Foreign Relations of the United States, 1969–1976, Volume XXXVII, Energy Crisis, 1974–1980

203. Memorandum From Rutherford Poats of the National Security Council Staff to Henry Owen of the National Security Council Staff¹

Washington, April 30, 1979.

SUBJECT

• Output of Energy Working Group for Economic Summit

Two and one-half days of committee drafting (including a session ending at 2:25 a.m.) produced the attached energy issues paper (Tab A)² for your Summit Preparatory Group. It is so written that communiqué material can be readily excerpted; however, the group refused, on the basis on instructions uniformly differing with mine, actually to draft the energy section of the communiqué. In fact, no other delegation came to the meeting with specific proposals for action at the Summit.

We agreed to meet on May 23 in Paris, immediately after the IEA Ministerial meeting, to draft the communiqué language in the light of IEA decisions and the Preparatory Group comments.

Much of the debate was devoted to two of the proposals that I submitted in writing and one contained in the Japanese draft of the issues paper:

—Our proposal of continued restraint on oil demand beyond 1979;

—Our proposal of an international finance corporation to lend at market rates directly to commercial scale energy project enterprises employing innovative technologies.

—The Japanese proposal to invite a resumption of multilateral dialogue between oil producer and consumer nations.

Differing views of the weight to give the Three-Mile Island incident³ in pronouncing on the nuclear option also consumed many hours. The result is at Tab A, paragraph 17–D, Nuclear.

We reached general agreement on continued oil demand restraint, as reflected in the first strategy statement (paragraph 16(i)) and first concrete policy guideline (paragraph 17(a)(1)(i)). I believe the communiqué language I submitted (Tab B)⁴ can be adopted, after haggling over the Mexican “out” for the US.

No delegation was ready to endorse our new IFI for energy commercialization without a detailed paper and governmental study, but Amaya personally supported it and McPhail was very positive. Lantzke of IEA also was enthusiastic. The text of my proposed communiqué language on this initiative is at Tab C.⁵ Note that it does not estimate total capitalization. I did not pass out the Treasury paper because it contained capitalization figures (contrary to Stu’s instructions to avoid numbers), implied that the institution would finance pre-commercialization projects, and was too heavy on technologies of primarily US interest or source. Despite these precautions, the Japanese evidently briefed the press during the last day of the meeting, leading to at least one news account that included the $20 billion figure. I am baffled as to the source of that number, unless it was retained by Sawada from his prior meeting with us in Washington.

I promised to send to each member of the working group by the end of this week a paper stating the rationale, functional fields, financing methods, capitalization, etc., of the proposed international energy finance corporation. Chairman Amaya urged that this paper express a firm USG proposal, subject only to Presidential review in the light of responses from the other six governments. As you know, I could not present a firm US proposal at Hakone because of OMB reservations.

The paper should spell out answers to the following questions, which I fielded orally at Hakone:

—What evidence do you have that ad hoc arrangements won’t be sufficient, that is, that the number of large commercialization projects requiring public international financing will be great enough to warrant the struggle to create a new IFI? Why not use the same informal consortium arrangement we use for grant-supported demonstration projects?

—What’s in it for us? The technologies you mention are either US or German, and your proposal states that a project could be in an LDC that is not a subscribing member of the finance corporation, and the assisted sponsors must agree to license the technologies to all comers on non-discriminatory and reasonable terms. So why should my country put up money?

—Private money will be available when output costs minus subsidies are seen to be equal to oil or gas prices. Until that is sure, you will need to offer subsidies (grants or off-take contracts) more generous than market rate loans to induce private companies to risk big money on commercialization projects. A lending corporation can’t solve this problem.

—In some cases, commercialization projects will be sponsored by state corporations such as utilities, which don’t need to borrow internationally; if the project makes sense, their parent governments will or should put up the loan capital.

—How can we make it attractive to OPEC governments to subscribe capital?

—Can we create an international finance institution to support innovative energy projects while continuing to refuse public financing for other high-risk energy investments, such as oil exploration?

My answers satisfied some members of the working group, but I doubt that Sir Jack Rampton, the British delegation head, or Francois de Wissocq, the French Director General of Energy, was persuaded. The most persuasive argument in our favor is this: The world will need the equivalent in energy supply capacity of a present Saudi Arabia about every 10 years beginning around 1990; only wide commercial application of several new technologies starting in the 1980s can promise that; we would be reckless to count on private investment decisions on commercialization of new technologies to be made early enough in the 1980s to lay the basis for a broad proliferation of commercial applications by 1990.

1. Source: Carter Library, National Security Affairs, Staff Material, International Economics File, Box 45, Rutherford Poats File, Chron, 4/12–30/79. Confidential. Copies were sent to Schlesinger, O’Leary, Cooper, Solomon, Katz, Brzezinski, Eizenstat, Press, Schirmer, and Cutler.
2. Tabs A–C are attached but not printed. Poats is presumably referring to meetings of the Amaya group. See footnote 2, Document 201.
3. The core of the nuclear power plant on the Susquehanna River near Harrisburg, Pennsylvania, experienced a partial meltdown on March 28. It was the worst nuclear accident in U.S. history.
4. The “Oil Import Restraint” statement at Tab B reads: “The heads of government reaffirm their commitments to achieve as early as possible in 1979 reduction of their nations’ demand for oil on the world market by the equivalent of 5% of previously projected 1979 oil consumption. Looking beyond 1979 they agreed that, irrespective of the recovery of Iranian oil production, there will continue to be a need to ease demand and price pressures on the world oil market. The seven governments will take individual and cooperative action to restrain demand for oil, increase production of oil, and expand production and use of alternative fuels, so as to avoid significant increases in their demand for oil from traditional suppliers while their economies continue to grow.”
5. The text at Tab C reads in part: “In order to assure that diverse, adapted technologies are ready for large-scale, privately-financed investment in the 1990s, the first generation of commercial applications should be operating by the mid-1980s. Accordingly, governments should act now to assure project financing to competent enterprises willing to take a substantial share of the investment risk in establishing commercial-scale projects employing innovative energy technologies. The seven heads of government decided, therefore to appoint representatives to prepare the charter of an international corporation which would provide or guarantee long-term loan capital at market interest rates to selected energy production projects.”