
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we believe that such a shutdown stemming solely from internal
problems would be short-lived and would have only transitory
effects. However,
Saudi adherence to Arab interests will figure heavily in two
other situations that could have consequences of considerable
magnitude.
D. The Saudis are taking the lead for the major exporting
nations in negotiations with the major producing companies over
future ownership of production facilities; these could reach an
acrimonious impasse leading to a multinational suspension of oil
shipments. As many as five major exporters (Saudi Arabia, Kuwait,
Iraq, Nigeria, and Libya) and several small ones -- producing in
combination some 50 percent of the world's normal exports -- might
cooperate, at least for a short period. Similarly, a severe
heightening of the tensions surrounding the Arab-Israeli problem
could lead to a sustained embargo on oil shipments by most of
the Arab oil producers; this, too, could affect up to half of the
normal world oil export trade.
E. Neither of these major contingencies now appears likely.
Of the two, the possibility of an impasse in Saudi negotiations
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with the oil companies seems closer in time; it will come, if at
all, within the next year or so. A new Arab-Israeli crisis or
conflict with major consequences for oil supplies does not now seem
imminent, but it will remain a possibility that could develop
with relatively little warning.
F. Excess oil producing capacity worldwide is far short
of the amount that would be needed to offset either of these
multinational contingencies. Continuing consumption at normal
levels would exhaust the oil stockpiles of the industrial
countries in as little as 3 months.
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DISTRIBUTION OF WORLD PROVED OIL RESERVES, 1971
Asia-Pacific Western Europe
2
2.6%.4%
South America
North America
Communist
Countries
ai
di Arabia
26,7%
14)6141it ,
'Old%
513758 6-72
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GROWTH IN WORLD CRUDE OIL PRODUCTION, BY MAIN AREAS
Thousand b/d
20,000
15,000
10,000
5,000
Middle East
United States*
Other
Western Hemisphere
Communist
Countries
\
?
?....te
_
-
....--"-'
I I
I
,f.i.l.c
I
I
1
Others
I
1961 62
63
*Excluding natural gas liquids.
513760 6-72
64
65
66
67
68
69
70
71
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I. SUPPLY, REQUIREMENTS, AND TRANSPORTATION
1. Aside from acts of policy, the factors that will influence
the supply of oil to the US, Western Europe, and Japan from mid-
1972 through 1975 can be forecast with considerable confidence.
The many troublesome questions that must be addressed in discussing
energy supply and requirements over the longer run are largely
irrelevant to the short-run supply picture. Long lead times are
involved in exploiting new oil discoveries, building new oil tankers,
constructing new oil and gas shipping facilities, and bringing
facilities for the production of energy from new sources into being.
It is, therefore, reasonably safe to assume that in 1975 oil will
continue to supply slightly over half of the world's energy needs,
that virtually all of the oil produced then will come from fields
already discovered and will move in pipelines already laid and in
tankers already built or on order, and that the bulk of the oil
moving in world trade will be produced in the Middle East and
North Africa. The US will be getting very little, if any, oil
from the North Slope of Alaska; Western Europe will be getting
only about 5 percent of its supplies from the North Sea.
2. During 1971, oil consumption in the-non-Communist
countries averaged about 41 million barrels per day (bpd); in
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1975, that figure is expected to lie between 52 and 55 million
bpd.* For analytical purposes, this paper uses a figure of 53.5
million bpd -- the mid-point of generally accepted projections
(See Table 1). By 1975, consumption in Western Europe is likely
to approach or equal that in the US; Japan will account for an
increased share of the total. The industrial nations the US,
Canada, Western Europe, and Japan -- will continue to consume
some 80 percent of the oil produced outside the communist area.
In the USSR, Eastern Europe, and Communist China as a whole,
production slightly exceeds consumption; as a group these
countries currently export about million bpd to the rest
of the world. Their output is expected to continue to grow
enough to permit exports at roughly the same level, at least
through 1975. This paper, therefore, includes 1 million bpd
of oil from the Communist countries as production in -- and
export by -- "Other" Eastern Hemisphere countries. It other-
wise excludes oil produced and consumed in the Communist
countries from the discussion.
We do not believe that the Communist countries have the capa-
bility to bring on a major world oil crisis, either by agi-
tating producing countries into a sweeping embargo or by
buying up and hoarding or destroying enough of the world's
production to make substantial inroads in supplies. On the
other hand, we would not expect them to do much to alleviate
the impact on the industrial West of any crisis that did
occur.
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Table 1
OIL CONSUMPTION IN THE NON-COMMUNIST WORLD
Million barrels per day
1970 1971
(Actual) (Actual)
1975*
(Forecast)
United States
14.4
14.8
17.5
Canada
1.5
1.6
1.9
Western Europe
12.7
13.2
17.3
Japan
4.0
4.4
6.6
Other
6.9
7.4
10.2
TOTAL
39.5
41.4
53.5
* Reflecting an average annual rate of growth during 1972-1975
of 6.6 percent in the total.; 4.3 percent for the US, 10.7
percent for Japan, 7.0 percent for Western Europe.
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3. These consumption projections involve certain assumptions
-- no major war, no world depression, and no widespread resort to
rationing. There is no doubt that aggregate production can be in-
creased to meet 1975 requirements, but forecasts of production by
country and area necessarily involve many assumptions about the
policies of governments in countries where oil is produced. Given
the continuation in office of governments similar to those now in
power, pursuing revenue and conservation policies now foreseen,
over 40 percent of the oil consumed by the non-Communist countries
will come from the Middle East and almost 15 percent will come from
North and West Africa (See Table 2). Saudi Arabia is already the
largest single supplier, and will probably continue to be so, with
Iran running second. In 1975, the two will account for over a
quarter of the oil produced fir consumption in the non-Communist
countries and about a third of the oil moving in world trade.
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'table 2
PRODUCTION OF OIL FOR CONSUMPTION IN NON-COMMUNIST COUNTRIES
Million Barrels per day
t
(Actual)
January-
June
1972
(Preliminary)
1975
(Projected)
USA
11.2
11.1
11.3
Canada
1.6
1.5
2.2
Subtotal: US & Canada
12.8
12.6
13.5
Venezuela
3.6
3.1
3.3
Other Western Hemisphere
1.6
1.6
2.0
Subtotal: Other Western
4.7
5.3
Hemisphere
5.2
Alan
4.5
4.8
6.5
Saudi Arabia!/
4.7
5.7
7.5
Kuwait2/
3.2
3.4
3.7
Iraq
1.7
1.6
2.3
Abu Dhabi
0.9
1.0
1.6
Qatar
0.4
0.4
0.5
Other Middle East
0.8
0.9
1.2
Subtotal: Middle East
16.2
17.8
23.3
Algeria
0.8
1.0
1.4
Libya
2.8
2.3
2.5
Nigeria
1.5
1.8
2.4
Other Africa
0.7
1.1
Subtotal: Africa
5.8
_ILE
5.6
7.4
Indonesia
0.9
1.0
2.0
Other Eastern Hemisphere-'
2.1
1.8
2.0
Subtotal: Other Eastern
Hemisphere
3.0
2.8
4.0
GRAND TOTAL
43.0
53.5
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Of which:
OPECY
OAPECV
Table 2
(continued)
1971
January-
June
1972
1975
(Actual) (Preliminary) (Projected)
25.0 26.1 33.7
15.1 15.9 20.1
cl/ Including one-half of production from Kuwait/Saudi Arabia
Neutral Zone.
22/ Including net imports from communist countries.
gy Organization of Petroleum Exporting Countries: Venezuela,
Iran, Saudi Arabia, Kuwait, Iraq, Abu Dhabi, Qatar, Algeria,
Libya, Nigeria, and Indonesia.
aji Organization of Arab Petroleum Exporting Countries: Saudi
Arabia, Kuwait, Iraq, Abu Dhabi, Qatar, Algeria, Libya, Bahrein,
Dubai, Egypt, and Syria.
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4. The extent and location of producing capacity available
in 1975 in the form of wells, pumps, and loading terminals depends
largely on investment already made or to be made within the next
18 months. Production capacity in excess of current output probably
now amounts to some 4 million bpd in the non-Communist world. Of
that figure, roughly half is in Libya and Kuwait. In Libya conser-
vation regulations have been imposed that hold production well
below previous peaks. Over a million bpd of excess capacity now
exists and will remain in being, but the companies are not free to
use it. Other countries with limited known oil reserves and no
pressing need for additional current income are also adopting con-
servation practices, which discourage investment in additional
facilities. Kuwait recently has limited its major concessionaire
to 3 million bpd at least half a million bpd below capacity.
As a result, the concessionaire has cancelled plans to expand
storage and loading facilities. In Venezuela, the companies
(rather than the government) have curtailed production, and output
could readily be increased by at least half a million bpd. There
is usually some spare capacity in Iran and Saudi Arabia, where oil
companies are expanding their producing facilities very rapidly as
a hedge against future supply crises; by 1975 installed capacity
in each of them is expected to exceed production by substantial
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amounts. Little spare capacity now appears to exist in other pro-
ducing countries and little appears to be planned.
5. Delivery of oil during the 1972-1975 period is not likely
to be hampered by shortages of tanker or pipeline capacity. Demand
for oil has fallen a bit short of expectations recently, because
Japanese and European economic growth has slackened slightly and
because an unusually mild winter in Europe left storage tanks over-
full. The world tanker fleet presently exceeds the demand for
tankerage by a substantial amount -- tankers recently have been
available for charter at all-time low prices. Moreover, additions
to the tanker fleet now on order will increase tanker capacity more
rapidly than necessary to meet any known forecast of demand, at
least until mid-1974 and probably for some time thereafter. The
expected tanker surplus would still be adequate to move the world's
oil if both the major Middle Eastern pipelines (from northern Iraq
and Saudi Arabia) were shut down even while the Suez Canal remains
closed.
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II. PROSPECTS FOR UNILATERAL ACTION TO CUT OFF OIL
6. A cut-off of oil production or shipment from one country
-- acting alone, willingly or not -- is most likely to occur for
one of two reasons. Internal domestic problems sometimes are
accompanied by real or threatened damage to oil installations,
making oil shipment impossible or excessively risky. Second, a
government/company dispute can lead either the host country or
the producing company to stop exports in an attempt to bring
pressure on the other. This section discusses the prospects for
such crisis-causing events in each of the nine largest exporting
countries. The prospects for multilateral action by oil pro-
ducing countries are discussed in Section III.
7. The joint dependence of oil companies and exporting
countries on oil and the revenues it generates is the strongest
-- and most often cited -- reason for expecting oil to continue
to flow from producers to consumers in a fairly regular way over
time. In general terms, dependence on oil revenues does, in fact,
exist in every exporting country but the need for money is far
greater -- and thus more compelling as a force -- in some cases
than in others (See Table 3). Some countries (e.g., Iran and
Algeria) are deeply committed to massive development programs
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Table 3
OFFICIAL RESERVE POSITION OF
MAJOR OIL EXPORTING COUNTRIES
Official Foreign
Reserve Holdings
June 1972
Commodity
Imports-1971
Monthly Average
Reserve/Import Ratio
(Million US Dollars)
(Million US Dollars)
(months)
Algeria
442
105a
4
Indonesia
Iran
negligible
b
808b
73-95a
156
0
5
Iraq
690
58
12
Kuwait
2147c
56
38
Libya
Nigeria
3148
b
353b
46a
126
68
3
Saudi Arabia
1951
76
26
Venezuela
1505
172
9
a/ 1970
b/ May
2/ March
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that demand large sums of money over an extended period of time.
For others (e.g., Nigeria and Libya) doing without oil revenues
would be more of an inconvenience than a disaster.
8. A continuing and growing supply of oil from /ran appears
as certain as anyting can be in an uncertain world. The Shah of
Iran has striiven consistently, over a number of years, to establish
his country as a reliable supplier; at every opportunity, he has
emphasized the contrast between his own attitude and the intemperate
25X1 actions and words of Arab neighbors. His policy is
to maximize Iranian revenues over the next decade or two, in order
to maintain and accelerate Iran's impressive economic development
program.
9. To batten down his position as most reliable Middle East
supplier, the Shah recently took the initiative in extending the
terl of operation of Iran's major oil producer, the Consortium, from
1979, when it was due to expire, to 1994, and to disassociate him-
self specifically from the expressed desire of other major oil pro-
ducing countries for direct ownership participation in all
exploitation companies. In return, he received assurances of
increased exploration, rapid expansion of oil production, shipping,
and refining facilities, greater access to oil at preferential
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prices -- in short, to more rapid development by the producing
Consortium of Iran's oil producing and processing capability.
He also made it abundantly clear that he expects to receive
financial compensation for Iranian oil at least as generous as
anything granted to the Arab producers. In these circumstances,
Iranian oil revenues, which have doubled in the past two years,
reaching about $2 billion in 1971, should continue to expand at
a healthy rate, and Iranian oil should continue to flow to the
consuming countries in ever growing quantities.
10. Immortality is not, of course, among the Shah's many
attributes, and Iran could be in for turmoil if he died or lost
control. A political struggle, however, would probably be
centered in Teheran, 300 miles or more from the oil producing
areas, and it probably would pose little or no threat to oil
production facilities. A successor government almost certainly
would be anxious to receive the oil revenues that have become
vital to the Iranian economy and to continuation of other costly
aspects of the Shah's ambitious programs. The overthrow of the
monarchy and a complete change of Iranian goals and political
orientation is highly unlikely in the next three years.
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11. Saudi Arabia is now the world's largest oil exporter,
and the plans of the Arabian American Oil Company (Aramco) for
increasing production capacity are likley to maintain it in first
place for some years to come, provided that there is no major
confrontation between Aramco and the Saudi Government. Aramco
and King Feisal's regime can probably negotiate themselves out of
the corners into which they have been busily backing one another
on the issue of participation (See Section III). If so, we see
no reason to anticipate unilateral Saudi action to curtail dras-
tically or cut off oil exports for an extended period. Feisal
is convinced that continued close cooperation with the United
States is in the best interests of his country and his regime.
He has repeatedly declared that he will not use a threat to cut
off oil supplies as a political weapon. The Aramco owners are
sufficiently confident of his sincerity to be installing addi-
tional producing capacity at an unprecedented rate.
12. King Feisal's regime has had no serious domestic poli-
tical problems. High paying jobs and gradual social change have
dampened most opposition elements, and the Saudi security system
has kept in check whatever Arab nationalist elements they have
found in the armed forces. Saudi Arabia is, however, a candidate
for political turmoil sooner or later; Feisal is aging, and he is
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tending toward political and religious conservatism while the
educated, potentially-political part of the population is becoming
more worldly and more liberal in its attitudes. Disaffection is
fairly widespread
Although the succession appears settled at
the moment, the royal family is huge and factional quarrels could
erupt during a succession crisis. Political upheaval might entail
sabotage of oil facilities in the Eastern Province. Governmental
crisis could lead to a shutdown of oil shipments, but we believe
that any stoppage would be very short-lived and that Saudi oil
would continue to be produced and exported. The domestic programs
of any Saudi regime -- even a revolutionary one -- are likely to
demand the continuation of oil revenues at very high levels.
Feisal's passing, however, probably would increase the prospects
for an Arab-wide attempt to use oil as a political weapon in the
Arab-Israeli dispute. (See Section III)
13. Kuwait is so dependent on the international oil business
that a unilateral decision to suspend oil exports for more than a
short period is virtually inconceivable. It has accumulated very
substantial financial reserves and could live off its savings for
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at least a year or two, so far as import needs are concerned.
Without oil production, however, economic activity would be dras-
tically curtailed. Indeed, the almost entirely urban population
would face grave difficulties if oil production were shut down
completely for an extended period. (Kuwait must keep pumping 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 ex-
ternal -- of a magnitude to cause any Kuwaiti deliberately to bring
on such drastic circumstances. It is possible that Iraq might at
some time attempt to take over Kuwait. That eventuality, however,
seems particularly remote at present; Iraq has a wide assortment of
pressing problems of its own and is receiving financial support from
Kuwait. Moreover, a major motive for any such move would be to
seize Kuwait's oil and sell it for Iraqi benefit, not to hold it off
the market.
14. The two large North African producers, Algeria and Libya,
stand in sharp contrast to one another. Algeria has a relatively
large, comparatively well educated population and a wide variety of
resources -- minerals, arable land, and tourist attractions -- that
can, with time and money, be developed. Its leadership has chosen
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to exploit moderate oil reserves and huge gas reserves as rapidly
as possible and to use oil and gas revenues to finance development
of the rest of the economy. It has moved in a gradual but deter-
mined manner to take over operation of all industrial facilities
formerly controlled by foreigners; the Algerian state oil company
now controls more than three-quarters of the oil produced. Gas
production is and will be carried out entirely by Algerian entities,
with foreign involvement confined to transporting and marketing
liquefied gas. We are confident that any Algerian government will
continue producing oil and making its oil sales decisions on com-
mercial grounds.
15. Libya is awash with money and short of virtually every
oiher asset necessary for development. Its people are few in
number and generally backward by the standards of the region. Its
government gives every appearance of being firmly in control; there
is no present sign of substantial, organized opposition. In the
immediate aftermath of the September 1969 revolution, the 12-man
Revolutionary Command Council (RCC) demanded and got the rapid
removal of US and British military installations; in late 1970 and
early 1971, it took advantage of its position as an important
supplier close to the markets in a tight transport situation to
wring two rapid increases in oil revenue payments from the oil
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companies. Since then the regime has been casting around for new
victories. The President of the RCC, Colonel Qadhafi, is a young
man with a messianic complex looking for new worlds to conquer and
bumping frustratedly against immovable obstacles to his cherished
objectives of Arab unity, Libyan glory, and Islamic purity. With
huge foreign exchange reserves, a strong bent toward conservation
of relatively limited known deposits of oil, and a leadership that
alternates between frequent quarrels in camera and dramatic con-
frontations with one or another external antagonist, Libya could be
in for almost any conceivable kind of turmoil and trouble. The odds
appear high that some event -- coup and nationalization head the
list of possibilities -- will lead to further curtailment or cessa-
tion of Libyan oil production between now and the end of 1975.
There is no necessary reason, in the case of Libya, to expect an
oil crisis to be of short duration.
16. Relations between the government of Iraq and the inter-
nationally owned Iraq Petroleum Company have been at or near crisis
level for over a decade, but oil production has never ceased totally.
Since their chronic quarrel reached a new extreme with the 1 June
1972 announcement by Iraq of nationalization of the northern IPC
fields, vituperation has lessened and all parties have begun yet
another search for yet another compromise. Mediators have been
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appointed, Iraq is free to sell oil from the nationalized fields
at least until October without the threat of immediate legal action
by IPC, and IPC affiliates are continuing normal operations of
fields in the southern part of the country which were not affected
by the nationalization decree. Iraq's need for oil revenues and
an apparent willingness on the part of the companies to accept any
sort of deal that does not set precedents that would do violence to
company operations in other parts of the world augur well for an
eventual compromise. An expanded consortium patterned on that de-
vised for Iran after Iranian oil was nationalized 20 years ago is
one possible outcome.
17. A deal permitting smooth operation of the nationalized
fields, however, would only serve to put to rest -- perhaps tem-
porarily -- 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 or the
Syrians could sabotage the p(peline from the northern fields to the
Mediterranean; the Syrians could close down the pipeline on their
own territory as they have in the past. 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
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new punitive action against Western oil interests. All things con-
sidered, some politically-inspired disruption of oil shipments from
Iraq during the next few years appears likely. Iraq's acute need
for money, however, leads us to believe that such disruptions
would be of comparatively short duration -- a matter, say, of one
to six months.
18. Nigeria will depend on oil for more than half of its
foreign exchange earnings and government revenues over the next
three years, but it could survive financially without oil income.
Its revenues have risen rapidly in recent years, its credit is
good, and it has had practice in coping with sudden stoppage in
revenues during the recent civil war. Nationalist sentiment and
distrust -- even hostility -- towards foreign investors andtmost
of the Great Powers have grown apace as the country has regained
self-confidence in the post-civil war period. For the time being,
however, the urge to increase Nigerian control over Nigerian assets
probably has been assuaged by a new policy, under which no new oil
concessions will be granted and a national company will hold all
areas not parcelled out and will take over exploration rights in
all areas relinquished by present concessionaries. Thus, a uni-
lateral move by the Nigerian government against foreign oil interests
within the next several years is possible, but it does not appear
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likely. Although a certain amount of civil commotion and turmoil
is to be expected, Nigerian oil deposits are located in areas
unlikely to be much affected. Another major civil war, on the
scale of the one that ended two years ago, seems highly unlikely
for some time to come.
19. We think there is virtually no prospect of an extended
interruption of oil exports from Indonesia over the next three
years. With no foreign exchange reserves to speak of, the Suharto
government has been struggling to meet its debts and get its
financial house in order. It has clearly focused on economic
betterment as the primary national goal and has decided on economic
cooperation with Japan and the West as the best means to accomplish
it. Operations of foreign oil companies currently earn Djakarta
about $200 million (20 percent of its foreign exchange earnings),
and this may double in 1973. Djakarta welcomes foreign investment,
especially in the oil sector. Indonesia already holds majority
ownership in all of the concessions issued in recent years, and it
has renegotiated the longstanding agreement with its major conces-
sionaire to provide for similar government ownership participation
in the future. In May 1972, the Indonesians received a development
loan of $207 million from Japan in return for Djakarta's promise
to sell the Japanese virtually all uncommitted low sulphur oil pro-
duction for the next ten years.
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20. Political change probably would be disadvantageous rather
than disastrous to the oi) companies. Oil export problems and
occasional work stoppages could occur in periods of domestic stress.
In such instances, the Indonesian Army could and would move quickly
to protect the nation's oil installations. While dissidents might
embark on a program of sabotage, including targets in the oil in-
dustry, we tend to discount the possibility of any major success
along these lines. The possibility of a xenophobic reaction to
the pro-West course of the Suharto government and a resurgence of
Sukarno-era ultra-nationalism appears distant in time. Even in the
highly unlikely event that a radical regime took control, we would
expect foreign firms to experience harassment and irresistible de-
mands for renegotiation of contracts, rather than expulsion.
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III. PROSPECTS FOR MULTINATIONAL ACTIONS TO CUT OFF OIL
23. The major oil producing countries are geographically dis-
persed, diversified in their interests, and disparate in economic
development and political orientation. Yet there are elements
common to a number of producers. Most are in the Middle East,
most are Muslim, most are highly nationalistic, and many are Arab.
The latter two characteristics underlie the only two contingencies
that are at all likely to embroil several of the producers in a
way that could lead to simultaneous disruption of oil supplies
from several major sources.
A. A "Participation" Crisis
24. Nationalist sentiment -- in particular, resentment that
oil resources long were controlled and exploited by foreigners who
could operate with little regard for the welfare of the countries
in which the oil originated -- was a motive force behind the estab-
lishment of the Organization of Petroleum Exporting Countries (OPEC)
in 1960. Membership has been expanded in the past twelve years;
the five founders (Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela)
have been joined by six newcomers (Libya, Algeria, Abu Dhabi, Qatar,
Nigeria, and Indonesia). But much more than the membership has
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changed. In several cases, the political orientation of member
governments has altered drastically. In all cases, the notion
that the government has an overriding duty to manage oil to the
maximum benefit of the country is now an article of faith. More-
over, by maintaining a considerable degree of solidarity through
a series of price confrontations with the companies, the OPEC
members have seen the tangible benefits of formulating and main-
taining a common position. Once the major international oil
companies controlled not only the markets but significant amounts
of excess capacity in the US as well as elsewhere. In recent
crises, the OPEC members, through their control of a commodity now
in relatively short supply, have been able to enforce demands on
the companies.
25. The desire for "participation" -- equity ownership in
producing companies given exclusive concessions decades ago --
was first expressed as an official goal of OPEC in 1968. In the
wake of a 1970-1971 series of price agreements that greatly in-
creased the amounts paid by companies to host countries for each
barrel of oil, participation became an immediate OPEC goal. Both
the OPEC members and the oil companies recognize that any agree-
ment on the terms for attaining and conducting participation will
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involve a host of complex issues and that the major single problem
in any particular company/country deal is that precedents would be
set for other agreements in areas where circumstances are not
identical. The Saudis, wanting the psychological fruits of leader-
ship and anxious to preempt ultra-nationalist Arabs, offered to
spearhead the drive for participation. OPEC agreed to let the
Saudi oil minister, Zaki Yamani, initiate negotiations with Aramco;
the other Arab members from the Persian Gulf area agreed to accept
the Saudi lead and to support one another in seeking agreements
on terms broadly similar to whatever the Saudis worked out. (Iran,
as noted above, chose to go its own way.)
26. The Saudis -- who were somewhat isolated in Arab affairs
for some years -- are delighted to be back in Arab favor playing a
key role. King Feisal's personal prestige and honor are committed;
he is anxious to demonstrate his dedication to Saudi and Arab
causes, his independence of the West, and his concern for the
interests of all the producing countries. In short, he is now on
record as unwilling to settle for anything less than 20 percent
participation immediately and majority participation (51 percent
or more) in the none-too-distant future, and he clearly means to
remain adamant.
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27. Aramco's four parent companies -- Standard of New Jersey,
Mobil, Standard of California, and Texaco -- have experienced great
difficulty in formulating a common position. Each of them (and the
19 other companies with whom they are consulting) is subject to
conflicting pressures from stockholders, customers, and govern-
ment bodies. Outside Saudi Arabia, they are competitors with
varying worldwide interests to protect. Their leaders disagree
both on proper strategy and on negotiating tactics; some, at least,
appear to have assumed wrongly that the King could be persuaded
to cut the ground from under Yamani. In March, after an ultimatum
by the King, Aramco grudgingly accepted the principle of 20 percent
participation. But all four companies are opposed to the Saudi
insistence that the formula for Saudi compensation of the Aramco
owners be based on the depreciated book value of existing facilities
in Saudi Arabia. None has come up with an alternative proposal
that is acceptable to the Saudis.
28. Negotiations continue to drag on, with another meeting
scheduled for August 19. If the parties can reach an agreement
on a compensation formula, this would remove a major roadblock to
a package deal on other contentious issues involved in participa-
tion, e.g., arrangements for marketing the Saudi share of
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production and provisions for Saudi sharing in future investment
expenditures. With such questions settled, Aramco would probably
continue to increase productive capacity in accordance with its
existing plans.
29. On balance, we are inclined to believe that an over-
all agreement eventually will be reached, without any interruption
in oil production. Feisal has declared his intention to keep the
oil flowing. He has indicated that his first move, following a
breakdown of participation negotiations, would be legislation to
nationalize the Aramco operations, rather than an embargo on ship-
ments. The companies certainly will strive to retain an owner-
ship position in the country with the world's largest oil reserves
and will go to great lengths to settle with Feisal on some basis
that avoids nationalization. Moreover, the companies badly need
Aramco oil to meet their marketing obligations and might continue
to ship Saudi oil even after nationalization.* Nevertheless, we
cannot be fully confident of any judgment on the Saudi/Aramco
situation; there are too many players, with too many conflicting
Standard of California depends on Aramco for almost
half the oil it sells; Texaco gets about a third,
Jersey Standard almost a quarter, and Mail nearly
a fifth.
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interests, subject to too many outside pressures, operating from
too many sets of preconceptions, prejudices, and loyalties.
30. If a Saudi/Aramco agreement is indeed reached, participa-
tion probably will lose its potential as a cause for widespread
disruption of oil production. In varying forms, the agreement
will be extended gradually to the other Persian Gulf producers
on the Arab side; Nigeria, too, will get an equivalent deal.
Iran will get some form of additional financial recompense, and
Venezuela will attempt to reap some benefits. Libya can, of course,
be expected to hold out for extra-special terms; it might well
induce a crisis leading to a cut-off of its own output. But Libya
is not now able unilaterally to bring about major, worldwide
problems, and it probably will not be in any such position over the
next few years.
31. On the other hand, if the Aramco/Saudi situation should
reach a showdown, the Saudis probably would not have to stand alone
against the companies. Should matters reach the extreme state of
a shutdown of Saudi production, Kuwait, Abu Dhabi, and Qatar probably
would follow the Saudi lead. The Libyans probably would follow
suit, too, although they would seek some excuse to make their action
appear independent of the Saudis, rather than an acknowledgement
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of Saudi leadership on the issue. Iraq, wanting continuing financial
assistance from other Arabs, and hoping to maximize its own future
revenues, probably would also leap on the bandwagon. Moreover,
Nigeria probably would cooperate with an OPEC-declared embargo on
shipments -- at least for some weeks, and possibly for a number of
months. We would expect production and shipment to continue --
and increase as much as possible -- in Iran and Indonesia, and
probably in Venezuela and Algeria as well.
32. On the basis of these individual country proclivities, it
is conceivable that some 50 percent of normal exports to the non-
communist countries might be cut off for a number of months. That
however, appears to be an outside limit; it is more likely that not
every participant would cooperate fully or for an extended period.
It is more realistic to visualize a situation in which a third or
so of world exports would be cut off for a few weeks with production
gradually resuming -- first in one country and then in another, as
each feels the pinch. We emphasize that the precipitant -- a
breakdown of Saudi/Aramco negotiations followed by a shutdown of
Saudi output -- for such a multinational cutoff remains unlikely,
especially because the Saudis themselves would want to be assured
of more than majority support from the OPEC members before shutting
off their own production.
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B. Arab Use of Oil as a Weapon in the Arab-Israeli Context
33. 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; they have frequently
discussed the possibility of depriving the West of oil in order
to bring pressure on Israel. The amount of world attention de-
voted to the need for energy in general and oil in particular in
the last several years has been reflected in increased Arab dis-
cussion of the relationship between oil, the West, and Israel.
Both Sadat of Egypt and Qadhafi of Libya have indulged in public
reminders of Western need for Arab oil in the past few weeks.
Nevertheless, the Arab world never has undertaken an embargo on
all oil shipments, and we believe any such action remains highly
unlikely as a deliberate act of collective Arab policy aimed at
bringing about an imposed settlement of the Arab-Israeli situation.
Saudi King Feisal has declared his opposition to the use of oil as
a political weapon and without the participation of Saudi Arabia
a purely Arab boycott would not be effective. The mutual trust
among Arab states necessary to bring about an embargo does not exist;
If King Feisat's regime were replaced by a radical one, the
possibility of joint Arab action to use oil as a political
weapon obviously would increase,
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in its absence, no Arab state -- with the possible exception of
Libya -- is likely to take the first step. Nevertheless, threats
no doubt will be uttered and repeated at frequent intervals.
34. Arab behavior might be different in the event of renewed
or imminent Arab-Israeli hostilities, and the possibility of such
hostilities,leading to a substantial interruption of oil supplies,
is a contingency that cannot be ruled out. A full-scale Arab-
Israeli war does not now seem likely, but the situation is potentially
volatile, subject to change because of developments in Israel, in
Egypt, in Jordan, in Saudi Arabia, or in the policies of the Great
Powers. In the event of a new crisis, some Arabs immediately will
look for ways to strike out at the US. In the past, the US oil
companies have been able to maintain an appearance of disinvolvement
in US foreign policy that has served them well when Arab-Israeli
issues became critical. Recently, however, both the companies and
some producer governments have encouraged increased US Government
involvement in oil matters; hereafter, the companies may find them-
selves more closely associated than before in Arab minds with US
policy on the Arab-Israeli question and hence more exposed to direct
punitive actions from Arab governments. At a minimum, some of the
Arab states would attempt to embargo oil shipments to the US.
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35. Moreover, the events of the past several years have in-
creased the chance that in a highly charged ;risis the majority
of the Arab producers would be willing to attempt a joint embargo on
all shipments to the US, Western Europe and Japan. The Arab
leaders are now much more aware that an embargo against the US or
only one or two other countries is unlikely to have any substantial
effect, whereas a total Arab shutdown would cut off roughly half
the oil normally moving in world trade. The new Libyan regime is
willing to do almost anything to promote the Arab cause. The
Saudis, as noted above, are back in the mainstream of Arab life
and anxious to maintain that position; King Feisal is deeply com-
mitte&emotionally to the Arab cause. He might undertake embargo
action in a time of crisis and continue it out of pride and
stubbornness. The Kuwaitis have never been in a position to ignore
the wishes of the Arab world when there is virtual unanimity of
opinion. And the animosities and mutual suspicions that hamper
joint Arab action in normal times tend to subside at least tem-
porarily when the Arabs believe they are being humiliated by --
or on behalf of -- the Israelis.
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36. Moreover, the capability of the several Arab oil producers
to sustain an embargo will improve in the years ahead. The various
revenue agreements of the past two years have led to a very rapid
accumulation of Arab financial reserves. The gold and foreign
exchange holdings of the four richest Arab producers have risen
from $3.3 billion at the end of 1969 to $7.2 billion in mid-1972.
(See Table 4.) (The total commodity import bill of the entire
Arab world in 1971 was about $6 billion.) By 1975, reserves
probably will be two to three times as large. The principle
of inter-Arab financial support has been clearly established by
the Khartoum subsidies
payments by Kuwait and
frontation with IPC.
probably would include
cooperation that could
down of oil production
initiated after the 1967 war and the current
Libya to support the Iraqis in their con
Consequently, any joint embargo agreement
a provision for inter-Arab financial
permit the Arabs to maintain a joint shut-
for long enough (several months) to cause
major problems for all the consuming nations.
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Table 4
OFFICIAL GOLD AND FOREIGN EXCHANGE HOLDINGS
December
1969
Million US Dollars
December December
1970 1971
June
1972
Iraq
476
462
600
690
Kuwait
1282
1376
1690!/
214712/
Saudi Arabia
607
662
1465
1951
Libya
918
1590
2666
3148
TOTAL
3283
4090
6421
7186
2/ September
March
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IV. SUPPLY EFFECTS OF VARIOUS CRISES
87. The consequences to the consuming countries of sudden
interruptions in oil exports of various magnitudes for certain
periods of time can be sketched out in a general way. It is vital
to note, however, that any projections and judgments necessarily
are based on literally dozens of assumptions. The projections in
Tables 1 and 2 are certainly more accurate in the aggregate than
in the detailed breakdown of either consumption or production by
area or country; they apply to 1975 on average, rather than to
any particular season; they assume an international situation
and a set of oil company/producing country relationships not
drastically different from those prevailing in mid-1972. The
following paragraphs, in essence, address the impact of a sudden
oil crisis introduced into an otherwise "normal" situation.
38. To soften the immediate impact of a major curtailment
of oil imports, the consuming countries can draw on stockpiles
and can attempt to increase oil production in countries not in-
volved in the curtailment. The Western European nations and Japan
have recently agreed to raise oil stockpiles to a 90-day supply
by 1975. Some steps are underway to put that decision into effect,
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but implementation will be slow -- the most important problems are
disputes over precisely what constitutes available oil in storage
and the very high cost of storage and facilities. So far as can
be determined, the actual 1970-1971 stockpile figure probably was
in the neighborhood of a 45-day supply, although a 60-day minimum
supposedly was in effect and all available storage capacity was in
use. It seems likely that targets will continue to be missed and that
the average availability will be on the order of a 55-60 day supply
in 1973, a 65-70 day supply in 1974, and a 75-80 day supply in 1975.
Supplies would be abnormally low at the end of a long, cold winter,
and at a peak at the end of summer. In the US, which produces
three-fourths of the oil it consumes, oil over and above the
amounts necessary to keep refineries and pipelines operating probably
amounts to only a 2-4 week supply, and we know of no major plans
for increasing storage capacity. On this basis the combined stock-
piles of the US, Canada, Japan, and Western Europe probably now
fluctuate around 1.4 billion barrels; by 1975, they probably will
fluctuate around 2.3 billion barrels. Combined consumption
amounts to about 1.1 billion barrels a month at present; it will
grow to about 1.3 billion by 1975.
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39. Production capacity in excess of current output probably
now amounts to some 4 million barrels per day in the non-communist
world. By 1975, based on what we know of existing plans of the
oil companies, excess capacity may increase 75 percent. At 7 million
barrels per day, however, it will still be equivalent to less than
15 percent of production. Moreover, the bulk of the excess will
be located in Arab countries -- that is, in countries where there
is a substantial risk of supply interruption. Only some 2 million
bpd (1.5 million bpd from Iran and 0.5 bpd from Venezuela) is
reasonably sure to be available under most circumstances)-' A
further 2.5 million bpd would be available from Saudi Arabia in
1975 if that country were not involved in a cutoff.
40. In Table 5, three alternative possibilities for oil
supply shortfalls are outlined in general terms. For purposes of
calculation, they assume that world consumption is maintained
in the face of the embargo. They also assume that shipments from
the communist countries are neither cut off nor increased."
1/ In the US and Canada, output probably could be increased
by only 200,000-500,000 barrels per day within 3 months.
The reasons for the latter assumption are noted in the
footnote to paragraph 2.
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They use a rounded consumption figure of 54 million bpd in 1975
and a conservative figure for the additional capacity that could
be brought into production. They further assume that the output
of the Western Hemisphere -- as well as the rest of the world still
producing -- is fully shared.
41. The situation sketched out in Case I -- a sudden cutoff
of 50 percent of the oil normally exported by all countries except
the US and Canada -- is approximately what we estimated above
as the worst that we would expect to result from a cutoff precipi-
tated either by a 'participation" crisis or an Arab-wide attempt
to embargo oil shipments. The Table indicates that the world could,
in theory, do without these supplies for about 3 months this year
and about 4 months by 1975. The other "Cases" are indicative of
the results if either crisis occurred in less sweeping fashion;
the world's stockpiles would last for six months if 25 percent of
normal exports were cut off this year and for 10 months if such a
cutoff occurred in 1975. (The question of whether or not Saudi
Arabia is one of the countries still producing makes very little
difference for 1972; in 1975, however, the ability to draw on
perhaps 2.5 million bpd of excess capacity in Saudi Arabia could
substantially slow the drawdown on stockpiles.)
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42. In a real crisis, of course, the situation would be far
more complicated. Lumping together the requirements of the non-
communist world averages out a great many differences. The effects
of any given curtailment would vary widely, depending on the role
that Oil plays in a particular economy and the sources a country
normally draws on for its oil. Japan depends on oil -- all
imported -- for 75 percent of its total energy supply; the com-
parable figure for Western Europe is about 60 percent. The US,
on the other hand, gets some 43 percent of its energy from oil --
and only 11 percent from imported oil. Japan gets a great deal
of its oil from Iran and Indonesia, Which would probably go on pro-
ducing and shipping throughout any of the contingencies we have
identified. Europe, by contrast, depends heavily on imports from
the Arab countries, which are more likely than the non-Arabs to
be involved in shutdowns. In any actual crisis, reality could be
worse than the models in some ways -- e.g., stocks would not
necessarily be in the immediate neighborhood of consumers. In
some ways, reality could be better -- e.g., consumption control
and rationing devices certainly would be introduced very early
in a major crisis. Severe and sustained rationing inevitably
would curtail industrial production, with a fairly immediate effect
on total economic output.
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Table 5
APPROXIMATE DIMENSIONS OF VARIOUS OIL CRISIS ALTERNATIVES
Million Barrels per day
CASE I: 50 percent of Normal World Exports Cease
1972
1975
AVAILABILITY
US and Canadian production at full capacity
13
14
50% of total normally exported
by other producers
15
20
Excess capacity in Iran and Venezuela
brought on stream
1
2
Total
29
36
NORMAL CONSUMPTION IN NON-COMMUNIST COUNTRIES
44
54
SHORTFALL
15
18
(% of consumption)
(34%)
(33%)
CASE II: 33 1/2 percent of Normal World Exports Cease
AVAILABILITY
1972
1975
US and Canadian production at full capacity
13
14
66 2/3% of total normally exported by
other producers
20
27
Excess capacity in Iran and Venezuela
brought on stream
1
2
Total
34
43
NORMAL CONSUMPTION IN NON-COMMUNIST COUNTRIES
44
54
SHORTFALL
10
11
(% of consumption)
(23%)
(20%)
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Table 5 (continued)
CASE III: 25 percent of Normal World Exports Cease
1972
1975
AVAILABILITY
13
14
US and Canadian production at full capacity
75% of total normally exported by
other producers
22
30
Excess capacity in Iran and Venezuela
brought on stream
1
2
Total
36
46
NORMAL CONSUMPTION IN NON-COMMUNIST COUNTRIES
44
54
SHORTFALL
8
8
(% of Consumption)
(18%)
(15%)
Balance between Shortfall and Stockpiles
Monthly drawdown
(million barrels)
Stockpile
(million
barrels)
Approximate
Months before
Supply Exhausted
1972
1975
1972
1975
1972
1975
Case I
450
540
1400
2300
3
4
Case II
300
330
1400
2300
5
7
Case III
240
240
1400
2300
6
10
-41-
Approved For Release 20AWTIA-RDP79R00967A000500020010-7
25X1 Approved For Release 2007/03/07 : CIA-RDP79R00967A000500020010-7
Approved For Release 2007/03/07 : CIA-RDP79R00967A000500020010-7