128. Paper Prepared by the National Security Council Staff1

ANALYTICAL SUMMARY

The thrust of the study is conveyed by its title:2 we face the likely prospect of an energy crisis over the coming decade.

[Omitted here is a summary of the Department of State paper based on Document 127.]

Key State Recommendations

1. State should outline to the oil companies USG views on probable developments in the world oil market over the coming decade, and encourage them to consider new relationships with OPEC producers after 1976 when last year’s Tehran accords3 expire. Encouragement should also be given to enlarging existing consortia to include companies from major oil consuming nations such as Germany, Italy, and Japan.

Comment: State is already doing some of these things in a routine, low key way, but a good case can be made that they should be done more vigorously. As the study notes, existing concessions are unlikely to last through 1976, and pressures for further oil price increases and for new company/government relationships are growing inexorably. There is substantial evidence from within the oil industry that companies could have been more imaginative in responding to nationalist pressures—e.g., for government participation in concessions—and in directing them to constructive channels. There is a major debate within the industry itself as to how it can relate to the changed essentially political demands of the producing countries.

Before the USG takes sides in this debate, we need to know within the USG what role is feasible for the companies in the coming decade. The purpose here is to know what advice to offer, and to avoid becoming tied to unrealistic and possible counterproductive company policies. The State Department—and the rest of the USG oil community—should be asked to argue the issues the companies face and to state the options they have and then to address the overall question of whether the USG should informally take a position and, if so, what.

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2. The USG should provide appropriate diplomatic support to assist the companies in facing OPEC demands—e.g., on “participation”—which would unilaterally alter existing agreements. In particular, we should remind producing countries of the dangers inherent in undermining the stability hopefully achieved by the 1971 Tehran agreements.

Comment: This goes back to the basic question concerning the degree to which USG interests and company interests are parallel. Clearly, much depends on the companies’ posture as nationalist pressures grow. This last spring, we counseled Aramco against intransigence in the face of Saudi participation demands, and encouraged a process of dialogue and compromise.4 Though agreement in principle was reached, negotiations are continuing and this issue could flare up again at any time. Since foreign ownership goes to the heart of the company role in Middle East oil, USG involvement can be deeply resented by the producing governments. We need to address basic questions now concerning our future posture and the degree of USG involvement.

3. The U.S. should maintain friendly relations with producing governments by continuing a policy of balance in our relations with all Middle Eastern states, avoiding a return to an “overtly, exclusively pro-Israeli position.” State argues that failure to maintain this balance would negate “most and probably all of the other steps the United States could take to secure oil supplies.”

Comment: There are two aspects to this long-standing issue. On the one hand, it should be recognized that many of the nationalist pressures confronting western oil interests would exist regardless of the Arab-Israeli situation. We need greater awareness of underlying social and political forces and sharper analysis of what can be done to deal with them. On the other hand, the Arab-Israeli problem is integrally related to the oil picture, and we must realize that oil leverage adverse to our interests is increasing. The real question here is whether likely oil developments constitute an argument for some action on the Arab-Israeli issue before this leverage gains intensity. This argument now is either being over-emphasized or not being adequately taken into account. We need to get it in perspective.

4. The U.S. should take appropriate steps to diversify our sources of foreign oil supplies. In particular, we should (a) work for energy agreements with Canada, Venezuela, Mexico, and other Latin American producers and (b) actively raise the issue of diversification of sources within the OECD context.

Comment: There are several facets to this problem and we consider that more overall analysis is needed before clearcut decisions are made. [Page 310]One issue is the desirability and likelihood of the emergence of “energy blocs.” Some argue that no matter what we do to secure Western Hemisphere supplies, Middle East oil will remain crucial. This view argues against any action on our part which would promote the impression that we have opted for the Western Hemisphere in preference to the Middle East, or that would encourage the development of a Middle East oriented bloc that discriminated against U.S. interests. Others argue that such blocs may be inevitable, and that we must play the game to avoid ultimate damage to our security of supplies. This school further maintains that the Western Hemisphere is the obvious choice for some form of preferential access to the U.S. market if we are to play the game. It may be, however, that Western Hemisphere supplies can be increased without damage to our interests elsewhere.

Another issue concerns the basis for discrimination about the reliability of alternative foreign suppliers. On geographic and political grounds a case could be made that we should concentrate on developing increased secure oil supplies from our own backyard, where Soviet influence is least prevalent. On the other hand, perhaps we should not assume that Latin producers are less likely than their Middle Eastern counterparts to exert nationalist pressures on U.S. oil interests. This line of reasoning argues for a selective discriminatory approach favoring increased U.S. oil imports only from countries with whom we can expect to maintain a sound political relationship. It must be recognized, however, that by politicizing oil relationships, we may be encouraging precisely the trend that has fuelled concern over the energy crisis. Some technical rationale would have to be found for masking the political criteria.

Finally, the current state of play is that we appear to be moving on all fronts simultaneously. We see no evidence within the USG of a clear conception of (a) worldwide oil availabilities, (b) capital and technological requirements of alternative oil strategies, (c) oil company plans and priorities on a regional and global basis, and (d) the political/strategic implications of alternative approaches. For example, we are now actively seeking to work out an energy agreement with Canada which would offer unlimited access to our market in return for certain supply guarantees in times of emergency. While this is an important objective, it should be recognized that our political and oil interests may suffer in Venezuela in the absence of a similar deal there.

5. The U.S. should give high level priority at home and abroad to encouraging the development of nuclear and other alternative forms of energy.

Comment: We have no problem with State’s recommendations in this area, which are consistent with current policy. The only question concerns State’s implication that not enough is being done to facilitate construction of nuclear plants and to explore other energy sources. [Page 311]Most suggested alternatives to oil run immediately into cost and technology hurdles, but there is some evidence that more could be done to follow up on the President’s Energy message of June 1971,5 especially in the area of exotic technologies. The real issue here is whether, to reduce our vulnerability to foreign oil blackmail, we are prepared to pay more for U.S.-produced alternatives.

6. The U.S. should take necessary steps to increase domestic oil production. Specific steps include development of Continental Shelf deposits, tax allowances for newly discovered oil, and rapid exploitation of oil shale and coal conversion.

Comment: Any proposal to maximize domestic U.S. oil production confronts the security argument that we should not “drain America first.” We do not want to solve our dependency and balance of payments problems for today at the expense of creating a permanent U.S. oil deficit in future. This, of course, is the rationale behind many of our existing oil policies. These points only emphasize the need to loosen our dependence on oil as a fuel by promoting development of other energy sources.

Conclusion

Clearly, we have a variety of sometimes conflicting interests in oil matters—e.g., to lessen the possibility of being blackmailed or coerced by reducing our dependence on Arab oil and diversifying to other foreign sources; to keep oil prices down so as not to penalize our competitive economic position; to maximize the balance of payments advantages flowing from the U.S. company role in oil; to protect our oil investments; to avoid depleting U.S. reserves; and to reduce our dependence on oil as a fuel.

  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.
  2. A reference to the March 9 Department of State paper, “The U.S. and the Impending Energy Crisis.” See Documents 116 and 127.
  3. See Document 86.
  4. See Document 114.
  5. See Document 90.