IRAN-IRAQ MILITARY SITUATION REPORT #12

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86B00420R000200320001-4
• Release Decision: RIPPUB
• Original Classification: T
• Document Page Count: 85
• Document Creation Date: December 22, 2016
• Document Release Date: July 30, 2010
• Sequence Number: 1
• Publication Date: March 19, 1984
• Content Type: REPORT

i
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
NSC Meeting
Iran-Iraq Energy Crisis
20 March 1984
Please return to:
SA/DCI/IA
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
A
NSC Meeting on Iran-Iraq
20 March 1984
Contents
Tab A A Memo from
Talking Points for You
Tab B
Tab C
Tab D
The NSC Policy Papers
(Contains Critique of NSC Agenda and
Entitled "Energy Emergency Preparedness"
"Iran-Iraq War: Escalation Scenarios and Threats to Persian
Gulf States" (Interagency Intelligence Assessment, 12 March 1984)
Tab E An Uncoordinated Draft of the Sections of the Forthcoming SNIE
"World Oil Market Outlook: Key Political and Economic Dimensions"
Dealing with Interruptions of Persian Gulf Oil Supplies
Tab F Selected IEEW Articles and an IA from OGI "International Oil Market
Outlook: Midyear Assessment"
Tab G Background Statistics on the Oil Market
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
Iq
Next 3 Page(s) In Document Denied
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
ti
THE DIRECTOR OF CENTRAL INTELLIGENCE
National Intelligence Council
NIC #01787-84
19 March 1984
MEMORANDUM FOR: Director of Central Intelligence
Deputy Director of Central Intelligence
NIO for Economics 25X1
SUBJECT: NSC Meeting on Iran-Iraq Energy Issues
1. The purpose of the NSC meeting is to establish some basic
guidelines on which to base US foreign policy and economic actions in the
event of a Persian Gulf supply interruption. The main issues for decision
concern:
o How should the US approach triggering the IEP sharing system in
the event of a severe disruption?
o To what degree should we seek consultation or coordination with
our Allies on stock draws?
o Should the US support coordinated international action to
influence this market?
On each issue the options range from little or no US Government action
(letting the market do the job) to various forms of joint action and
coordination with other nations.
2. In our opinion, the issues on which the NSC is asked to focus
basically address how best to minimize the impact of a given disruption on
the world oil market. The Administration's main objective is to avoid a
recurrence of the enormous price increases that occurred in 1979 in
response to a very small world oil shortage. Although this is certainly an
important objective, even more important are two types of policy action
which are only briefly mentioned in the attached papers. These are:
o What the US can do to prevent a supply disruption in the first
place; and
o What actions the US can take to minimize the size of any shortfall
and its duration.
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86BOO42OR000200320001-4
 I
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
SECRET
3. The NSC study does not systematically review US diplomatic,
economic, and military initiatives aimed at preventing an Iraqi escalation
of the war which would threaten Iranian oil supplies, or an Iranian
response which could threaten Gulf oil supplies. Up to now, both the
Iraqis and the Iranians have been cautious in their actions, if not in
their statements. Iraq will probably attack Iranian oil exports if its
military situation looks desperate. But so far it is not, and US support
for any Iraqi oil export pipelines, as well as continued large-scale Saudi
assistance to Iraq, may prevent the worst from happening. These questions
are being addressed in the CCPG, but we have not seen any paper.
4. Just as important is US deployment of military forces in the area,
both to dissuade Iranian attacks and to deal with them if they occur.
Working with the Saudis and Kuwaitis to increase oil industry security and
to protect and rebuild facilities if an attack occurs obviously are also of
critical importance, and little is said about the subject. DoD is
examining these questions, but we are not aware that any interagency
process is under way.
5. From an intelligence point of view, you may wish to make the
following points:
o Although Southern Gulf oil facilities are highly vulnerable to
attack, the chances are small that the Iranians would succeed in
damaging them so severely as to cause an extended reduction in
Saudi and Kuwaiti exports once the smoke had cleared. Most of the
critical facilities would have to be largely destroyed to cause a
big oil supply shortfall.
o Oil tankers in the Persian Gulf are highly vulnerable, however, to
all kinds of attacks. Reopening the Straits would not make the
Gulf safe for tankers. A large US naval presence might be
required to do the job
.
o If there were major attacks a ets in the Southern
Gulf, a great deal of uncertainty wgu-1?d-prevail about the extent
of the damage and its market ijipatt. Initially, oil prices would
probably shoot up rapidly -The US Government could help calm the
market by disseminating me accurate information.
I
Since we believe that the-grea ei5ty of possible disruptions
would have a relatively small and short-lived impact on world oil
supplies, it makes sense to focus policy reactions on calming the
market and releasing stocks, rather than on triggering major
coor mated policy moves, such as under the IEA. The IEA should
be tivated only if the disruption is known to be large and
li ly to continue for at least several months.
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
SECRET
MEMORANDUM FOR
SYSTEM II
9038
NATIONAL SECURITY C U
NCIL
WASHINGTON, D.C. 20506
March 16, 1984
MR. DONALD P. GREGG
Assistant to the Vice President
for National SEcurity Affairs
Office of the Vice President
MR. CHARLES HILL
Executive Secretary
Department of State
MR. CHRISTOPHER HICKS
Executive Secretary
Department of the Treasury
COLONEL JOHN STANFORD
Executive Secretary
Department of Defense
MR. BARRY ALLBRIGHT
Director, Executive
Secretariat
Department of the Interior
MRS. HELEN ROBBINS
Executive Assistant to the
Secretary
Department of Commerce
SUBJECT: NSC Meeting on
MR. WILLIAM VITALE
Executive Secretary
Department of Energy
MR. ALTON KEEL
Associate Director for
National Security and
International Affairs
Office of Management and Budget
MR. THOMAS B. CORMACK
Executive Secretary
Central Intelligence Agency
MR. WILLIAM NISKANEN
Member
President's Council of
Economic Advisors
AMBASSADOR HARVEY FELDMAN
Washington Representative for
U.S. Ambassador to the United
Nations
BRIG. GENERAL GEORGE A. JOULWAN
Executive Assistant to the
Chairman
Joint Chiefs of Staff
Iran-Iraq Energy Issues (S)
A National Security Council meeting has been scheduled for 2-3:00 p.m.,
Tuesday, March 20, 1984 in Room 208, old Executive Office Building to
discuss international energy issues and policy options arising out of
the Iran-Iraq war. Attached are an agenda (Tab A) and background
papers prepared by the Department of State (Tab B). (S)
Attachment
Tab A Agenda
Tab B Background Papers
SECRET
DECLASSIFY ON: OADR
Robert M. Kimmitt
Executive Secretary
0E710%0CT
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
SECRET
SECRET
SYSTEM II
90348
IRAN-IRAQ ENERGY ISSUES (S)
National Security Council Meeting
Tuesday, March 20, 1984
2-3:00 p.m.
Room 208, OEOB
AGENDA
Introduction (5 minutes) . . . . . Robert C. McFarlane
Overview of Oil Market Situation
and Prospects (5 minutes) . . . . . Donald P. Hodel
International Energy Issues and
Policies (10 minutes) . . . . . . . . Richard Fairbanks
Discussion (35 minutes). . . . . . . . Principals
Conclusion (5 minutes) . . . . . . . . Robert C. McFarlane
SECRET r-% r T
1 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
0/0 ?54U/4b4
United States Department of State
Washington, D. C 20520
March 12, 1984
SECRET/NODIS/EYES ONLY
MEMORANDUM
TO: The National Security Council
FROM: Allen Wallis, Chairman
International Energy Security Group (IESG)
SUBJECT: Energy Emergency Preparedness --'International
Energy Policy Issues Requiring Decision
The IESG has completed the first phase of its examination'
of policies of an international character that will enable us
to deal effectively with an interruption of oil supplies from
the Persian Gulf. Several issues for decision are set forth in
this memorandum; others, dealing with the macroeconomic impact
of an interruption, will be presented separately. The DOE-
chaired Energy Response Group will submit to the Cabinet a
separate set of options dealing with domestic aspects of
preparing for an emergency.
NSDD-87 establishes that US policy in a disruption is to
rely on the market, supplemented by withdrawal from the
Strategic Petroleum Reserve (SPD). The US is committed in case
of an energy emergency to consulting with its allies both
bilaterally and in the International Energy Agency (IEA)* and
to fulfilling its obligations under the International Energy
Plan (IEP).
*The IEA is made up of the 21 leading industrial countries (all
of the Western European countries except France and Finland, as
well as Canada, US, Japan, Australia and New Zealand). Collec-
tively the members account for about 70% of free world consump-
tion. It was founded after the 1973 oil disruption, and the
agreement includes a sharing plan which can be triggered if oil
supplies to an individual member or to the IEA as a whole drop
by 7% or more. Under the plan if triggered, each member
country has agreed to limit its imports of oil. The US is
committed to fulfilling its obligations under the plan, and to
participation in its implementation if triggered. An infor-
mation paper describing more fully the plan and the trigger is
at Tab A.
SECRET/NODIS
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
SECRET/NODIS
Because of the threat of major price and economic impacts
we believe the NSC should address the international aspects of
the policies set forth in NSDD-87. Descriptions of the options
and the considerations involved are set forth in papers on each
issue. This memorandum will briefly describe the current
energy situation, the potential consequences of a disruption,
and the issues for decision.
A. The Current Energy Situation
- The international oil market today remains soft. Free
world crude production in 1984 will likely range between 43 and
46 million barrels per day, of which Persian Gulf supplies
would normally be about 30%; 20-22% of free world supply will
transit the Strait of Hormuz. '
NET IMPORTS STOCKS
IMPORTS Through (Million Barrels)
as % of Strait of
Consumption Hormuz Commercial Strategic
US 31-34% 2-4% 1055 387
OECD Europe 65-68% 18-22% 1000 145
Japan 100% 68-69% 339 79
- Japanese and European stocks are lower than ours measured
in days of imports, but comparable to ours if measured in days
of consumption. The figures for commercial stocks are over-
stated since they include amounts required to operate the
refining and distribution system, and those amounts (40-60% of
commercial stocks) are not available for use. There is cur-
rently surplus oil producing capacity of some 9-12 million
barrels per day (MMBD) in the free world, 3 to 3.5 MMBD of it
located outside the Persian Gulf area. Some 58% of the 7.7
MMBD currently exported through the Strait of Hormuz could be
replaced through full utilization of existing alternative
facilities.
B. Potential for Disruption
- The conflict between Iran and Iraq presents the
possibility of interruptions in supply. An escalation of the
conflict could result in attacks on the major Iranian export
terminal, Kharg Island. Iraqi success in preventing Iranian
oil exports could lead to Iranian retaliation against other
SECRET/NODIS
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
SECRET/NODIS
Gulf exporters or international shipping, and as a last resort,
to attempts to close the Strait of Hormuz. An effort to close
the Strait'is unlikely, and the US has pledged to keep it
open. More likely (though not yet probable) are attacks
against other facilities or international shipping. The US, in
cooperation with other Western countries, would assist Gulf
countries in protecting their facilities and international
shipping, if requested. There is a risk of terrorism, subver-
sion, sabotage or other attacks against oil facilities in the
Gulf, which, if successful, could disrupt supply.
C. Economic Effects of Disruption
- Two previous oil disruptions (1973-74 and.1978-79),
during periods when the US had price and allocation controls,
led to sharp price increases and contributed to inflation and
recession.
In 1973, loss of 6% of world supply quadrupled oil prices (from
$2.86/bbl to $10.84/bbl); inflation then rose from 6.4% to 10%,
and unemployment rose from 3.4% to 8.5%. In 1978-79 the dis-
ruption caused by the Iranian revolution resulted in a loss of
1-2 MMBD, most of which was offset by other production. The
market reacted to concerns about future supply in a period of
expanding demand with low stocks, and spot prices increased
from $13.34/bbl to $38/bbl. The 1980-81 disruption of Iraqi
crude exports caused a small, temporary price increase. Spot
prices rose to $40/bbl and official prices from $32 to $34/bbl,
from which they have since retreated to $29/bbl.
- An interagency Data Base Group has modeled five
"scenario" disruptions that show that while the risk is low, a
major sustained disruption.could cause prices to rise sharply
and result in substantial GNP losses. Even a smaller dis-
ruption could lead to sharp price increases because of market
perceptions about the severity, duration and likely conse-
quences. Government actions will influence these perceptions.
These projections are based on defined circumstances and
periods, and do not reflect the uncertainty likely in a
disruption.
SECRET/NODIS
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
SECRET/NODIS
Net Disruption
Duration
Average
US GNP
Crude
Loss %
Case
(MMBD)
(Months)
Oil/bbl Price
Points
1
0
6
30-40
0.0-0.8
2
3
35-75
0.6-2.5
35-75
0.8-2.9
50-95
1.3-3.2
70-125
2.3--4.1
-The impacts estimated above are based on the assumption
that NO actions are taken to ameliorate the impacts Of a
disruption. In particular, it is assumed that the SPR is not
used, and that the IEP is not triggered (although a disruption
of 5 MMBD might and one of 8 MMBD would exceed threshold levels
for a general trigger).
-Data Base Group projections indicate that in a disruption
causing a net loss of 3 million barrels/day prompt release of
the SPR would keep prices in the range of $30-45/bbl, and that
if foreign stocks also are used, prices would be held in the
range of $30-40/bbl. In larger disruptions, similar beneficial
price effects would be expected if stocks were released.
- Two sets of issues are within the framework of our
present policy: whether and to what extent we should consult
with our allies and others. before a crisis, and what actions
should we take during the first weeks of a crisis? Because any
pre-crisis consultations turn on our policy for dealing with a
crisis, we discuss first the options for a crisis. Of course,
actions under our international energy policy will affect our,
and domestic energy policy, and vice versa.
1. During a Crisis
There are three interrelated decisions that will effec-
tively govern how we approach our IEA obligations during a
crisis:
SECRET/NODIS
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
SECRET/NODIS
- how should the US approach triggering the IEP-
sharing system in the event of a severe disruption?
(TAB B)
- to what degree should we seek consultation or,
coordination with our allies on stock draws? (TAB C)
- should the US support coordinatedinternational
action to influence the spot market? (TAB D)
The IEP can be triggered only if one or more members suffer
a loss of at least 7% in supply. In less severe ("subtrigger")
disruptions, the US has agreed to consult with its IEA allies
to determine what, if any, responses are needed. In the early
stages of a crisis, the extent of a disruption is likely to be
unclear. Even in a subtrigger disruption, the issues of stock
draw and spot market actions will be raised, and some countries
may raise the trigger. The IESG has not agreed on subtrigger
actions.
Under NSDD-87, US policy is to rely on the market and to
consult and cooperate with our IEA allies. Triggering the IEP
system would interfere with market functioning, but some
countries might press it, either for their perceived advantage
or as leverage to obtain other actions. Drawing stocks would
be consistent with both market functioning and cooperating
within the IEA. It is our best weapon to limit economic damage
from a supply disruption, and to fend off pressures toward
market interference. Actions to influence the spot market are
less clear, with some arguing the US intent would be only to
provide information, and others arguing such actions are
contrary to our market oriented policy.
- IEP Trigger - (TAB B)
The IESG generally agrees that activation of the IEA
sharing system should be avoided, especially early in
a disruption. Under the Agreement, however, if the
Executive Secretariat of the IEA makes a finding
triggering the system, it would be difficult for us to
block under the voting system. At the same time, most
IESG members believe that activation could be delayed
if the US offered such alternatives as stock draws and
perhaps agreed to spot market actions.
SECRET/NODIS
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
SECRET/NODIS
11
Stock Use - (TAB C)
US-policy as recently stated by Secretary Hodel is
that early use of the SPR ordinarily is the most
effective action we can take to reduce the economic
impact of a disruption. Because our allies' stocks
are smaller, they might decide to hold their stocks
while the US drew down its SPR. The FRG, for example,
has formally stated a policy of using its stocks only
as a last resort. Congressional and public concern
about unilateral stock draw then would become very
intense. In light. of this concern, the IESG agreed
that US policy should support coordinated inter-
national stock draws early in a disruption.. Any
coordinated stock draw must take account of the
circumstances should the IEP be triggered and the
potential that the US would then earn the right to
supplies from other countries.
Spot-Market -- (TAB D)
The IESG is divided on the issue of actions to
influence the spot market. IEA has in the past
attempted to influence companies to restrain
"abnormal" spot market purchasing in order to dampen
price effects of a disruption. There are no con-
vincing data to demonstrate the effect of jawboning.
There is concern that jawboning can be counterpro-
ductive, would be seen as the first step toward other
government intervention, and that it is not in accord-
ance with the Administration's market-oriented
philosophy. Some believe that the apparent effect of
jawboning is related to the levels of available stocks
(particularly commercial stocks) and market percep-
tions of future price paths, supply and economic
activity. Others strongly believe that the option to
approach companies about particular purchases should
be retained, and that such efforts by other countries
is one means to ensure that the Europeans and
Japanese, despite the low level of their stocks, help
dampen price spikes and market hysteria. The Euro-
peans and Japanese would likely expect US participa-
tion in any IEA efforts to influence the spot market.
Other IEA countries may also be expected to apply
demand restraint measures prescribed under the IEP.
SECRET/NODIS
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
SECRET/NODIS
2. Pre-Crisis Actions
a. Consultations with Allies on Policy -- (TAB E)
Once decisions on our policy toward triggering the IEA
system, drawing on stocks and attempts to influence
the spot market have been reached it may be useful to
consult other countries bilaterally and in the IEA to
describe our policy and preparedness. Although this
issue was not discussed in depth in the IESG, most
agencies agree on the advisability of advance con-
sultation on crisis management. The Department of
State would undertake those consultations working with
appropriate agencies, unless a decision is made to the
contrary.
b. Urging Stock Build - (TAB F)
Beyond the issue of actions to take during a supply
disruption, analysis indicates that stock draws are
the simplest mechanism for reducing price impacts of a
disruption. In light of concern that other countries
are not sharing the burden of preparing to meet dis-
ruptions, we considered urging other countries to
build their stocks. The US has raised this issue
repeatedly in the IEA. The IESG believes that further
efforts would be appropriate. Unless a decision is
made to the contrary, the US delegation will raise
this issue during IEA meetings and bilaterally and
develop a strategy for further pursuit of the issue,
including the possibility of redefining stocks to take
into account the problem of operating inventory.
Information Papers (Tabs A - J)
SECRET/NODIS
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
SECRET
Tab
Information: The IEA allocation system A
Issue: U.S. policy relative to triggering the B
IEA-sharing system
Consultations/coordination with our IEA C
allies on stock drawdown issues
Activities with our IEA allies vis-a-vis
the spot market
Desirability of consultation in advance
with allies on triggering the IEA system
and/or other IEA activities
Issue: Initiatives to promote higher stock levels F
in IEA countries
Issue: Bilateral diplomatic approaches to producers
to increase oil production in a crisis
Information: Pre-crisis contacts to deter escalation H
of the Iran-Iraq war
Issue: Desirability of contacts with GCC and OPEC I
to minimize a supply disruption
Information: Intelligence capabilities j
SECRET
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
A
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4 u;
THE IEA ALLOCATION SYSTEM (INFORMATION)
1. Trigger Mechanism
The emergency oil sharing mechanism of the IEA. was
designed to assure an equitable sharing of the burden of any
serious oil supply interruption among its member countries.
Activation of the system is premised on close coordination
and the development of a consensus that use of the system is
truly necessary. Voting procedures are provided in the
event of disagreement, although it is unlikely that those
would be used. The IEA oil sharing system can be activated
under two types of circumstances: the general trigger would
be pulled in the event of an IEA wide loss of oil; the
selective trigger for a serious loss to any one country.
-- General Trigger: The general trigger would acti-
vate the sharing system whenever IEA countries as a whole
have sustained or "can reasonably be expected to sustain" a
reduction in oil supplies of at least seven percent of the
average daily rate of IEA base period final consumption of
petroleum. (The base period is the preceding 4 quarters -
for which IEA statistics have been calculated.)
-- Selective Trigger: The system can be activated if
any individual IEA member sustained or could reasonably be
expected to sustain a shortfall of at least seven percent
over base period final consumption.
While any IEA member can set in motion theprocess of
making the determination that a trigger situation has
occurred, it. is expected that the IEA Secretariat would
issue a recommendation in the first instance.
-- Voting Arrangements for activation/blocking
triggers: When the Secretariat has made a finding that a
trigger situation has occurred, it reports to the "Manage-
ment Committee" which is composed of all IEA members. The
Management Committee reports to the Governing Board within
48 hours. The Governing Board has a further 48 hours to
meet and review the Management Committee's work. The
Secretariat finding that a trigger situation has occurred
will in itself cause activation of the system unless the
Governing Board by a special majority decides not to acti-
vate the system.
Such a decision by the Governing Board to block activa-
tion would be difficult to reach. A "special majority" is
needed to block a Secretariat finding. This would mean that
15 of the twenty countries voting (Norway as a non-participant
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
in the IEA plan does not vote) would have to oppose activation
and 60% of the combined voting weights would have to be
cast in opposition. To satisfy the latter condition, the
U.S. would need to be joined for example by Japan, Germany,
the UK and Canada in opposition. As can be seen, activation
of the system was designed to be virtually automatic after a
positive Secretariat finding that the shortfall conditions
had been met.
Any member state can request a finding that a.trigger
situation has occurred. However, in the absence of a
positive Secretariat finding, the voting system is skewed to
make activation very difficult.
2. Calculation for Allocation:
After the IEA trigger has been pulled, IEA members are
committed to consuming a percentage less than their normal
consumption minus their obligation (if any) to drawdown
strategic reserves. In any emergency in which oil supplies
to the IEA are cut by seven percent, reduction in demand by
each member should be seven percent. In an emergency in
which supplies are cut by 12 percent or more, members are
obligated to reduce consumption by 10%.
The method of computation of the actual quantities is given,
below.
The right of an IEA member to oil supplies pursuant to
the Agreement (called the "supply right") is calculated as a
percentage of Base Period Final Consumption (BPFC) less the
Emergency Reserve Drawdown Obligation (ERDO). The BPFC is
an IEA calculated figure for the four quarters preceding
the last full quarter. (The provision allows the statisticians
time to compile data.) Once the IEA trigger is pulled the
same BPFC data are used for all calculations. The BPFC is
not updated during a disruption. The ERDO is an IEA member's
percentage of total IEA emergency reserve commitments
multiplied by the amount by which total IEA supplies are
less than the amount IEA members would be permitted to
consume after a straight demand restraint calculation. (if
IEA consumption were 100 units before a 7% disruption, then
they would be 93 units after the demand restraint calculation
but if IEA supplies available actually totalled less than
93, the IEA secretariat would apportion an emergency reserve
drawdown obligation or an ERDO.)
In sum, the system is designed to apportion the shortfalls
of a disruption in a fashion proportionate to size, consumption
and imports of oil. The formula in a less severe interruption
is weighted more heavily towards consumption; in a more
severe disruption the weight on imports increases. (The
shortfall is not "equally" apportioned as some might assume.)
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
IV. Impacts of the International Energy Program
This Appendix discusses the Emergency Sharing System of the
International Energy Agency's (IEA) International Energy Program
(IEP). The first section addresses the potential of triggering
IEP sharing under each of the supply disruption cases previously
specified. The second section assesses the supply posture of the
United States and other IEA nations under IEP sharing. There
are assumed to be no policy interventions (such as SPR drawdown)
or abnormal stock movements in any case.
Trigger .Calculations
Activation of IEP sharing encompasses a review of both
quantitative (e.g., loss of projected. supplies) and qualitative
factors (e.g., =weather, declining demand). This discussion
addresses only the technical trigger calculation that compares
disrupted supplies with the levels of oil consumption
experienced during a previous 12 month period (called the base
period). IEP sharing would not, in fact, be activated until the
Secretariat makes a finding that the group or an individual IEA
member sustains or is reasonably expected to sustain a reduction
in oil supplies of at least seven percent of their base-period
consumption. The finding is then reviewed by the Governing
Board of the IEA. The Governing Board could vote by "special
majority" to override; or, if the Secretariat declined to make
the trigger finding, the Governing Board could activate IEP
sharing by a weighted ."majority" vote. The "general trigger" of
the IEP could be pulled if remaining supply levels for the IEA
as a whole fall seven percent or more below the consumption
levels experienced during the base period due to an oil supply
disruption. However, the "selective trigger" of the IEP could
be pulled if any one or more members' supplies are reduced by
this amount.
In disruption Cases 1, 2, and 3, the net loss of free world oil
supplies is assumed to range from 0 to 3 million barrels per day
(MMBD). Until market forces allocate the available oil, nations
that are heavily dependent on oil from the disrupted sources
could experience temporary shortages. Although unlikely,
-several IEA.nations that import significant amounts of the
disrupted oil could invoke the "selective trigger." Based upon
OECD trade data for the first three quarters of 1983, Persian
Gulf import dependencies suggest the following candidate
c-ountr-ies: Australia, Belgium, Japan, West Germany, Greece,
Italy, the Netherlands, Portugal, Spain, and Turkey. The
disruptions of 3 MMBD or less are not of sufficient magnitude to
cause the "general trigger" to be pulled because they amount to
less than 7 percent of total lEA base period final consumption
(BPFC).
The oil supply loss in the 2nd quarter of 1984 resulting from a
Case 4 disruption would probably be of sufficient magnitude to
pull the "general trigger" of the IEP. The net loss of 5 MMBD
of available world oil supplies is estimated to result in supply
losses in IEA member nations of about 0.2 MMBD in excess of the
required 7 percent of their BPFC. Hence, the "general trigger"
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
could be pulled. However, this is a borderline calculation and
slight changes in the data could result in the trigger not being
pulled. The United States' supply right under IEP sharing would
be about 14.3 MMBD. This level of supply would be 1.7 MMBD less
than the pre-disruption available supplies in the U.S.
The net loss of 8.0 MMBD of available world oil supplies assumed.
in a Case 5 disruption would result in supply losses in IEA
member nations of about 0.6 MMBD in excess of 12 percent of
their BPFC. Hence, the "general trigger" could be pulled at the
12 percent level, which requires a 10 percent level of demand
restraint. The United States' supply right under IEP sharing
would be about 13.5 MMBD, which would be 2.4 MMBD less than
pre-disruption available supplies.
It should be noted that these-trigger calculations were made
based upon the best available historical data and upon the Energy
Information Administration's quarterly oil forecast that appears
in the February 1983 Short-Term Energy Outlook. Although there
is no doubt that the 12 percent trigger threshold is reached in a
Case 5 disruption, the pulling of the trigger in a Case 4
disruption is quite borderline. Because the IEA would make the
trigger calculation on the basis of their own data and forecasts,
it is impossible to predict whether or not they would reach the 7
percent trigger threshold in the Case 4 disruption..
Supply Posture of IEA Nations Under Emergency Sharing
i
Tables 17 and 18 present estimates of allocation rights and
obligations for IEA nations under disruption Cases 4
and 5.
It
is assumed that the "general trigger" of the IEP has
been
pulled. By definition, a nation incurs an allocation
right
if
its available supplies (the sum of indigenous production and
net
imports) are less than the supply, right determined under the
IEP
sharing'formula. Conversely, an allocation obligation will
be
incurred if available supplies are greater than the calculated
supply right.
Table 17 presents allocation right/allocation obligation
estimates assuming that no reallocation of available world oil
supplies has taken place due to market forces. In-other words,
the only imports that a nation loses are those imports from
disrupted sources. These results could only occur if world oil
prices failed to rise and reduce demand during a disruption.
Rights and obligations are derived by comparing these disrupted
levels of imports with the import ceilings i mplied by the IEP
supply right calculations. Under this "no reallocation"
assumption, the United States would incur an allocation
obligation of approximately 1.5 MMBD in a Case 4 disruption and
2.1 MMBD in Case 5.
Table 18 presents allocation right/allocatio.n obligation
estimates assuming that market forces have fully reallocated
supplies; that is, sufficient time has elapsed such that world
oil prices have increased and available oil supplies have been
reallocated to reflect those market forces. Rights and
IV-2
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
obligations are derived by comparing estimates of net imports
based on a market solution to estimates of imports based on the
IEP sharing formula. The estimates indicate that the United
States would incur an allocation right of approximately 0.1 MMBD
in disruption Case 4 and 0.4 MMBD in Case 5 once the market had
fully reallocated supplies.
It is perceived that the allocation right/allocation obligation
estimates presented on Tables 17 and 18 represent a range of
extremes. Triggering of IEP sharing would probably dampen
market pressures due to non-price demand restraint measures that
would be adopted by other IEA countries. Thus disruption
impacts presented in Section III would likely be lessened by
triggering of the IEP. Table 17 represents a situation that
would be very unlikely except in the very earliest stages of a
disruption, before market prices rise and supplies are rerouted
from their original destinations. As market forces bring about
a reallocation of.shipments, the situation would gradually
evolve toward the equilibrium depicted in Table-18.
IV-3
r r rr In - /.
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
II a/2
CONFIDENTIAL
How should the U.S. approach triggering the IEA sharing
system in the event of severe interruption?
Current Policy
The U.S. policy emphasizes primary reliance on the domestic
and international marketplace both before and, to the extent
possible, during an energy emergency. It seeks to improve the
functioning of the marketplace before an emergency so that it
will operate with maximum efficiency once an emergency occurs.
(NS DD-87, p.1.) The primary mechanism to protect against the
worst effects of such emergencies is maintenance of stockpiles,
including the SPR.
The U.S. has reaffirmed its commitment to meet its
obligations under the International Energy Program (IEP) and is
prepared to consult and to cooperate with its IEA partners in
the event of a disruption in order to reduce panic, to minimize
economic dislocations, and to ensure that indivi;,ual countries
do not suffer unacceptable harm as a result of the shortfall in
oil supplies. The U.S. is prepared to consult and cooperate
with IEA partners toward these ends, especially to foster
market pricing of energy supplies and to increase stock levels,
and to exchange information on national use of stocks
(NS DD-87, pp. 9-10).
Background
The emergency oil sharing mechanism of the IEA is designed
to assure an equitable sharing of the burden of any serious oil
supply interruption among its member countries. Activation of
the system is premised on close coordination and the
development ofa consensus that use of the system is mutually
beneficial. Voting procedures are provided in the event of,
disagreement, although it is unlikely that those would be
used. The IEA oil sharing system can be activated under two
types of circumstances:
-- General Trigger: The general trigger would activate the
sharing system whenever IEA countries as a whole have sustained
or "can reasonably be expected to sustain" a reduction in oil
supplies of at least seven percent of the average daily rate of
IEA base period final consumption of petroleum. (The base
period is the preceding 4 quarters for which IEA statistics
have been calculated.)
CONFIDENTIAL
DECL: ADR
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
CONFI DENTIAL
-- Selective Trigger: The system can be activated if any
individual IEA member sustained or could reasonably be expected
to sustain a shortfall of a least seven percent over base
period final consumption.
1. Selective Trigger Situation
Analysis - The IEA Secretariat has expressed the view that
activation of the sharing system would be inappropriate either
in a crisis of short duration or when the direct effects of a
disruption are limited to one or two . countries-- because of the
dislocations in normal commercial practices that would follow
triggering of the system. In this light, alternative supply
arrangements or cargo diversions by the U.S. alone or by the
IEA as a whole could be considered. Because price is a
critical issue for the smaller IEA countries in particular, and
because a disproportionate supply shortfall can persist only if
the country is failing to pay world market prices, the first
priority may be to try to persuade these countries to abandon
price control policies and purchase on the open market. Such
attempts however, are likely to be met by requests for
international financial assistance.
Several smaller IEA countries are likely to be of
significant importance to us because of the presence of U.S.
base facilities and for their strategic importance in NATO.
Portugal, Turkey, Greece and perhaps Spain fall into this
category. If it is U.S. policy to assist these countries in
obtaining oil supplies in the event of a serious disruption, we
will need to decide whether to do so through the' IEA allocation
(i.e. use the selective trigger device) or to do so outside the
IEA through bilateral or multilateral efforts directly with
international oil companies. Concerted international effort to
assist those countries most heavily affected by a smaller scale
crisis could avert the need to activate the selective trigger
mechanism.
Options
-- Seek to postpone activation of trigger and encourage
affected countries to work with not against market forces.
This option, if it succeeds, permits delay in creating the
economic dislocations inherent in the allocation system and
provides maximum flexibility for the market to work. However,
it may alienate key allies, especially those where U.S. bases
are located.
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
-3-
Seek to postpone activation of the trigger by
attempting to arrange for alternative supplies at market
prices. (Such activity might follow the lines of the effort
undertaken in response to a request from Turkey during the 1980
disruption'. U.S. companies were contacted by DOE and State
officials and asked to assist Turkey in locating oil supplies.
DOD's Defense Fuel Supply Center also made an offer of oil
products to Turkey.)
This option shows some U.S. willingness to cooperate with
affected countries, but avoids any direct expenditure of U.S.
funds. The prospects for success of such an option may
be limited, however, leading to requests for financial
assistance (following option).
-- Seek to postpone activation by mobilizing alternative
assistance both in terms of locating supplies and providing
credit and/or financial assistance. This option also provides
great flexibility and permits a more complete assessment of the
real nature of the problem faced by the affected country or
countries. Some USG loans or financial assistance would be
required. Amounts could be substantial. For example,
financing a-10 percent loss in Turkish consumption could
require financial assistance up to $125 million per quarter at
$40 per barrel.
- Support selective trigger activation in the event of a
request. This option demonstrates to our allies U.S. faith in
the IEP system, and as an announced policy would contribute to
U.S. interests in the early phases of another selective embargo
against the U.S. As a realistic option in the event of a
serious crisis, however, it may not provide sufficient time for
analysis of the parameters of the crisis if those requesting
the trigger activation press their case during the initial
stages of the disruption.
2. General Trigger Situation
Analysis - Some countries will seek to trigger the IEA
Emergency Sharing System as early as possible in a serious
disruption. The U.K. has already informed us that it prefers
early activation in order to dampen upward price pressure and
discourage speculative buying. Japan may also press for early
activation. The IEA consultations prior to activation will
provide an opportunity for the U.S. to put forward its own
analysis of the severity of the crisis and the likely utility
of activating the general trigger. If an attempt is made to
pull the trigger quickly, however, the consultations could be
extremely brief. Moreover, in the face of substantial pressure
from a number of IEA members, the U.S. may not be able to
prevent activation unless specific alternatives meeting the
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
CONFIDENTIAL
-4-
countries' needs are presented.
We will want to give careful consideration to the use of
stocks as an alternative to early trigger action. At the onset
of a serious crisis, we are likely to be faced with incomplete
information on damage which may have occured to key Persian
Gulf oil facilities or to be faced with a conflict of uncertain
duration. Early coordinated use of stocks could calm markets
and add to supplies, allowing a clearer judgement to-,be made
somewhat later on the need to activate the sharing mechanism.
Options
-- Seek to delay activation to the greatest extent
possible. This option will provide maximum flexibililty to the
U.S., permit markets to clear? permit the gathering'of more
complete information as to the extent of the crisis before
engaging the complicated IEP system, and enable the IEA
partners to consult on appropriate measures short of full
activation. This option could prove very divisive in terms of
a unified IEA approach to the crisis in that it is likely to be
unacceptable to IEA members suffering particularly acute supply
problems. Given the nature of our IEP commitment, therefore,
this option could probably not be exercised in the most severe
crises (i.e. case 5).
-- Act with reserve in triggering the system, and urge
coordinated stock drawdowns in place of early triggef. This
option will help maintain a sense of unity in the crisis, and
also may permit a greater exchange of information anf views on
the crisis than if the U.S. were perceived as holding back from
cooperative measures. This option assumes U.S. willingness to
discuss and agree on an early coordinated release of stocks.
-- Support early trigger action. This option would meet
the demands of those IEA countries most seriously affected by a
supply interruption and in the view of most European countries
would help calm the oil market during what is potentially the
most volatile period of a severe crisis. But information about
the nature, depth and extent to the crisis will also be least
available during the same period of time. This option is
inconsistent with the policy of maximum reliance on markets.
3. Less than Severe (Subtrigger) Disruption
Our analysis indicates that the IEA emergency oil sharing
system would not be activated in smaller scale interruptions.
Disruptions of 3MMB D or less would not be of sufficient
magnitude to cause the "general trigger" to be pulled because
they amount to less than 7% of the IEA base period final
consumption.
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
Administration policy is to seek to preserve maximum
decision-making flexibility for dealing with interruptions when
and if they occur, and to place primary reliance on the
marketplace both before and during an energy emergency. This
flexibility and marketplace reliance are most important when
dealing with a subtrigger disruption, to ensure that the
response to such disruptions does not actually increase the
economic harm resulting from the disruption. The U.S. has
agreed with its IEA counterparts, however, to meet promptly and
to consider a variety of actions to avoid serious economic
damage to the member countries.
Attachment:
Impacts of the International Energy Program: Data Base and
Analysis Group
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
THE ALLOC?TICN RIGHTS / OBLIGATICNS
OF INFEFcATICNAL ENERGY AGENCY NATICNS
PRIOR TO ANY MARKET AIIACATICNS
(2nd QUARTER 1984, MID-ESTIMATE ASSL1 !P IONS )
CASE 4
(NET SHORTAGE
5.0 MM, WORLD OIL PRICE = $29)
NET
DISRUPTED
NET
IE P
ALLOCATION:
RIGHT (+) /
IMPORTS
ZM..PORTS
OBLIGATION
United States
5.5
4.0
-1.5
Canada
0.0
-0.3
-0.3
Japan
2.9
3.4
0.5
Australia/New Zealand
0.0
0.1
0.1
Norway/Sweden
-0.1
-0.1
0.0
United Kingdam/Ireland
-1.2
-1.1
0.1
Benelux/Dermark*
1.0
1.1
0.1
West Germany
2.0
1.8
-0.2
Austria/Switzerland
0.4
0.3
0.0
-Spin/Portugal
0.8
0.9
0.1
Italy
1.1
1.3
0.2
Greece/Turkey
0.2.
0.4
0.2
CASE 5
(NET SHORTAGE
8.0 M24BD, WORLD OIL PRICE = $29)
NET
DISRUPTED
IMPORTS
NET
IEP
IDTORTS
ALLOCATION:
RIGHT (+) /
OBLIGATICN (-)
United States
5.3
3.2
-2.1
Canada
0.0
-0.3
-0.3
Japan
1.9
2.9
1.0
Australia/New Zealand
-0.1
0.0
0.1
Norway/Sweden
-0.1
-0.1
0.0
United Kingdan/Ireland
-1.2
-1.1
0.1
Benelux/DeInark*
0.9
1.0
0.1
West Germany
2.0
1.5
-0.4
Austria/Switzerland
0.4
0.3
-0.1
Spain/Portugal
0.6
0.8
0.2
Italy
0.9
1.1
0.2
Greece/Turkey
0.1
0.3
0.2
*Benelux = Belgium, the Netherlands, and Luxembourg.
Note: Numbers may not be precise due to independent rounding.
ENTIAL
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
THE AT.WCATICN RIGHTS / OBLIGATIONS
OF INT TIONAL ENE GY AGMICY NATIONS
AFTER A FULL FREE MARKET ALL= ATICN
(2nd QJAFTER 1984, MID-ESTIMATE ASSUMPTIONS)
CASE 4
(NET SHORTAGE = 5.0 MMBD, WORLD OIL PRICE = $57)
NET
MARKET
IMPORTS
NET
IE P
LNTORTS
ALLOCATION:
RIGHT (+) /
OBLIGATION (-)
United States
3.9
4.0
0.1
Canada =
-0.2
-0.3
-0.1
Japan
3.5
3.4
-0.1
Australia/New Zealand
0.0
0.1
0.0
Norway/Sweden
-0.2
-0.1
0.1
United Kingdaci/Ireland
-1.2
-1.1
0.2
Benelux/Deranark*
1.1
1.1
0.0
West Germany
1.9
1.8
-0.1
Austria/Switzerland
0.3
0.3
0.0
Spain/Portugal
0.9
0.9
0.0
Italy
1.3
1.3
0.0
Greece/Turkey
0.4
0.4
0.0
CASE 5
(NET SHOF
GE = 8.0 1-1`SD, W(DRLD OIL PRICE = $79)
NET
NET
ALICC'ATICN :
MARKET
IEP
RIGHT (+) /
IMPORTS
IMPORTS
OBLIGATION (-)
United States
2.9
3.2
0.4
Canada
-0.3
-0.3
0.0
Jean
3.2
2.9
-0.3
Australia/New Zealand
0.0
0.0
0.0
Norway/Swedes.
-0.2
-0.1
0.1
United Kincd.n/Ireland
-1.3
-1.1
0.2
Benelux/Dernrark*
1.0
1.0
0.0
West Genneny
1.8
1.5
-0.3
Austria/Switzerland
0.3
0.3
0.0
Spain/Portugal
0.8
0.8
-0.1
Italy
1.2
1.1
-0.1
Greece/Turkey
0.3
0.3
0.0
*S~r.e1u.: _ lcit the Netherlands , and Luxe-ml:curc.
Note: Nur bars rev not be precise due to independent ro=ding.
IV-5
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4 3 ' ('.L
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
0-
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
CONFIDENTIAL II c
To what degree should we seek consultations and/or
coordination with our Allies on stock drawdown issues?
Current Policy
The Administration seeks to preserve maximum decision-
making flexibility for dealing with interruptions when
and if they occur; however, the U.S. is prepared to consult
with its IEA partners to exchange information on the national
use of stocks (NSDD-87).
U.S. concerns have centered on maintaining flexibility
in deciding the timing and drawdown rate of the SPR, and
assuring that control over private sector stocks remains
in the hands of the private sector.
Analysis
Several factors are relevant in examining the issue
of the degree to which international stock draw coordination
should take place. The first is the need to retain control
over the use of the SPR. We have invested as a nation over
$11 billion in building our SPR. Obviously, we do not want
to cede control to other nations over this vital resource.
On the other hand, the U.S. has substantially more
stocks than any other importing nation, compared to its
import levels. The control of the USG over the bulk of its
useable stocks is also more direct than that of other IEA
nations. Most other IEA nations hold lower proportions of
government stocks or none at all and rely on mandatory stock
levels which can be lowered in the event of a crisis. Prob-
ably no more that 50% of these commercially held mandatory
stocks are useable -- the rest are needed for minimum
operating requirements. The leading IEA stock holding
nations hold stocks as follows below:
STOCKS ON LAND (January 1, 1984)
DAYS
DAYS
STOCK
FORWARD
1983 NET
COUNTRY
LEVEL*
CONSUMPTION
IMPORTS
United States
1,418.25
96
311
Japan
454.5
94
105
FRG
278.25
118
130
Italy
211.5
75
93
*Million barrels (complete table attached)
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
CONFIDENTIAL
-2-
The above figures can-be misleading if the minimum operating
requirement is not kept in mind.
It is important to understand that a unilateral release
of strategic oil stocks by the U.S. will place an inordinate
burden on us and will dilute the effects of the SPR.
Because of the integrated nature of the world oil market, a
release of stocks from the U.S. SPR will benefit consumers
of oil worldwide by providing extra supplies. Administration
policy has in fact moved toward early release of the SPR.
In his testimony February 21, Secretary Hodel said that "in
a major disruption, the early sale of SPR oil in large
volumes is ordinarily the best policy for SPR use...The
market place needs to know in advance that this is our
general policy so that unnecessary panic behavior can be
avoided." If the U.S. pursues such a policy of early
release, however, other IEA nations may decide to retain
their smaller oil stocks against the possibility of a
worsening of the disruption. The FRG's policy, for example,
is to use its stocks as a last resort measure. Consultations
with Europe and Japan may be needed to assure that this does
not happen.
Our analysis indicates that rapid use of the SPR in
Case II disruption (3 MMBD net disruption lasting six months)
would reduce oil prices by $5 to $30 per barrel below what
prices would have been had the SPR not been used. Instead
of rising to $35 to $75 per barrel, prices are projected to
be held to a range of $30 to $45 per barrel. In the event
that foreign government controlled stocks were also utilized,
prices are projected to'be held to a range of $30 to $40 if
a disruption took place in the second quarter of 1984. The
projected benefits of simultaneous drawdown of foreign govern-
ment stocks become larger as the disruption size increases.
An additional price reduction of $5-15 would take place in
Case IV (5 MMBD net disruption) and Case V (8 MMBD) net dis-
ruption were foreign controlled stocks are drawn together
with the SPR vs. the case where the SPR alone is drawn.
There have been no consultations with our IEA partners
on plans for coordination of stock,drawdowns to date.
Most European IEA members (but notably excluding FRG)
have long argued that some release of government controlled
stocks at an early stage of even a small scale disruption
could have a beneficial effect in avoiding price run-ups.
In the past, U.S. attempts to press for higher stock levels
have been met with Furonean demands for use of these stocks
in a so-called "sub-trigger" situation, i.e., one in which
CONFIDENTIAL
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
CONFIDENTIAL
_3-
the sharing system is not activated. Present U.S. policy
continues to be that the market should be allowed to function
unimpeded in the event of a small scale disruption.
In a large-scale disruption, coordinated release of
government stocks could be considered either before or after
activaton of the IEA sharing system. If, for example,
conflict in the Persian Gulf disrupted supplies on a major
scale, but for an unknown duration, early. coordinated
use of strategic stocks might be called for as an alternative
to immediate activation of the IEA sharing system.
Coordination of stock drawdowns in a trigger situation,
may not be feasible. In the event of a severe petroleum
interruption and triggering of the IEA sharing formula each
member country would be required to limit petroleum imports
to levels determined under-the formula. Since each member
country is permitted to use a range of methods to limit im-
ports e.g., fuel switching, stock drawdown, demand reductions
through price or government regulation, any attempt to coordi-
dinate stock drawdown will be difficult if not impossible if
the IEA is triggered. Therefore, coordinated stock drawdown
should be evaluated as an alternative to triggering the IEA.
OPTIONS
-- Coordinated government statements. Attempts by
governments at the onset of a serious disruption to lessen
the perception of crisis and calm the fears of market
participants could be very useful. An internationally
coordinated public policy statement encouraging private
stock draws, where possible, could have particular effect
because of the importance of stock draws in reducing the
impact of a disruption. On a worldwide level however,
commercial stocks are relatively low and the positive
effects of their drawdown would be of marginal utility.
Moreover, USG guidance to U.S. companies on when to draw
stocks would'be inconsistent with a market reliance policy.
-- Seek advance agreement on coordinated release of
government-controlled stocks as an alternative to triggering
the IEA. A major U.S. concern continues to be that advance
attempts at stock policy coordination with our allies would
limit U.S. flexibility in SPR policy. Because the U.S. has
the highest stock levels, it would face demands by other
countries to draw the earliest and at the highest rates. On
the other hand, if the U.S. pursues a policy of early
drawdown of the SPR, it will be much to our advantage to
have other IEA nations drawing their stocks as well. A
general coordinated release plan may be necessary to assure
a European and Japanese draw.
CONFIDENTIAL
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
CONFIDENTIAL
-4-
-- Do not pursue advance agreements, but make decisions
on a coordinated stock approach if and when an interruption
occurs. This option most closely follows current Administra-
tion policy of maintaining maximum flexibility with respect
to the use of stocks. In a disruption the size of case 4,
and especially case 5, however, it may not permit adequate
time to engage in necessary consultations with our allies
should we desire to pursue coordination. It may, therefore,
result in IEA member government-controlled stocks not being
drawn down in the earliest stages of the disruption, thus
reducing the ultimate benefits of the drawdown.
-- Assure IEA members that the U.S. favors mutually
supportive stock draws, but refuse to establish specific
conditions in advance for their release. Instead, we would
rely upon consultations to frame the appropriate timing and
level of stock draw for a given disruption.
CONFIDENTIAL
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
January 1, 1984
Days
Stock Level Forw.
MMT Mbbl Cons
Days
1983
Net
Imps.
Days
1981/83
Av. Net
Imports
Canada
15.6
117.00
73
-
7,527
United States
189..1
1,418.25
96
311
300
North America
204.7
1,535.25
93
311
324
Australia
4.7
35.25
71
299
222
Japan
60.6
454.50
94
105
184
New Zealand
.7
5.25
63
87
81
Pacific
66.0
495.00
92
110
108
Austria
3.3
24.75
120
140
131
Belgium
5.1
38.25
86
104
97
Denmark
5.0
37.50
147
223
195
Germany
37.1
278.25
118
130
126
Greece
3.7
27.75
119
118
116
Ireland
.9
6.75
68
80
70
Italy
20.2
151.50
75
93
89
Luxembourg
.2
1.50
70
82
80
Netherlands
12.0
90.00
159
283
256
Norway
2.2
16.50
93
-
-
Portugal
2.4
18.00
89
70
72
Spain
10.1
75.75
71
78
73
Sweden
6.4
48.00
116
133
113
Switzerland
6.0
45.00
156
172
174
Turkey
2.0
15.00
44
43
4,6
United Kingdom
15.7
117.75
70
-
-
IEA Europe
132.3
992.25
96
117
112
403.0
3,022.50
94
170
170
* A portion of these stocks represent minimum operating require-
ments for refineries, pipelines, etc. Between 40-60% of privately
held stocks are probably unuseable in a crisis.
1. Stock levels adjusted per IEA definitions using crude or
equivalent.
2. Products adjusted by 1.065.
3. IEA data is given in metric tons; conversion to Carrels is
based on 7.5 barrels per ton.
4. Stocks include crude oil and products.
SOURCE: IEA Data
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
CONFIDENTIAL II e
Should the U.S. support coordinated international
action to influence the spot market?
Current Policy
Administration policy precludes government. intervention
in oil markets except in severe petroleum supply disruptions
-when the IEP is triggered. However, in the event of any
disruption, we do support consultations with other IEA
countries to assess the magnitude of the interruption and to
discuss what, if any, IEA country actions would be appropriate
to reduce panic and to minimize economic dislocations.
These consultations would include discussion of whether to
discourage "abnormal". spot, purchases that could further
disrupt the market.
Analysis
The crude oil spot market has grown in importance in
recent years as demand has weakened, OPEC's share of world
oil trade has declined, and purchasers have. relied less on
long-term contracts. Data on the spot market is difficult
to-gather because cargoes on the high seas are often sold
many times through the spot market before finding their way
to refineries. Although no reliable figures are available,
we estimate that 20-30 percent of internationally-traded
crude oil is never subject to term contracts, and some term
contract crude is also eventually resold on the spot market
after liftings take place. Hence, what happens to the price
of oil on the spot market has a profound effect on term
contract prices, including those for OPEC oil.
Spot mar'?zets respond both to real supply shorta-,es an;
political, strate _c (oreoaredness le - -
and oerceDzional factors. Tnus, an-,' influence to be
e.:ercise:.
over spot market price increases, similar to that aztempte?d
by the IEA during 1979-80, must be directed to all these
factors as well as to the underlying supply problem. IEA
efforts during that period to discourage spot market purchases
at excessive prices were accompanied by efforts to spread
reliable information on market conditions so as to reduce
market panic. However, there is disagreement about the
utility of the IEA intervention.
Snot markets can be influenced in
ti?'o
wavL. T:?-
= =
--
and most effective method is to chance
the
.
fundamen-is
c4
CONFIDENTIAL
DECL:OADP
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
CONFIDENTIAL
the market, i.e., to decrease demand or to increase supply.
Increased production and stock drawdown both provide a
deterrence to spot market panic. A second approach is to
disseminate information and discourage speculative behavior.
Some observers argue that government intervention measures
such as "jawboning" oil purchasers have beneficial effects
in reducing upward price pressures. Such efforts, it is
argued, are likely to have the greatest effect when combined
with efforts to.gather and disseminate reliable information
about market conditions to a broad audience. Others believe
that the reverse is true and that such government intervention
has perverse effects on market behavior.
In 1980 the IEA Governing Board adopted an overall
declaration calling on all members to encourage their
companies to avoid spot market purchases wherever possible.
This decision was implemented. through close coordination
among governments. For example, U.S. officials notified the
Japanese Government on several occasions when there were
reports of Japanese companies making major spot purchases.
We in turn contacted U.S. companies to urge forbearance as
we became aware of reports of major U.S. activity on the
spot market.
Proponents argue that jawboning could limit "panic"
purchases and thus "excessive" increases in the world oil
price. They base their view on the'fact that prices in-
creased at the beginning of the Iranian revolution when there
was no jawboning, but did not increase at the outbreak of the
Iran/Iraq war, when there was jawboning. Critics of jawboning,
however, attribute this difference in price behavior to basic
differences in the supply and demand situation.
Some believe that jawboning will in fact make the crisis
worse. It may inadvertently bring about panic purchases by
the oil companies. The oil companies may view our attempt.at
~G.. .". viI~. the= fir.. z ... to T'o._ _ ?? :.~i l1t ..n -. L. ., ~:..~
.... i 1.~.~ a. ..v_~ bpi... :vim. r .:- .L .. ... - .l .. ..
as much oil as possible before the government imposes inventory
controls. In addition, any executive that follows our advice
without legal sanction will open himself up to a stockholder's
suit. Finally, some believe jawboning may lull government
officials into believing that they are effectively addressing
the supply disruption and providing an excuse to avoid the
more difficult decision of whether or not to use the SPP..
OPTIONS
Alloy, the market to vor., unencumoerec'as it nas sine.
and make no atterntrto i f iuence the behavior c:
market Particinants. This oction is consistent '.:it.., Admin-
istration policy of market reliance. It may be, no::eveL",
COi :'ID N''IAL
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
CONFIDENTIAL
-3-
especially in a situation where drawdown of government-con-
trolled stocks is delayed or perceived by the industry not
to be sufficient, that some market participants will engage
in activities such as large-volume speculative purchases
which, if unchecked, may significantly increase spot market
pressures and result in price spikes of the nature seen in
1978/79.
Conduct a public information.campaign urging restraint
in spot market purchases. This option may help to restrain
demand. However, in the absence of legal constraints, we do
not know how effective such a campaign would be, and some
believe it may be counterproductive. This approach may be
seen by some as inconsistent with a market reliance strategy.
As a variant of this option, U.S. oil companies could be
advised directly by senior Administration officials that
spot market behavior, if it was viewed as excessive by the
Congress, could have counter-productive consequences in
terms of encouraging price and allocation control legislation.
Argue that IEA members already heavily involved in
market activities may act to restrain speculation, while
focusing USG activities on stock drawdown and public informa-
tion. This option would recognize that there is little we
can do to influence the activities of the Europeans and
,Japanese in this area, but would avoid divisive splits in
the IEA. (This option and the preceding option could be
taken together.)
Take direct action with our IEA partners such as that
taken during 1980 by the IEA to influence market participants.
This action may restrain demand more effectively than either
of the first two options because it combines "jawboning"
(seen by some as more effective than a public relations
camnaian' ith dissemination of reliable ml-;r1:et _^r:rm
~'~ :a ,.ion
in a most serfcs :~? - -i - - .- I
? ~ -:- - -. LCD
calm markets. Others believe this LL e^c,:cor
ductive and seriously erode the Administration's market re-
liance policy in that it could also lead to domestic pressure
for more substantial intervention in the market.
For instance, jawboning techniques may create a sense
of "shortage paranoia" that otherwise may not have existed.
Also, jawboning involves the presumption that governments
are in a better position to make market decisions than the
companies directly involved in it through their daily
trans =. '_zinn5. Rut companies re=_- daily
market purchases at the behest o= the c~nvernm:n-^-
be disadvantages, particularly if the aisruotio:? worsens an.:
prices, as a result, increase precinitousl.?.
CONFIDENTIAL
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
CONFI LENTIAL
ISSUE:
Once we have completed a review of our own emergency
planning, should we engage in advance bilateral consultations
with our allies on triggering the IEA system and other aspects
of emergency preparedness?
CURRENT POLICY:
Maintain strong and continued cooperation with other major
energy consuming countries to reduce panic, minimize economic
dislocations and assure that individual countries do not suffer
unacceptable harm as a result of a shortfall in oil supplies
To these ends, the U.S. seeks to foster market pricing of
energy supplies, to increase stock levels, and to exchange
information on national use of stocks. (NS DD-87, p. 9).
BACKGROUND:
The British have on several occasions told us they would
welcome consultations on the situation in the Persian Gulf and
our views on how to deal with the energy effects of a potential
conflict. The Japanese have been active in consulting with the
Europeans about IEA and emergency policy, and have also asked
for consultations with us. We have undertaken no systematic
consultations with other IEA members on energy emergency
preparedness issues in connection with the current Persian Gulf
situation.
DISCUSSION:
As noted in previous papers, some discretion is provided in
the IEP with regard to triggering the IEA System, especially in
cases where the duration of an interruption is uncertain. Once
a decision has been made within the U.S.G.-on trigger policy,
we may find it to our advantage to consult with key allies on
our rationale and seek their support. This would have the
distinct advantage of minimizing disagreement at the onset of a
supply crisis.
Such consultations could also involve several other areas
such as:
a) coordination of the tenor of public statements to
be made at the onset of a crisis.
CONFIDENTIAL
DECL:OADR
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
CONFI LENTIAL
-2-
b) Exchange of views on parallel attempts to calm the
market and assure adequate dissemination of
information.
c) consultations and exchange of information on stock
draw policies.
d) discussion of developments in the Middle East from
an energy perspective.
In addition, we may wish to consult the Canadians with
regard to increased exports of. natural gas to the U.S. in the
event of an emergency. We estimate that Canada has 1.5 MMCF/D
of shut-in capacity, 2/3 of which is available to the U.S.
under present Canadian export,authorizations, and more could be
made available in a crisis.
OPTIONS:
a) undertake no consultations in advance of a crisis on the
premise that our policies have been adequately explained to
our allies. This would preserve maximum U.S. flexibility
in dealing with any crisis. No detailed consultations have
been undertaken with our allies on energy contingency
planning in recent months.
b) undertake consultations in connection with other
regularly planned IEA meetings. An upcoming meeting of the
IEA Governing Board at the end of March could be used to
outline U.S. thinking on energy emergency planning.
c) send two or three U.S. officials to Europe, Canada, and
Japan to ensure full allied coordination of preparations to
deal with an energy supply interruption. This would allow
for more detailed discussion with individual countries of
detailed plans and probably result in more effective
coordination, but might raise expectations that we are
willing to commit to specific SPR drawdown plans. Consider
whether these energy consultations should be undertaken
together with the politico-military contingency planning
being done with our allies.
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
CONFIDENTIAL
To what extent are IEA country stocks adequate? To what
extent should efforts be made to increase stocks of IEA member
states?
CURRENT POLICY AND BACKGROUND
The International Energy Program (IEP) requires that IEA
members maintain an emergency reserve equal to 90 days of net
oil imports. A table of current IEA member stock levels is
attached. While IEA members on the average hold land-based
stock equal to 170 days of net oil imports, the U.S. currently
has nearly 300 days of 1980-83 average net oil imports in "land
based" stocks. The 90-day requirement, is currently met by all
IEA members except Spain, New Zealand, Turkey, Ireland,
Luxembourg, and Portugal. It should be noted that these
figures represent total oil stocks held in these countries.
portion of these stocks represent minimum operating
requirements for refineries, pipelines etc. Between 40-60% of
privately held stocks are therefore probably unusable in a
crisis, although this percentage may vary according to price.
Discussion
We can pursue several approaches with other IEA members to
increase overall IEA stock levels. One possibility would be to
press countries with less than 90 days of stocks to comply with
the IEP. New Zealand, Ireland, and Luxembourg have 80 days of
stocks or more. Portugal, with stocks of 72 days and a weak
economy, would have greater difficulty than these countries in
meeting the IEP requirement. Stock builds by these countries
would not, however, materially affect total IEA stocks in any
event. They might, however, reduce pressures in an emergency
. tricc.~r activation or for financial assistance.
Stock builds by Spain and Turkey ;:ould be somewhat -ore
meaningful. Spain, with consumption of about one million
barrels per day, now has 73 days of stocks. Turkey, which
consumes about 300,000 b/d, would need substantial investments
to double its current stock level from 43 days to the 90 day
requirement. Both countries have special military
significance, but neither is likely to build stocks without
outside pressure. Even with large stock builds by these
countries, overall IEA stock levels would not significantly
ir irtiv4 d ~~ E '.. .. cc r t. U :oL:1
ter rc'.,:c .
CC. L\~ I L.JL' T I A L
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
CONFIDENTIAL
Another possibility involving bilateral efforts would be to
ask IEA members that already meet the IEP stock requirement to
build their stocks further over the next two years. Further
builds by Japan and the FRG, which have the largest IEA
stockpiles after the United States and both of which exceed the
IEP stock requirement, would be especially helpful. Overall
Japanese stock levels exceed the 90 day requirement by 15 days
(the minimum operating level requirement, of course, means this
figure overstates stocks available in a crisis), but the
Japanese have been reluctant for financial reasons to emphasize
government stocks. In this regard, Japanese government-owned
and controlled stocks are at only 23 days.
We have strongly encouraged the Japanese to increase both
overall and government stock levels on many occasions over the
last several years, including specific appeals to Japan in the
IEA Governing Board. They have responded by resuming the
filling of government-owned stockpiles. Despite this movement,
Japan remains especially vulnerable to a disruption because of
its heavy dependence on imports and on the Gulf as a supplier.
The Germans, with 130 days of stocks, also exceed their IEP
obligation. The German equivalent of the SPR contains about 55
million barrels of crude oil, and the FRG also has stocks of
petroleum products held by a semi-private company amounting to
approximately 100-115 million barrels. These two stocks
together equal 90-100 days of German consumption additional to
normal commercial inventories.
After the U.S., Japan, and the FRG, Italy holds the largest
stocks among IEA members. The Italians are currently at the
IEA requirement level but could also be encouraged to build
their stocks more rapidly. Taken together, stock builds over
~r ::t levels 'nv Jams:., the FRG, arc' Ital_?, could have
_,.t c:: 9-:anestcrr e- ^e- , nrera ., _-.
ce: e:ally and in increasinc IEA stock level sLLecificai
We might also work within the IEA to raise the IEP
recuirement to more than 90 days of stocks, perhaps to 100-110
days. In 1982 we supported an IEA Governing Board decision to
increase emergency stock levels. At its December 1982 meting
the Governing Board reaffirmed a decision to require that
"member countries make efforts not to let stocks fall below" 90
days of net imoorts. The Governing Board also took a decision
tc require the calculation to be based c:: the higher of the
the _r~ ^r :.: -) o cafe..
\ear c _. a~L- this l:oul. -. l- .- i
av'.n ac:c ne 1 _ is v_ _123
COUF I DEN IAL.
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
CONFIDENTIAL
Governing Board decision did not completely satisfy us, we did
not press the issue at that time since the European IEA members
linked it to consideration of a stock drawdown in a short
supply situation not sufficient to activate the IEA sharing
system (the so-called "sub-trigger" situation).
Although we should not be overly optimistic about
short-term success in effecting a change in IEA stock
requirements, persistence on our part might yield longer-term
results and would be responsive to concern on the part of
Congress and elsewhere that the U.S. is bearing an unfair
portion of the free world's stockpile burden.
Options:
I. Undertake bilateral efforts to persuade those countries
below 90 days, in particular Spain and Turkey, to raise
their stock levels at least to IEP mandated levels.
This would demonstrate to smaller IEA countries that we
continue to press them to meet their IEA commitments.
Given the financial constraints of these countries,
however, chances of success are limited.
II. Press key consumer countries (especially Japan) to
raise stock levels by substantial amounts over the next
two years. This would have the key advantage of
providing significantly higher stocks world wide;
however, pressure by the U.S. over the past two years
has produced only limited results.
III. Seek an amendment to the IEP raising stock requirements
to 100-110 days. Such a change in the IEP would
require Concressional approval, opening the way for
-c-ressiorial cons idera-~ic-.7 of
prepare-dress issues.
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
STOCKS ON LAND IN IEA COUNTRIES*
January 1,
1984
Stock Level
MMT Mbbl
Days
Forw.
Cons
Days
1983
Net
Imps.
Days
1981/83
Av. Net
Imports
Canada
15.6
117.00
73
7,527
United States
189.1
1,418.25
96
311
300
North America
204.7
1,535.25
93
311
324
Australia
4.7
35.25
71
299
222
Japan
60.6
454.50
94
105
184
New Zealand
.7
5.25
63
87
81
Pacific
66.0
495.00
92
110
108
Austria
3.3
24.75
120
140
131
Belgium
5.1
38.25
86
104
97
Denmark
5.0
37.50
147
223
195
Germany
37.1
278.25
118
130
126
Greece
3.7
27.75
119
118
116
Ireland
.9
6.75
68
80
70
Italy
20.2
151.50
75
93
89
Luxembourg
.2
1.50
70
82
80
Netherlands
12.0
90.00
159
283
256
Norway
2.2
16.50
93
-
-
Portugal
2.4
18.00
89
70
72
Spain
10.1
75.75
71
78
73
Sweden
6.4
48.00
116
133
113
Switzerland
6.0
45.00
156
172
174
Turkey
2.0
15.00
44
43
46
United Kingdom
15.7
117.75
70
-
-
i 32.. cc2.
403.0 3,022.50 94 170 170
* A portion of these stocks represent minimum operating require-
ments for refineries, pipelines, etc. Between 40-60% of privately
held stocks are probably unuseable in a crisis.
Stock levels adjusted per IEA definitions using crude or
equivalent.
L r 0, ^ C t s a .., w Le
Ii.'_ data is aiven in rte uric tone con-7ers i cn to b rrels is
,used on 7.5 barrels ton.
Stocks include crude oil and products.
SOURZE: ISA Date.
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4 U A
CONFIDENTIAL
ISSUE: What should be done to encourage Japan to significantly
increase its strategic petroleum stocks in order to be
adequately prepared for a severe interruption?
BACKGROUND/ANALYSIS
By far, the largest government stockpile, both in volume and
relative to oil import needs, is held by the U.S., followed by
Germany and Japan. As a trame of reference, the oil imports, oil
consumption and oil dependence for each of these nations for 1982
is provided below:
Net Oil
Imports
(MB/D)
Oil
Consumption
Imports %
of Oil
Consumption
Oil as %
Total Energy
Consumption
United States
4.1
15.3
27
43
West Germany
1.9
2.0
95
39
Japan
$..2
4.2
100
58
As indicated, Japan is by far one of the most highly dependent of
the industralized countries on oil imports and consumption.
Comparison of Petroleum Stock Levels
Shown below are
government plus
behind the U.S.
current government-owned
private sector stocks. A
and West Germany in the o
strategic
s can be
il import
stocks and
seen, Japan lags
coverage
provided by its government strategic stockpile..
Government-Owned
Strategic Stocks
Total Private and
Government Stocks
Days of
Days
Millions
of
Barrels
1982
Net Oil
Imports
Millions
of
Barrels
of 1982
Net
Imports
Days of
1982 Oil
Consumption
United States
385
95
I';.440
355
95?
Japan
79
19
418
100
100
West Germanyl/
55
28
289
149
145
1/ Germany also has about 132 MB (68 days of net 1982 imports)
held oy a special corporation. We estimate that about 90 MB
of the l.i2 MB are "strategic stocks", in part government
financed, for a total of 145 MB or approximately 75 days of
net imports.
CONFIDENTIAL
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
CONFIDENTIAL
Japan has not made much progress in the last year in filling its
government stockpile in spite of statements that it wishes to
raise the reserve expeditiously to about 190 million barrels. In
contrast, the U.S. added 64 MB to the SPR last year. Nor is Japan
expected to make much progress in the current fiscal year: JNOC
plans to increase its crude oil stockpiles to only 15 million
kiloliters (about 93 million barrels) by the end of fiscal 1983.
Tnis represents a fill rate of only 50,000 b/d, in comparison to
the current U.S. fill rate of 186.000 b/d in 1984 and 145,000
in 1985. Listed below is the fill schedule for the U.S. SPR
comparea with current Javanese fill. The 17 Y84 1nudaet o-)roi oscl
to Parliament includes funding to increase the government oil
stoc!:pile to about 32 'ays of net oil i.r
ports by arch 1935
Date of Completion
Japan
(Storage Capacity)
U.S. 1/
(Oil Stored)
---- Million Barrels -----
Current Fill 80 (fill)
327
FY
1985
448
FY
1987
520
FY
1988
557
I/
President's Budget assumptions.
At current petroleum prices the capital invested in government
strategic stocks is $10.0 billion by the U.S., $2.3 billion by
Japan, 91.6 billion by West Germany. By 1985 the U.S. will have
45U MB valuea at $13 billion, whereas the Japanese do not appear
to have firm commitments to purchase stocks beyond current
levels.
SUMMARY
Japan's strategic stockpile program 1983 fill rate and overall
size is not adequate in view of their heavy reliance on Middle
East oil (50%+ of oil consumption). If the Japanese government
reserve reaches 189 MB as planned, this will still only represent
about 45 days of net oil imports at the 1982 import rate.
Moreover, if this level is only achieved at the rate of the
completion of permanent storage (i.e., by FY 1988), the implicit
fill rate is only 50,000 barrels per dav. In 1983 this low rate
was not achieved. 1984 fill plans call for an increase to 32 days
of net oil imports at the current import rate.
At the same time, the U.S. is stockpiling at far greater rates
(186,000 barrels per day at present) even though we are far less
dependent on oil imports. Our main concern is that Japan is not
adecuately buffered by its own stocks in the event of a
disruption. They may not be able to meet its IEA obligations in a.
L1JNbUEN I IAL
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
CONFIDENTIAL
severe interruption and are likely to enter such a market
bidding up prices unnecessarily as was the case in 1979. This
would place the U.S. in a very awkward position of SPR
drawdowns that benefit Japan without a comparable response from
GOJ. The GOJ would benefit directly from any U.S. SPR drawdown
since additional supplies would lower prices and free up
alternate supplies for other importing countries. In effect,
the U.S. is providing petroleum supply interruption insurance
even though GOJ can afford its own insurance in the case of oil.
OPTIONS
1. Do nothing. We have raised the issue of stock building
frequently with the Japanese already and they are making
some progress. Raising the issue again at this time risks
adding yet another area of contention to our relations with
the Japanese.
2. Mount a senior level effort (Secretary, Deputy Secretary)
to get GOJ to substantially increase strategic stocks in
the near-term if oil markets remain calm. A high-level
approach would underscore our great concern over the GOJ's
relatively relaxed attitude towards stocks and our belief
that adequate IEA stocks are essential to cope with any
serious oil supply disruption.
1 tft^~? tT 1
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
G
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
CONFIDENTIAL
issue
SURGE PRODUCTION - Should the U.S. undertake bilateral
consultations specifically to seek increased production in
the event of a disruption
Current Policy
To develop and maintain positive political, economic and
security relations with certain key producer countries to
demonstrate that their interests are not served by oil
supply disruption. (NSDD-87, p. 9).
1. Analysis
There is presently some-10-12 million b/d surplus
capacity available to meet oil supply disruptions. However,
virtually none of that is in OECD countries, and over 2/3 (7
mmbd) is located in the Persian Gulf. In prior disruptions,
Persian Gulf suppliers, particularly Saudi Arabia, have
shown a willingness to increase production. In the event of
a closure of the straits, however, most of this capacity may
be unavailable.
The producers outside the Gulf with the greatest amount
of spare capacity are Libya (0.9 mmbd), Nigeria and Venezuela
(0.7 mmbd), and Indonesia (0.3 mmbd). All other producers
combined have approximately 0.8 mmbd in available spare
capacity. Given the current budget stringencies and prior
practice we believe each will be inclined promptly to
increase its production, charging what the market will bear.
The amount of increased production will take into account
both short and longer term revenue requirements. In any
event, it will take several weeks to several months to in-
crease production to full capacity and producers may also
be concerned about damage to their oil fields from too rapid
an increase in production or from maintaining a higher than
prudent level of production. On balance, the chances are
good that about 3 mmbd of additional production will be avail-
able in 30-90 days to offset shortfalls in Gulf production.
Libya is a special case, because its spare capacity is
the largest outside the Gulf but also because it alone
has traditionally not been characterized as a "high absorber"
(i.e., a country with a large population, relatively low per
capita income and pressing revenue needs). It could decide
for political reasons not to increase its production --
CONFIDENTIAL
DECL: OADR
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
CONFIDENTIAL
- 2 -
especially if prices rose dramatically, providing higher
revenue without increasing his oil production. On the other
hand, during two previous periods of tight supply (the
1973-74 Arab oil embargo and the collapse of the Shah's
regime in Iran in 1979),,Libya did take advantage of the
market. It did this in 1973 even while it was stridently
attacking U.S. Middle East policy.
The.USG maintains contacts with the producer countries,
and during a crisis would in any event seek information on
current and projected production, along with diplomatic
exchanges on the events. Because prior practice and economics
would favor increased production, specific exchanges seeking
an increase would be of marginal benefit. In fact, one can
argue that such approaches might cause producers to make
demands on us in return for their acceding or promising to
accede to our wishes.
2. Recommendation:
The IESG recommends that no pre-crisis diplomatic con-
tacts be undertaken with producer nations to seek increased
production in the event of a crisis. It is likely that all
OPEC producers would raise production close to maximum
levels in a major disruption. Pre-crisis approaches might
only expose us to political and economic demands for some-
thing which would probably happen in any case. If and when
an interruption occurs, we would then consider approaches
as necessary to any producer which might be reluctant to
increase production to maximum levels.
CONFIDENTIAL
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
H
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
III a
SECRET
Pre-Crisis Contacts to Deter Escalation
(Information Paper)
Background
Since its inception, the Iran-Iraq war has posed a threat
to the security of Persian Gulf oil supplies. Iranian actions
earlier in the war, combined with closure of the Syrian
pipeline, have already cut Iraqi exports from 3.3 million b/d
to 800,000 b/d. In the summer of 1983, Iraq moved to acquire
weapons systems giving it the capability to interdict, at lower
risk, Iranian exports. Iraqi use of Super-Etendard aircraft,
delivered by France last fall, to launch Exocet missiles
against tankers in the Gulf could keep ships from loading at
Iran's Kharg Island terminal. Iraq may have the capability to
damage facilities at Kharg.
Iraq has thus far not made a concerted effort to halt
Iran's oil exports. Until recently, it was contemplating the
possibility of resuming its own Gulf exports through a limited
cease-fire with Iran. Our continuing efforts and those of
others to stave off escalation in the Gulf may also have
influenced Iraq to exercise restraint. However, the Iraqi
Government has recently reiterated in strong terms its warning
that all shipping is subject to attack in the war zone it has
declared in the northern Gulf; the statement emphasized that
this policy applied to tankers calling at Kharg, and reports of
Iraqi attacks on tankers are increasing. Iran has responded by
threatening to stop the export of all Gulf oil if its own
exports are halted.
U.S. Policy
Concerned about the growing danger of a disruption in the
flow of oil from the Gulf, the U.S. has undertaken several
initiatives to reduce the likelihood of escalation. We have
focused these efforts on convincing Iraq that alternatives to
military action exist that either promise movement ::o%.:-=:d a
cease-fire or would stabilize its financial position vis-a-vis
Iran, permitting it to carry on the war should Iran continue to
refuse to negotiate.
On the diplomatic front, we fostered UN Security Council
Resolution 540 calling for a cease-fire in the Gulf, and we are
urging the Secretary General to reactivate UN mediation
efforts. Iran has refused to make a formal commitment even to
a limited cease-fire, and we are encouraging others to explore
the possibility of an informal understanding guaranteeing the
security of both belligerents' oil facilities and expo:-s In
SECRET
DECL:OADR
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
SECRET
-2-
the Gulf. In particular, we support Japan's playing such a
role.
We have urged Saudi Arabia and the other Gulf states to
increase financial assistance to Iraq, either directly or by
the sale of oil on Iraq's account. Our own decision to grant
$400 million in CCC credits to Iraq financed basic food imports
when Iraq's need for credit was particularly acute.
We are also encouraging Iraq to develop additional oil
export outlets in order to relieve financial pressures.
Options currently being pursued by Iraq include a 500,000 b/d
link to Saudi Arabia's Petroline and a pipeline to the
Jordanian port of Aqaba that would carry 1 to 1.5 million b/d.
Even the prospect of added oil earnings would provide a basis
for creditors to continue to accommodate Iraq.
Iraq has made clear that it retains, and eventually may
exercise, the escalation option if international pressures on
Iran have no effect. Iraq may again find itself facing a
financial crisis if progress on alternate export routes is
slow. Likewise, the military and psychological pressures of
sustaining a war of attrition with a larger and potentially
more powerful adversary may in time cause Iraq's political
structure to crack. Cisequently, the danger of a desperate
recourse to escalation remains, and its likelihood increases in
proportion to whatever success Iran may achieve in its current
offensive. In pointing out to Iraq the consequences of such an
action on its part, we have cautioned that an escalation of the
war will not draw us into the conflict on the Iraqi side and
that the direct involvement of outside powers poses
unpredictable risks.
SECRET
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
SECRET
Should we engage in either pre-crisis or crisis contacts
with member states of the GCC and OPEC to attempt to minimize a
supply disruption, and if so, on a bilateral or multilateral
basis.
CURRENT POLICY:
Develop and maintain positive political, economic and
security relations with key producing countries to demonstrate
that their interests are not served by oil supply disruptions,
to develop economic relations that reinforce the production and
exchange of oil and to assist these countries, as appropriate,
in their defense against outside agression and internal unrest
(NS DD-87, p.9). We have consistently avoided putting such
contacts on a multilateral (p. ex., IEA-OPEC) basis.
BACKGROUND:
Last summer French Minister of External Affairs Cheysson
proposed an informal producer-consumer dialogue, a call which
has been picked up and echoed by Venezuela and most recently by
the Swiss. The Swiss tried to sell their proposal by
emphasizing that it would provide a communication channel that
could be useful in a supply disruption. A Swiss official
discussed the idea in early December with Yamani who allegedly
was enthusiastic.
The Swiss approached us with their idea. We reacted
negatively, restating opposition to formal or informal
multilateral producer-consumer dialogue. The Swiss then made
demarches to most IEA capitals and later reported to us that no
nation was as negative as the U.S., but most countries were
skeptical. In view of the negative reaction, the Swiss have
informed us they intend to drop proposal.
U.K. officials have also advised us that they have heard
that the Saudis might be interested in multilateral discussions
focussing on energy contingency planning in the event of a
Persian Gulf closure. The British are skeptical about the
value of such an exercise.
On January 11, New Zealand Energy Minister W.F. Birch met
with Yamani. The press release issued after the meeting noted
that Birch urged a greater exchange of information between IEA
and*O,PEC, implying a positive attitude toward a multilateral
approach. Although Birch served as Chairman of the 1983 IEA
Ministerial, he was given no mandate from IEA countries as a
group to make such a suggestion. The USG subsequently notified
our embassies that our position is unchanged.
SECRET
DECL:OADR
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
SECRET
DISCUSSION:
We see nothing to be gained by a pre-crisis multilateral
meeting with OPEC. We fear that any such discussion would
inevitably lapse into a debate over pricing and production
levels, both of which we consider best determined by the
marketplace. Our IEA allies seem, for the main part, prepared
to go along with this position.,
Furthermore, we question whether there is genuine interest
on the part of OPEC since statements by Yamani can be variously
interpreted. We have had no direct approaches from the Saudis
proposing a dialogue with consumers.
Pre-crisis discussions with individual GCC or OPEC counties
would likely be more frank and open, and thus contribute to a
more fruitful exchange.
The European Community meets regularly on a technical level
with the GCC, and such meetings could be used, if it appears
necessary, to sound out the Gulf producers on physical security
issues.
The possibility of discussion during a crisis with a
selective group of countries bordering the Persian Gulf should
not be ruled out at this time.
Recommendation:
The IESG recommends that no multilateral contacts between
oil producers and consumers be undertaken at this time.-
Despite tentative approaches from producers to European IEA
members, we remain unclear as to what could usefully be
discussed in such a dialogue. In all likelihood, we would face
producer requests for price stabilization agreements which
would run counter to U.S. policy. We would, however, continue
a full range of bilateral contacts with oil producing states.
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
Iq
Next 4 Page(s) In Document Denied
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
SECRET/
INTERAGENCY INTELLIGENCE ASSESSMENT
12 March 1984
IRAN-IRAQ WAR:
Escalation Scenarios an rea s to Persian Gulf States
We believe the warnings about possible escalation of the Gulf war
contained in SNIE 34/36-2-83 dated October 1983 remain valid. The SNIE
predicted a series of intermediate escalatory steps by Iraq to increase
military pressure on Iran, possibly culminating in Iraqi attacks on Iran's
Khark Island oil terminal or associated tanker traffic and Iranian
retaliation against oil exports from Arab Gulf states. We believe Iraq
already has passed through many of the intermediate warning steps outlined
in the SNIE.
The risk of a serious Iraqi effort against tankers or Khark Island
will increase if, as expected, Iran launches its next major offensive,
probably within a month. A serious Iraqi effort against Khark is
particularly likely if the battle goes badly for Baghdad. On paper Iraq
has the capability to shut down Khark Island through direct military attack
or attack on tankers calling at Khark. Iraqi willingness to risk heavy
losses in such efforts is the question.
As we noted in the October SNIE, the result of Iraq's initial attacks
on Iranian oil exports from Khark is not likely to be clear cut. Should
sporadic or limited Iraqi attacks cause only a modest interruption in
Iranian oil export we believe Iran would choose options at the lower end of
the escalatory scale.
This Interagency Intelligence Assessment was requested by the National
Security Council Staff. It was prepared under the auspices of the National
Intelligence Officer for Near East and South Asia. The Assessment was
coordinated at the working level with the Central Intelligence Agency, the
Defense Intelligence Agency, the National Security Agency, the Department
of State, and the intelligence services of the U.S. Army and Marine
Corps. Information available as of 12 March 1984 was used in preparation
of this Assessment.
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
SECRET
At a minimum, we believe the Iranians will employ psychological
warfare through the use of Iranian inspired and supported Shia terrorism
directed at Iraq's Gulf supporters as well as US personnel and facilities
in the region and beyond.
Iran might also execute some of the lower risk options if its new
offensive is defeated by Iraq.
Lower Risk Options
As discussed in the SNIE, Iran has numerous options for retaliation
but we believe the Iranians would first try to choose optons which Tehran
felt would not provide a pretext for Western military intervention. We
continue to believe that trying to shut down the Strait would be Iran's
last step in escalating the war. We believe lower-risk options include:
-- overflight of off-shore Arab Gulf oil facilities and terminals
or shipping bound for them by Iranian combat aircraft.
-- random detention and search of bulk shipping carriers bound for
Arab Gulf ports for contraband
-- further air raids against targets in Kuwait
-- attacks against Iraq's remaining oil exporting facilities,
including the Iraq-Turkey pipeline.
Should Iraq inflict serious damage on Khark--through which 90 percent
of Iran's oil is exported--or cut off tanker traffic to Khark for a
prolonged period, we believe Iran would react more sharply.
More Serious Steps
Tehran probably recognizes that its other two escalatory options would
carry a significant risk of confrontation with the US. They are:
-- military actions against Saudi Arabia or the Arab states of the
lower Gulf. This would include naval air or commando attacks
against off-shore or on-shore Arab Gulf oil facilities,
desalination plants, or other economic targets.
-- disruption of Gulf oil shipping. This could range from a
declaration that the Strait had been closed or mined--a bluff
that initially probably would be respected by most shipping--to a
direct air and naval action, including mining, to force the
closure of the Strait to commercial traffic. It would entail
continued attacks against tankers in the Gulf even if the Strait
was cleared.
2
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
SECRET
We believe these scenarios would occur roughly in the order stated.
We cannot, however, rule out simultaneous use of some actions. Terrorism
could be expected to form a backdrop to any of the above.
Iranian Perceptions
Iran does not view the Gulf War in isolation, but as part of a broader
struggle to advance fundamentalist Islam and reduce Western influence in
the region and beyond. In the wake of events in Lebanon, Iran may feel
more confident of its ability to oppose the US in the Gulf over the long-
term.
We judge Iran does not want to draw US forces into the Gulf. Should
US forces become involved, however, Iran's clerical leaders might find it
in their interest to keep the US engaged in a protracted conflict. It
would provide the regime with an increased threat to rally the Iranian
population. The Iranians could step up terrorist attacks against US
targets in the region and elsewhere to demonstrate US inability to protect
itself. Tehran also would be likely to adopt a drawn out strategy of
sporadic harassment of oil shipping and facilities under the assumption
that it could outlast the US and that the US would be restrained in its
ability to hit back at Iran because of the Soviet Union.
Gulf State Vulnerability to Terrorism and Subversion
Given the success of Iranian backed terrorism in Lebanon we would
expect to see Tehran put special emphasis on the use of terrorism and
subversion in the Gulf. Iran clearly has the capability to instigate
assassination and terrorist attacks by Shia. More than a thousand Gulf
Shia have received guerrilla training in Iran in the past five years. Many
of these Shia are in place in the Gulf states and can execute terrorist
operations on short notice.
We doubt that the Shia will be able to directly seize power in any of
the Gulf states, with the possible exception of Bahrain. The Gulf security
services probably can handle minor incidents, such as protest demon-
strations by Shia in their countries, but they cannot prevent the more
likely acts of terrorism and subversion. Most of the services are plagued
by inadequate training, bureaucratic rivalries, and poor coordination. In
addition, long and inadequately monitored coastal borders complicate
efforts to block saboteurs.
Gulf Security Services
The security services in the Gulf states vary in effectiveness. The
British-run Bahraini and Omani services have proved themselves capable of
early detection of subversion and terrorist threats and have excellent
counterterrorism capabilities. Bahrain, however, remains susceptible to
Iranian-sponsored subversion because of its large Shia population.
SECRET
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
SECRET
The security services of Kuwait, the UAE, and Qatar have not
effectively penetrated their Shia communities. None is likely to know in
advance of terrorist operations against them. The resources of the Kuwaiti
services were stretched to their limit in responding to the bombings in
December. We believe the services of Qatar and the UAE would be similarly
hard pressed.
Despite stepped up security measures in the wake of the Kuwaiti
bombings, serious weaknesses in Saudi internal security remain. While
still inadequate to completely control terrorism, the Saudi security
services have a heightened awareness of the problem and have begun to take
steps to improve defenses against pro-Iranian terrorist attacks. Saudi
borders--especially the long eastern shoreline--are difficult to secure
adequately and are highly susceptible to penetration. In addition, Shia
make up one-third of the work force in the Saudi oil industry.
Gulf State Vulnerability to Iranian Military Action
Iran has the capability to conduct a variety of military operations
against Gulf targets. Tehran's overall military capabilities have been
diminished greatly through 3 1/2 years of war and the US arms embargo. The
Iranian Navy's capability has suffered due to purges in leadership and
limited availability of spare parts and weaponry but it is capable of
supporting unconventional warfare activities directed at the Gulf states.
Iranian Fighter/Bomber aircraft are only about 35% operational leaving
approximately 85 aircraft for all air force missions. The Air Force could
use some of these aircraft to conduct strikes against Gulf Arab targets in
a sequential or combined operation.
Defense Capabilities
The air defenses of the Gulf states would be unable to prevent some
Iranian aircraft from reaching important targets. Kuwait is particularly
vulnerable, given its proximity to Iran. Saudi Arabia has the largest and
best-equipped Air Force of any Gulf state, but it could not react to an
Iranian attack quickly enough to fend it off. Even with warning from US
AWACS monitoring the Persian Gulf, the Saudis would have no more than 15
minutes to respond to aircraft approaching from Iran.
The Omanis and Saudis possess a capability to retaliate against Iran
with air strikes. Although such attacks might be helpful in limiting
Iran's ability to inflict damage, they probably would also contribute to
Iran's aim of rendering the Gulf as a whole unsafe for continued maritime
commerce, further isolating Gulf Arab oil terminals.
Southern Gulf coastal and offshore oil facilities are vulnerable to
Iranian naval/commando attacks, as was demonstrated by the damage done to
the Iraqi offshore oil terminals in the early months of the war. The
Saudis, however, are improving their defenses, especially at the critical
oil export facility at Ras Tanura.
25X1
SFf'RFT
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
SECRET
Oil tanker traffic is the portion of the Gulf oil export process most
vulnerable to Iranian interference. Iranian harassment of oil tanker
traffic might be prolonged as Iran tries to demonstrate that the US is
unable to effectively protect tanker traffic. Moreover, even the
destruction of the bulk of Iran's air and naval forces would not
necessarily end the threat as Iran could use dhows, small boats, and light
aircraft to continue harassing tankers. Such Iranian threats could require
Western navies to convoy tankers for months.
Impact of the Escalation Scenarios on Oil
The potential for oil price increases would be limited so long as
Saudi Arabia can use its oil producing capacity to continue supporting the
current oil price. It would take the unlikely event of major disruption to
Saudi oil exports to substantially change this picture. Two types of
Iranian actions could reduce Gulf oil exports to the point that free world
oil supplies would be significantly disrupted. These circumstances are:
-- Successful coordinated Iranian attacks against the Ras Tanura
Juaynah oil terminals and the processing facilities at Abqaiq.
Such a major attack might shut down Saudi oil activities for up
to two months, after which production would begin to recover,
perhaps returning to the 5-6 million b/d level in an additional
3 to 5 months, with US assistance.
-- Sustained and successful Iranian attacks against tanker traffic
in the Straits and the Gulf.
SECRET
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
Iq
Next 21 Page(s) In Document Denied
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Intelligence
International Oil Market
Outlook: Midyear
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
a; eF Directorate of Secret
Secret
GI 83-10171
July 1983
Copy 414
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
Assessment (u)
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
Intelligence
Assessment
International Oil Market
Outlook: Midyear
Strategic Resources Division
This paper was prepared the
Office of Global Issues. Comments and queries are
welcome and may be directed to the Chief,
Secret
GI 83-10171
July 1983
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
Secret
International Oil Market
Outlook: Midyear
Assessment
Key Judgments Recent gains in OPEC oil production and a firming in spot oil prices have
Information available signaled a return to more stable conditions in the oil market. OPEC
as of 8 July 1983 members have largely followed the production and pricing guidelines set in
was used in this report.
March. Even non-OPEC producers appear determined to avoid triggering
a price drop
Although non-Communist consumption has continued to fall and inven-
tories are being depleted, the willingness of producers to cooperate and
prospects for a sustained economic recovery should, in our view, cause
prices to hold through December. In the absence of a sustained economic
recovery and a resultant rebound in oil use, the willingness of financially
pressed producers to hold the line on prices is likely to wane.
Even if OPEC holds the line on prices through yearend, oil market
conditions will remain soft and the cartel will continue to face a number of
problems in the next year or so. One major hurdle will be the manner in
which OPEC members establish quotas when demand exceeds the present
17.5-million-b/d ceiling. Because of pressing financial needs, we believe
there will be a great temptation to produce too much too soon. If
consumption continues to fall, major oil companies would accumulate
excess inventories and cause a return to the weak market that prevailed in
early 1982 and 1983. An unexpected end to the Iran-Iraq war in the
coming months and attempts by these two countries to raise production
would also sharply increase downward price pressures.
iii Secret
GI 83-10171
July 1983
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
International Oil Market
Outlook: Midyear
Assessment
Introduction
The oil market has been in turmoil over the past two
years as producers have attempted to adjust to sharp
declines in revenues as a result of rapidly dwindling
demand for oil. In an unprecedented move this past
March, OPEC members cut the price of the bench-
mark crude, Arab Light, by $5 per barrel and estab-
lished an overall production ceiling of 17.5 million
barrels per day for the group, nearly 14 million b/d
below 1979 production levels. Despite the consider-
able differences among OPEC members especially
concerning revenue needs, the group has generally
adhered to the March production and pricing guide-
lines and prevented a major collapse in oil prices.
Although some stability has returned to the oil mar-
ket in recent weeks, the cartel has by no means
regained control of the market. Whether the organi-
zation will prevent a further decline in prices over the
coming year or so will depend on a number of factors,
the most important of which is an increase in oil
consumption.
Recent Trends
Consumption Patterns. The decline in oil consump-
tion continues. Based on oil industry data, we estimate
that non-Communist oil consumption fell by about
5 percent during first-quarter 1983, the 14th consecu-
tive quarter that oil sales have declined from year-
earlier levels. Partial data for the second quarter
indicate that the decline in oil sales is continuing,
albeit at a slower rate than in 1982. Oil consumption
in the United States and Italy fell by 3 percent in
April-May. During the same period oil sales in France
approximated year earlier levels
In addition to sluggish economic activity in major
industrial countries and continued conservation, sev-
eral other factors have contributed to the decline in oil
sales in recent months:
? Relatively warm weather from September to April
caused heating requirements in the seven major
developed countries combined to fall 10 percent
below year-earlier levels.
? Appreciation of the dollar has pushed up imported
oil costs in some foreign countries despite lower
official oil prices. From January 1982 to January
1983, the price of imported crude oil in France and
Japan, for example, rose 9 percent and 2 percent,
respectively, while the average OPEC official sales
price declined by 3 percent. (Crude oil prices are
denominated in dollars.)
? LDC austerity programs also contributed to the
drop in consumption. 25X1
Inventory Adjustments. Industry expectations of a
price decline caused a large inventory liquidation in
recent months, contributing to the depressed demand
for OPEC oil. We estimate that primary oil stocks fell
by about 4 million b/d during the first quarter, nearly
500,000 b/d greater than the normal seasonal rate.
As a result, non-Communist oil stocks on land de-
clined to about 3.9 billion barrels at the end of the
first quarter, about 92 days of forward consumption 25X1
(table 1). We believe secondary and tertiary stocks-
oil held by wholesalers, retailers, and users-were also
drawn down in anticipation of an oil price decline.
Because of the historic relationship between stock
levels and consumption, stocks at the end of March
were still above normal by about 100-200 million
barrels, representing two to four days of forward
consumption. Our estimate of consumption and cur-
rent supply levels indicates that commercial inven-
tories during the second quarter held roughly steady 25X1
or declined by as much as 1 million b/d. This is in
marked contrast to a normal seasonal buildup.'
' Because of historic seasonal fluctuations in the level of oil
consumption, non-Communist primary oil stocks are normally
accumulated during the spring and summer months. The buildup is
usually about 1.5 million b/d during the second quarter and
approximately 2.5 million b/d during the third quarter. These
stocks are then depleted during the fall and winter to meet peak
consumption needs. The drawdown is normally about 1 million b/d
during the fourth quarter and about 3 million during the first
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
Table 1
Non-Communist Primary Oil Stocks on Land,
End of Period a
Billion Barrels
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
1978
3.6
3.7
3.9
3.9
1979
3.5
3.8
4.2
4.3
1980
4.3
4.6
4.8
4.6
1981
4.5
4.6
4.7
4.6
1982
4.3
4.2
4.3
4.3
1983
3.9 b
a Estimates include government-owned stocks in Japan and the
United States that have increased from 18 million barrels in first-
quarter 1978 to about 385 million barrels at end of first-quarter
1983. The increase amounts to about nine days of forward
consumption.
b Estimated.
Days of Forward Consumption
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
74 76 74 69
72 78 81 82
91 99 97 93
101 104 100 96
97 98 97 96
92 b
Table 2
OPEC Crude Oil Production
Quota January February March First April a May a June a Second
Qtr Qtr a
Total
18.8
17.5
17.0
14.9
15.9
15.9
15.9
17.4
17.4
16.9
Algeria
0.6
0.725
0.7
0.7
0.7
0.7
0.7
0.7
0.7
0.7
Ecuador
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.2
Gabon
0.2
0.15
0.2
0.1
0.2
0.2
0.2
0.2
0.2
0.2
Indonesia
1.3
1.3
1.2
1.0
1.1
1.1
1.4
1.4
1.3
1.4
Iran
2.3
2.4
2.7
2.5
2.6
2.6
2.3
2.3
2.3
2.3
Iraq
1.0
1.2
0.8
0.8
0.8
0.8
0.8
0.8
0.8
0.8
Kuwait
0.7
1.05
0.6
0.8
0.9
0.8
0.7
0.8
0.7
0.7
Libya
1.2
1.1
1.4
1.2
1.3
1.3
1.1
1.1
1.1
1.1
Neutral Zone
0.3
b
0.3
0.2
0.2
0.2
0.4
0.5
0.4
0.4
Nigeria
1.3
1.3
0.8
0.7
0.9
0.8
1.2
1.6
1.5
1.4
Qatar
0.3
0.3
0.3
0.2
0.2
0.2
0.3
0.3
0.3
0.3
Saudi Arabia
6.3
4.6
3.6
3.6
3.9
3.9
4.6
4.9
4.5
UAE
1.2
1.1
1.2
1.1
1.1
1.2
1.2
1.2
1.2
1.2
Venezuela
1.9
1.675
2.1
1.8
2.1
2.0
1.7
1.7
1.7
1.7
a Preliminary.
b Neutral Zone production is shared about equally between Saudi
Arabia and Kuwait and is included in each country's production
quota.
c Saudi Arabia has no formal quota; will act as swing producer to
meet market requirements.
Note: Because of rounding, columns may not add up to totals shown.
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
aecrer
OPEC: Crude Oil
Arab Light Prices Production
US $ per barrel Million b/d
35 Official price
30
Spot price
20 Jan Jan 14 Jan Jan
1982 1983 1982 1983
25X1
300087 7-83
Production Trends. Preliminary data million b/d. The duration of this measure, however,
Dindicate OPEC crude oil production in June
remains unspecified. While maintaining output at
averaged 17.4 million b/d, more than 1 million b/d
near-capacity levels, the United Kingdom dropped
above April levels and approaching the cartel's pro-
prices only slightly in April.
duction ceiling of 17.5 million b/d set in March (table
2). Nigeria, the UAE, and Indonesia are the only
nations to have exceeded their individual production
quotas; second-quarter production in all three nations
was close to 100,000 b/d above their ceilings. Saudi
production in June rose 300,000 b/d from May to 4.9
Recent Price Developments. In addition to producer
million b/d.
willingness to hold down production, a number of
other factors have contributed to the stability of oil
prices since OPEC lowered the official sales price of
OPEC producers-including Iran, Libya, and Vene-
Arab Light crude oil by $5 last March to $29 per
zuela-continued to produce within their allocation
__
barrel and established production quotas (see charts):
levels in support of the OPEC agreementF
1
Major non-OPEC exporters have also signaled their
intentions not to undermine the price structure. Ac-
cording to statements made by senior Mexican oil
officials, Mexico has adopted a temporary 1.5-
million-b/d export ceiling even though Mexico is
having financial problems and could export nearly 2
Buyer acceptance of the British National Oil Com-
pany's minimal price reduction in April and the lack
of retaliatory cuts by Nigeria and other OPEC
members helped firm prices.
25X1
25X1
25X1 I
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
Table 3
Oil Price Trends 1983
US $ per barrel
(end of month)
Official
30.00
29.00
29.00
29.00
29.00
Spot
28.00
29.00
28.85
28.60
28.90
Yield
25.54
26.57
28.02
27.31
27.49
Kuwait Medium
Official
28.30
27.30
27.30
27.30
27.30
Spot
27.50
26.25
27.25
26.95
27.10
Yield
24.69
25.67
27.05
26.31
27.26
Official
30.00
30.00
30.00
30.00
30.00
Spot
28.00
28.50
30.00
29.75
30.20
Yield
26.54
27.82
29.40
28.81
29.65
? The Soviet Union and Egypt announced an increase
in their official oil prices of about 50 cents per
barrel effective l May, and both announced a
further 50-cents-per-barrel increase effective 1 July.
Soviet prices are now in line with the OPEC
benchmark)
Spot crude oil prices continue to fluctuate around
official prices. Arab Light prices are now only 10
cents below the official price, while spot crude prices
for Bonny Light are running about 20 cents above the
official level (table 3). We do not believe the modest
spot price movements reflect a major market trend,
Demand Outlook
Consumption Factors. Oil market conditions during
the remainder of this year will depend in large part on
consumption trends. Predicting consumption patterns,
however, is difficult:
? Forecasters have limited success in predicting the
sharp decline in consumption during the past few
years. Estimates differ on how much of the decline
was due to conservation versus the recession. There
is also considerable uncertainty regarding the
amount of additional investment in energy efficien-
cy that is under way despite recent declines in real
and nominal oil prices.
? The pace of economic activity and its impact on oil
consumption are uncertain. Many forecasters be-
lieve a recovery will bring a rebound in oil use
because increased activity in energy-intensive indus-
tries and oil's traditional role as a swing fuel should
bolster oil demand.
? Accurate and timely data on end-user consumption
of oil is not available. The apparent consumption
measured by companies includes secondary and
tertiary stock movements, the effect of which cannot
be easily separated from actual oil use. If, as we
expect, significant drawdowns of these stocks oc-
curred in early 1983, a reversal in this trend could
cause major international companies to overesti-
mate final consumption in second-half 1983, unnec-
essarily boost imports, and wind up with excess oil
stocks.
25X1
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
Secret
The exact level of usable stocks held by companies is
a function of their market outlook and company
strategy as well as miscalculations in balancing
supply and demand. In addition to minimum operat-
ing levels, compulsory stocks, and government-owned
stocks, inventory levels include a residual that cannot
easily be fine-tuned to match a company's financial
objectives. Factors influencing stock decisions
include:
? Estimates offuture consumption levels, including
the strength of economic recovery.
? Expectations about price movements.
? Expectations about supply availability, particularly
stability in certain key oil producing nations.
? The level of interest rates.
? Fluctuations in currency exchange rates will cause
oil prices, and hence consumption, to vary among
countries.
Consumption Outlook. To assess the market outlook
for the balance of 1983, we have examined two
scenarios for oil consumption. Under our base case,
we assume the economic recovery combined with
erosion in real oil prices raises oil consumption to
year-earlier levels in the fourth quarter. Although the
OECD economies now appear to be pulling out of the
recession, the recovery is neither uniform nor rapid.
Most economic consulting firms expect growth in the
United States and Japan, for example, to outpace
growth in Western Europe. These same forecasters
expect average OECD growth to approximate only 2
percent for the year. To accommodate the uncertainty
about economic recovery and the possibility of contin-
ued high rates of conservation, we have also examined
an alternative case that assumes that the rate of
decline in oil consumption continues at its recent pace
through 1983. Under both scenarios we assume LDC
oil consumption remains relatively flat. In estimating
annual oil consumption, we adjusted results from the
CIA econometric model on the basis of our review of
recent industry projections. In estimating quarterly oil
demand, we constructed a set of quarterly growth
rates consistent with the pattern of recovery forecast
Inventory Behavior. Movements in oil inventories will
play a key role in determining the level of oil demand
for the balance of this year. Companies still have
some leeway to reduce stocks and probably will strive
to keep inventories at minimum levels. Our base
forecast assumes that at some point in the next few
months, however, inventory depletion will be halted,
either because stocks will be approaching minimum
levels or companies perceive that the price decline is
over. Because they have different levels of inventories,
some companies may have already ceased depleting
stocks, which probably accounts for the recent rise in
OPEC production. On balance, the resumption of
normal inventory patterns later this year alone could
raise oil demand by nearly 2 million b/d. Under our
alternative case, we assume excess inventories remain
through 1983 because international oil companies
continue to overestimate future consumption levels, in
part because of their inability to obtain accurate and
timely data on end-user consumption of oil.
Near-Term Price Outlook
The Base Case: Prices Hold. Should oil consumption
rebound and inventory patterns return to historic
patterns during second-half 1983, demand for OPEC
oil, including natural gas liquids, would increase to
about 20 million b/d by the fourth quarter (table 4).
Such an increase should help underpin the present
pricing structure and lessen pressures for some OPEC
members to cheat on their quotas. OPEC members
appear determined to prevent a further slide in oil
prices, and production controls would remain essential
to maintaining price stability. We expect OPEC
members to have difficulty apportioning new quotas
once demand exceeds the present level.
Alternative Forecast: Price Weakness. Should the
lower consumption case materialize, demand for
OPEC crude oil would average roughly 17.5 million
b/d during second-half 1983, approximating the cur-
rent OPEC ceiling. Under this scenario OPEC mem-
bers would have difficulty preventing a further price
decline. If OPEC production increases overshoot actu-
al consumption levels, excess stocks would persist and
spur another downturn in demand for OPEC oil this
25X1
25X1
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
Table 4
Estimated Non-Communist Oil Supply and Demand
Consumption a
Inventory change b
Supply
Non-OPEC
OPEC
Consumption
Inventory change
Supply
Non-OPEC
OPEC
a Includes refinery gain.
b Includes stock change afloat.
I
II
III
IV
Year
47.5
44.0
43.2
44.6
44.8
-3.3
-1.8
0.2
-1.2
44.2
42.2
43.2
44.8
43.6
23.3
23.6
23.8
24.4
23.8
20.9
18.6
19.4
20.4
19.8
winter. Under these circumstances and without a
sustained rebound in oil consumption, serious price
pressures could return in early 1984, repeating the
pattern of the previous two years.
Another key in the near-term market outlook will be
the behavior of non-OPEC producers. Although oil
market stability remains in their interest, we believe
coordination with OPEC would wane if oil demand
drops sharply:
? Renewed market weakness would pressure Mexico
to lower prices, given its financial difficulties and its
desire to sell up to its export capacity.
? The United Kingdom would face increased pressure
to cut prices if sales plummet as a result of market
weakness or attempts by other exporters to increase
their market share.
? The Soviet Union would be among the first to shave
prices to maintain volume and ensure vital hard
currency earnings.
I
II
III
IV
Year
45.0
42.5
42.8
45.4
43.9
-4.2
-0.8
1.6
-1.2
-1.1
40.8
41.7
44.4
44.2
42.8
24.1
24.2
24.4
24.4
24.3
16.7
17.5
20.0
19.7
18.5
44.7
42.0
41.0
43.0
42.7
-3.9
-0.3
1.9
-0.6
40.8
41.7
42.9
43.0
42.1
24.1
24.2
24.2
24.3
24.2
16.7
17.5
18.7
18.7
17.9
Pressure on Exporters
The financial strain facing most members of the
cartel pressures each one to maximize production and
exports without regard for the others. Even under our
base case demand estimate for 1983, OPEC would
experience a current account deficit of about
$30 billion. Only five OPEC states are likely to run a
surplus in 1983-Kuwait, Qatar, Iran, the United
Arab Emirates, and possibly Gabon. Most of the
deficit countries are already in financial trouble and
these problems could intensify, especially if the bank-
ing community moves to constrain lending to these
countries. Should demand for OPEC oil fall 1 million
b/d lower than our base case, the current account
deficit would rise by about $10 billion unless offset-
ting import cuts were made.
25X1
25X1
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
secret
A survey of recent short-term oil market forecasts,
major war between two members, and financial prob-
lems in some member countries, OPEC was able to
reach an agreement on pricing and production that
indicates expectations of a continued soft mar-
ket through at least yearend. Most forecasters expect
the current price structure to hold through 1983.
Some analysts, however, call for renewed downward
price pressures later this year, especially if the re-
bound in oil use fails to materialize.
Most companies anticipate a moderate economic
recovery during second-half 1983. The decline in non-
Communist oil consumption is expected to slow, and
oil use is projected to exceed year-earlier levels by
the fourth quarter. Although most forecasters expect
the stock ajustment process to be completed this
summer, they do not rule out a further decline in
stocks, particularly if prices weaken. According to
most of these forecasts, demand for OPEC crude oil
will approximate 19-20 million b/d during second-
half 1983, 2-3 million b/d above current levels
(table 5).
The size of a possible supply glut-the excess of
desired production over demand for OPEC oil-
provides an indication of the potential for downward
price pressures. To estimate OPEC's desired produc-
tion level, we calculated the level of production each
country needed to maintain total financial assets at
yearend 1982 levels, assuming current prices hold. On
this basis, we estimate that OPEC's desired produc-
tion approximates 23-24 million b/d including natural
gas liquids, nearly 5 million b/d above our base line
demand estimate. Should OPEC members attempt to
achieve this desired production level, prices would be
likely to fall sharply, perhaps to $20 per barrel or
lower.
Looking Ahead
The major factor behind OPEC's success in prevent-
ing a further drop in the price of oil these past few
months has been the willingness of members to co-
operate. Despite political differences in the Gulf, a
has basically been adhered to by all the participants:
? The Saudis accepted the role of swing producer and
have been willing to bear the brunt of the decline in
demand.
? Iran has largely abided by the production and
pricing guidelines despite the ongoing war with Iraq
and its political differences with other OPEC mem-
bers in the Persian Gulf.
? Venezuela and Libya, two members that violated
the 1982 OPEC accord, have adhered to the guide-
lines of the present pact.
OPEC has also been successful in attaining the
apparent cooperation of such key non-OPEC produc-
ers as Mexico and the United Kingdom.
Even though we believe this cooperation and a slight
rise in oil demand will result in stable oil prices
through the end of the year, oil exporters are by no
means out of danger of a price collapse. Given the
financial difficulties faced by many producers, a
sustained rebound in oil consumption will be needed
to maintain cooperation and to avoid the temptation
to cheat on pricing and production guidelines in an
attempt to improve market share. Equally important
will be the ability of OPEC members to establish new
quotas once demand exceeds the present 17.5-million-
b/d ceiling. We expect these negotiations to be diffi-
cult, and considerable pressure will be generated by
several financially pressed members to obtain as large
a share of the new quota as possible. The danger for
OPEC would be to produce too much too soon,
causing the accumulation of excess inventories and
repeating the pattern of the past two years. If this
were to happen, we would expect another crisis to
develop early in 1984 when the market approaches the
normal seasonal drop in oil consumption.
25X1
25X1
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
Secret
OPEC's problems would be further compounded in
the unlikely event that the Iran-Iraq war ends. Any
attempt by Iran and Iraq to increase exports would
put downward pressure on prices and force OPEC into
difficult rationing decisions. While Iranian production
is not constrained to its present level by the war, Iraq
would require only four to six months after the war to
increase exports by 1-2 million b/d. Even the antici-
pation of such an increase in supplies would soften the
market and pose serious problems for producers at-
tempting to maintain oil prices.
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B00420R000200320001-4
 Secret
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
Secret
Energy
Developed Countries' The industrialized countries have cut oil consumption and imports particularly
Dependence on Persian from the Persian Gulf region. Despite reductions in imports from the region-
Gulf Supplies from nearly 15 million b/d in 1979 to approximately 6 million b/d last year-
several industrialized countries rely on the Persian Gulf for more than one-
third of their oil needs.
Major Developed Countries: Estimated Dependence
on Persian Gulf Oil Imports,
January-September 1983
Iran
Iraq
Kuwait Qatar Saudi
Arabia
United
Arab
Emirates
Total
Persian
Gulf
Oil
Total
Developed
Country
Supply a
Persian
Gulf Oil
as a
Share of
Supply
(percent)
Total
1,282
407
363
208 2,716
948
5,924
36,627
16
United States
59
10
9
NEGL 252
26
356
15,061
2
Japan
352
12
105
144 1,264
604
2,481
4,160
60
Western Europe
837
385
244
64 1,192
318
3,040
15,513
20
West Germany
47
26
27
6 145
30
281
2,290
12
France
88
25
19
20 294
128
574
1,860
31
Italy
229
111
90
10 227
66
733
1,880
39
United
Kingdom
11
17
13
0 114
22
177
3,060
6
Austria
1
0
0
0 27
0
28
195
14
Belgium/
Luxembourg
8
37
1
3 38
0
87
723
12
Finland
7
0
0
0 11
0
18
243
7
Greece
8
24
0
0 97
0
129
339
38
Netherlands
118
3
67
3 47
9
247
1,591
16
Norway
0
0
0
0 5
0
5
684
1
Portugal
25
19
0
0 49
7
100
208
48
Spain
163
45
0
22 99
54
383
1,096
35
Sweden
16
0
0
0 1
0
17
476
4
Secret
9 March 1984
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4
Non-Communist Oil Supply and Demand in 1984a
(million barrels per day)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Year
Total Consumption
46.5
43.2
43.5
46.0
44.8
Inventory Change
-2.4
0.1
1.4
-0.5
-0.3
Supply
44.1
43.3
44.9
45.5
44.5
of which
Non-OPEC
24.9
24.7
25.0
25.3
25.0
OPEC
19.2
18.6
19.9
20.2
19.5
a Excludes refinery gain.
Non-Communist Primary Oil Stocks on Land-End of Quarter
Million Barrels Days of
Forward Consumption
1st
Qtr
2nd
Qtr
3rd
Otr
4th
Otr
1st
Qtr
2nd
Qtr
3rd
Otr
4th
Qtr
1983
Crcial
3,565
3,540
3,720
3,580
84
83
80
78
Government-(honed
445
465
480
520
10
11
11
11
Total
4,-16
4,005
4, 200
4,100
94
94
91
87
1984
Commercial
3,345
3,335
3,445
3,385
77
77
77
75
Government-Owned
540
560
575
595
11
12
13
-
12
Total
3;
75
80
IT
7
qu
77
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP86B0042OR000200320001-4