TALKING POINTS FOR THE ADCI - INSTABILITY AND OIL SECURITY IN THE PERSIAN GULF

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP89B00224R000602040022-1
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 22
• Document Creation Date: December 22, 2016
• Document Release Date: November 3, 2011
• Sequence Number: 22
• Publication Date: April 28, 1987
• Content Type: MISC

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ROUTING AND RECORD SHEET
SUBJECT: (Optional)
Joint EPC/DPC Meeting on Energy Security, 29 April at 1300
FROM: EXTENSION NO.
Deane E. Hoffmann NIC 01881-87
NIO for Economics DATE 25X'
28 April 1987
TO: (Officer designation, room number, and DATE
building) OFFICER'S COMMENTS (Number each comment to show from whom
RECEIVED FORWARDED INITIALS to whom. Draw a line across column after each comment.)
1.
8 8
APR
egg
EXECUTIVE REGISTRY
3.
4.
D/Exec Staff
5.
6.
7.
ADCI
B.
9.
10.
11.
12. NI0/Econ
7E48, Hqs.
13.
14.
15.
FORM 610 USE DITIO PREVIOUSNS
1.79 E
DCI
EXEC
REG
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SECRET
The Director of Centrai n e tg n
Washington, D.C. 20505
National Intelligence Council
NIC 01881-87
28 April 1987
MEMORANDUM FOR: Acting Director of Central Intelligence
FROM: Deane E. Hoffmann
National Intelligence Officer for Economics
SUBJECT: Joint EPC/DPC Meeting on Energy Security, 29 April
1. Action. You will be asked to reiterate the points on energy
security you made at the EPC/DPC on 14 April. Although you are not formally
scheduled to speak, Bill Martin arranged for Carlucci to introduce the
discussion on energy security and turn to you to complete the presentation.
2. Background. Deputy Secretary Martin called me this morning to be
assured that you will attend tomorrow's EPC/DPC with the President and that
you will cover the same points as in the previous meeting. Martin told me
that one point of your presentation implied that any oil disruption in the
1990s would be brief because of the desire on the part of others to
produce. In reviewing your talking points, I altered the language on that
section so as not to preclude lengthly disruptions such as occurred as a
result of the Iranian Revolution or the Iran-Iraq War.
3. You should be aware that Energy Secretary Herrington has seized on
the reduction in US drilling rigs relative to those in the USSR as one
possible argument for subsidizing US industry. (US drilling crews can drill
two to four times faster than Soviet crews using Soviet equipment.) Martin
has, so far, been unable to persuade Herrington that the US-Soviet rig count
is a red herring.
l!0 W f/p/t_
Deane E. Hoffmann
Attachment:
Talking Points
CL BY SIGNER
DECL OADR
SECRET
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STAT
29 Apr '87
EXECUTIVE SECRETARIAT
ROUTING SLIP
ACTION
INFO
DATE
INITIAL
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EXDIR
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D/ICS
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DDI
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DDA
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DDO
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DDS&T
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Chm/NIC
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GC
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IG
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Compt
13
D/OCA
14
D/PAO
15
D/PERS
16
D/Ex Staff
x
17
NIO/ECON
X
18
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4y
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Eu*w Ittrt
THE WHITE HOUSE 87-1706X/1
WASHINGTON
CABINET AFFAIRS STAFFING MEMORANDUM
Date: April 29, 1987 Number: 317,315
Subject: Energy Security Issues
Due By:
ALL CABINET MEMBERS
Action
^
FYI
^
Action FYI
CEA &( ^
CEQ ^ ^
Vice President
0
OSTP
State
^ ^
Treasury
EX
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,
^ ^
Defense
13
^ ^
Justice
0
^ ^
Interior
Agriculture
Commerce
Carlucci [a' ^
Labor
0
Cribb Cd' ^
HHS
Bauer 10 ^
HUD
ra'
^
Dawson (For WH Staffing) 0
Transportation
0
Energy
C~
^
0 0
Education
^
^
Chief of Staff
^
"
^
^
OMB
0
^
^ ^
UN
^
^
USTR
V
^
CIA
11:p
11
Executive Secretary for:
DPC 0'
A
GSA
^
13
^
EPC
NASA
^
^
0
OPM
^
^
SBA
^
^
VA
^
^
0
REMARKS: The attached memorandum from Jim Miller is forwarded
for your review prior to today's EPC/DPC meeting with
the President.
RETURN TO:
Nancy J. Risque ^ Associate Director
Cabinet Secretary Office of Cabinet Affairs
456-2823 456-2800
(Ground Floor, West Wing) (Room 235, OEOB)
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kpril 29, 1987
NOTE FOR ECONOMIC POLICY COUNCIL
DOMESTIC POLICY COUNCIL
FROM : NANCY J. RISQUE 14C)Ai
Jim Miller asked that I send the attached materials to you before
today's EPC/DPC meeting.
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EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND BUDGET
WASHINGTON, D.C. 20503
April 28, 1987
SUBJECT: Ene uG/urity Issues
Over the past few days, I have had several conversations
with Secretary Baker and Secretary Herrington regarding
potential offsets for the increased budgetary costs of the
two options presented in the EPC/DPC issue paper. Based on
subsequent staff analysis, I have prepared the attached
table summarizing the production estimates, budgetary costs,
and our best estimate of the potential offsets for the two
options. (This does not include the option of increasing
the Strategic Petroleum Reserve (SPR) fill rate through
direct Government outlays.)
The table makes three points:
1) The full cost of Option 2 can be fully offset
in FY 1988, but not over the five-year period.
2) Option 1 can be more than fully offset.
3) Achievement of the offsets depends heavily upon
Secretary Herrington's ability to sell the
Great Plains facilities in FY 1988, and most
importantly, upon the Administration's ability
to develop a viable private financing mechanism
for the SPR that will result in no net cost to
the Government. This will require relinquish-
ment of some of the current Government controls
over SPR drawdown and use.
I look forward to reviewing the issues with you in our
meeting with the President.
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Summary of Production Effects, Budgetary Costs,
and Potential Offsets
Current Administration
Proposals (Natural Gas
Deregulation and Expanded
Attachment
Budget Costs ($ in Millions) Incremental CY
FY 1988 thru 1992 Oil and Gas
FY 1988 FY 1992 Production (B/D)
OCS Leasing) .............. (Already in the budget.) 375,000
Option 1 (Current proposals
plus repeal transfer rule
and increase net income
limitation) ................
488,000
Option 2 (Option 1 plus G&G
expensing and production
credit) .................... +592 +5,172* 1,013,000*
Potential Offsets
o Lease Arctic Wildlife
Refuge (ANWR) .... ...... -- -425
o Private SPR Financing.... -233 -1,273
o Sale of Great Plains
Synfuels Plant ........... -360 -450
Total -593 -2,148
* This cost could be reduced by approximately $2 billion through a
three-year sunset of both items, resulting in 170,000 B/D of less
production.
Note:
All estimates of budget costs are based on oil price forecasts contained in
the budget, and are generally consistent with those in the House Budget
Resolution and the Senate (Chiles) Resolution. Use of the higher price
forecasts contained in the Energy Security Study would result in lower
costs. However, higher energy prices would also increase the baseline
budget deficit estimates by a larger amount, so the effect would be to
increase the deficit overall.
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NATIONAL INTELLIGENCE OFFICER
FOR ECONOMICS
National Intelligence Council
29 April 1987
MEMORANDUM FOR
Director, xecu i Staff
FROM: Deane Hoffmann
NIO for Economics
I calle to have him remind Bill
Martin that, per agreement with Martin, the ADCI
would speak on the possibility of oil supply
disruptions. I prepared the attached talking
points, however, in case Herrington does ask
about the economic impact of disruptions.
Deane Hoffmann
Attachment:
As stated
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29 April 1987
SUPPLEMENT to Talking Points for EPC/DPC Meeting
29 April 1987
In terms of the impact of oil disruptions, it is important to remember
that the problems go well beyond the initial economic effects on inflation,
growth, and unemployment.
-- The difficulties we face in our efforts to get Western Europe and
Japan to stimulate their economies is rooted in the budget deficits
they created in the 1970s in order to counter the deflationary
effects of the 1973/74 oil shock.
-- Also, the soaring levels of debt in the Third World were in large
measure created by efforts to ameliorate sluggish growth and cover
the cost of oil imports.
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THE WHITE HOUSE
WASHINGTON
SECRET
ATTACHMENT
CABINET AFFAIRS STAFFING MEMORANDUM
Date:April 28, 1987 Number: 317,314 Due By:
/.OD
Subject: Joint DPC/EPC Meeting--April 29, 1987--Ti-6$-a.m.--Energy Security
Action FYI
ALL CABINET MEMBERS ^ ^
Vice President ^
State ,~ ^
Treasury 4,I O 0
Defense
Justice ^
Interior
Agriculture ^
Commerce a
Labor
HHS ^
HUD [[~~ ^
Transportation ^
Energy ^
Education ^
Chief of Staff ^
OMB ^
UN ^l 0
USTR (~'
............................................... .
CIA lig' , 13
EPA P
E1d ^
GSA ^ ^
NASA ^ ^
OPM ^ ^
SBA ^ ^
VA ^ ^
Actin FYI
CEA ^
CEQ ^ ^
NSF V 0
NSF V ^ ^
^ ^
Carlucci
Cribb
Bauer
Dawson (For WH Staffing)
Executive Secretary for:
DPC 0 0
EPC 0
^ ^
^ ^
^ ^
^ ^
^ ^
REMARKS: A joint meeting of the Domestic and Economic PA1. Councils
will be held on Wednesday, April 29, 1987 at a.m. in
the Cabinet Room. The President will chair the meeting.
The agenda will be Energy Security. A background paper is
attached for your review.
RETURN TO:
2lancy J. Risque ^ Associate Director
Cabinet Secretary Office of Cabinet Affairs
456-2823 456-2800
(Ground Floor, West Wing) (Room 235, OEOB)
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THE WHITE HOUSE
April 27, 1987
MEMORANDUM FOR THE DOMESTIC AND ECONOMIC POLICY COUNCILS
Executive Secret DPC
EUGENE J. MCALLISTER
Executive Secretary, EPC
RALPH C. BLEDSO
SUBJECT: Joint Meeting on April 29, 1987
A joint meeting of the Domestic and Economic Policy Councils will
be held on Wednesday, April 29, 1987 at a.m. in the Cabinet
Room. The President will chair this mee , in which we will
discuss Energy Security.
A paper outlining the issue is attached for your review.
SECRET ATTACHMENT
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DOMESTIC POLICY COUNCIL AND ECONOMIC POLICY COUNCIL
JOINT MEETING
Wednesday, April 29, 1987
/$6a
~t?- -04-- a.m.
AGENDA
1. Energy Security -- Secretary Herrington
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UNCLASSIFIED WITH SECRET ATTACHMENT
THE WHITE HOUSE
April 27, 1987
MEMORANDUM FOR THE PRESIDENT
FROM: THE DOMESTIC POLICY COUNCIL
THE ECONOMIC POLICY COUNCIL
SUBJECT: Energy Security
Last October, you promised to conduct a review of our
energy-related national security concerns. Shortly thereafter,
Congress included in the Consolidated Omnibus Reconciliation Act
of 1986 a provision requiring Secretary Herrington to conduct a
study of domestic crude oil production and petroleum refining
capacity and the effects on oil imports. The legislation also
requires that within forty-five days of receiving Secretary
Herrington's study, you shall report your views:
concerning the levels at which imports of crude oil and
refined petroleum products become a threat to the national
security and advise the Congress concerning [your] views of
the legislative or administrative action, or both, that will
be required to prevent imports of crude oil and refined
petroleum products from exceeding those import levels that
threaten our national security.
Secretary Herrington issued his report cr. March 17, 1987. The
analysis has been very well received. Among the study's most
important conclusions is that the costs of an oil import fee
would clearly outweigh the benefits.
The White House Counsel advises that "cu are under no
constitutional obligation to recommend legislative or
administrative action and that you have substantial flexibili*v,in deciding how to report your views. The Domestic and Economic
Policy Councils believe it is in your interest to convey your
views and policies, because energy security is a very important
issue and the Administration has done much to improve that
security. The Councils recommend that you convey your views in
a May 1, 1987 letter, while not forwarding a specific legislative
proposal.
The Councils have reviewed the Department of Energy study and
have prepared several policy options for your consideration.
These options reflect the tension between competing goals of:
(1) improving national security; (2) preserving the principles
established in tax reform; (3) maintaining a free market energy
policy; and (4) reducing the Federal budget deficit.
UNCLASSIFIED WITH SECRET ATTACHMENT
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NATIONAL SECURITY CONCERNS
The Department of Energy study concludes that by the mid-1990s we
may be importing more than half of our oil. This prospect raises
national security concerns about a potential supply interruption.
The national security community believes such an interruption is
a real possibility because of the the potential for political
instability in the Middle East and the ever-present Soviet threat
to this region.
A supply interruption (or threat thereof) might pose two dangers:
o Disrupting our economy and economies of our allies who are
also highly dependent on imported oil, more specifically
Persian Gulf oil; and
o Impairing our ability to conduct the desired foreign policy.
Although the danger of a supply interruption significantly
impairing our ability to mobilize our defense establishment is
small, it could cause severe distress to civilian sectors as
defense needs are given priority access to available oil
supplies. (A fuller description of the national security concerns
is attached.)
ADMINISTRATION GOALS
While there is disagreement about specific additional initiatives
you might seek, the Councils unanimously recommend that in your
letter to the Congress you establish the following broad goals
for U.S. energy and oil policy:
The United States should take steps to better protect ourselves
from potential oil supply interruptions and increase our energy
security. These steps should include:
-- increasing our domestic stockpiles, which we can draw dowr
in the event of a supply interruption;
-- maintaining a strong domestic oil industry;
-- expanding the availability of domestic oil and gas
resources; and
-- . promoting among our allies the importance of increasing
their stockpiles.
An additional. element of our U.S. "energy security" stratec-v is
to promote the use of alternative economically efficient erergy
sources. The increased use of coal and the introduction of rcw
types of nuclear reactors are among the most promising
alternatives.
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PREVIOUS ADMINISTRATION ACTIONS
The Councils believe it is very important to keep the idea of
energy security in perspective. You have already taken two
extremely important actions to increase our energy security by:
(1) fully decontrolling oil prices in 1981; and (2) filling the
Strategic Petroleum Reserve (SPR) to more than 500 million
barrels and committing to a 750 million barrel SPR. Some of the
other major steps this Administration has taken to strengthen our
energy security and maintain a strong domestic oil industry
include:
o Reestablishing the five-year outer Continental Shelf (OCS)
leasing program and reducing the minimum bid for certain
offshore leases.
o Increasing Federal sperding for clean coal to $2.5 billion
over the next five years and reestablishing a Federal coal
leasing program.
o Preserving the favorable treatment of intangible drilling
costs in the Tax Reform Act and retaining the full-cost
accounting provisions.
o Lifting foreign policy controls on the export of petroleum
equipment and technology.
o Encouraging our allies to build up their stockpiles, which
amount to about 350 million barrels (mostly in Germany and
Japan).
o Vetoing standby petroleum price control and allocation
legislation in 1982.
These actions, and their effects, should be cited in your letter
to Congress. They have substantially increased our energy
security and improved our capability to mitigate a future supply
disruption of twice the size of historic disruptions, but would
not be sufficient to completely mitigate a much larger
disruption.
CURRENT ADMINISTRATION PROPOSALS
In addition, the Councils believe your report to the Congress is
an excellent opportunity to re-emphasize the importance of a
number of initiatives that you have proposed but which have not
yet been adopted, including:
o Seeking comprehensive natural gas decontrol, including
wellhead price decontrol, and repeal of the Fuel Use Act.
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-4-
o Repealing the Windfall Profit Tax.
o Continuing to improve access to OCS and Federal lands.
o Seeking nuclear licensing. reform, reauthorization of the
Price Anderson Act, and developing a nuclear waste
repository.
o Continuing to push hard for higher levels of oil stockpiles
among our allies, particularly at the ministerial meeting of
the International Energy Agency in May and the Venice
Summit.
If all these proposals that are currently on the table were
enacted, they could yield additional domestic production of
375,000 barrels per day of oil equivalent by the early 1990s.
ADDITIONAL PROPOSALS
The Domestic and Economic Policy Councils reviewed a number of
additional proposals for improving our energy security. These
proposals can be divided into three general categories: (1) tax
incentives; (2) Federal lands leasing policy; and (3) the SPR.
Tax Incentives
The Councils considered four tax proposals designed to increase
U.S. oil production. The first two proposals remove restrictions
on the use of percentage depletion by independents. This will
reduce early well-abandonment and will stimulate additional
drilling activity. The last two proposals are incentives
targeted toward exploration and development of new oil and gas
reserves and toward helping to maintain the domestic oil and gas
exploration infrastructure.
1. Repealing the transfer rule to permit use of percentage
depletion for proven properties that have changed ownership.
2. Increasing the net income limitation on the percentage
depletion allowance from 50 percent to 100 percent per
property.
3. Providing for faster tax-write off of geological and
geophysical expenses.
4. Providing a non-refundable tax credit for oil exploration
and development on new properties which would be fully
creditable against the alternative minimum tax.
These proposals are arrayed below according to cost and expected
additional production. The additional production would peak in
1992 and decline thereafter.
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Additional
Change Five-Year Revenue Loss
Production by 1992
Tax
Transfer Rule
$ 142 million
55,000 b/d
Net Income Limitation
$ 212 million
58,000 b/d
G&G expensing
with $21-25 barrel
phase out
$ 1.9 billion
200,000 b/d
with three-year sunset
$ 1.1 billion
125,000 b/d
Tax Credit for Exploration
and Development
with $25 barrel sunset
$ 2.9 billion
325,000 b/d
with three-year sunset
$ 1.7 billion
230,000 b/d
Federal Lands Policy
Federal lands have tremendous potential for new significant oil
and gas discoveries. Offshore has a potential of more than 11
billion barrels of recoverable oil. Onshore, the Arctic National
Wildlife Refuge (ANWR) alone has a potential of up to 30 billion
barrels of oil in place with a recoverable reserves potential of
up to 9.2 billion barrels.
On April 20, Secretary Hodel announced that the Department of
Interior would forward a report and environmental impact
statement to Congress seeking authority for full leasing of ANWR
in a manner reflecting wildlife values.
An additional initiative the Administration might take in lands
policy that would lead to more exploration and development
without any budget costs is reducing the minimum bid requirement
for Federal leases from $150 per acre to $25 per acre.
The Administration might also eliminate the royalty requirement
on new competitive leases, except in the case of ANWR.
Strategic Petroleum Reserve
One of the most important steps we have taken to strengthen our
energy security is to commit to building up our strategic
petroleum reserve to 750 million barrels. The 1988 budget calls
for a SPR fill rate of 35,000 barrels a day, with a budget cost
of $233 million in 1988 and $1.3 billion over five years. By
1995, the SPR would reach almost 640 million barrels, providing
63-83 days of import protection. The Councils have developed
three proposals for accelerating the SPR fill rate.
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1. Increasing the SPR fill rate to 75,000 barrels per day,
resulting in completion of 750 million barrel reserves in
1995. This would provide 18 percent more days of import
protection by 1995 than does the 35,000 fill rate. Outlays
would be increased by $304 million in 1988 and $2.1 billion
over 1988-1992.
2. Increasing the SPR fill rate to 100,000 barrels per day.
This would complete the 750 million barrel reserve by 1993.
Outlays would be increased by $482 million in 1988 and-$3.2
billion over 1988-1992.
3. Studying the possibility of providing a special oil-based
security that would be sold to investors to finance up to
100,000 barrels per day in the SPR at lower cost than if DOE
purchased the oil for SPR.
OPTIONS
The Councils have developed two options based on these proposals.
Option 1 has been fashioned to be revenue neutral and avoid
reopening basic issues considered in tax reform.
Option 2 is designed to increase U.S. oil and gas production up
to 1 million barrels per day, to help make up the production lost
in the 1986 oil price collapse and to stimulate drilling activity
in the troubled oil service sector. The 1 million barrel
increment would increase domestic production by about six
percent, reduce projected imports by about ten percent, and
reduce world dependence on Persian Gulf oil up to five percent.
Secretary Herrington believes that a goal of 1 million barrels
new production is essential to curb rising imports and preserve
domestic oil industry infrastructure.
Option 1: Supplement current Administration proposals with a
revenue neutral program and tax changes of a relatively
technical nature. Elements included in this option
are:
- opening up ANWR
- reducing the minimum bid requirement
- increasing the net income limitation
- repealing the transfer rule
- studying the possibility of private financing for a
SPR fill rate of up to 100,000 barrels per day
Advantages
o Does not increase the budget deficit and continues our
effective policy of relying on the market.
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o Avoids a major reopening of tax reform while en''orsinc t?-c
changes, which though technical in nature, have nevertheless
significantly discouraged marginal production.
o Focuses pressure on Congress to take the actions that are
very important for our energy security and a strong domestic
oil industry: natural gas deregulation, opening up ANWR, and
repealing the windfall profit tax.
o A private SPR may have a number of attributes, including
reducing Federal costs and incorporating private sector
judgments about the possibility of supply interruptions.
Option 2: Supplement current Administration proposals with
additional proposals that may not be revenue neutral
(depending in part on the budget savings resulting
from the private SPR) but which will lead to
significantly more domestic oil and gas production
than option 1. This option includes the elements of
option 1. with the following additional possibilities:
A. Providing for faster tax write-off of G&G
expenses;
B. Providing a tax credit for ril exploration and
develooment;
C. Tncreasinq the SPR fill rate up to
75,000 barrels per day if the private SPR
financing is not feasible.
Advantages
o Provides substantial new C.S. oil production of up to a
million barrels per day and offers a credible alternative to
the oil import Fee.
o Tax proposals will help sustain the enmestic oil industry
infrastructure so that it will be able to respond effectivPl-
when prices rise in the 1990s.
o Increasing the SPR fill rate to 75,000 b/d will lead to a 750
million barrel SPR by 1995 when the national security
projections show we will be most vulnerable.
Declassified in Part - Sanitized Copy Approved for Release 2011/11/03: CIA-RDP89B00224R000602040022-1
 Declassified in Part - Sanitized Copy Approved for Release 2011/11/03: CIA-RDP89B00224R000602040022-1
DECISION
Option 1: Supplement current Administration
proposals with a revenue neutral program and
only technical tax changes. Elements included in
this option are:
- opening up ANWR
- reducing the minimum bid requirement
- increasing the net income limitation
- repealing the transfer rule
- studying the possibility of private
financing for a SPR fill rate of up to
100,000 barrels per day.
(The savings estimates for private SPR
financing range from zero to $250 million per
year. OMB has concerns about the budget
integrity of such a proposal.)
Option 2: Supplement current Administration
proposals with additional proposals that may not
be revenue neutral but which will lead to
substantially more new domestic oil production
than option 1. This option includes the
elements of option 1 with the following
additional possibilities:
A. Providing for faster tax write-off of G&G
expenses. (See page 5 for additional
estimated production and revenue loss.)
i. with $21 - $25 per barrel
phase-out
ii. with three year sunset
B. Providing a non-refundable tax credit for oil
exploration and development. (See page 5 for
additional estimated production and revenue
loss.)
i. with $25 per barrel sunset
ii. with three year sunset
C. Increasing the SPR fill rate to
75,000 barrels per day if the
private SPR financing is not
feasible.
Options 1 and 2 are mutually exclusive. Option 2, sub-options A,
B, and C are not mutually exclusive.
EDWIN MEESE III
Chairman Pro Tempore
JAMES A. BAKER, III
Chairman Pro Tempore
Declassified in Part - Sanitized Copy Approved for Release 2011/11/03: CIA-RDP89B00224R000602040022-1
 Declassified in Part - Sanitized Copy Approved for Release ~~2011}/11/03 : CIA-RDP89B00224R000602040022-1
t~LVJIt I
23 April 1987
MEMORANDUM FOR: Distribution
SUBJECT:
Inter-Agency Meeting
TYPE OF MEETING
DATE
TIME
PLACE
CHAIRED BY
ATTENDEE(S) (probable)
SUBJECT/AGENDA
Cabinet Room
President
Energy Security
PAPERS EXPECTED By COB 23 April
INFO RECEIVED
DISTRIBUTION:
DCI
DDCI
ExDir
DDO
DDI
Ch/NIC
D/Exec Staff,
ES
SDO/CPAS
ER
SECRET
Per Cabinet Affairs, 1000
Declassified in Part - Sanitized Copy Approved for Release 2011/11/03: CIA-RDP89B00224R000602040022-1