127. Memorandum From Robert D. Hormats, Richard T. Kennedy, and John D. Walsh of the National Security Council Staff to the President’s Assistant for National Security Affairs (Kissinger)1

  • SUBJECT
    • Foreign Policy Ramifications of U.S. Oil Policy

Introduction and Summary

Secretary Rogers has submitted to the President a State Department study of “U.S. policy and the impending energy crisis.” (The study, together with our summary and the Secretary’s covering memo, is at Tab D.)2 State’s study includes “suggested actions” to meet the problem, and indicates that these suggestions are being put forward for consideration by OEP’s Oil Policy Committee and by the Domestic Council’s Subcommittee on Energy.

The State Department paper makes the case that we face the likely prospect of an energy crisis over the coming decade. The facets of this crisis will include:

  • —a permanent sellers market for oil produced by a primarily Arab cartel.
  • —growing U.S. oil import requirements, largely from the Middle East, with attendant political and balance of payments costs of increased import dependence.
  • —elimination or reduction of the leverage and lucrative earnings of the international oil companies.

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State argues that its proposal could significantly alter the prospects for 1980. In effect, State wants policies which would minimize the potentially damaging influence of oil problems by reducing our dependence on imported, especially Middle East, oil. Though it is debatable whether much could be achieved along these lines before 1980, we agree that a start should be made.

The Political Dissension

The problem with State’s paper is that it addresses the energy crisis in essentially technical terms. We consider that the oil problem has political ramifications of direct and fundamental importance to U.S. foreign policy—and will increasingly do so in the years a head. What is needed is sharper analysis of its political consequences and the political fallout from alternative courses for dealing with it. In the absence of a broad political review, we foresee a real risk that our policy will be shaped by ad hoc country-by-country (and company-by-company) decisions reflecting the full weight of parochial interests within the USG.

The case for reviewing the energy crisis in political terms is as follows:

1.
The past few years have seen a decisive shift in the balance of power away from the oil companies and consuming countries and in favor of the producing states. In origin a result of supply and demand factors, this trend has fed on anti-western nationalism and the demonstrated vulnerability of foreign oil concessions in areas of political turmoil. Today, key Middle East states are able to play the companies (and the consumers) off against each other, where formerly it was the Arabs who could be so manipulated.
2.
The new leverage of producing states has led directly to sharply increased oil prices and to growing demands for “participation” in lucrative foreign concessions. It may soon eliminate the current role of private western companies in Middle East oil production. But the most politically significant development is an emerging Arab capacity to sustain financially a total embargo on oil shipments over a protracted period. The growing financial reserves of Middle East producers have made oil a weapon for coercion or blackmail that we can no longer dismiss.
3.
This shift in power introduces a new factor into the Arab-Israel equation, creating the potential for serious Arab pressure on the U.S. and on our principal allies. Moreover, since European and Japanese dependence on Middle East oil will continue to be far greater than ours, effective Arab leverage will increasingly represent a divisive factor in overall relationships with our allies, and points to further divergence of views on the Arab-Israeli situation.
4.
The prospects for enhanced Soviet pressure and influence are clear. We can no longer assume that the Arabs’ need for exports will ensure [Page 306]their resistance to Soviet and radical pressures to cut the flow of oil for political purposes. Moreover, growing Soviet export commitments, and the cost of developing Soviet reserves, suggest that Moscow may increasingly offer an alternative middle man for Arab oil.
5.
Supply and demand pressures are approaching the point where all major energy importers are anxious to secure supplies. Growing talk of “energy blocs” bolsters the leverage of producing states. Soviet offers of “secure” supplies to Europe and Japan are a direct result of this process. Again, the political implications for our alliance relationships suggest the need for serious attention to oil policy. As an increasingly import-dependent consumer, the U.S. must also weigh carefully the pros and cons of the “energy bloc” approach reflected in pressures for Western Hemisphere preferences.
6.
The economic pressures of the energy crisis could produce their own political dynamics. Our balance of payments position is affected by oil in two ways—by the currently substantial earnings of U.S. companies overseas and by the price of oil we import. (State calculates that price increases and our growing import requirements will have an adverse payments impact of $6.5 to $25 billion by 1980.) It is prudent to recognize that balance of payments problems approaching this order of magnitude could generate further domestic pressure on the costs of U.S. foreign policy. U.S. military deployments overseas and our economic aid program could become vulnerable targets.
7.
The energy crisis has a direct security dimension in our desire to limit dependence on a volatile nationalistic region such as the Middle East. At the same time, there is little evidence that any other region can begin to rival that area’s reserves (currently 2/3rds to 3/4ths of global reserves). State’s proposals for expanding U.S. production run into the security hazards of “draining America first.” These factors may suggest the need for greater urgency in diversifying away from oil as an energy source.

Where We Go From Here

State’s paper is a useful beginning, but it should be folded into a broader review addressing the sorts of issues we have outlined. State urges that greater USG attention be given to oil policy, and proposes a concentration of decision-making authority for all forms of energy in OEP’s Oil Policy Committee—pending formation of the new Department of Natural Resources proposed by the President.

We think top priority should be given now to addressing the overall foreign policy ramifications of oil policy. Strong support for this view is contained in Senator Jackson’s recent letter to the President (Tab E)3 urging [Page 307]an NSC review of “the national security, foreign policy and domestic energy policy implications of our growing dependence on imported crude oil and petroleum products from the Middle East and elsewhere.” The Senator’s letter indicates that he plans hearings on our international oil policy in the near future.

In light of his key role in oil matters, Peter Flanigan has action on the State paper. Nevertheless, we consider that oil issues are now so basic to U.S. foreign policy that it is appropriate for you to indicate your concern to Flanigan and propose a joint NSCCIEP review. Such a review is desirable now (1) to lessen the risk that ad hoc decisions could jeopardize our broader interests, (2) to ensure a balanced and thorough review of the issues we have raised, and (3) to capitalize on the opportunity, presented by public and Congressional interest, for you to emphasize the fundamental foreign policy dimensions of oil policy.

We have drafted a memorandum from you to Flanigan at Tab A. It asks him to co-sign a memorandum to the President (Tab B)4 recommending that he approve a joint study. Our proposed NSSM is at Tab C.5

Recommendation

That you sign the memorandum to Peter Flanigan at Tab A.

  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 action. Concurred in by Jorden, Saunders, and Sonnenfeldt. Printed from an uninitialed copy.
  2. Rogers’ covering memorandum is Document 116. The study is attached but not printed. The summary is Document 128.
  3. Attached but not printed is the June 13 letter.
  4. Neither Tab A nor B is attached.
  5. The proposed NSSM, “U.S. International Oil Policy,” is attached but not printed. In an August 4 memorandum, NSC Staff member Jonathan Colby informed Kennedy that the proposed NSSM was stalled by Saunders, Hormats, Odeen, and Hyland (acting for Sonnenfeldt). They thought the proposed NSSM placed an insufficient emphasis on economic and balance-of-payment questions, were reluctant to involve Kissinger, and felt the timing was poor. Odeen also thought the proposed NSSM was too political. (National Archives, Nixon Presidential Materials, NSC Files, NSC Institutional Files (H-Files), Box H–197, National Security Study Memoranda, NSSM 174 (Response))