1970 : EUROPE PLANS IN AN OIL SUPPLY EMERGENCY. BE READY FOR RATIONING !
This publication is part of the GLOBAL ENERGY HISTORY program investigating the 1970s ENERGY CRISIS[1]. This worldwide oil crisis triggered at the end of 1973 many oil “conservation and demand restraint” programs in most OECD countries[2].
In March 2022, the International Energy Agency (IEA, an offshoot of the OECD) has proposed a plan to curtail oil consumption[3]?as a consequence of the war in Ukraine that involves Russia, a major Oil & Gas exporter :
This publication focuses on a confidential O.E.C.D. report[4]?on this very subject, from 1970 :?
“REVIEW OF THE PLANS WHICH THE EUROPEAN MEMBER COUNTRIES HAVE READY TO PUT INTO EFFECT IN AN OIL SUPPLY EMERGENCY”
with its Table by country in Annex II.?And the French version of the OECD document : “REVUE DES PLANS QUE LES PAYS MEMBRES EUROPEENS SE TIENNENT PRETS A METTRE EN APPLICATION EN CAS DE CRISE DES APPROVISIONNEMENTS EN PETROLE??
Context of this September 1970 OECD Confidential report
With the?Six Days War?in June 1967, an attempt of oil embargo by Arab OPEC members had been a failure. Targeting U.S. and U.K. oil imports from the Middle-East, this embargo was considered ineffective, as the U.S. had still significant surplus oil productive capacity at that time, and were able to use them, reaffirming its leadership in the world oil market. Still the closure of the Suez Canal in June 1967 weakened the main oil supply channel of Europe, as it would become obvious in 1970 with a growing shortage of oil tankers. In fact, the impact of the 1967 war on the European oil market would last for several quarters as shown in Fig. N°1.
FIGURE N°1 : FULL COST OF OIL INCLUDING FREIGHT – 1966-69
The full price of oil, including transport by freight around Africa, would go from 2,5$ per barrel in 1966 to more than 4$ in August 1967. If that oil freight cost would then fall down to more normal price in Q2 1969, that respite would be short-lived, because of the world oil demand and exponential thirst for Persian Gulf oil, and the bottlenecks in oil tankers availability.
May 1970 was the real beginning of the 1970s oil crisis. From May 1970 on, the world oil market landscape would then dramatically shift, with (1) the Tapline pipeline interruption in Syria ; and (2) Libyan oil production cuts. For the first time, the threat of oil cuts by Libya would lead an international negotiation – mostly with U.S. oil & gas companies - to significantly higher prices …
In May 1970, the cuts by Kaddafi Government in the Libyan oil production were drastic, making the threat of further cuts very tangible. From nearly 4,3 million barrels/day in the first days of May 1970, Libyan production was reduced to less than 2,5 million barrels/day at the beginning of September. With Saudi Arabia and Iran, Libya had been one of the three main oil exporters of the Middle East. Now on, oil coming from Libya would be more expensive. And the missing oil no longer coming from Libya – or no longer coming through the broken Tapline pipeline in Syria- would have to come from the Persian Gulf, around Africa, so that oil would be much costlier
FIGURE N°2 : LIBYAN OIL CUTS – May-September 1970
Consequently, as soon as end of July 1970, the U.S. – that would have to sharply rise its domestic oil production (see below : Oil &Gas Journal Statistic – US crude oil production graph)- would be warning other O.E.C.D. members countries -mostly Europe and Japan- about the rising risks (OECD 1970 confidential Archive document[5]?[??Events in the Middle East and North African oil producing nations?/?Les évènements survenus dans les nations productrices de pétrole au Moyen-Orient et en Afrique du Nord??].
Source?: Oil & Gas Journal December 4th, 1967
To get a better feeling of the situation from the western side of the negotiation tables, an Appendix to this article provides an excerpt from G.H. Mayer Schuler’s testimony in 1974 at a US Senate hearing on foreign policy. He was an oil expert, at the heart of international oil negotiations in those years[6]. During this “first round” that ended in September 1970, he stated that :?“(…)?On May 7, Libya began a series of limitations on Occidental’s permissible production which reduced production from a peak of 800,000 BPD in April to 485,000 BPD in June?(…) With the September anniversary of the Revolution coming up, the ever-increasing rumors of impending unilateral government action or even nationalization increased. On August 30, Dr. Hammer [Oil Company Occidental] reportedly flew to Tripoli and left with agreement in principle on September 3. On September 4, the RCC [Libyan Revolutionary Command Council] accepted a September 2 proposal from Occidental (…)”
That September 1970 “capitulation” by US petroleum companies was the first of a long list of OPEC victories, culminating in October 1973.
Coincidence ? In the summer of 1970, O.E.C.D Secretariat asked O.E.C.D. European members to update their plans ready to put into effect in an oil supply emergency.
OECD DIE/E/PE/70.125
The following OECD confidential archives document (DIE/E/PE/70.125)?is the review of these updates (in English and in French). The “Annex I” with the review is not published, as it does not provide that much details, but below “Annex II Table” summarizes of all these European members replies to the OECD Secretariat request.
Points N°6 & N°7 of this OECD confidential report are noteworthy : “Conclusion and recommendation”. There is a sense of urgency in these paragraphs. OECD Oil Committee members certainly had a comprehensive understanding of the dangers that were rising in the Middle East, and they were well aware of the vulnerability of Europe[7].
The major OECD recommendation for Europe was “loud and clear” : be ready for rationing.
Paris, le 12 avril 2022
Michel LEPETIT
Vice-Président de The Shift Project
Chercheur associé au LIED
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ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT
Oil Section
DIE/E/PE/70.125
Annexes I and II
CONFIDENTIAL
Paris, 25th?September, 1970?
Or. Engl.
REVIEW OF THE PLANS WHICH THE EUROPEAN MEMBER COUNTRIES HAVE READY TO PUT INTO EFFECT IN AN OIL SUPPLY EMERGENCY
?(Note by the Secretariat)
(…)
DRAFT CONCLUSIONS AND RECOMMANDATION TO DIE/E/PE/70.125
Conclusions and recommendation
6. In view of their heavy dependence on source outside the O.E.C.D. area for oil supplies and of their current level of security stocks coverage, it is particularly important that the European Member countries have measures by which consumption can be reduced quickly and effectively while producing a minimum of economic dislocation, and while taking into account an established list of priorities between such sectors as power plants, industry, construction, domestic heating, public and private transport, etc. Although most European Member Governments have measures which can be put fairly rapidly into effect in an emergency to conserve supplies, most countries rely in the first instance on a general restriction of deliveries rather than a selective system of allocation (rationing) to consumers. A number of Member Governments provide for allocation to consumers (rationing) as a second step, but in most cases only coming into effect after a period of weeks. A few Member Governments have no provision at all for allocation or rationing.
7. The Oil Committee therefore proposes that the Council recommend all the O.E.C.D. European Member countries have measures prepared which can be promptly put into effect in the event of an oil supply emergency to restrict oil consumption through a system of priority allocation to consumers.
1st?October, 1970.
ORGANISATION DE COOPERATION
ET DE DEVELOPPEMENT ECONOMIQUES
Section Pétrole
DIE/E/PE/70.125
Annexes I et II
CONFIDENTIEL
Paris, le 25 septembre 1970
Or. angl.
REVUES DES PLANS QUE LES PAYS MEMBRES EUROPEENS
TIENNENT PRETS A METTRE EN APPLICATION EN CAS DE CRISE
DES APPROVISIONNEMENTS EN PETROLE
(Note du Secrétariat)
领英推荐
PROJET DE CONCLUSION ET RECOMMANDATION A AJOUTER AU DIE/E/PE/70.125
Conclusion et Recommandation
6. Les pays Membres européens et le Japon dépendant fortement pour leurs approvisionnements en pétrole de sources situées à l’extérieur de la zone O.C.D.E., et étant donnée la garantie représentée par le niveau actuel de leurs stocks d’urgence, il est particulièrement important que ces pays disposent de mesures qui permettent de restreindre, de fa?on rapide et efficace, la consommation en réduisant au minimum la perturbation de l’économie tout en prenant en considération les impératifs sociaux et les priorités à accorder au chauffage domestique, aux transports privés, etc. La plupart des gouvernements des pays Membres européens ont des plans qu’ils pourraient appliquer assez rapidement en cas de crise pour conserver les approvisionnements, mais beaucoup d’entre eux comptent, en première étape, pour cela, sur une réduction générale des livraisons plut?t que sur un système sélectif d’allocation (rationnement) appliqué aux consommateurs. Un certain nombre de gouvernements Membres ont prévu la mise en ?uvre d’allocations aux consommateurs (rationnement) en deuxième étape, mais qui, dans la plupart des cas, ne produiraient leur effet qu’après des semaines. Un petit nombre de gouvernements Membres n’ont aucun système d’allocation ou de rationnement prévu.
7. Le Comité du Pétrole, en conséquence, propose que le Conseil recommande à tous les pays Membres européens de l’O.C.D.E. ainsi qu’au Japon, de tenir prêtes à être mises rapidement en ?uvre, en cas de crise des approvisionnements de pétrole, des mesures de restriction de la consommation de pétrole faisant appel à un système d’allocation aux consommateurs.
1er?octobre 1970
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APPENDIX :
HEARINGS BEFORE THE SUBCOMMITTEE ON MULTINATIONAL CORPORATIONS OF THE COMMITTEE ON FOREIGN RELATIONS UNITED STATES SENATE NINETY-THIRD CONGRESS
SECOND SESSION ON MULTINATIONAL PETROLEUM COMPANIES AND FOREIGN POLICY
August 30, 1974
PART 6 - Appendix to Part 5
STATEMENT BY GEORGE HENRY MAYER SCHULER,
CHIEF LONDON POLICY GROUP REPRESENTATIVE FOR THE BUNKER HUNT OIL CO.
(…)
ROUND??1-—LIBYA, SEPTEMBER 1970
(Note. Much of the following is based upon public accounts but a general familiarity is necessary to an understanding of the events that follow.)
Upon seizing power in Libya on September 1, 1969, Col. Moamer Qadda??and his Revolutionary Command Council (RCC) quickly adopted a policy of unhesitant confrontation with oil companies as well as governments. Confrontation was designed to achieve four overlapping and complimentary goals: firstly, to ignore existing agreements and OPEC-wide pricing standards so as to increase dramatically the government income per barrel of oil produced; secondly, to seize control of the producing operations from the oil companies, thus enabling the RCC to manipulate oil supplies for political or commercial purposes; thirdly, to demonstrate to people governed by more moderate regimes that revolution and “Arab socialism” are the wave of the future; and, fourthly, to utilize oil and the revenues derived therefrom in “the battle to liberate Palestine.”
After consolidating power at the end of January, 1970, Col. Qadda??summoned local oil company representatives to their first and last personal meeting. Col. Qadda??immediately set the tone for the impending posted price discussions by stating that “People who have lived for 5000 years without petroleum are able to live without it even for scores of years in order to reach their legitimate right.” The Minister of Petroleum, Ezzidin Mabruk, and the Chairman of the Price Committee, Omar Muntasser, left no doubt that?a very large increase had become the RCC’s prime political goal so as to discredit the previous regime.?The Libyan position was based upon alleged underposting of Libya‘s first exports of crude in 1961, upon the enhanced freight advantage subsequent to the closing of the Suez Canal in 1967 and upon low sulfur qualities. This position was endorsed by the Organization of Arab Petroleum Exporting Countries (OAPEC) which then included Saudi Arabia and Kuwait, and by Iraq and Algeria which were not yet members. In fact, Libya coordinated its rumored goal of about $0.44 increase in posting with the demands Algeria was making upon France, and frequent consultations between the two Arab countries continued throughout 1970.
Occidental was the first company to meet individually with the Price Committee. and others were summoned during the first 2 weeks of February, including Hunt on the 9th. No company volunteered to increase its postings so a second round of meetings commenced February 23 at which companies were to defend their postings in detail. The accompanying political background should be noted as Minister Mabruk flew off for the first visit of a senior Libyan to Moscow and as the import of Algerian natural gas to the U.S. was challenged by Atlantic Richfield and Phillips whose assets had been expropriated in Algeria. This round of negotiations failed to produce any results so the Price Committee abandoned the industry-wide approach to concentrate on Esso and Occidental. In April, Col. Qadda??called for mobilization to fight the oil companies which he linked with “world Zionism and local forces of reaction” and put Dr. Mahmud Mughrabi, Libya’s first post revolution Prime Minister, in charge of the Price Committee. Although an able lawyer and oil economist, Dr. Mughrabi was best known for his extreme political views. Born in Palestine he was sentenced to jail by the former regime for his efforts to continue the 1967 embargo on oil exports to the United States and Western Europe after the Khartoum Conference had decided to abandon the embargo.
Dr. Mughrabi issued a politically-charged statement and called in as consultants, several well known Arab advocates of nationalization, Dr. Nicolas Sarkas and Abdullah Tariki. They subsequently suggested price levels of $2.61 and $3.115, the latter based on Venezuela. Discussions with Esso and Occidental resumed in May with Dr. Mughrabi clarifying that the demanded sharp increase in posting must be retroactive and would merely serve to “correct” alleged under postings; however, a week’s meetings achieved only agreement in principle by the two companies to some increase.?On May 7, Libya began a series of limitations on Occidental’s permissible production which reduced production from a peak of 800,000 BPD in April to 485,000 BPD in June; the government simultaneously refused to permit Esso to commence export of liquefied gas from its $350 million Brega gas project. Subsequently, Amoseas production was slashed by 81% to 275,000 BPD on June 15; Oasis was cut by 12% to 895,000 BPD on July 20; Mobil/Gelsenberg were cut 20% to 222,000 BPD on August 15 and Esso were cut about 15% to 630,000 BPD on September 5.
The reduction in available Libyan supply, coupled with the Syrian closure of Tapline soon drove up the spot market prices for oil and tankers.?Meanwhile, Algeria nationalized all assets of Shell and Phillips.?Price negotiations with Esso and Occidental resumed in late June. On July 4, the local marketing companies of Esso, Shell and ENI were nationalized.?Also in mid-July, Algeria announced a unilateral increase in the postings of French companies from $2.08 to $2.855 retroactive to January 1, 1969.?In mid-August Esso and Occidental were reported to have made new offers direct to Deputy Premier Major Abdulsalam Jallud. They were considered unacceptable and Occidental’s production was reduced to 425,000 BPD a few days later.
With the September anniversary of the Revolution coming up, the ever-increasing rumors of impending unilateral government action or even nationalization increased. On August 30, Dr. Hammer reportedly flew to Tripoli and left with agreement in principle on September 3. On September 4, the RCC accepted a September 2 proposal from Occidental which accomplished the following:
(1) Increased posting of 40°oil by $0.30 from $2.23 to $2.53 effective September 1.
(2) Posting to escalate $0.02 per year for 5 years commencing January 1, 1971.
(3) Postings below 40° to be reduced by $0.015 per degree rather than $0.02 as universally accepted.
(4) Increased tax rate from 50-58%. Although neither the genesis nor calculation of this new form of increase in “government take” has been made public, there have been reports that it was in substitution for future payments on Occidental's Kufra agricultural project in addition to some $56 million owed for Kufra underpayments and $0.30 per barrel retroactively from January 1, 1970 through August 31, 1970.
(5) Occidental’s production ceiling was provisionally increased from 425,000 BPD to 700,000 BPD on condition that Occidental satisfy the head of the Ministry’s Technical Department that this represented “good oil field practice.”
On September 10, the producers of high pour point (waxy) Libyan crude met in New York to outline possible strategies for resisting the increases agreed by Occidental on the grounds that the market place put a $0.30 penalty on high pour crudes so no adjustment was required. On September 11, all Libyan producers including Occidental met in New York to discuss various matters including the reported Occidental settlement. The Occidental representative was unwilling to provide details, pleading government restraint, so the results of the two industry meetings were entirely inconclusion. The focus of much concern and speculation at these meetings was whether this break in the front would encourage the Libyans to legislate a similar basis for all companies. Dr. Mughrabi had made clear that Libya had unilaterally cancelled all arbitration provisions in the concession agreements, and Major Jallud had assured Algeria that Libya would never submit to arbitration so this avenue of resolution was considered to be closed. Because of the U.S. desire to reopen diplomatic relations with Algeria and the U.S. interest in gas imports, the U.S. government had reportedly been reluctant to make representations on behalf of American companies whose properties were nationalized by Algeria, so this avenue of recourse was also not promising.
On September 12, the Oasis partners received letters demanding agreement to Occidental’s $0.30 increase retroactive to the commencement of production plus $0.10 more over 5 years. Discussions began on September 18. On September 21, Continental, Marathon and Amerada Hess signed letters “proposing” similar posted price increases and agreeing to increase tax rate by 4% "in satisfaction of the Government's claims for additional payments on account of the difference between the posted price provided under paragraph 1 above, and the posted price in effect during the period January 1, 1965 through August 31, 1970”. The Government “accepted” these “proposals” the same day, and reportedly replaced an onerous per well allowable with a field allowable of 900,000 BPD. Between Occidental and the 3 Oasis partners, Libya now had half its total production assured at vastly increased “government take”. Nonetheless, recognizing the precedential problem, Shell refused to accept the Hobson’s choice of 5 years retroactivity or 4% increase in tax rate and was refused permission to lift oil after September 22. On the same day, the Ministry summoned representatives of Texaco, Socal, Hunt, Gelsenberg, Arco and Grace and gave these companies until September 27 to accede to similar terms.?On September 28, Esso, Mobil and BP unilaterally increased their postings by $0.30 per barrel and accepted the new gravity factor.
In the face of this industry acceptance of the general increase, the only things left to fight were the $0.05 wax-quality discount for Hunt, BP, Gelsenberg, Socal and Texaco; the Hunt-BP freight factor of $0.02; and the retroactivity-tax rate increase claim. The Libyans insisted that the additional tax rate required to buy out of the retroactive underposting must be based upon 1969 operating costs, current allowables, scheduled increases in postings and a 7.5 year pay-out. The Libyans even refused to permit the companies to specify that the $0.02 per year increase was in recognition of sulfur and they required explicit written acknowledgement that there had been an underposting ever since 1965 even though this was not in accord with the facts. After little more than the trappings of a negotiation, the companies were forced to capitulate on September 30, and tax rates were agreed as follows: Hunt (55%) ; Texaco and Socal (55% plus $150,000 cash in lieu of 0.02%) ; Gelsenberg (55.5%) ; Grace (54%) ; and Arco (55%). Thus, Hunt's posting increased by $0.385 to $2.485 plus $0.02 increase per year; “government take” increased $0.327 effective upon signing. On October 8, Esso, Mobil and BP agreed to similar terms.
Conclusions to be drawn from round 1
A number of themes and conclusions emerged from the first encounter between the Libyan RCC and the international oil industry. Some points may be painfully obvious with the bene?t of hindsight, but it must be remembered that these young army officers were completely unschooled in economics and negotiations and no one knew anything about them, so both sides could merely feel their way along:
(1) The revolutionary government decided upon a strategy of going first for those companies which were unduly dependent upon Libyan production. It is open to speculation as to how this change in attitude from that of the former regime developed, but, in any event, it became clear that those producers which were unduly dependent upon Libyan crude oil would have to find access to alternative sources of oil if they were to resist inordinate demands in Libya.
(2) The revolutionary government sought to increase its revenues not through the volume increases which had accounted for Libya’s prior rapid development but rather through unit increases in per barrel “government take”.
(3) Subsequent to the rapid increase in Occidental’s exports after the beginning of 1968, the independent producers controlled more than 50% of Libya’s exports at their peak in June 1970.
(4) The Libyans recognized that a combination of huge increases in unit take (2 above) and sizable volumes of vulnerable independent production (1 and 3 above) would permit the Libyan government to survive a shut-in of major oil company production with few if any adverse economic consequences. More importantly, this situation would be readily apparent to the companies operating in Libya.??
(5) The Libyans found that a rationale concocted out of state sovereignty, the doctrine of changing circumstances and allegations of monarchical corruption could be claimed as justification for total abrogation of existing commitments and agreements.
(6) The Libyans recognized that “conservation” was a “motherhood issue” which had OPEC’s blessing and which was so subjective that it could be argued interminably.
(7) The young officers worked closely with their Algerian counterparts who were demonstrating that U.S. appetite for gas was such that even the U.S. Government would do little or nothing to support American producing interests in Algeria. They knew that this had to be even more true of European governments which required more than just peak load gas.
(8) By combining “conservation” (6 above), the state sovereignty rationale (5 above) and increasing energy demand (7 above) with a healthy dose of cynicism, the Libyans found they could bring companies and governments to their knees by imposing production restrictions under the guise of “conservation”. Similarly, they could threaten “unilateral action” or “legislation” with virtual impunity.
(9) It became apparent that growing coordination of oil policy among producing states on a multilateral basis (e.g. OPEC, AOPEC) and on a bilateral basis (e.g. Libya with Algeria and Libya with Iraq) would not flounder on ideological differences or selfish national considerations. Disputes and differences between producing states were more apparent than real, more contrived than deep-seated, and more transient than lasting.
(10) The Libyans discovered that they could wield this arsenal of weapons to obtain retroactive increases as well as prospective increases, but that the companies preferred to spread these over the future rather than make a lump sum settlement. This approach had great tactical as well as substantive advantage because they could make a demand to establish an effective date and then wait for optimum weather, freight or supply conditions to apply the pressure.
(11) Qadda?’s speeches and RCC interest clearly demonstrated that oil policy was seen primarily as a political tool which could be used for internal or external purposes.
ROUND 2 – THE REST OF OPEC, DECEMBER 1970
(…)
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[1]?See?:?Lepetit?M.?(2021 a) -?August 15th?1970 : Oil and the end of the Bretton Woods Monetary System – Chapter I : Introduction – 15/08/2021
[2]?The following OECD confidential archive documents have already been published on this subject :
DIE/E/PE/74.123?:?Renseignements sur les plans de rationnement des produits pétroliers - information on petrol rationing scheme (1974)
[4]?I want to thank once more the team at the OECD Archive Department in Paris for their precious help.
[5]?OECD -?DIE/E/PE/70.122?: remarks by W Laird?[??Events in the Middle East and North African oil producing nations?/?Les évènements survenus dans les nations productrices de pétrole au Moyen-Orient et en Afrique du Nord??]?(July 1970)
[6]?He was then Chief London policy group representative of an oil company.
[7]?This document can be put in perspective with two other OECD confidential reports from 1974, after the 1973 “Oil shock” :