153. Memorandum From the President’s Assistant for International Economic Affairs (Flanigan) to the President’s Assistant for National Security Affairs (Kissinger)1

Delivered herewith is the initial version of a lengthy book on “Energy.”2 The introductory section deals with the history of the energy problem, the current situation, and the broad options for action. Following that is a section of each major issue under consideration. Each section is made up of (a) a background discussion, (b) a statement of the problem, (c) a series of options, with pros and cons relating to each, and (d) a statement of the conclusions and recommendations reached by the responsible agencies. For some issues there is also included additional information in appendices. Should you want further information or studies on any issue, it is available. Where legislation is required by the recommendations, it is prepared and available.

Attached is a seven page summary of the energy problem, and the recommendations for dealing with it reached by the Domestic Council Subcommittee.

For the quick “education” in energy which you requested, I particularly commend to you the summary memo and the introductory section of the book. Because the international aspects of energy are of particular interest to you, I also recommend that you read the section entitled “International.”

Attachment

THE ENERGY PROBLEM AND POSSIBLE SOLUTIONS

Summary

Background

During the last four years, the U.S. energy picture has changed dramatically. We no longer have excess oil production in Texas and Louisiana, and the Arab states control two-thirds of the world’s proven oil reserves through the OPEC cartel. OPEC has increased crude prices [Page 385]40% in the past two years; prices are scheduled to rise significantly through 1975 and a further sharp increase is expected in 1976. U.S. oil production has peaked, constrained by price and availability of new oil bearing areas on the Outer Continental Shelf. Natural gas production has also peaked because gas exploration and development are unprofitable at prices set by the FPC. Production of coal, our most abundant fossil fuel, has been stymied due to increasing costs, the uncertainty created by the Clean Air Act, and possible strip mining legislation.

The following is a review of the findings and recommendations of the Domestic Council’s Subcommittee on Energy which has been working for the past eight months on solutions to the nation’s energy problem. The urgency of the problem is indicated by the intense attention it has been given in recent weeks throughout the media and in Congress. The limited fuel shortage in the Middle West during the recent cold spell may well be followed by broader shortages elsewhere this winter.

In considering these proposals, it is important to recognize that past action by the Federal government has been one of the primary causes of the energy problem. For valid security reasons the government has limited oil imports from abroad;3 for environmental reasons the government has set standards prohibiting the burning of much of the nation’s coal; and for price reasons the government has so limited the cost of natural gas at the well-head as to discourage exploration for new gas reserves.

While not purporting to be the final and complete solution to a constantly evolving problem, the proposals listed below will comprise a comprehensive initial attack on the energy problem in the near term (1973–1985), the medium term (1985–2000), and the long term (after 2000). They relate to all forms of energy, and to both the domestic and international fronts. They involve legislation, action through executive order and international negotiations. The principle underlying these proposals is that government interference with the free market system should be as limited as possible, and that this system is best capable of providing sufficient clean energy at an acceptable price. This is a consistent set of proposals which will build on the President’s first Energy Message of June 4, 19714 and which holds the promise of providing sufficient energy from our domestic resources at a reasonable environmental and economic cost.

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Proposals

1. Request Congress to pass legislation permitting competition to set the price at the well-head of newly found natural gas. Twice since the Supreme Court ruled in 1956 that the Federal Power Commission has the power to regulate the well-head price of gas the Congress has reversed this, only to have it vetoed, the last time when President Eisenhower vetoed the Harris Bill. The result has been a lid on gas prices which has made gas the cheapest fuel, thus increasing demand, while at the same time making gas exploration uneconomic, thus decreasing supply. Studies by industry and academic experts uniformly predict that a continuation of present policies would result in cutting current domestic gas production in half by 1985 (with the difference made up by 10 million barrels per day of imported oil at an annual cost of $14 billion). By allowing the market to set the price, an increase in prices (perhaps 65¢ a thousand cubic feet compared with today’s 26¢) would increase production by 1985 by 50% to a level equal to demand.

In the face of today’s acute and growing gas shortage, we are restricting the price paid to the domestic producer to one-fifth of the equivalent price of imported LNG and other substitutes. This anomaly is so blatant, and the results of FPC regulation so stifling, that such disparate groups as the environmentalists, certain gas distributors, the gas producers, and even The Washington Post have called for a change in the pricing system. Consumerists will, of course, oppose any lessening of federal regulation. The President’s Economic Report of a year ago5 called for competitive pricing of new gas.

2. Instruct the Department of Interior to accelerate its leasing on the Outer Continental Shelf (OCS). The American continental shelf is believed by most geologists to be rich in oil and gas, and the areas where work has been done—the Gulf of Mexico and the southern California coast—have confirmed the projection. The need for development of these areas was emphasized by December’s auction of offshore leases which brought the Treasury bids of a record $1.67 billion.

A continuation in the present leasing schedule is projected to yield no significant increase in annual gas and oil production by 1985. However, a sharply expanded leasing schedule, which the Department of Interior now proposes, including the Atlantic Coast, the Gulf of Alaska, and continued leasing in the Gulf of Mexico into waters deeper than 200 meters, is projected to yield an important portion of our gas and oil requirements.

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This program will bring objections from some environmentalists, but the alternative to drilling in these areas would be increased oil imports.

3. Reorganize the Executive Branch’s mechanism for handling energy problems. Although the Congress refused to accept the President’s proposal for a DNR, the present organization of energy management in the Executive Branch is under constant Congressional and press attack.

The Domestic Council and OMB have developed a series of options for both improving the capability of the Department of Interior and for broader reorganization. The preferred reorganization would involve increased emphasis on energy in DNR, renaming the department the Department of Energy and Natural Resources (DENR). The most difficult question involves the conduct of energy R&D, either including most of the non-military, non-regulatory AEC functions under DENR (favored by the Domestic Council) or placing all energy research under AEC (favored by OMB).

4. Accelerate research and development on hydrocarbons, nuclear energy and exotic forms of energy. While this is one of the most frequently advanced solutions to the energy problem, there is also serious exaggeration of how much could be accomplished in the next few years. OMB proposes increases in R&D from about $600 million in FY’73 to $660 million in FY’74, while OST recommends somewhat more than $700 million in FY’74. Though this builds on the substantial R&D program for breeder reactors set forth in the first energy message, even the high OST recommendation will inevitably be castigated by congressional and other critics as inadequate.

A proposal is also being developed to encourage substantial increases in private utility funded R&D.

5. Alterations in the Mandatory Oil Import Program. When the MOIP was instituted in 1959, the U.S. had considerable surplus spare production capacity, imports were limited to 12% of domestic production, and shortfalls in demand were made up by increased domestic production. Since early in 1972 U.S. reserves have been produced to capacity, so increased demand has been met from increases in oil imports. In 1972 imports averaged about 4.7 million barrels per day; in 1973 they will rise to over 6 million.

The Oil Policy Committee is considering two changes in the Program: (a) auction any increase in quota tickets, instead of giving them away, and (b) allow free importation of foreign crude oil for production of synthetic natural gas and residual fuel oil. Although the latter would result in high price gas, it would be quickly available and the procedure would encourage development of domestic refining capacity for fuel oil. These steps would be supported by critics of the Oil Import Program.

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6. Request Congress for legislation for federal licensing of deepwater ports. Our imports of oil and other raw materials in the future, regardless of what other action we take, will increase. Most oil in world trade is now carried by giant tankers, which currently can dock at no American port. Importing oil by supertankers unloading at deepwater ports is preferable both from an economic and an environmental point of view to the smaller tankers now used for the U.S. imports. The proposed action would incur no cost to the Federal government, and private interests building deepwater unloading facilities would have to comply with federal and state regulations.

7. Maintain utilization of coal. Our most abundant domestic source of energy is coal. Stringent air pollution regulations make it difficult to use much of the high-sulphur coal and utilities have switched to imported oil; safety regulations have resulted in a decline in productivity in most deep mines in the last two years and strip mining is under constant attack.

Reasonable strip mining legislation is imperative; there are essentially no alternatives. However, the interrelated problems of the effect of current air quality standards, the state of the art of stack gas cleaning, and the usability of coal do provide options. At the present time, it is expected that delay by the states in implementing the secondary standards (allowed under the Clean Air Act) will allow continued production of high-sulphur coal at present levels. With technological developments, production of high-sulphur coal can increase by 1980.

8. Proceed with leasing of shale lands. There are very substantial oil reserves—estimates run as high as a trillion barrels—in the oil shales of the West. The cost of production is high, the water requirements are enormous, and the problems of disposing of the waste material have not been solved. The Department of Interior has a program to develop commercial-scale prototype shale plants which was proposed in the first energy message. Six 5,120 acre tracts will be leased, two each in Colorado, Utah and Wyoming. (This is less than 0.3% of the shale lands in these three states.) It is expected that these leases will result in the development of technology so that shale can be an important long-term source of energy for the U.S. Environmentalists have opposed this program.

9. International actions regarding the energy problem. Cooperation between major consumers and major producing nations on developing new sources of energy and on handling available energy in times of shortages must be increased. Europe and Japan are entirely dependent on imported oil. U.S. representatives have talked with the Europeans and Japanese for two years on a possible cooperative approach to the problem, but until recently they have looked on these overtures as a not-too-subtle attempt to regain economic hegemony over them. Their views have now changed and they seem to understand well that, if each nation [Page 389]tries to solve its own problems, the solutions will be slower; and if each nation tries to sew up available hydrocarbons around the world, the result would be bidding prices up to astronomical levels. An intensification of these discussions is under consideration. It may well be appropriate to include in a Presidential energy message a statement that we recognize the international nature of the problem, and that we desire to examine the possibility of a wide cooperative approach.

Negotiations are underway with both Canada and Venezuela on energy matters. If the talks with Canada are completed, the removal of quantitative restrictions on Canadian oil could be included in an energy message. Reference could also be made to the negotiations with Venezuela which we hope will result in the exploitation of Venezuela’s very large heavy oil reserves.

10. Measures to conserve energy and use it more efficiently. References to the Administration’s backing of legislation to use part of the gasoline tax for mass transit, to work being done by the GSA on energy conservation in homes and office buildings, to DOT’s work on more efficient automobile engines, and to research being carried out on more efficient electricity generation and transmission could be included in an energy message. Study is being given to proposals for the formation of an “Office of Energy Conservation” in the Department of Interior, and compulsory labeling of energy efficiency and cost of operation of appliances and automobiles. This initiative will be attacked as inadequate, with proposals for federal regulation of the use of energy.

[Omitted here is the section on Congressional Aspects.]5

  1. Source: National Archives, Nixon Presidential Materials, NSC Files, Box 250, Agency Files, National Energy Office, Vol. I, March 1972–February 1973. No classification marking.
  2. The full study was not enclosed and a final version has not been found. Flanigan’s progress report on this undertaking is Document 146.
  3. Scowcroft underlined the first clause of this sentence and wrote in the margin: “questionable assumption.”
  4. See Document 90.
  5. See footnote 6, Document 146.
  6. This section of the summary closely resembles the progress report Flanigan provided Nixon, Document 146.