WORLD OIL MARKET OUTLOOK: KEY POLITICAL AND ECONOMIC DIMENSIONS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP87T00126R000100090002-8
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 25
• Document Creation Date: December 22, 2016
• Document Release Date: August 26, 2008
• Sequence Number: 2
• Publication Date: April 13, 1984
• Content Type: NIE

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Director of Secret
Central
Intelligence
25X1
World Oil Market Outlook:
Key Political and
Economic Dimensions
Secret
NIE 3-2-84
13 April 1984
Copy 537
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N I E 3-2-84
WORLD OIL MARKET OUTLOOK:
KEY POLITICAL AND
ECONOMIC DIMENSIONS
Information available as of 13 April 1984 was
used in the preparation of this Estimate.
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THIS ESTIMATE IS ISSUED BY THE DIRECTOR OF CENTRAL
INTELLIGENCE.
THE NATIONAL FOREIGN INTELLIGENCE BOARD CONCURS.
The following intelligence organizations participated in the preparation of the
Estimate:
The Central Intelligence Agency, the Defense Intelligence Agency, the National Security
Agency, and the intelligence organizations of the Departments of State and
the Treasury.
Also Participating:
The Assistant Chief of Staff for Intelligence, Department of the Army
The Director of Naval Intelligence, Department of the Navy
The Assistant Chief of Staff, Intelligence, Department of the Air Force
The Director of Intelligence, Headquarters, Marine Corps
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CONTENTS
Page
SCOPE NOTE ...................................................................................... v
KEY JUDGMENTS .............................................................................. 1
DISCUSSION ........................................................................................ 3
Market Trends and Uncertainties .................................................... 4
Pressures To Raise OPEC Oil Production ...................................... 7
Nigeria ............................................................................................... 7
Venezuela .......................................................................................... 9
Libya .................................................................................................. 9
Iraq .................................................................................................... 10
Iran ..................................................................................................... 10
Other Producers ................................................................................ 10
Saudi Arabia-the Balancing Factor ............................................... 11
Prospects for the Oil Market ............................................................ 11
Potential for Supply Disruption ....................................................... 12
Iran-Iraq War ............................................................................... 12
Other Supply Disruptions ................................................................ 14
Reaction to Disruption ..................................................................... 14
Other Supply Factors ................................................................... 15
Oil Price Changes and Economic Impact ....................................... 16
Price Declines ............................................................................... 16
Price Increases ................................................................................... 16
The Soviet Role ................................................................................. 16
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SCOPE NOTE
This Special National Intelligence Estimate examines the outlook
for the world oil market through 1986 and the implications of possible
major discontinuities. The emphasis is on developments that could
produce a pronounced fall or sharp rise in oil prices and the interplay of
oil market forces and political and economic pressures.
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KEY JUDGMENTS
Unless the threats to Persian Gulf oil supplies are realized,, the
underlying pressures on the oil market will be downward over the next
three years or so, resulting in a decline of oil prices in real terms,
although probably not in nominal terms. Several member nations of the
Organization of Petroleum Exporting Countries (OPEC), notably Nige-
ria, Venezuela, Iraq, and possibly Libya, will see increased oil sales as
the principal way to ease their severe economic problems and perhaps
to maintain political stability. It will be difficult to reconcile these
pressures for higher oil output with the likely slow increase in demand
for OPEC oil. Saudi Arabia will remain the swing producer and under
some circumstances will have to cut its already low production further
to balance the market.
The chances are that OPEC will hold together despite these
pressures. The OPEC countries have powerful common interests in
avoiding a large price decline and have developed patterns of coopera-
tion. Saudi Arabia, the lowest cost producer with the largest reserves,
considers maintenance of the current $29 price to be consistent with its
long-term national interests, although the Saudis might prefer a some-
what lower price-for example, $25 a barrel-if oil demand proved
weaker than expected.
In the unlikely case OPEC cooperation should break down,
competition for market shares would quickly push prices down, perhaps
to $15 a barrel or less. But we believe that such a price collapse would,
within a few months, cause OPEC producers to regroup and agree again
on controlling production, and that the price of oil would be set in the
$25 to $29 range.
At the other extreme, the intensification of the Iran-Iraq war could
disrupt oil supplies, through a temporary closure of the Persian Gulf or
damage to Gulf oil facilities, and produce a sharp increase in oil prices.
Under the most likely disruptions, however, oil supply reductions would
be brief enough to be absorbed through stock drawdowns or too small to
reduce world supplies because of the prevalence of excess productive
capacity; consequently, prices would quickly return to, or even fall
below, their previous level. The inevitable uncertainties during a supply
'See SNIE 34/36-2-83, Iran-Iraq War: Increased Threat to Persian Gulf Oil Exports (S NF), 13
October 1983.
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interruption would breed speculative buying that would add to any
price rise, but it is unlikely that a buildup of oil stocks would play as
large a role as it did in 1979.
Large price increases lasting several months would require system-
atic, continuing Iranian attacks (conventional and unconventional)
against tankers or key oil facilities in the Persian Gulf or sufficient
damage to Saudi facilities to make the Saudis incapable of holding down
the price of oil.
Even if no major oil supply interruptions occur, we cannot rule out
the possibility that, should Iranian power become dominant in the
Persian Gulf, and Saudi Arabia were also subjected to protracted
externally directed subversion, the Saudi Government would no longer
have the self-confidence to play a strong leadership role in OPEC. This
might mean, for example, not increasing their oil production to prevent
other OPEC countries from raising oil prices.
A stable or slowly declining oil price would have generally
favorable effects on the world economy because it would tend both to
stimulate economic growth and to slow inflation; it would particularly
benefit nonoil developing countries with large debt problems by
reducing their debt service burden. Several oil exporters, however,
would face growing economic difficulties, and perhaps political instabil-
ity. Nigerian politics may become increasingly chaotic with declining
revenues, heightening the prospects for a series of coups and counter-
coups that could allow a radical, anti-Western regime to seize power.
Venezuela has no alternative sources of revenue to oil exports, and its
democratic institutions may have great difficulty coping with several
more years of economic stagnation or decline. Libya has far more
flexibility than Nigeria or Venezuela but would be unable to finance
some of its major domestic and foreign policy goals. Soviet hard
currency earnings would be reduced and oil deliveries to Eastern
Europe could be cut back, aggravating the already austere economic
conditions. These countries in turn might take advantage of the soft oil
market to accelerate bartering goods for oil.
A large oil price increase, on the other hand, could do substantial
damage to the world economy and it could lead to a moratorium on,
debt service in Brazil and other key oil-importing LDCs. It would slow
Western economic recovery and would be a major benefit for the USSR.
Moscow's hard currency earnings would increase by $2.5 billion, or 7
percent for every $5 increase in oil prices. The Soviets could also benefit
indirectly from the strains that would occur within the West as a result
of oil supply disruptions and price hikes.
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DISCUSSION
1. The weak oil market of today grew out of the oil
price explosions of the 1970s. Oil consumption in the
major industrial nations 2 fell by 8 million barrels per
day (b/d) or roughly 20 percent between 1979, the
peak year, and 1983. The drop in consumption was a
result of a combination of reduced economic growth,
energy conservation, and substitution of other forms of
energy for oil. It was sustained by such factors as the
shift away from energy-intensive industry to services
and the strength of the US dollar (see table 1).
2. Lower consumption resulted in a drastic reduc-
tion in industrial countries' oil imports, including
imports of oil from the member nations of the Organi-
zation of Petroleum Exporting Countries (OPEC).
Total US oil imports dropped from a peak of 8.8
million b/d in 1977 to 4.7 million b/d in 1983, those of
Japan from 5.5 to 4.3 million b/d, and those of France
from 2.5 to 1.8 million b/d during the same time
frame.
3. The reduced demand for oil has produced strains
within OPEC, although in 1983 OPEC members
reached agreement on a cut in official prices and set
associated production quotas. Although the Saudis
have borne the brunt of demand cuts, producing as
much as 4 million b/d below their capacity in the first
'Members of the Organization of Economic Cooperation and
Development (OECD).
quarter and acting as the residual supplier in the
market, prices could not have been maintained with-
out substantial cooperation from other OPEC coun-
tries. Kuwait, Libya, Nigeria, the UAE, Venezuela,
and Iran are producing well below their capacity and
the levels at which they would prefer to produce.
Iraq's production continues to be held down by the
war. Current surplus capacity in non-Communist
countries is about 8 million b/d, but only about 3
million b/d of excess capacity is located outside the
Persian Gulf. Mexico is the only non-OPEC producer
with sizable surplus capacity, about 200,000 b/d.
4. The drop in oil exporter revenues has brought
problems-mainly economic, but also political-for
oil-exporting states, including those outside of OPEC.
All of the oil states boosted spending sharply in the
revenue boom years; some also turned to heavy bor-
rowing. In the latter category, Mexico, Venezuela, and
Nigeria have had to enter into renegotiations of their
enormous debt loads. Financial problems in Nigeria
and Venezuela have contributed to changes in govern-
ment-by a military coup in the case of Nigeria. Table
2 presents oil earnings, imports, and the current
account balance for the major OPEC countries in
1978, before the last large oil price increase, and in
1981, the peak year for oil earnings in most OPEC
countries, except Iran and Iraq, and 1983. Imports
have had to be cut sharply in Iraq, Nigeria, Venezuela,
OECD Energy Consumption
Million Barrels
per Day
Oil Equivalent
Percent of
Total
Energy
Consumption
Million Barrels
per Day
Oil Equivalent
Percent of
Total
Energy
Consumption
Million Barrels
per Day
Oil Equivalent
Percent of
Total
Energy
Consumption
Oil
39.8
54
40.6
52
33.0
46
Natural gas
14.4
20
15.2
19
13.1
18
Coal
14.0
19
15.2
20
16.0
22
Nuclear power
.9
1
5.1
6
4.0
6
Other
4.5
6
2.7
Total
73.6
100
78.8
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OPEC Earnings and Imports
Oil Export Earnings
Merchandise Imports (fob) Current Account Balance a
1978
1981
1983b
1978
1981 1
983b
1978
1981
1983b
Saudi Arabia
36
110
45
20
34
39
-2
57
-15
Kuwait
9
14
9
4
7
7
5
12
7
United Arab Emirates
8
19
12
5
9
8
2
8
2
Iraq
11
11
8
7
20
11
1
-17
-9
Iran
21
11
20
18
11
15
1
-2
NEGL
Nigeria
9
17
11
12
18
9
-5
-5
-I
Venezuela
9
19
14
11
12
8
-6
2
1
Libya
10
15
11
7
15
8
1
-4
-1
Indonesia
6
15
9
8
17
15
-I
NEGL
-4
Others
10
21
14
12
15
14
-4
1
-1
Total
129
252
153
104
158 1
34
-8
52
-21
a In addition to oil exports and merchandise imports, includes non-
oil-export earnings, payments on receipts for services, grants,
investments income, and transfers such as worker remittances.
b Estimate.
and Libya, and in some cases are also below the 1978
level. Moreover, since 1981 official foreign assets in
OPEC countries have declined 10 percent to $293
billion and debt has increased by 20 percent, as shown
in table 3.
5. The near-term market outlook is affected by
conflicting pressures. On the one hand, the poorer
producing states are under pressure to sell more oil to
boost oil export revenues, thereby adding to down-
ward price pressures. On the other, the war between
Iran and Iraq threatens to expand and interfere with
deliveries through the Gulf and drive up price.
Market Trends and Uncertainties
6. Barring a major supply disruption, we believe the
market is likely to remain weak for the next several
years. On the basis of trends in the world economy and
on nonoil energy markets, and assuming a constant
nominal oil price, oil consumption in the non-Commu-
nist world is expected to grow by only about 1 or 2
percent annually through 1986. With some increase in
oil supplies likely from non-OPEC sources, demand
for OPEC oil will also grow only slowly. There is,
however, a considerable range of uncertainty.
7. Among the major factors affecting oil demand,
most forecasters agree on the following:
- OECD economic growth of 2.5 to 3 percent a
year through 1986 (with the United States and
Japan leading the way) and LDC growth of
about 3 to 4 percent (substantially slower than in
the 1970s, but still slightly faster than in industri-
al nations).
- Continuing energy conservation, but at a declin-
ing rate. Many energy-saving investments contin-
ue to be profitable, and the impact of earlier
conservation decisions-for example, in the de-
sign of buildings, machinery, and vehicles-is
increasing. On the other hand, where energy
prices have fallen substantially, as in the case of
gasoline in the United States,' there are signs of
reduced interest in conservation (see figure 1).
- Continuing substitution of other energy sources
for oil, but also at a declining rate. Most profit-
able substitution possibilities in existing plants
apparently have already been completed, but
new construction is based increasingly on nonoil
energy sources (see figure 2).
8. Non-OPEC oil supplies are likely to increase by
up to 1 million b/d in the next three years. Most
experts expect US and Canadian production to be
marginally down, North Sea production to level off,
and Mexican production to continue rising, but only
slowly because of a slowdown in investment. Perhaps
an additional 0.2-0.3 million b/d will come from other
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OPEC Reserves and Debt
United Arab Emirates
Iraq
Iran
Venezuela
Libya
Indonesia
Other
Total
1978 1981 1983 1978
57 144 130 4
30 63 67 3
15 33 36 5
10 21 3 2
19 10 11 12
9
6
3
10
161
Figure 1
OECD Energy and Oil/GNP Ratio
1981 1983
6 6
5 6
5 6
3 5
8 6
14 12 16 30 36
12 7 1 1 1
6 5 15 20 28
20 21 20 24 24
327 293 82 111 133
Barrels per thousand $ of GNP (in constant prices)
5
1978
1981
1983
53
138
124
27
58
61
10
28
30
8
18
-2
7
2
5
-7
-16
-24
5
11
6
-12
-22
-23
-10 '
-4
-3
79
208
159
0 1973 74 75 76 77 78 79 80 81 82 83 84a 85a 86a
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Figure 2
Percent Share of Oil in OECD Energy Consumption
1 1 1 1 1 1 1 1 1
40 1973 74 75 76 77 78 79 80 81
I I I I
82 83 84a 858 868
non-OPEC producers, but net exports from Commu-
nist countries are more likely to decline slightly than to
increase.
9. These basic projections yield a fairly broad con-
sensus that the demand for OPEC oil will increase by
2 to 3 million b/d from 1983 to 1986. Projections by
the International Energy Agency (IEA), and major
governments, oil companies, and other private institu-
tions are nearly all in this range. Table 4 presents
illustrative projections of demand for OPEC oil which
include a consensus projection of non-Communist oil
demand. But plausible cases have been made for
lower, or higher, projections of demand for OPEC oil:'
- On the high side, it is conceivable that several
years of falling real oil prices and the impact of a
a Moreover, changes in currency exchange rates are a major
uncertainty in projection of oil demand. Nominal oil prices are set in
US dollars and have not been changed to reflect changes in the
dollar's purchasing power over other currencies. In recent years, the
prices of oil, although falling in dollar terms, have increased or
strong economic recovery on the economic struc-
ture will raise the energy-to-GNP ratio, and push
up demand for OPEC oil by as much as 4 million
b/d.
On the low side, if the Western economic recov-
ery should be prematurely ended or greatly
slowed, OECD demand growth would be small
and LDCs, especially the large debtors, would be
forced to further curtail their demand. The result
might be little (that is, 1 million b/d) growth in
the demand for OPEC oil by 1986.
remained stable in most other major currencies. A substantial drop
in the value of the dollar would lower oil prices elsewhere, and
consequently would strengthen oil demand.
Inventory decisions will be another important uncertain factor.
Despite large-scale oil company destocking in the last two years, a
continued weak market and high interest rates-which increase the
cost of holding stocks-are encouraging the companies to keep
stocks low. Commercial stocks in OECD countries currently amount
to 2.7 billion barrels, with some 100 million barrels surplus to
normal operating needs. Another 500 million barrels are held in
government-owned stockpiles-mainly in the United States, Japan,
and West Germany.
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Table 4 Million b/d
Non-Communist Oil Supply and Demand a b
Total consumption
44.0
44.8
45.4
46.0
Inventory change
-1.0
-0.3
0.2
0.1
Supply
43.0
44.5
45.6
46.1
Total non-OPEC
24.5
25.0
25.0
25.0
15.8
15.9
15.8
15.8
10.2
10.2
10.1
10.0
1.6
1.6
1.5
1.5
United Kingdom
2.4
2.5
2.6
2.6
Norway
0.7
0.7
0.7
0.7
Other
0.9
0.9
0.9
1.0
7.2
7.6
7.8
7.9
Mexico
2.9
3.0
3.1
3.2
Net Communist exports
1.5
1.5
1.4
1.3
Implied demand on OPEC
18.5
19.5
20.7
21.1
a Excluding refinery gain.
b Because of rounding, components may not add to the totals shown.
Pressures To Raise OPEC Oil Production 25X1
10. With the demand for OPEC oil likely to in-
crease by only 2 to 3 million b/d over the next three
years, several OPEC countries will have great difficul-
ty making ends meet, and will try very hard to
increase their oil exports and market shares. Indeed,
Nigeria, having slashed its imports and nearly exhaust-
ed its foreign exchange reserves and borrowing poten-
tial, has since early 1984 been producing well over its
OPEC Quota. Iraqi production, which has been limit-
ed by the war, is likely to increase substantially over
the next three years if the war , ends. Even if it
continues, construction of additional export pipelines
now in the planning stage would add to capacity.
During the next three years, we see the following
potential increases in OPEC oil supplies over second-
half 1983 levels, reflecting desired production levels or
bounds to export capacity:
Nigeria
Venezuela
Libya
Iran
Iraq
Other (except Saudis)
Total
0.4-0.7 million b/d
0.2-0.5 million b/d
0.1-0.5 million b/d
0.5-0.8 million b/d
1.0-2.0 million b/d
0-1.0 million b/d
2.2-5.5 million b/d.
11. These pressures to raise production will be
strong throughout 1984 and even stronger in 1985-86,
when new Iraqi export capacity may come on stream
and patience with several years of economic austerity
in several of OPEC countries wears thin. With de-
mand for OPEC oil increasing only slowly, it will be
difficult to reconcile the interests of OPEC members.
Saudi Arabia will play the key role in holding OPEC
together (see table 5).
Nigeria
12. The new Nigerian military regime has promised
to improve living standards and rescue the nation from
its worst economic recession since the civil war of
1967-70. It is counting on increased oil revenues and
Western economic help-the International Monetary
Fund (IMF), debt rescheduling, and new loans-to do
so. Nigeria's oil output in February averaged about 1.6
million barrels per day, up 200,000 b/d from January.
Oil company concern about an escalation of hostilities
in the Gulf and a surge in US demand probably helped
Lagos sell more oil this past winter. Nigeria is lobbying
for an increase in its OPEC quota.
13. Nigeria's economic predicament is a direct re-
sult of the weak oil market and economic policies that
encouraged imports and discouraged nonoil exports.
Oil revenues in 1983 were less than half their peak
level in 1980. To make ends meet, the previous
government cut imports in 1983 to the lowest level in
seven years, resulting in major shortages of essential
consumer and industrial goods and record unemploy-
ment; urban unemployment is about 30 percent. At
the same time, the government piled up unpaid bills
amounting to $7-8 billion. Despite these measures,
Nigeria's foreign exchange reserves have dipped well
below $1 billion, compared with $10 billion in 1980.
Lacking any alternative major source of increased
export earnings, the Nigerians almost certainly will try
to push up oil production toward the available capaci-
ty level of over 2 million b/d.
14. Major General Buhari, the head of state, be-
lieves he must show progress on the economic front
and in other areas to fend off a coup by lower ranking
officers or a palace coup. Buhari's takeover reportedly
preempted a similar action by middle-grade officers.
These officers regard many senior officers in the new
government as corrupt and believe Buhari is moving
too slowly on the economic front and too leniently in
dealing with officials of the previous government.
15. The Nigerians will consider various ways of
marketing increased output. They may renew efforts
to sell crude at discounted prices to the US Strategic
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Table 5
Non-Communist Oil Supplies a
Available
Capacity b
Second Half
1983
Production
Pr
Q
oduction
uota
Surplus
Capacity
Iran
3.2
2.4
2
.4
0.8
Kuwait
1.2
1.0
1
.05
0.2
United Arab Emirates
1.6
1.2
1
.1
0.4
9.7
7.1
2.6
1.6
1.4
0.2
Nigeria
2.2
Venezuela
2.4
1.7
1.675
0.7
0.9
0.2
Gabon
0.2
0.2
0.15
OPEC Total
27
19.8
7.2
Non-OPEC
23.5
23.2
0.3
Mexico
3.2
3.0
0.2
Norway
0.7
0.7
United Kingdom
2.4
Canada
1.8
. 1.7
Estimated.
b Available capacity includes those facilities on line and capable of
responding almost immediately to a decision to raise production.
Production ceilings imposed by individual producers for policy
reasons are also taken into account.
c Saudi Arabia has no formal quota, will act as swing producer to
meet market requirements.
d Neutral Zone production is shared about equally between Saudi
Arabia and Kuwait.
c Includes natural gas liquids.
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Petroleum Reserve and perhaps other Western na-
tions' strategic reserves. Barter or foreign processing
deals would be another option with the Nigerians
attempting to disguise discounting. Lagos would also
respond in kind to price cuts by others, particularly
North Sea producers, whose crudes compete directly
with Nigerian crudes. The Buhari government will
probably try to achieve Nigeria's objectives through
negotiations with other OPEC countries. As the former
military government's top oil man, Buhari personally
has considerable credibility in OPEC circles. A more
radical Nigerian government would be more likely to
make large unilateral increases in oil output.
16. In any event, should Nigeria have to live with
anything close to the 1983 level of oil revenues, its
political stability would be severely endangered. It is
highly unlikely that any Nigerian government would
have the political clout and will to take the painful
measures necessary to diversify exports and rebuild a
more balanced and healthy economy. Barring such
unlikely fundamental reforms, stagnant oil revenues
would almost certainly continue to bring economic
stagnation, squabbling over a fairly fixed economic pie
will breed growing political unrest, and the vast
corruption which developed during the oil boom is
unlikely to be much reduced. Captains, and later
perhaps sergeants, may replace generals as heads of
military governments, perhaps leading to the creation
of radical anti-Western governments.
17. Venezuela's economic problems are not as acute
as those of Nigeria, in part because Caracas has
substantial foreign exchange reserves, but its depend-
ence on oil export earnings is even greater. With oil
revenues down 28 percent between 1981 and 1983,
Caracas cut imports by a third from 1981 to 1983, and
by more than half from 1982 to the second half of
1983, and imposed tight exchange controls. Venezue-
la's most urgent problem is servicing and refinancing a
$36 billion debt, most of which has been contracted by
the government. Although in 1983 Venezuela pro-
duced oil at about its 1.7-million-b/d OPEC quota, it
exported at an unsustainable rate by drawing down oil
inventories.
18. Caracas probably can manage with its OPEC
quota for perhaps a year. Venezuela, however, opposes
any significant increase in the Nigerian quota and
would push up oil production toward 2 million b/d
unless it also were. given concessions. In the longer
term, however, political pressure to exceed the quota is
bound to increase. Although Venezuela has a high
standard of living and strong democratic traditions, it
too has no potentially significant source of income
other than oil and a large part of its population
depends on government spending from oil revenues
for its sustenance. Stagnant oil revenues would mean
several more years of declines in per capita real
income. In this situation, Venezuelan democratic insti-
tutions would be subjected to severe strains, and the
outcome would be uncertain.
Libya
19. The largely discretionary nature of Libya's hard
currency expenditures and Qadhafi's volatility make
the Libyan oil card potentially a wild one, with a
capability for stability or disruption. Libya is not
experiencing economic and political pressures as se-
vere as those in Nigeria and Venezuela, despite pro-
ducing oil far below capacity. Libya's population is
small and its needs can be met with only a fraction of
current oil revenues, which gives the government a
wide range of choices regarding both oil production
and spending. With current oil revenues, however,
Libya would be hard put both to pay for massive
Soviet arms imports and to finance a large domestic
economic development program, including such
multibillion-dollar projects as the Great Manmade
River Project.
20. In the past two years, Libya has made major
adjustments in support of a stable OPEC price. Im-
ports, including food, have been trimmed by nearly 50
percent since the 1981 peak. Even so, foreign ex-
change reserves have fallen from $12 billion in 1981 to
$6 billion in 1983.
21. Qadhafi's willingness to observe the OPEC
agreement until now reflects:
- Qadhafi's desire to end his isolation in the Arab
world. Ties with Saudi Arabia have improved,
and Qadhafi received Saudi help in improving
relations with Morocco.
- OPEC willingness to meet Qadhafi's quota re-
quest. The original OPEC draft agreement called
for a quota of 850,000 b/d but the quota was
subsequently raised to the current level of 1.1
million b/d.
- Libya's incumbency as president of OPEC from
July 1983 to July 1984.
Over the next few years the Libyans almost certainly
will try to raise production toward their capacity of
1.8 million b/d. However, unlike Venezuela and
Nigeria, the Libyan Government is not under strong
domestic political pressure to do so.
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Iraq
22. The loss of oil revenues as a result of the
severing of two of three of Iraq's prewar export
routes-seaborne shipments from the Persian Gulf
and pipeline deliveries to the Mediteranean Sea via
Syria-has forced Baghdad to slash imports nearly in
half since 1981 and almost exhaust its foreign ex-
change reserves despite upwards of $23 billion in aid
from the rich Gulf oil states. Some of the Gulf aid has
been in the form of oil deliveries to Iraqi customers on
Iraqi account.
23. Iraq's oil production during the next few years
will depend on the course of the war with Iran, the
construction and expansion of export pipeline capaci-
ty, and what the market will bear. Even if the war
continues, Iraqi oil export capacity could increase
from the current 0.9 million b/d to 2.5 million b/d
during the next two years. In addition to the nearly
completed 0.3-million-b/d expansion of the pipeline
through Turkey, Iraq is negotiating contracts to build
a link with a capacity of 0.5 million b/d to the trans-
Saudi pipeline, which could be constructed in about 18
months. And negotiations for constructing about a
million-b/d line through Jordan are in progress. Even
in the likely event that Saudi and, Kuwaiti financial aid
were to cease once these pipelines came on stream,
Iraq would be able by 1986 to match the peak year-
1980-oil earnings of around $25 billion, although it
might not be able to produce to capacity because of
marketing constraints.
24. When the war ends, Iraq could increase its Gulf
oil export capacity by some 1 million b/d within six to
10 months. This could be accomplished by the installa-
tion of single-point mooring buoys near the offshore
facilities Iran destroyed early in the war. Within a
year, Iraq's Persian Gulf export capacity could reach 2
million b/d. Iraq's Gulf export capacity would be only
1.2 million b/d less than the prewar capacity. The
pipeline through Syria with a capacity of 1.2 million
b/d might also be reopened.
25. When the war ends, Iraq's oil exports are likely
to be limited more by demand and OPEC agreements
than by productive capacity. Saudi Arabia will cer-
tainly pressure Iraq to restrain its oil production to
help support the price of oil. This restraint could
become a form of repayment for the large wartime
Saudi aid. Even if the war does not end and the new
export pipelines are all built, Iraq may not use them to
full capacity.
Iran
26. Iran's oil exports are constrained mainly by the
weak market rather than by the war. The Iraqis have
inflicted only negligible damage to production and
export facilities in Iran so far. Iraqi attacks and threats
have raised shipping and insurance costs, but the
Iranians have absorbed these costs through price
discounts.
27. Iranian oil production has averaged 2.4 million
b/d-Iran's OPEC quota-over the past 12 months.
This rate of production, which permits exports of
about 1.9 million b/d, yields enough revenue to
support the population at an austere standard of living
and to finance the war.
28. Over the next few years, Iran will almost
certainly try to increase its oil production and exports
to help rebuild and expand the economy. There is
currently about 1 million b/d of unused productive
capacity. Moreover, Iran could increase capacity over
the next few years if it began reorganizing its manage-
rial structure, attempting to attract senior personnel
back to Iran, and negotiating for foreign equipment.
29. Iran has been a "price hawk," although not on a
consistent basis. Tehran wants to conserve its oil
resources for the long term, partly in reaction to
overproduction under the Shah, and wants to keep its
economy and level of living lean. Iran argued vehe-
mently in OPEC for price increases and against price
cuts, and would probably raise prices if it had the
opportunity. Tehran has often been critical of Saudi
leadership in OPEC.
Other Producers
30. The other OPEC producers will generally con-
tinue to defer to Saudi leadership as long as price
cheating does not get out of hand. Outside OPEC the
United Kingdom, Norway, the USSR, and Egypt are
likely to adjust their crude price periodically in line
with spot market prices.
31. Since late 1981, Mexico has changed its oil
policy from rapid to slow expansion of oil production.
Mexico is cooperating with OPEC by holding oil
production at about 3 million b/d, some 0.2 million
b/d below sustainable capacity. Moreover, sharp cuts
in the Mexican oil industry's investment budget, have
substantially reduced the likely expansion of capacity
during the next few years.
32. The causes of Mexican restraint in oil produc-
tion at a time when severe financial difficulties forced
cuts of almost 70 percent in imports and a sharp
decline in economic activity are complex. They proba-
bly include the following: a reassessment of oil re-
serves; the extraordinary corruption in the government
oil monopoly (PEMEX), even by Mexican standards;
the bureaucratic tendency to force all agencies to
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share in budget cuts; the Mexican Government's real-
ization that oil producer cooperation was necessary to
support the price of oil; and perhaps the desire of the
de la Madrid administration to slowly diversify the
economy away from oil to lay a healthier foundation
for economic growth. Although some of these consid-
erations will probably diminish in importance over
time, it is highly unlikely that the Mexicans will soon
return to a policy of headlong oil expansion.
Saudi Arabia-the Balancing Factor
33. Saudi oil policy reflects a mix of economic,
security, and foreign policy objectives and concerns.
The basic concerns are the position of the royal family
and the stability of the political system. Against this
background, Riyadh understands that Saudi Arabia's
economic interests are probably best served in the long
term by an oil price low enough to ensure a continued
large market for its vast oil reserves. Riyadh at times
has taken tough positions to protect its interests; it has
also compromised to avoid confrontations potentially
disruptive to its relations with other states.
34. Saudi public and private statements indicate a
desire to maintain stable nominal oil prices in the next
few years. Although the Saudis probably believe that
oil is still somewhat overpriced, they would probably
prefer to let the real oil price be eroded by inflation
rather than to undertake the difficult task of negotiat-
ing a lower nominal price. Moreover, having seen a
substantial retrenchment in Western plans for devel-
opment of alternative energies and in drilling for new
oil and gas reserves, the Saudis do not view price cuts
as necessary to protect their long-term market, a key
economic concern.
35. In our judgment, the Saudis will not make a
major issue of small-scale production "adjustments" by
Nigeria or other OPEC members. Saudi Oil Minister
Yamani has expressed support for Nigeria's desire to
increase its quota, and the Saudis have turned the
other cheek to small violations by others in the past.
Riyadh might offer Lagos financial aid in an effort to
discourage large-scale cheating.
36. We believe the Saudis would be willing to play
the role of swing producer in OPEC as long as others
show reasonable restraint. This could mean further
reduction in Saudi production for a limited period.
Domestic requirements for associated gas are a consid-
eration, but not a critical constraint. Although the
Saudis claim they must now produce 4-5 million b/d
of oil to meet their associated gas needs, they could
manage with as little as 3 million b/d with adjustments
in the oil mix and maximum switching in power
stations from gas to liquid fuels.
37. In 1983, Saudi Arabia's foreign assets declined
by about $20 billion, or about one-sixth. An additional
cut of 1 million b/d in oil exports, with prices and
expenditures remaining the same, would reduce ex-
port revenues by another $10 billion. Some fairly easy
reductions could be made in imports, remittances, or
other expenditures: up to now, although some new
investment projects have been curtailed, overall im-
ports have remained near their peak level. We believe
that the Saudis would tolerate an oil production cut to
a level of around 4 million b/d for a year or two, if this
seemed essential to maintaining a stable oil price and
longer term market prospects seemed favorable.
38. In recent years, some radical OPEC members-
especially Iran and Libya-have tried to intimidate
Saudi leaders into making concessions on oil issues by
threatening to promote subversion in Saudi Arabia or
terrorism against Saudi interests abroad. There is no
indication that these efforts have had any major
impact on Saudi oil policy or that Riyadh contem-
plates any oil policy changes. Nevertheless, we cannot
rule out the possibility that, should Iranian power
become dominant in the Persian Gulf, and Saudi
Arabia were also subjected to protracted externally
directed subversion, the Saudi Government would no
longer have the self-confidence to play a strong leader-
ship role in OPEC. This might mean, for example, not
increasing their oil production to prevent other OPEC
countries from raising oil prices.
Prospects for the Oil Market
39. The balance of oil market forces in the next
three years or so appears to be downward.4 There is
more than enough excess capacity in OPEC to cover
any conceivable increase in demand. Even if demand
for OPEC oil should increase relatively quickly (that
is, by 3 or 4 million b/d), there would be ample new
supplies from OPEC countries anxious for the oppor-
tunity to increase their earnings, and consequently no
* The OPEC countries' growing role in product markets, initially
planned in order to capture the profits in this sector, may cause
additional problems for the organization in controlling crude prices.
Oil product prices are not included in the cartel's official price
structure and OPEC members have little recourse if producers
choose to discount product prices, even though such discounts tend
to erode crude prices. Furthermore, product sales are more difficult
to monitor than crude sales. Current OPEC product export capacity
amounts to only about 1.5 million b/d, but projects under construc-
tion, principally in Saudi Arabia and Kuwait, will add an additional
0.9 million b/d in capacity by 1986. 'Purchase of foreign down-
stream capacity, primarily by Kuwait, will add to OPEC's product'
sales potential.
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upward pressure on prices would be likely to develop.
Only in an extreme case of a large increase in demand
for OPEC oil coupled with severely limited Iraqi
capacity would it be necessary for Saudi Arabia to
raise its output to balance the market, and even then
Saudi production would remain below a level likely to
trigger interest in a price increase. With a relatively
slow increase in the demand for OPEC oil (that is, 1-2
million b/d), there would be severe pressures on
OPEC. Even if other OPEC countries were restrained
in increasing production, Saudi Arabia would have to
cut production to keep oil prices from falling. Agree-
ment on production quotas within OPEC would be
difficult and the Saudi role crucial.
40. Although it is possible that OPEC cooperation
will break down, resulting in a precipitate price fall, it
is more likely that there will be continued agreement
to support a stable price. This means that Saudi Arabia
and the other southern Gulf countries will not have to
carry the entire burden of supporting the price: that
other OPEC countries will continue to produce below
capacity. Although there is great economic and politi-
cal diversity among OPEC countries, the common
interest in a stable price which brings in large govern-
ment revenues is strong. Moreover, patterns of cooper-
ation have been developing, especially in the past year
or so. Although we believe maintenance of the current
$29 price to be likely, a decline to $25 or so is possible
if the Saudis should reassess longer term market
prospects.
41. In the unlikely event of a breakdown of OPEC
cooperation, headlong competition for oil market
shares would cause a precipitate drop in the price of
oil-probably to $15 or even lower. It is highly
unlikely that such a situation would last more than a
few months before the common interests of the OPEC
producers would reassert themselves, leading to a new
price agreement, presumably on Saudi terms and in
the $25 to $29 range.
Potential for Supply Disruption
Iran-Iraq War
42. The development most likely to lead to a
tightening of the market is an expansion of the Iran-
Iraq war. The combination of Iran's dedication to
pursuing the war and Iraq's desire for an end to it
have prompted Baghdad to initiate attacks against
Iran's oil lifeline. Iran, in turn, has threatened to
retaliate for such an Iraqi move by closing the Gulf to
oil exports; some 8 million b/d of oil exports now
transit the Strait of Hormuz. We also believe Iran
might strike out at the oil facilities of the other Gulf
producers that are providing economic and logistic
support to Iraq in the event of an escalation by
Baghdad (see table 6).
43. The Iraqis reportedly have developed plans for
direct air attacks on Khark island, Iran's major oil
export terminal, and are threatening to continue to
escalate attacks on oil shipping from Iran. The French
delivery to Iraq of Super Etendard and Mirage F-1
aircraft, configured to carry Exocet antiship missiles,
has improved the capability of the Iraqi Air Force to
strike at tankers. Even though the Iraqi economic
decline may have bottomed out-the precipitate fall
in imports appears to have ended in the second half of
1983, and the economy could improve considerably in
1986 if Iraq can open pipeline outlets to the Red Sea-
major Iranian military gains on the ground could
trigger all-out attacks on Iranian oil exports.
44. Iraqi strongman, Saddam Hussein, probably has
not yet moved in a major way against Iranian oil
because he has doubts about his Air Force's capability
to inflict enough damage to change radically the
military outlook, a fear of heavy Iraqi losses, and a
concern over the international reaction. The Iraqis
have adhered to a conservative military strategy since
their attack into Iran at the beginning of the war.
Despite a massive advantage in equipment, the princi-
pal Iraqi goal has been to find a way out of the war
and hold down casualties. Indeed, we believe the
Iraqis see escalation as a way not only to impair Iran's
warmaking capacity, but also to encourage Tehran to
begin negotiations to end the war, and, failing that, to
force the West to intervene. In any event, we expect
Iraq to continue its attacks against shipping to Iran and
against Iranian cities and naval units. We also expect
continued public and private threats by the Iraqis to
escalate.
45. We do not believe Iran would immediately
attempt to close the Strait of Hormuz to oil exports or
strike Saudi oil targets in response to an Iraqi attack on
its oil lifeline. Instead, it probably would take other
steps less likely to provoke Western military reaction.
Likely shortrun Iranian responses would include at-
tacks against military and oil targets in Iraq, including
the Iraq-Turkey pipeline, increased subversion and
terrorism in the southern Gulf states, small-scale at-
tacks on oil facilities, especially in Kuwait, and harass-
ment of shipping in the Gulf or the Strait of Hormuz.
46. A prolonged interruption of Iranian oil exports
by Iraq almost certainly would trigger a major escala-
tion by Iran. Iran would probably take military and
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Table 6
Major Developed Countries: Estimated Dependence
on Persian Gulf Oil Imports,
January-September 1983
Saudi
Arabia
United T
Arab P
Emirates G
O
otal
ersian
ulf
il
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
Canada
34
0
5
0
8
0
47
1,893
2
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
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
Denmark
3
0
18
0
4
0
25
266
9
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 2
47
1,591
16
Norway
0
0
0
0
5
0
5
684
1
Portugal
25
19
0
0
49
7 1
00
208
48
Spain
163
45
0
22
99
54 3
83
1,096
35
Sweden
16
0
0
0
1
0
17
476
4
paramilitary actions against the southern Gulf states,
including Saudi Arabia, in the form of air attacks,
naval commando raids, terrorist actions, and sabotage
on key oil facilities and other economic targets, such as
electric power and desalinization plants. Most oil
facilities are vulnerable to such attacks. Air defenses
could not repel initial surprise air attacks; some off-
shore oil facilities are lightly defended and could be
taken by surprise, as were the Iraqi offshore terminals;
and the. local security services would be hard pressed
to anticipate internal attacks by domestic Shias, some
members of whom have been trained by Iran and who
constitute about one-third of the Saudi oil industry
labor force.
47. But although the facilities are vulnerable, dam-
age may be limited, and the impact on oil production
even more so. The Iranian Air Force has only 70 to 80
operational aircraft and is poorly trained. The Iranians
would need a great deal of luck to do major damage in
a first strike, and subsequent airstrikes would probably
be challenged. Some of the most important Saudi oil
facilities can be defended against commando or terror-
ist attacks while others are hard to reach. Most
important, there is enough excess capacity and flexibil-
ity in the Saudi oil system that production could be
maintained under all but extreme circumstances.
48. Major damage to Saudi Arabia's most critical oil
facilities-the Ras Tanura and Juaymah oil terminals
and the Abgaiq processing facilities-could force a
shutdown of Saudi production for up to two months
while damage control and emergency operation plan-
ning efforts were under way. If key technical person-
nel are willing to work in this wartime environment,
production and export levels of about 2 million b/d
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could be achieved shortly after this shutdown in all but
the worst conceivable Iranian attacks. With US assist-
ance, current production levels could probably be
achieved using emergency restoration efforts an addi-
tional three to five months after the facilities were
secured from further Iranian attacks.
49. It would be easier for Iran to make the Gulf
unsafe for tanker traffic, but such action could be
expected to trigger immediate US and allied military
intervention. Tehran cannot reasonably expect to keep
the Strait closed in the face of such intervention, but
may believe that conventional and unconventional
attacks against tankers in the Strait and elsewhere in
the Gulf would reduce Gulf oil trade to a trickle.
Tankers are highly vulnerable not only to mines but
also to attacks by military planes, small Kamikaze
aircraft, small armed boats, and sabotage. It might
take a large US and allied military presence to counter
this threat. Iran probably could survive a prolonged
cutoff of its own oil exports-its foreign exchange
reserves would cover a year's imports. A complete
blockade of its trade through the Gulf, however,
would cause a serious drop in grain supplies. Iran
probably could meet its military and minimum civil-
ian requirements for several months using land and air
routes for its imports. This would require Soviet
cooperation, which would be problematical.
50. A worrisome aspect of a potential escalation of
the war is the psychological impact on the employees
of the oil industry in the southern Gulf. Iranian
terrorism could be directed not only against key oil
facilities but also against Aramco employees and their
homes and families. Insecurity both in the workplace
and at home could trigger a major exodus of foreign
employees, including critical technicians, unless very
effective countermeasures were taken. This threat
maybe more difficult to counter than the threat to the
facilities themselves.
Other Supply Disruptions
51. The expansion of the Iran-Iraq war is the most
obvious, but not the only, potential source of supply
disruption. We cannot predict where or when other
disruptions would occur, but note the possibility that
political problems could get out of hand in such
important producing nations as Nigeria, Libya, Mexi-
co, or even Saudi Arabia.
52. Another Arab-Israeli war, accompanied by an
Arab oil embargo against the Western nations, is a
remote possibility, but cannot be dismissed. An embar-
go is likely to be-and, more important, perceived in
Since 1950 oil supplies from major exporting coun-
tries have been disrupted on 14 occasions. Most of these
occasions were of short duration-less than five
months-and produced only small losses in produc-
tion-less than 1 million b/d relative to world oil trade.
With the exception of the Nigerian civil war of 1967-70,
all of the disruptions occurred in the Middle East.
The most serious disruptions were in the Persian Gulf
area. The longest was 44 months and resulted from the
nationalization of the Iranian oilfields. The most serious
in terms of output was the loss of 3.7 million b/d of
Iranian oil as a result of the Iranian revolution in
1978-79.
the market to be-of short duration. To be effective
even for a short period, the embargo would have to be
accompanied by a substantial cutback in production.
In the absence of such a cutback, the flexibility of the
international oil market would enable consumers to
switch suppliers with little difficulty. The end result
would be either (1) Arab oil would go to non-Western
consumers while the non-Arab oil- it displaced (and
probably increased non-Arab output) would go to the
West, or (2) the Arab oil would move through several
middlemen to the West despite the embargo.
Reaction to Disruption
53. The near-term market impact of any major
supply disruption would depend most importantly on
the market's expectation of the duration and magni-
tude of the disruption. Although uncertainties and
rumors in the early stages of a disruption would
exacerbate price pressures, the most likely disruptions
would probably generate only a small price spike
lasting from a few days to a few weeks. If, for
example, in response to an Iranian closure of the Strait,
Western nations moved quickly to reopen the water-
way, the market probably would be reassured, and the
incentive to hold stocks would be reduced. The cur-
rent combination of surplus productive capacity and
inventories provides consumers more protection than
they had at the time of the last major price rise-at the
beginning of the Iranian revolution.
54. Changes in the structure of the oil market since
1979 also will tend to dampen speculative stockbuild-
ing. Lags between spot market and official price
increases will be shorter because most oil producers
need money badly. The spot market is much broader.
More OPEC oil is being traded under short-term
contract and on-the-spot market; some market analysts
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How the Current Situation Differs From 1978/79
In 1979 the Iranian revolution set in motion a
sequence of events which resulted in a 170-percent
increase in oil prices. In the event of an oil supply
interruption in the Persian Gulf, we do not expect oil
price increases of this magnitude and, once the disrup-
tion ends, we would expect prices to return to their
predisruption level. The present situation differs from
that in 1978 in the following ways:
- There is a great deal more excess oil production
capacity in OPEC countries than in 1978, the
largest amount being in Saudi Arabia.
- There is every reason to believe that the Saudis do
not want oil prices to rise and would use their
capacity to hold prices down; in 1979 the Saudis at
first did not resist a price increase and later lacked
the capacity to block further increases.
- Government oil stocks are larger than in 1978-79.
- An interruption of Persian Gulf oil supplies would
be considered temporary and probably short lived;
the reduction in Iranian oil production during the
revolution was considered permanent.
- Oil consumption growth is now widely expected to
be slow for several years; in 1979, large future
increases were expected.
- Western dependence on Persian Gulf oil has
declined.
estimate that spot transactions account for 20 to 25
percent of total non-Communist oil trade, compared
to 5 to 10 percent in the 1970s. The increased
availability of cracking facilities has promoted easier
switching among the various crudes and more flexible
stock management.
55. We believe the Saudis, for economic as well as
political reasons, are' currently committed to prevent-
ing a large and lasting price rise and would utilize
their excess capacity to the extent possible in the event
of a disruption. The Saudis admit that the price surge
in 1979-80 is a major factor in OPEC's current
problems and understand that large oil price increases
will erode demand for its oil over time, their key
economic consideration. In discussions of contingency
planning with other Gulf nations-in the Gulf Cooper-
ation Council-the Saudis have pressed for acceptance
of a major US role if Iran tries to block the Strait, but
they have not been willing to make "precrisis" ar-
rangements to facilitate possible US actions.
56. The Saudis have also recently built up stocks
outside the Persian Gulf that they probably would
release in the event of a Gulf disruption. We estimate
out-of-country inventories-in both tankers and on-
shore stocks as of 1 April-at 50-60 million barrels of
crude oil, more than a week's net oil flow from the
Gulf.
57. The only circumstances under which the oil
price rise could be large and last several months
appear to be the following:
- Iranian success in making the Gulf unsafe for oil
shipping for an extended period.
- Destruction of sufficient Saudi oil production
and export capacity to prevent Saudi Arabia
from controlling the price of oil through in-
creased production.
Other Supply Factors
58. Most countries outside the Gulf would react to a
surge in spot prices, as a result of a disruption, by
raising export prices. The increases could be only small
ones if Saudi Arabia were able to support the current
price, but they could be massive (50 percent or more)
if Saudi Arabia could not provide such support. Libya,
Nigeria, and Venezuela might also raise production as
well, but first they would raise prices, so that demand
might be met without ever reaching capacity levels.
They would be most likely to increase production to
sustain oil revenues when prices had started down,
thereby adding to the downward pressure.
59. So far, other than the United States, industrial
nation governments holding strategic oil reserves have
not announced specific plans to use their stocks in an
emergency. West German and Japanese officials con-
sider their government stockpile a "final reserve."
Recent US statements that it would use its strategic
stocks in the early stages of a disruption probably
would ease market uncertainties.
60. A major supply disruption-the type of prob-
lem the International Energy Agency s was organized
to solve-could trigger the IEA allocation system.
Effective operation of the system, however, would
depend on the political will of the members. For
example, members could differ substantially over
whether or not each country's measures to reduce oil
'The IEA, formed by OECD members other than France in
1974, has devised an emergency oil allocation program. The system
can be "triggered" when any member country suffers a 7-percent
decline in oil imports. The European Community runs a parallel
program which includes France.
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demand constituted a sufficient response. In any
event, the IEA provides an important forum for
information sharing and policy coordination.
The relative market stability during the disruption
caused by the outbreak of the Iran-Iraq war in 1980 was
due in part to the existence of about 400 million barrels
of excess stocks that stockholders were willing to de-
plete. In addition, consumption was falling and the IEA
was urging members to refrain from spot market
purchases. The OPEC average official sales price rose
only from $31.74 to $34.64 per barrel during the period
despite a loss of 4 million b/d in supplies from Iran and
Iraq.
Oil Price Changes and Economic Impact
Price Declines
61. If the real price of oil moves slowly downward
over the next several years, or there is a moderate
decline in nominal oil prices, the impact on the world
economy should be favorable. In the industrial coun-
tries, lower oil prices would provide opportunities for
accelerating economic growth, further slowing infla-
tion without lowering economic growth. These bene-
fits would be partly offset in countries with substantial
oil production, like the United States and the United
Kingdom, by decreased incomes in the oil sector. Oil-
importing LDCs would tend to benefit both directly,
through lower import prices, and indirectly, as a result
of higher demand for their exports and/or lower
interest rates. Oil-exporting countries would, of course,
suffer direct losses, but at least some of them would
obtain offsetting gains from higher nonoil export
earnings and/or lower interest rates to service debt.
The USSR would end up as a net loser and most of the
East European countries as net winners. A $5 per
barrel real price drop would probably not cross any
important thresholds affecting energy conservation or
interfuel substitution, nor would it make any signifi-
cant amount of oil production unprofitable.
62. For illustrative purposes, table 7 shows the
direct impact of a $5 per barrel decline in oil prices on
the values of oil imports and exports of the major
nations, assuming no change in the volume of trade.
Condidering also the indirect effects on incomes and
inflation, a $5 per barrel oil price decline would raise
OECD GNP by at least 0.5 percent after two years.
63. A sharp drop in oil prices, for example to $15 or
$20 per barrel, would create economic problems,
along with substantial benefits, for oil consumers.
While it lasted, it would contribute to economic
growth and lower inflation in the industrial countries.
Oil-importing debtor countries would gain a windfall,
which could be used to reduce their debt obligation.
At the same time, oil investments, and perhaps invest-
ments in some other forms of energy, probably would
be put on hold until the market situation became
clearer, and oil-exporting countries would face severe
financial difficulties. More generally, an unstable oil
price would create substantial uncertainty in financial
markets.
Price Increases
64. A small, brief oil price increase should have
little impact either on basic or cyclical economic
trends or on government economic policies. The at-
tendant uncertainty and publicity, however, would no
doubt influence financial and commodity markets and
would complicate the already difficult problem of
negotiating new loan packages and programs for debt-
ridden, oil-importing LDCs, such as Brazil.
65. In the event of a large oil price increase-for
example, a 50-percent increase for six months-
growth of OECD GNP would be reduced.
66. Oil-importing LDCs, such as Brazil, Chile, and
the Philippines would be seriously hit by sharply
higher oil prices. They have already made severe
internal adjustments to manage their debt problems
and would be hard put to make further import cuts. A
substantial oil price increase lasting many months
would probably force some such countries to discon-
tinue interest payments on debt.
The Soviet Role
67. The Soviet role in the world oil market is
unlikely to change substantially during the next few
years. Soviet hard currency oil exports probably will
level off or decline slightly, in contrast to the substan-
tial increases of the past two years. Even if recent
difficulties are resolved and a slow growth of produc-
tion is resumed, domestic oil demand is likely to
increase as much as or more than oil output. Meeting
domestic and East European oil requirements while
maintaining a high level of oil exports for hard
currency is an expensive proposition for Moscow.
Investment in the Soviet oil industry during 1981-85
will be double the 1976-80 level.
68. The USSR, a major exporter of both oil and gas
to the West, would be an important financial benefi-
ciary of a large supply disruption and price hike. Its
hard currency revenues would rise substantially; every
$5 per barrel increase would mean about $2.5 million
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Direct Trade Impact of $5 per Barrel Oil Price Decline a
Decrease in
Export Revenues
(Billion US $)
Total Exports,
1983
(Billion US $)
Column 1 as a
Percent of Column 2
7.6
1.9
2.9
2.5
Decrease in Net
Import Costs
Total Net
Imports, 1983
Column 1 as a
Percent of Column 2
a Assuming no change in volume of exports from 1983.
b Hard currency, excluding arms sales.
annually in additional income, an amount equal to 7
percent of current hard currency earnings.
69. The Soviets could also benefit indirectly from
disruptions in Western, Third World, and rich Gulf
state economies, including strains among Western
countries and between the West and the Third World
that would result from reduced oil supplies. Cuba,
Vietnam, and Eastern Europe, who depend on Soviet
oil, would be little affected.
70. The USSR would be a factor in any major
escalation of the Iran-Iraq war which threatened Gulf
oil supplies. The proximity of Soviet military power
and Moscow's expressed high interest in the Gulf area,
and in the northern Gulf in particular, are important
considerations affecting Allied responses to Iranian
moves. There are no indications, however, that Mos-
cow is seeking a crisis over Persian Gulf oil.
71. Declining oil prices would mean reduced Soviet
hard currency earnings which, however, could be
partly offset by cutting back deliveries to Eastern
Europe to free additional oil supplies for hard curren-
cy sales. A further cut in Soviet oil deliveries to the
nearly stagnant economies of Eastern Europe would
intensify the need for austerity measures and aggra-
vate the danger of popular unrest there. These coun-
tries might increase attempts-in a soft market-to
barter goods for oil to replace Soviet cutbacks. The
link between oil and gas prices would work to Soviet
disadvantage in the near term by depressing gas prices,
but would further discourage development of alterna-
tive gas supplies in Western Europe and improve the
Soviet long run-market prospects.
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1. This document was disseminated by the Directorate of Intelligence. This copy is for the
information and use of the recipient and of persons under his or her jurisdiction on a need-to-
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within their respective departments:
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and the organization of the Joint Chiefs of Staff
c. Assistant Chief of Staff for Intelligence, for the Department of the Army
d. Director of Naval Intelligence, for the Department of the Navy
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g. Deputy Assistant Secretary for Intelligence, for the Department of Energy
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Treasury
k. The Deputy Director for Intelligence for any other Department or Agency
2. This document may be retained, or destroyed by burning in accordance with applicable
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3. When this document is disseminated overseas, the overseas recipients may retain it for a
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4. The title of this document when used separately from the text is unclassified.
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Approved For Release 2008/08/26: CIA-RDP87TOO126R000100090002-8