119. Memorandum From Chester A. Crocker of the National Security Council Staff to Richard T. Kennedy of the National Security Council Staff1

  • SUBJECT
    • State Paper on the Energy Crisis

You were correct in surmising that the attached study2 is fascinating. State’s paper covers the whole spectrum of oil and energy related issues—trends in attitudes and bargaining power among the oil-producing countries, consuming countries and oil companies; current issues in the OPEC talks; projections of reserves, investment requirements, production costs and pricing; alternative energy sources; and ways of dealing with the “crisis.”

The thrust of the study is conveyed by its title—we face the likely prospect of an energy crisis over the coming decade. Unless corrective action is taken we will be facing by mid-decade a “permanent sellers market” for the oil produced by a primarily Arab cartel which controls ⅔ to ¾ of the non-Communist world’s known reserves. By 1980 we will have to import 50% of our projected requirements, primarily from Arab producers; there is little prospect of increased domestic production without conscious and determined USG and company effort and changes of policy. (The prospects for our European and Japanese allies [Page 290]are even worse.) For the U.S., the balance of payments impact of this level of imports by 1980 is estimated at between $6.5 billion (current prices) and $25 billion (U.S. domestic prices). The study concludes that sellers market conditions caused by worldwide production and consumption trends will not only cause prices to rise (theoretically to the level of costs for producing oil from sands and shale), but will drastically reduce the bargaining power of international companies and consuming nations. These trends could eliminate or radically alter the companies’ role.

To deal with this “impending crisis,” the State study suggests a number of actions for consideration by the Oil Policy Committee and the Domestic Council, to gradually reduce our dependence on foreign oil. They include:

  • —encourage companies to recognize the urgency of forestalling forced “participation” or nationalization by OPEC, by offering new arrangements to producing countries for the period after the expiration of the Tehran accords;2 and to broaden international participation in production arrangements.
  • U.S. diplomatic initiatives in the OPEC context to assure maximum security of oil supplies, and respect for existing agreements.
  • U.S. diplomatic efforts in the OECD context to encourage more serious study of energy problems, capital needs, diversification of supply possibilities, desirability of increased stocks of oil, alternative energy possibilities (atomic power).
  • —serious efforts to conclude energy agreements with Canada, Venezuela, and other Western Hemisphere producers to increase oil supplies from these sources.
  • —a determined national effort to increase domestic oil production by changes in licensing and oil lease policies, encouraging exploitation of secondary and tertiary reserves, etc.
  • —encourage more “rational” use of our energy supplies by fostering mass transit, discouraging wasteful forms of consumption, raising gasoline taxes, etc.
  • —encourage development of alternative energy sources—atomic power.

Comment:

While some of the analysis may be imperfect and some of the recommendations extreme, I think the study should be taken very seriously indeed—particularly the general recommendations that the issue be given greater priority and that more concentrated decision-making authority on energy matters be developed within the USG. The study’s key premises—that the problem of dependence on the Arabs may well reach crisis proportions and that there are things we can do about it—are valid in my view.

  1. Source: National Archives, Nixon Presidential Materials, NSC Files, NSC Institutional Files (H-Files), Box H–197, National Security Study Memoranda, NSSM 174 (Response). Secret. Sent for information. An attached handwritten note from Kennedy to Crocker reads: “Thanks—an excellent summary. Please ask Bob Hormats how this is being handled. (I understand it has been referred to Peter FlaniganCIEP). When and how will NSC staff input be made? What is the implication for oceans policy and Law of the Sea? Have the national security implications been examined fully? What are the long range and foreign policy implications vis-à-vis Arabs, Europe, and our Hemispheric friends? Does this suggest any important changes in the thrust of our policies toward them? RTK
  2. Entitled “The U.S. and the Impending Energy Crisis,” March 9, and summarized in Document 116. The NSC Staff’s completed assessment of this paper, including an analytical summary, is Document 128.
  3. See Document 86.