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

60. Paper Prepared in the Department of State¹

Washington, undated.

INTERNATIONAL ENERGY POLICY

I. The International Energy Program—Overview

Our principal policy objective vis-à-vis the other major oil importing countries continues to be the construction of a comprehensive framework of cooperation on energy. This effort is designed:

—to establish under US leadership a political and economic counterweight to OPEC, rejuvenating consumer country confidence in their ability to respond to the energy crisis and limiting the corrosive impact of the crisis on our overall relationship with other industrialized countries; and

—to accelerate the impact of market forces on both supply and demand and thereby weaken OPEC’s ability to maintain high prices over the medium term.

Our efforts in the ECG and later in the IEA have concentrated on (1) the establishment of an institutional framework for cooperation and the establishment of an emergency arrangement, and (2) the creation of a program of long-term cooperation in conservation and accelerated development of new energy.

A. Emergency Program: The first of these tasks is largely completed. The International Energy Agency is firmly in place, and the emergency program is in the final stages of implementation. The emergency program is designed to limit in the short-term the political and economic vulnerability we face as a result of excessive dependence on imported oil. It offers three major benefits:

—political unity: countries are committed in advance to share oil with any one country which is the target of a selective embargo;

—limitation of economic damage: prepositioned demand restraint programs and emergency supplies greatly enhance our collective ability to withstand the economic impact of an embargo; and

—strategic, diplomatic and military freedom of action: countries that are better protected against the political and economic disruption of an embargo thereby also are better protected against the potential military and diplomatic impact of an embargo, and are better able to retain their overall strategic freedom of action.

B. Long-Term Cooperation: By itself, however, the emergency program would have only limited validity over the medium-term. The IEA countries have recognized explicitly that a permanent solution to the problem of vulnerability can only be achieved by reducing dependence on imported oil.

On the demand side, we have achieved agreement on a 2 MMBD target for reduced consumption of imported oil by the end of 1975. Similar targets will be set for future years. While specific country quotas were not assigned for 1975, the US share of the overall target is the 1 MMBD saving established in the President’s program. This is roughly proportional to the US share of total IEA consumption.

On March 20, the IEA Governing Board reached agreement in principle on a coordinated system of cooperation in the accelerated development of new energy supplies.² As now agreed, this system will include:

—The pooling of national R & D efforts on a project by project basis;

—Cooperation in providing specific incentives to investors in high cost energy sources on a project by project basis; and

—Agreement to stimulate and safeguard investment in conventional nuclear and fossil fuel sources through a commitment not to allow imported oil to be sold domestically at less than a common agreed price.

The first two of these elements, while of potentially major importance, are relatively non-controversial. Joint R & D efforts will not only provide a highly visible vehicle for concrete cooperation but will also offer significant rationalization of costs. The second tier of cooperation would permit countries to share in the costs and benefits of synthetic fuels production and could, in some cases, be a natural follow-on to R & D cooperation. This element in the overall system is of particular importance to those IEA countries with little or no indigenous energy potential (outside nuclear) and who see political and economic value in having the possibility of access to development of tarsands, shale, coal, synthetics, etc.

C. Minimum Safeguard Price: This is the key element in the overall system. Under this agreement, countries would agree for a fixed period of years not to allow imported oil to be sold domestically at less than a common, pre-agreed price. This price will be set at a level high enough to stimulate and safeguard investment in the bulk of conventional nuclear and fossil fuel sources.

Process: The minimum safeguard agreement, together with the other elements of the overall system is now being elaborated in an IEA working group. The IEA Governing Board is scheduled to review the working group’s report and take decisions on all aspects of the program by July 1, 1975.

The major issues to be addressed in the USG and the IEA in elaborating the minimum safeguard agreement include:

1) Level—The March 20 discussion specified that the safeguard price aimed at stimulating and protecting investment in the bulk of conventional sources. The IEA working group is now elaborating a rough analysis of the various amounts of new energy (North Sea and North Slope oil, conventional coal, nuclear, etc.) estimated to be available at various price levels. (FEA is supplying up-dated cost estimates for the US.)

In the final analysis, however, the range of choice is not likely to be very wide. There is general agreement that the level should not be so low as to be trivial. On the other hand, there are strong political imperatives in all countries (including the U.S.) against setting a very high price.

2) Mechanisms: The March 20 agreement specifies that countries would be free to use measures of their own choice to mention [maintain?] the safeguard price, e.g. tariff, variable levy, quota, etc. The IEA Working Group is analyzing the trade and general economic implications of various measures with a view toward drawing up an agreed list from which countries could choose.

3) Timing: We will have to decide prior to July 1 whether we want to push for the prompt establishment of a maximum safeguard commitment, including the fixing of the level, or whether we would prefer to establish a standby commitment, leaving countries to establish the necessary mechanism only if the price actually breaks. There may be some argument for a standby type agreement, on the grounds that mechanisms, level, etc. can better be chosen when the medium-term market outlook clarifies.

On the other hand, the effectiveness of the safeguard price as a stimulus to investment would be weakened if the commitment to provide protection against imported oil is not explicit. Also, it would be considerably more difficult to obtain agreement in the future on a level sufficiently high to limit the risk of our giving a “free ride” to the Europeans and Japanese if the world price begins to decline.

4) Legislative requirements: The type of agreement we seek will probably require specific Congressional authorization. (The Executive may in fact have adequate statutory power to maintain a safeguard price, but Congress clearly expects the opportunity to review the program in detail.) Title IX of the Energy Independence Act³ would provide adequate legislative authority. The timing and strategy of a concerted push for this legislation will have to be carefully assessed over the next few months.

III. Relations with Oil Producers: Over the past year, we have concentrated on intensified bilateral contracts with key producer governments. Our principal objective has been to maximize our political and economic leverage by increasing the vested interests of these countries in strong bilateral ties with the U.S.

Until recently, we have been in a holding pattern on a multilateral dialogue, arguing successfully that consumer solidarity was an essential pre-condition to any multilateral producer/consumer dialogue. With the completion of the overall framework of consumer cooperation in March, we agreed to move to a preparatory meeting to lay the ground for a formal producer/consumer conference.

A. Prepcon: The preparatory meeting of April 7–15 reached an impasse over the basic issue of the scope of the formal conference. The US, EC, and Japan maintained that the conference should be centered on energy, covering as well a number of issues directly and indirectly related to energy. The seven OPEC/LDC delegations, acting as a single bloc, insisted that the conference must give equal treatment to other raw materials and problems of economic development as well as energy.

The two most significant conclusions to be drawn from the experience of the preparatory meeting are:

1) OPEC (particularly the more radical elements such as Algeria, Venezuela, and Libya) has little interest in discussing energy and will use the LDC issue to deflect such discussions. Thus, the strong OPEC/LDC alliance will make it very difficult to engage in an effective multilateral dialogue on energy, even agreement on our part to move forward simultaneously on other raw materials and development might not guarantee a substantive dialogue on energy.

2) Our efforts to achieve consumer solidarity have paid off. The consumers maintained an impressive unity at the prepcon. But there continues a strong desire among consumers for some sort of dialogue with producers, and unless we can devise some sort of multilateral mechanism for such contracts we risk seeing other consumers show new interest in the bilateral route.

B. Where Next: With the failure of the prepcon, the multilateral dialogue is at least temporarily checked. We will of course continue on the bilateral track and may find that our position with some of the key producers such as Iran and Saudi Arabia has been enhanced as a result of the failure of the prepcon. These producers have a real interest in discussing investment issues, for example, while the Algerians and Venezuelans are not going to acquire a significant stake in the industrialized countries’ economies.

However, we must also address the question of producer/consumer relations within the context of our objectives with other consumers. While other IEA countries supported the US, EC, and Japanese decision to hold fast to the notion of an energy-centered conference which was the major reason for the failure of the prepcon, the failure of the prepcon does leave a major gap in the IEA program. Therefore, there may be considerable pressure in the IEA to move forward directly in the establishment of a dialogue with producers, although the producers will reject this. More likely, we can expect pressure to agree to reconvene the prepcon, even at the price of agreeing to a much broader conference agenda than we were previously willing to accept.

We plan to pursue two parallel courses to meet this situation:

1. Isolation of Raw Materials Question—We will continue to stress willingness to participate in an energy centered conference. We will quietly resist reconvening the prepcon in the near future. We will use this time to move forward with our internal reassessment of raw materials policy, concerting our views with other industrialized countries in the OECD and with the more responsible members of the OPEC at the right time. We will then attempt to place the raw materials issue on a separate track, and then return to the question of a producer/consumer conference focused on energy-related matters. If coordinated bilateral discussions with key producers indicate an energy-centered conference can be held, we could proceed with a second try at it.

2. Coordination and Targeting of Bilaterals through the IEA—In order to satisfy IEA demands for a more active role vis-à-vis the producers, we will propose a process of closer IEA coordination of bilateral contracts with producers. We could attempt to agree on a common set of objectives and modalities for bilateral policies in selected areas of the producer/consumer relationship. Two possibly promising areas for such an approach are accelerated industrialization of producer country economies and aid to the MSA’s.

This approach would have several advantages:

—it would give internal political content to the IEA position in the producer/consumer relationship;

—if properly structured, it need not restrict US flexibility in bilateral relations with key producers; and

—it would help to ensure that the failure of the prepcon does not cause a loss of IEA political momentum in other areas such as long-term cooperation.

1. Source: Ford Library, National Security Council, Institutional Files, Box 112, International Economic Policy Review. Confidential. The Department of State submitted this paper for the International Economic Policy Review meeting, which took place May 2–3 at the Old Executive Office Building. Secretary of the Treasury Simon chaired the meeting, and the paper was prepared for the May 2, 11:15 a.m., session, “Energy: International Economic Implications.” The Departments of the Treasury, Defense, and Agriculture, as well as the Federal Energy Administration and the Office of Management and Budget also contributed papers, all of which are ibid.
2. See Document 48.
3. See footnote 3, Document 33.