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

6. Memorandum From the Chairman of the International Energy Review Group Working Group (Enders)¹

Washington, September 16, 1974.

TO

• The Secretary of State
• The Secretary of the Treasury
• The Secretary of Defense
• The Secretary of the Interior
• The Director of Central Intelligence
• The Chairman, Atomic Energy Commission
• The Chairman, Council of Economic Advisers
• Administrator, Federal Energy Administration
• The Assistant to the President for International Economic Policy
• Director, Office of Management and Budget

Status of IEP Negotiations

We are now at the final stages in the ECG negotiations of the integrated emergency program (now titled the International Energy Program). A special ECG Working Group has completed a draft text of an agreement which will be considered at the ECG meeting on September 19–20. (Tab A)²

This draft pulls together in one broad agreement all the work which has been going forward under the ECG, including an emergency program, a long-term effort to reduce dependency on imported oil, and a mechanism and procedures for relations with the international oil companies.

Emergency Program

The emergency program consists of three major interrelated commitments: (1) a common level of stocks; (2) packages of measures to restrain demand by a common amount in an emergency; and (3) an allocation system to spread the shortfall evenly among the participants.

In terms of U.S. interests, the basic purpose of the agreement is to create strong basis for the consumer solidarity essential to shift the balance of power vis-à-vis the producing countries.

But there are a number of specific features of interest to us:

—Balance of Advantage: The agreement increases our oil security by committing the Europeans and Japanese to increase stocks significantly—and to restrain demand in an emergency. The attached tables (Tab B) show the amount of oil which would be available to the U.S. under various types of supply emergencies. Under almost all of these we do better than could be expected in the absence of an emergency program. As these tables show, the IEP would have been of benefit to us during the last crisis.

—Protection Against Selective Embargoes: Other members are committed to come to the aid of any one or more countries singled out by a producer embargo.

—Automaticity: No political decision will be required to activate the program when crisis occurs—a fatal weakness of earlier emergency planning. Rather, the program will be activated automatically when quantitative criteria are met unless a strong majority of the countries agree to reverse the trigger.

—Avoidance of Political and Price Strains: By establishing in advance rules for behavior during an emergency we should minimize the type of corrosive damage to our overall political-economic relationships which occurred during the last crisis. Moreover, by controlling some 80 to 90 percent of world demand in a crisis, we should be able to moderate greatly the price explosion of the sort which occurred during the last embargo.

—Long-Term Cooperation: The agreement will also provide a strong commitment to cooperative programs to reduce dependency on imported oil over the longer-term. Specific joint R and D projects are already agreed to in principle. We will have an institutional framework for joint action in the areas of conservation, the accelerated development of alternative sources of energy, uranium enrichment, etc. Once the overall package, including the urgently needed emergency program, is in place we intend to take the same strong initiative to develop the long-term area that we have taken on the emergency plan.

—Companies: The agreement will establish an intergovernmental information exchange mechanism to meet European and Japanese demands for greater “transparency” in the international oil industry. It will also establish a framework for consultations with individual companies on a problem by problem basis. We have taken care in setting up this program to prevent any erosion of competition within the industry and to ensure compliance with U.S. anti-trust and other laws. We have consulted closely with the U.S. majors on this aspect of the program—as well as on the emergency measures. They have indicated that the information requirements are generally acceptable. They have also responded positively to the emergency program which they believe will get them out of the middle in disputes between importing countries over who should get oil.

Position of Other Potential IEP Members:

As of now there appears to be solid support for prompt conclusion of the IEP agreement among the twelve ECG countries except Norway.

For Norway the IEP poses potentially serious political problems, and nationalistic tension on oil (“hands off the North Sea”) causes the Norwegian Government to reserve its position on the IEP. A decision by Norway not to participate would not be fatal to the IEP, but it would be damaging. Under continuous pressure from us Norway is now showing some signs of coming along, but won’t be ready to join by September 19/20. Our tactic will be to try to get the Norwegians to down play their reserve while preserving a way for them to come on later.

Several other OECD countries which are not in the ECG have already shown strong interest in becoming full IEP members. These include Switzerland and Sweden, who may ask for charter member status, and Australia and New Zealand who have the IEP under full government review. Austria and Spain have also stated interest in exploring IEP membership. We have said that we will support IEP membership for any OECD country which can satisfy the group that it is ready and able to assume all obligations.

France is still negative; but not on the offensive. Canada and possibly Japan will be reluctant to commit themselves finally without the French, but as of now we doubt that they will be willing to take the onus for holding the whole exercise up.

Present Timetable

We have agreed in the ECG to try to place the IEP under the general auspices of the OECD. We would create a new, virtually autonomous agency under the general umbrella of the OECD. The creation of this new International Energy Agency to run the IEP will require approval by the OECD Council, subject to veto by any member.

Here the only potential serious problem is France. In theory, the French could veto setting-up the new agency. As of now, this is not a likely development. But to hedge against it, we have insisted that the IEP is non-negotiable in the OECD. If the OECD Council vote is not promptly forthcoming, we would have to proceed to set up a permanent structure to run the IEP. The other ECG countries are reluctant to face this contingency but probably could be brought along.

At this next meeting on September 19–20, we are aiming for complete agreement on the IEP text at the ECG level. We will then point toward a final meeting of the ECG in the first half of October at which the IEP will be formally approved. This meeting could possibly be held in Paris back to back with an OECD Council meeting to establish the new agency. Our objective remains to have the IEP in place by November 1.

We will begin to move ahead immediately in the long-term area, concentrating initially on conservation and R and D. In the conservation area, we will aim for group targets and commitments on limiting the growth of oil consumption. The new Agency will have a strong policy capability to develop and coordinate additional cooperative R and D activities. We already have agreement in principle to carry out ten specific R and D projects. A viable long-term cooperative program to reduce dependency on imported oil is the essential second step in redressing the producer/consumer power balance.

Remaining Issues:

We have a few issues still to resolve. These are difficult but should not present any insurmountable obstacles to agreement.

—Trigger Levels: The present draft provides for a seven percent threshold (supply shortfall) for both a selective embargo (allocation of oil) and the general crisis situation (allocation plus mandatory demand restraint). It also provides that the selective trigger shall apply to major regions of those countries whose petroleum distribution systems are not completely integrated (U.S. and Canada). This formulation is fully acceptable to us since it gives us a relatively low selective trigger level. But this question is likely to be reopened by other countries at the next ECG. If necessary, we would propose to agree on a straight 5 percent selective trigger—which limits our self-risk to some 850,000 barrels/day—and a general trigger of either 5 or 7 percent. Agreement along these lines should be attainable.

—Voting: We have an ECG consensus that voting should be weighed on the basis of oil consumption and that no one country (US) or group of countries (EC) should have a veto. Putting these general principles into specific voting formulations is not easy, but we appear to have a basis for agreement at the September 19–20 meeting.

—Form of Agreement: We want a firm international agreement setting forth the basic commitments of participation. The U.K., Ireland, and Canada would prefer a memorandum of understanding, which they describe as morally binding. The Japanese want to put the IEP into force through the OECD Council decision setting up the new agency. They claim this would bind them to the agreement but would enable them to avoid going to the Diet for approval. The others are generally prepared to accept a formal international agreement. On the basis of the discussion at the September 3–7 Working Group, it appears likely that we can agree on entry into force procedures that will meet the constitutional and political problems of all countries while preserving the legally binding character of the present draft.

U.S. Congress and Legislation:

We have consulted with more than 50 Senators and Congressmen on the IEP and our objectives in the negotiation. The reaction to the basic idea has been almost universally positive. Most members allow that implementing legislation (standby authority for consumption restraint in particular) will be controversial. But the most commonly voiced view is that legislation to implement a firm agreement among others will pass in the next session.

We believe that, if absolutely necessary, the U.S.G. has sufficient legislative authority (Defense Production Act, Trading with the Enemy Act, Trade Expansion Act, and Emergency Petroleum Allocation Act) to meet its obligations under the IEP if an emergency should occur soon after signing. However, specific legislative authority is needed over the longer-term, and we would propose to go to the Congress for legislation in the following areas:

1. demand restraint measures, including rationing, by FEA regulation,

2. utilization of stand-by production, increase of production rates over MER, adjustment of refinery operations, mandatory fuel-switching,

3. fulfillment of international allocation obligations, either voluntarily or under FEA regulation, with appropriate anti-trust exemptions,

4. collection and exchange of energy information.

1. Source: National Archives, RG 59, Central Foreign Policy Files, P820053–0736. Confidential. Drafted by Enders and Bosworth on September 12. The IERG was established pursuant to NSDM 244, February 8. See Foreign Relations, 1969–1976, volume XXXVI, Energy Crisis, 1969–1974, Document 310.
2. Tabs A and B are attached but not printed. Regarding the meeting of the Energy Coordinating Group, see footnote 6, Document 9.