36. Memorandum From Robert Hormats and Robert Oakley of the National Security Council Staff to Secretary of State Kissinger1
SUBJECT
- Consumer/Producer Dialogue
You have had considerable success to date in persuading the consumers to go along with our policies on international energy and recycling matters. However, pressures are building which could lead to divisions among the consumers. These could jeopardize our ability to get the essentials of what we want in the way of consumer policies and consumer solidarity.
—Concern in Europe that, because of differences between the Congress and the Executive Branch and serious domestic economic problems, the United States will be unable to deliver on its commitments, e.g., the “financial safety net.”
—A growing number of bilateral deals between oil producers and individual European countries (France, the UK, Germany and Italy). Some of these involve the sale of oil at below market prices. Such arrangements dilute enthusiasm for consumer cooperation and hold out the hope that the oil producers have a greater ability and will to aid Western Europe than does the US.
—The progressive weakening of the economies of Western Europe raising the prospects of new trade barriers, or other “beggar-thy-neighbor” policies, which will further weaken consumer cooperation.
—An increase in producer pressure on certain consumers, expressly designed to counter what the producers perceive as a United States wish to somehow “break” the producer position by trying to delay consumer-producer dialogue while we build up enough consumer solidarity for a successful confrontation with the producers. (This perception stems from several factors: our overall lack of enthusiasm about a producer-consumer conference, our lack of progress in beginning a serious bilateral dialogue with the producers on economic problems other than price; what is misunderstood as our threats to use military force, and the impression given in the Joint Commissions that [Page 120] we are stalling and do not want to get down to effecting specific projects.) We have reports of Saudi and Iranian operations with Italy, the UK and other countries where there is a clear link between large loans and other financial benefits from the producers and sympathetic policies from the consumers.
To counter these trends before they pose a serious threat to our economic strategy and before they begin to raise questions about our basic political relationship in the minds of leaders like the Shah and King Faisal, we suggest that the United States:
—Begin right away a series of bilateral talks at high levels with key producer governments (Iran, Saudi Arabia, Algeria, Kuwait, Nigeria and Venezuela) in order to have in-depth exchanges on the major themes outlined below. This would be in keeping with what you have already arranged between Shultz and the Shah and with the visit by a “senior colleague” to Algiers. If at all possible, these talks should take place prior to the OPEC “summit” in Algiers in mid-February.2
—Shift the immediate emphasis of our discussions with the producers from price to financial issues (without abandoning pressures for a lower price). Whether or not the price of oil is lowered, recycling poses massive problems, as does the large-scale transfer of resources to producers. While the producers feel compelled to maintain unity of price, they are far from unified on financial matters. We would have the opportunity to wean the moderates from the radicals on this issue. Saudi and Iranian acceptance of suggestions for a scheme of delayed oil payments (e.g., 75% now, 25% later) with a low interest rate and a long repayment period on the unpaid portion would effectively lower the oil price by nearly 25%. Both countries could do this without appearing to “break” the cartel.
—Begin to develop a strategy of rewards and punishments to cajole countries into producing more oil and, therefore, to put downward pressure on price. There is presently over 7 million barrels of “shut-in” oil capacity. Foreign exchange needs have already forced countries like Ecuador to increase pumping. A selective World Bank voting policy and Ex-Im lending policy to restrict loans to those countries with excessive shut-in policy would provide additional incentives. We could provide special considerations to countries which agree to increase percentage of capacity utilized.
—Engage in discussion with the holders of large amounts of reserves on “ground rules” for investment in industrialized countries. Trying to reach agreement on general guidelines on what percentage of what types of companies would be tolerable and on fair treatment [Page 121] (guarantees) for investment would have a highly beneficial reaction in countries such as Saudi Arabia, Kuwait or Iran. Moreover, it would better enable the US to attract continuing high levels of investment from the producers, investment which we need but which can be scared away by the absence of clearly understood guidelines.
—Seek common objectives and perhaps parallel programs for aid to developing countries taking advantage of international development institutions which can utilize OPEC funds in the most efficient way, and work toward getting maximum amount of concessional development funds from OPEC countries. This, too, would have the effect of lowering prices and the build up of OPEC revenues.
- Source: Ford Library, National Security Adviser, Presidential Subject File, Box 4, Energy (5). No classification marking. Sent for information. At the top of the page, Kissinger wrote: “Want to have oil group meeting, Burns, Simon, Robinson, Enders, early in the week. Want to discuss this paper which is good.”↩
- The OPEC summit was held March 3–6. See Document 48.↩