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

233. Memorandum From the Director of the Policy Planning Staff (Lake), the Deputy Assistant Secretary of State for Economic and Business Affairs (Hormats), and the Assistant Secretary of State for International Organization Affairs (Maynes) to Secretary of State Vance¹

Washington, September 6, 1979.

Energy Proposals

While we are not ready at this point to recommend specific actions in the energy area, a number of ideas have been considered in the Department. These relate specifically to the problems of a) a producer-consumer arrangement to stabilize world oil prices and supplies, b) financing energy exploration and development in LDCs, and c) improved interagency coordination of US energy activities affecting developing countries.

Price and Supply

One proposal for a producer-consumer arrangement to stabilize prices and supplies is to negotiate a commodity agreement for oil. Such an agreement would include a) an agreed formula to maintain or gradually increase the real price of oil, b) a possible premium for incremental production above present levels, c) international oil stock building in periods of slack demand, to be used in the event of an emergency such as the Iranian cut-off, d) fees and/or direct OPEC and industrial country contributions to a fund to finance LDC oil stock building and energy development, e) regular consultation and exchange of information on national oil production and consumption plans. Consumers would agree not to import oil above the agreed price and to embargo oil from producers who disrupt supplies for political reasons.

Such an arrangement could give the oil producers what they at least say they want: inflation-proof income from their oil. Consumers would have some assurance of stable prices and supplies for the duration of the agreement. The LDC’s would stand to gain from the financing program and from the real clout which an oil commodity agreement, if it becomes a member, could give to the Common Fund.

The advantage of an international commodity agreement for oil is that it would bring OPEC into an international process for considering price and supply, and thus make the world oil market less subject strictly to the balance of forces between hawks and doves within OPEC, the whims of individual producers, and the day-to-day state of relations between a major consumer such as the U.S. and a key producer like Saudi Arabia.

The question is whether such an agreement would hold sufficient attraction for key OPEC members to overcome their heretofore firm resistance to outside influence on their production and pricing policies. Much more modest efforts to draw OPEC into discussions of supply and demand trends in world energy markets, with no direct reference to price, have been strongly resisted. Moreover, there is a question of whether such an agreement would be meaningful without the addition of spare production capacity by key producers such as Saudi Arabia. An international commodity agreement of the sort postulated would ensure that prices increase during periods of market slackness, but might well be ignored by oil producers when because of deliberate decisions on production or capacity, or unforeseen events such as those occurring in Iran, market conditions are tight. Consuming countries, desperate for scarce oil, would have little leverage, except the weight of the agreement itself, to prevent higher-than-agreed-upon price increases. (Today we do not even have that leverage.) Producers would have to pay the political price of having broken their word and abrogating an international agreement.

And if the agreement were to break down, there would still be considerable pressure on the developed countries to continue to live up to their part of the bargain to finance LDC energy development.

Additional Support for LDC Energy Development

According to INR, Lopez Portillo is going to propose in his UNGA speech, a universal dialogue on energy consumption, production, marketing and transport and relating energy problems to other economic issues.² What form this dialogue should take is not clear. In addition he will call for creation of a special fund to finance development of energy resources, especially in developing countries. The U.S. needs to come up with an appropriate response or a counter proposal before the end of September.

IDCA has proposed the establishment of an international energy bank with annual operating capital of $2–$3 billion, to finance energy research, exploration development and training in developing countries. Henry Owen and Dick Cooper feel strongly that even if the proposal has merits per se, proposing it to Congress at this time could jeopardize the President’s domestic energy program.

A proposal which has apparently not been given serious consideration by the Administration but is under discussion in the House Ways and Means Committee, is to give preferential tax credit treatment for income from oil exploration and development in non-OPEC developing countries. Through a series of recent rulings, IRS has considerably tightened its definition of creditable foreign income “taxes”. At least one major US oil company has protested that these rulings will make oil exploration in many LDC’s unattractive, and unprofitable. Giving differentiated tax treatment, i.e., exempting the non-OPEC LDC’s from these rulings, would be consistent both with our interest in helping the LDC’s with their energy problems and in encouraging the development of potential sources of US oil imports outside OPEC. We know from past history in the Middle East that tax considerations are a critical factor in determining where oil companies invest.

At the same time, it would be confrontational with respect to OPEC as a group and damage relations with countries such as Indonesia, Nigeria and Venezuela. It would not be consistent with our interest in expanding global oil supply, including OPEC supply, in order to moderate pressures on the world price.

The US delegation to UNCSTD was authorized to invite the World Bank as part of its on-going efforts to coordinate energy assistance efforts to developing countries, to review existing research, development and training in national and regional energy facilities in developing countries; identify any gaps that may exist; and recommend possible new approaches and institutional arrangements. This proposal was not formally presented at UNCSTD, and you may want to include it in your UNGA speech.³

In addition, we can give a high priority to energy in the AID and ISTC budgets; continue to support expanded MDB programs in this area as their expertise and ability to manage energy projects grows, and improve the coordination of domestic agency programs that affect LDC energy interests.

Agency Roles in Developing Country Energy Programs

Several USG agencies have policy or program concerns in the LDC energy area. While effective informal coordination has been possible in some instances, considerable friction has developed between DOE and AID over which agency should have primary, or major responsibilities for undertaking programs in the LDCs, with each arguing on the basis of their respective energy and development mandates. This question of agency responsibilities is closely related to other issues:

—Energy programs in non-AID countries: the U.S. should be able to undertake energy programs with developing countries not currently receiving AID assistance (and has to some extent on an ad hoc basis). At issue is what form this assistance should take and where within the USG the capability should be housed.

—Legislative authorities: we need revisions in existing legislation which contains duplicative and overlapping authorities for energy programs with developing countries.

—Coordination: close coordination of activities among agencies is needed so that our overall foreign policy objectives are effectively served. A key question is what type of mechanism would best serve this purpose.

IDCA is perhaps the logical agency to take the lead in establishing a permanent coordinating mechanism and drawing up a set of proposed legislative changes.

1. Source: National Archives, RG 59, Central Foreign Policy Files, P790149–2411. Confidential. Drafted by Lissakers and sent through Cooper. A stamped notation indicates Vance saw it.
2. See footnote 5, Document 236.
3. The UN Conference on Science and Technology for Development met in Vienna August 20–31. See Yearbook of the United Nations, 1979, pp. 633–651. President Carter did not address the UN General Assembly, but Secretary Vance, in a speech to the General Assembly on September 24, noted U.S. support for global negotiations aimed at stabilizing the price and supply of oil. For the text of his speech, see Department of State Bulletin, November 1979, pp. 1–6.