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The Roots Of Bush’s Oil Policy BY EDWIN S. ROTHSCHILD Washington, D.C. AS CRUDE OIL PRICES begin to collapse once again, most oil analysts are pointing to “market fundamentals” as the explanation. The combination of warm weather and recession have indeed dampened demand and resulted in excess supply. While this analysis is accurate, it misses one important element the role of Saudi Arabia and other Persian Gulf producers in keeping production high, despite changing market conditions. For the last six years, under the leadership of King Fand, Saudi oil production policy has been closely linked to U.S. and Western economic and political interests. More specifically, previously classified government documents reveal that in early 1983 the Reagan-Bush administration devised a secret policy to support a sharp drop in world oil prices as a way to stimulate the U.S. and world economies. Coincidentally the lower oil prices stimulated Republican political prospects during election years. President George Bush, despite his Texas oil industry roots, not only supported and furthered this policy, but benefited from it in 1988 and may benefit from it again in 1992. Government documents, including some made public under the Freedom of Information Act, and other reports show continuing efforts of the Reagan and Bush administrations to keep oil prices low at the expense of domestic producers. ‘Good Judgment’ Saudi oil production has averaged close to 8.5 million barrels a day since November 1990, when the kingdom increased its output to replace embargoed Iraqi and Kuwaiti production. By keeping its production high as consumption has dropped, Saudi Arabia, more than any other oil producing nation, precipitated a $5 per barrel decline in price that began at the end of October. In appreciation of Saudi Arabia’s pro-U.S. pricing policy, the Bush Administration’s deputy energy secretary, W. Henson Moore \(a former Louisiana Republican congressman, recentduring his recent trip to the kingdom that Saudi resistance to raising prices “is something that from our economic point of view we appreciate” and it “reflects goo l d judgment on their part.” The Saudis’ “good judgment” on oil pricing policy was inspired by the Reagan Administration when it became clear that without Saudi cooperation on production, world oil prices would remain too high, limiting oil consumption in the West and depressing production in the Persian Gulf. In early 1983 the Department of Treasury under then-Secretary Don Regan completed a major policy study on the implications of a fall in world oil prices. That study concluded that an international oil price decline from $33 to $20 a barrel would benefit the United States. This report provided the economic rationale for the Reagan-Bush administration’s decision to intervene in the oil market by persuading Saudi Arabia to sharply increase production in 1985-86. Treasury advised that if Saudi Arabia and other countries “with available oil reserves should step up their production and increase world output by … about 2.7 to 5.4 million barrels a day and cause the world price to fall by about 40 percent, the overall effect on the United States would be very beneficial.” The Treasury document also accurately predicted that oil imports would rise after two to three years by 1.75 million barrels a day \(they actually rose by 1.6 mb/d between 1985 and Edwin S. Rothschild is Energy Policy Director of Citizen Action, a consumer advocacy organization, in Washington, D.C. “significant reductions in profits and cash flow.” Despite an expected drop in U.S. production and “pressure to do something, especially from the independent oil producers who are numerous, vociferous, and politically active,” the Treasury Department advised against interfering to protect domestic producers with an import fee or other price protection mechanism. While unconcerned about the impact on independent producers, the Reagan-Bush policymakers found that the oil price drop “should have no effect on oil refining and marketing sectors in the short run. Later, as sales increase due to economic growth and lower oil product prices, these subsectors should see higher profits.” Although this became the administration’s position, the Department of State did not appear to share Treasury’s views. A confidential State Department memorandum expressed serious reservations about the policy, especially the long-term consequences. “… lower prices and increased economic activity will result in increased oil use [and] will also discourage investment in new oil production…As a result, the free world could again be vulnerable to oil emergencies.” At a closed hearing of the Senate Energy Committee in early 1983 a high-ranking Treasury official told producing state senators that, “The Administration believes that a decline in oil prices is clearly to be desired, with beneficial net effects.” In the committee’s subsequent public hearing several days later, another administration official testified that “a relatively precipitous decline in oil prices to $20 a barrel would be manageable from an energy perspective.” Although the Reagan-Bush Administration may have expected marketplace activity to result in lowering world oil prices, efforts by various governments and international oil companies in 1983 and 1984 prevented significant price declines \(prices in 1983 did drop about $5 Yamani, the former Saudi Oil Minister, the British Secretary of Energy and the major international oil companies successfully stopped prices from falling and defended the $29 price. Two weeks later, Don Regan sent a memorandum to Energy Secretary Don Hodel advocating lower oil prices, saying that “we should resist any pressure on us to prop up oil prices.” In October 1984 citing the prospect of lower oil prices, a confidential State Department memo revealed that the Treasury Department reviewed its 1983 study and concluded “that lower oil prices would be good for the world economy, and that the problems such a development might create for oil exporters do not present a threat to the world trading or financial system.” Realizing that the market had not conformed to their expectations in 1983 and that U.S. allies Saudi Arabia and Great Britain had worked to hold prices up, the administration changed gears and began an all-out effort to “talk down” oil prices. Energy Secretary Hodel, in a speech to a London oil conference said pointedly, “Are [oil] customers seeing prices that are low enough?” Several weeks later, in response to OPEC efforts to maintain oil prices at the $29 per barrel level, Hodel took the highly public and unusual step of sending telexes to major oil companies in the United States criticizing OPEC’s effort “to manipulate the market by setting artificially high prices or by seeking to fashion arbitrary restrictions on production.” Sea Change Hodel’s comments were viewed as a clear sea change in U.S. policy. Jean Syrota, a high-ranking French energy official told U.S. Embassy officials that Hodel’s comments were the first time a top U.S. energy official had so specifically addressed the oil price issue. The U.S. 10 FEBRUARY 14, 1992