(UNTITLED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00287R001100220001-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 13
• Document Creation Date: January 12, 2017
• Document Release Date: August 20, 2010
• Sequence Number: 1
• Publication Date: May 4, 1984
• Content Type: MEMO

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Memorandum fork
Diane Dornan
Deputy Director for
Intelligence Programs
NSC Staff
Attached, as requested, is a quick look at
Summit country attitudes/positions on
potential energy actions in response to the
Persian Gulf situation. If we can be of
further assista you or to Bill Martin,
please call me or
Chief, Strategic Resources Division,
Office of Global Issues
C ie ,
Western Europe Division
EURA
Office of European Analysis
Directorate of Intelligence
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 Sanitized Copy Approved for Release 2011/04/04: CIA-RDP85T00287R001100220001-7 25X1
Spot Market Monitoring
the volume of oil traded in 25X1
the spot market or in spot type transactions has increased
markedly in the past year or two. Some estimates indicate that
as much as 20 percent of oil is now traded in spot
transactions. While we doubt the figure is that high, we believe
it is considerably higher than the 3-5 percent level that
prevailed in past years. Much of the increase in spot
transactions represents the erosion of market share of the major 25X1
companies, increased marketing by national oil companies and a
reduction in the number and length of term contracts.
Monitoring individual transactions in the spot market is
difficult because details of many transactions go unreported and
the same cargo may change hands several times before final
delivery. Price quotes are readily available and are reported
daily in the press such as Platt's Oilgram. The futures market
is also a good indicator of trends in spot prices.
Government policies will also be a key indicator of spot
activity because of the proliferation of state-owned or
controlled companies in many of the consuming countries. The
French, for example, have encouraged spot purchases in the past
by CFP when oil supplies were disrupted. Japan has also
encouraged its companies to engage in spot purchases. In 1983,
Tokyo relied on the spot market to supply about 18 percent of
total oil needs.
Demand Restraint Monitoring
Our ability to monitor the effectiveness of demand restraint
measures in foreign countries is very limited and we have some
concerns regarding the ability of anyone to get an accurate and
timely measure of a reduction in oil use. To measure the
effectiveness of demand restraint measures an estimate of pre-
crisis demand--a baseline against which demand reductions would
be measured--is required. In most instances, we believe
countries will purposely inflate the demand projections to make
the restraint measures appear more effective than they actually
Refinery sales is the best available indicator of oil use.
Data for these sales, however, is often 2-3 months old by the
time it can be aggregated and made available. The IEA reporting
system can provide a more timely estimate of oil sales but is not
an accurate measure of actual consumption because it reflects
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intentions rather than actual use. The data problem is further
compounded by lack of reliable information on secondary and
tertiary stocks. Implementation of demand restraint measures
might cause consumers to use these stocks initially rather than
cut oil use. Such a decision would cause a reduction in refinery
sales and make it appear that the demand restraint measures were
effective when in reality, end users had not cut back on oil
consumption.
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Major neveloped (buntries:
nil stock situation
31 March 1994
oi.l
(Y)nsimmt ion
1QR'1
Million
h/d
mt.al Stocks
(bvernment-
Owned
(bnmercial
Total
(bverrrnent- (bmnercial
Owned
tTni ted atafies
Canada
1.1
114
n
114
RR
0
Tartan
4.1
40R
9n
319
95
21
Prances
l.R
.1 C;0
n
150
83
0
Italy
1.'
169
Fh
163
Tmited Ki,ngrlrxn
1.5
119
n
119
inst. ('Prmany
25
hl Assumes no increase in government-owned stocks since
yearend 19RI,
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Central Intelligence Agency
DIRECTORATE OF INTELLIGENCE
31 May 1984
Summit Countries: Views on Response to an Oil Supply Disruption
The other Summit countries generally agree in principle on the
desirability of a coordinated response to a disruption of Persian Gulf oil
supplies. Their views on specific issues are sufficiently different, however,
that we doubt a significant agreement on cooperation can be worked out soon.
In particular, West Germany and France are opposed to a policy of early
drawdowns of government oil stocks. There is probably greater unanimity of
opinion on the dangers of a sudden rush to line up spot oil contracts, but
even here some countries--especially Italy--are reluctant to limit their
freedom of action in advance. In an emergency the actions of the four West
European Summit countries will be strongly influenced by their participation
in the EC's oil crisis machinery--which emphasizes demand restraint rather
Japan
Tokyo was considering permitting early release of oil stocks in a supply
disruption even before US Ambassador Fairbanks went to Tokyo in May and
outlined Washington's support of early and coordinated stock drawdowns. The
Japanese are unsure when their review of oil crisis policies will be completed
but have promised to take US preferences into account. Ambassador Fairbanks'
discussions with Foreign Ministry officials made clear the Japanese belief
that to be effective at calming spot markets, an early stock drawdown scheme
must be relatively specific and publicized in advance. Officials in Tokyo
have also indicated that individual countries should have the option of using
demand restraint measures prior to drawdowns since not all countries have
stocks as large as the United States
25X1
25X1
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The Japanese Government and oil industry have been fairly optimistic in
recent months about their country's ability to cope with a cutoff of oil from
the Persian Gulf. Oil stocks in Japan are high, reducing oil companies'
incentives to engage in panic buying on the spot market. Also contributing to
Japan's relaxed attitude are seasonally low energy demand and the general
softness in the world oil market. As a result, Japanese oil companies believe
at least half of any Gulf-related shortfall could be offset by boosting
purchases from Indonesia, Mexico, and Africa. A Foreign Ministry study done
in December indicated that even without heightened conservation efforts or
increased oil supplies from other sources, Japan had enough oil stockpiled to
last 215 days; the US Embassy noted,. however, the study failed to take account
of operational stocks as well as price factors.
Japanese optimism has waned somewhat following stepped-up attacks on
ships in the Persian Gulf. On 26 May, Japanese shipowners and the All Japan
Seaman's Union agreed to indefinitely suspend sending Japanese oil carriers
and cargo vessels into the northern part of the Gulf. Nonetheless, with
inflation running at 3 percent and a projected 1984 current account surplus of
$25 billion, Japan is in a better position than most countries to absorb oil
price rises that may result from an escalation of hostilities in the Gulf.
Canada
Oil imports from the Persian Gulf--around 50,000 b/d last year--currently
account for less than 4 percent of total Canadian consumption. Nonetheless,
in response to the escalation of the Iran-Iraq War, Ottawa began interagency
contingency planning in March to prepare for an oil shortage. Canadian
production is near capacity, so little incremental oil would be available.
Ottawa maintains no strategic oil stockpile, but commercial firms hold about
90 days reserves. Ottawa has the power to allocate these reserves upon
d
l
i
ec
ar
ng an emergency situation.
Ottawa is concerned mainly with keeping oil prices from rising rapidly
and would advocate dampening price increases through timely release of
strategic reserves by those countries holding them. On the other hand, Ottawa
would try to limit its own activity to IEA programs and would not immediately
order commercial stock drawdowns. Trudeau's traditional concern for the
welfare of Third World economies would likely prompt Ottawa to urge measures
to aid the LDCs.
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European Community
EC Commission officials and energy ministers continue to downplay the
possibility of a severe disruption of petroleum supplies from the Persian Gulf
as a result of the Iran-Iraq War, even though Commission officials determined
last December that a cutoff of Gulf oil would result in a shortfall of 1 to
1.5 million b/d for the Community--between 12 and 18 percent of EC
consumption. Commission officials discount a major oil supply crisis,
according to the US Mission to the European Community, because they believe:
o Any disruption will be short.lived.
o The United States will keep the Straits of Hormuz open.
o Existing stocks--including floating Saudi storage--provide a
comfortable cushion.
o Saudi Arabia will increase production, if necessary, to maintain
current prices for crude oil.
EC Energy Ministers discussed Persian Gulf developments at their meeting on 22
May and concluded that continued conservation efforts, market conditions, and
the level of existing stocks "provide the necessary means to cope with the
The EC's emergency plans for dealing with a potential interruption of oil
supplies emphasize consultation, coordinated demand restraint, and intra-
Community trade actions to minimize oil price fluctuations. The Community's
oil crisis machinery has three key elements:
o Mandatory national stocks equal to at least 90 days average
consumption (based on the previous calendar year).
o A three-phased system to reduce oil consumption and reallocate
supplies among EC members that is compatible with but independent of
the IEA system.
o Export licenses for intra-EC shipments of petroleum and petroleum
products to maintain stability within the Common Market.
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The Petroleum Supply Group (PSG)--consisting of experts from each of the
ten EC countries--coordinates EC policy during an oil crisis. EC members must
inform and consult with both the Commission and the PSG before oil stocks are
drawn below the compulsory limit. In our judgment, most EC members believe
coordinated demand restraint measures add greater stability to the global oil
market than manipulation of emergency stocks. Consequently, we think the EC
countries are unlikely to agree to draw down existing oil stocks except under
the most dire circumstances. According to State Department reports, France,
in particular, believes drawing on emergency oil stocks is a measure of last
West Germany
Bonn backs the principle of equitable burden sharing and considers the
IEA to be the best coordinating mechanism for joint action. However, West
Germany will seek to delay implementation of the IEA sharing system as long as
possible. Before agreeing to IEA-backed plans, the Kohl government will want
to assess carefully the severity of the crisis and the likely market response
to measures such as a release of stocks. Although petroleum stocks are
currently in excess of 120 days of consumption--well above the agreed 90-day
floor--Bonn does not want to resort immediately to drawing down stocks.
Instead, the government prefers initially to use restraints such as limits on
speed and weekend driving, and to permit prices to rise to ration the reduced
oil supply. Bonn likely would be willing to contribute to a plan to ease the
impact of an oil crisis on the LDCs, but will expect the costs to be shared
equitably.
France
French dependence on oil--particularly imports of Persian Gulf crude--
remains high although it has dropped significantly since 1973 due to increased
use of nuclear power and natural gas. French officials apparently agree on
the need for a collective Western response to a major disruption of Gulf oil
supplies. In particular, they believe the major countries should not rush to
buy oil on the spot market, as this would only push up prices unnecessarily.
Nevertheless, they are still not willing to participate directly in any IEA
coordination effort but rather will act through the European Community. In
addition, any coordinated response must be seen as an attempt to deal with an
actual shortfall and not as an exercise in "OPEC busting."
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Paris would prefer that the first reaction to an oil market disruption be
in the form of demand reduction. Stocks, in the French view, are a second
line of defense that will last longer for essential needs if demand reduction
is the major response. If the initial shock were small and clearly temporary,
however, reducing stocks could be sufficient without cutting demand. In any
event, the decision to draw down oil stocks would have to be coordinated with
Italy
At the first sign of a supply crunch, the Italian Government would
consider drawing down its reserves, including its strategic stocks, if other
countries agreed to do the same. Rome has had a longstanding interest in the
early use of stocks and believes that such a policy is preferable to immediate
imposition of demand restraints. While conforming as much as possible to any
international cooperative effort, Rome would still seek to protect its
national interests. For example, Rome does not favor--even in concert with
others--exerting pressure on oil companies to stay out of the spot market
because this would restrict Italian supply flexibility. In the past, Rome has
limited itself only to recommending that companies utilize the spot market on
a programmed and nondiscriminating basis--but only to avoid unexpected price
increases.
On the domestic side, Rome probably would return to a greater emphasis on
diversifing Italian energy supplies. Demand restraint measures probably would
focus on gasoline consumption and include lower speed limits, increased taxes,
and limited driving hours on Sundays and holidays. If rationing were to
become necessary, oil supplies would be allocated away from "nonessential"
25X1
25X1
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United Kingdom
London probably would support Washington's oil stock policy in the event
of an oil supply disruption. Nevertheless, the Thatcher government would
prefer an early triggering of the IEA sharing mechanism--especially if the
crisis appears likely to be prolonged--as a show of international unity and to
create an atmosphere that will divert pressure from the United Kingdom--a net
oil exporter--to assist in bilateral oil supply efforts by drawing down its
oil stocks. British oil production is currently near full capacity and could
not be substantially increased in response to a crisis. A primary British
concern is to maintain market stability and to avoid recourse to spot market
purchases which would drive up oil prices. Government officials fear that
higher oil prices and increased uncertainty in the oil market would aggravate
LDC debt problems and slow the worldwide economic recovery. London's concern
to preserve the recovery also is evident in its reluctance to impose demand
restraint or conservation measures, which would threaten industrial
production.
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Distribution:
1 --Diane Dornan,
Dep. Dir, for Intelligence
/SRD (3G31)
OEA/Japan (4G31)
NI0/Econ (7E62)
C/
EI/EI (5G31)
NA/D (4G43)
1 - OD/EURA
1 - OD/OEA
1 - NI0/WE
2 - EURA Production
4 - IMC/CB
1 - WE Division
5 - Contributing
DDI/EURA WE
(30May84)
Programs, NSC Staff
25X1
25X1
25X1
25X1
25X1
25X1
25X1
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