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

187. Memorandum From Philip A. Odeen of the National Security Council Staff to the President’s Assistant for National Security Affairs (Kissinger)¹

Washington, June 6, 1973.

• SUBJECT
  • Energy and the Atlantic Alliance

Our work is pointing to several areas where energy related issues can play an important part in efforts to develop a new basis for our relationship with Europe and Japan. In addition to the work on the energy NSSM,² these issues have been developed during preparation for the OECD meetings by the ad hoc committee on international aspects of energy.³

This memo summarizes the results of our studies and discussions that impact on the “Year of Europe.”

Areas of Cooperation

Cooperation was the dominant theme of the international side of the President’s Energy Message.⁴ Specific areas for cooperation were to be subsequently defined. Our work to date shows three areas where specific cooperative efforts could be focused:

• —Emergency sharing schemes and coordinated emergency stockpile arrangements.
• —Cooperation in research and development.
• —Cooperation among consumer nations to provide a counter to the OPEC cartel.

In each of these areas, our relative strength could provide leverage to be exploited in your “Year of Europe” effort. Policy coordination is an obvious necessity if this leverage is to be exploited.

U.S. Leverage on Energy

Our leverage in energy matters results from several factors:

First, we have considerable economic and political influence with the two richest oil nations—Saudi Arabia and Iran, which must make very large production increases if worldwide oil needs are to be met through 1980.⁵ Although projections differ, all agree that substantial increases will be required.

Principal Suppliers of World Oil

(millions of barrels per day)

	1972	1975	1980
Saudi Arabia	4	7–10	11–20
Iran	3	5–7	7–10
Iraq	1	2–3	3
Libya	3	3	3
Other Middle East	6	8	12
Total	17	25–31	36–48

Without U.S. participation, it is doubtful that the proper economic environment can be created that will bring about these increases. Particularly, if the Saudis are to meet required levels of production, they will need investment opportunities for their earnings and a general economic environment in which they feel secure. Kuwait has already held production back because they do not need oil earnings to meet domestic objectives and they believe it safer to keep oil in the ground for future generations than sell it and run the risk of losing invested revenues. The Saudis could make a similar decision and our help in providing the needed investment opportunities and economic institutions will help reduce the likelihood of this happening.

U.S. identification with Israel is an obvious political hindrance to our efforts in this regard, but without our economic and political support it is unlikely that the needed expansion will occur.

[Note: To begin developing investment opportunities and improving the economic climate with the Saudis, the ad hoc international energy group is considering a joint Simon/Casey mission to Saudi Arabia in August or September. An issue paper on this trip is being prepared. When it is complete, we will be asking for your guidance.]⁶

Second, our technological advantages also give us leverage. We lead in most fields of energy-related technology, especially new energy sources. (R&D is discussed in more detail later in this memo.)

A final factor is that the U.S. is the only major consumer nation with sufficient domestic resources to have the option of reducing our future demand for oil imports (almost complete self-sufficiency is a possibility by the early 1980s). Development of our more costly domestic alternatives could substantially relieve future tight oil markets and without U.S. demand (about 30–40 percent of the total) the OPEC countries could find it difficult to maintain prices at the current level of 10 to 15 times cost.⁷

On the other hand, if we decide to compete for foreign oil rather than develop domestic alternatives, the Allies will find it hard to meet their own needs and will pay a higher cost. Thus, our efforts to develop domestic energy resources and other alternatives to Middle East oil provide the other consuming countries with influence they would not otherwise have in counter to the OPEC countries. This fact has not been sufficiently stressed in our discussions with the Allies.

These general sources of strength in energy matters translate into specific sources of leverage in issues under discussion within the OECD and elsewhere. An example is cooperative emergency sharing and stockpile schemes.

Emergency Sharing Schemes

Because of our comparatively large domestic oil reserves and access to Canadian and Venezuelan supplies, the U.S. will be far less dependent on imported oil than European countries or Japan. It is projected that in 1980 we will import about 30 percent of our oil from Middle East sources compared to 60 and 85 percent for Western Europe and Japan. This means that under most circumstances we are net contributors to import sharing schemes as shown below:

Cuts in U.S. Oil Consumption

(Percent in 1975)

		Embargo by
	All-Arab	Libya	Iran/Iraq	Saudi Arabia
No Agreement	18	Negl	6	13
Agreement to Equalize Cuts in Imports	24	5	10	3

The only situation in which we would gain from a sharing agreement are: (a) under a Saudi Arabian embargo, (b) an Arab embargo of oil sales to the U.S. only—perhaps in the context of an Arab/Israeli conflict.

Finally, these calculations do not address the prime objectives of a sharing scheme—to deter a politically motivated cut off by limiting the attractiveness of an embargo focussed against one country. An agreement would, therefore, reduce the likelihood of oil being used for political purposes by increasing the production cuts that must be made to hurt any one country. The Europeans are aware of this and want U.S. participation.

Without U.S. participation, the deterrent value of any sharing arrangements would be severely reduced. Thus, we should probably expect some concessions in other areas in exchange for U.S. participation in an import-sharing scheme.

However, certain factors do tend to weaken U.S. leverage with respect to emergency sharing agreements:

• —The Europeans may not believe that a formal import sharing scheme is essential—if a cutoff occurred they could rely on political pressures and the normal reactions of the oil companies to bring about a roughly equitable sharing of remaining supplies.
• —U.S. oil stockpiles are somewhat less than Europe and Japan.⁸ Thus, in a coordinated arrangement we might be required to build up our stockpiles at a significant cost ($3–5B).
• —If the U.S. were selected out as the sole target of an embargo, (perhaps the most likely case) we would, of course, benefit from an import sharing scheme and the Allies would suffer.

At the OECD meeting, Under Secretary Casey will propose that an OECD working group be created to analyze options and implications for import sharing and coordinated stockpile programs.⁹ In the meantime, our working group is studying the various alternative approaches to develop a preferred U.S. proposal.

Research and Development

The U.S. is well ahead in most areas of energy technology (e.g., nuclear power) although there are some areas such as conversion of coal into gas where the Europeans have an advantage.

Our technological lead plus our large and varied research and technical resources are essential to any major coordinated effort to develop nuclear energy, coal, and other non-petroleum energy sources. We have much more to offer than to gain from such an effort. Thus, our cooperation should earn some “quid” from the Allies.

At the OECD meeting we will propose establishing an information “clearing house” aimed at inventorying each country’s basic research efforts. Actual technology sharing would be based on subsequent bilateral negotiations which will yield real but probably modest results.

There may well be much more that can be done in joint R&D, but we do not yet have the data needed to be specific. U.S. funding of energy R&D is modest to say the least but some promising areas (geo-thermal and solar energy, for example) could fruitfully be funded at twice the current level (or more). Joint ventures may be a promising way to bring more resources to bear and we may wish to take a bold initiative at some point; e.g., a major multi-nation effort to develop solar power.

Multilateral R&D, however, has pitfalls also. It is often slow and cumbersome and frequently results in technology transfer from the U.S. to the other partners. Thus, we should proceed with some care and consider these issues on a case by case basis.

Consumer Country Cooperation

The most critical area of political cooperation with Europe is in joint efforts aimed at improving consumer country market position vis-à-vis the producers—primarily the OPEC cartel. A number of observers are calling for a strong consumer country organization as a counter to the market power of the producers. They point out that in today’s tight market situation, unless the consumers work together, they will be played off one against the other, pushing prices even higher. A critical time for these negotiations on price will be late 1974 and 1975, as the expiration date of the current agreement with the OPEC nears.

It is hard to fault the general concept of consumer nation cooperation. The real issue is the nature of the cooperative effort and the feasibility of getting the major consumers to agree to work closely together particularly in planning how scarce oil might be allocated. A range of cooperative efforts have been suggested including:

• —Exchange of information on individual energy needs and policies regarding prices, etc., to aid in general market planning and negotiations.
• —Explicit government support for the international oil companies in their dealings with the OPEC—through government to government dealings in non-oil areas such as arms and economic cooperation. These would be a direct quid for an informal agreement to meet production and other energy related goals.
• —Developing a tight consumers organization to negotiate with the OPEC cartel in matters of price and production.

There are wide differences over the wisdom and feasibility of the various cooperative approaches. In Europe, the French are dragging their feet and have thus far prevented the European Community from developing a firm position on cooperation. The French, Italians, and Germans are each going their separate ways seeking their own sources and the British are hoping North Sea oil will solve their problem. The Japanese, who are 100 percent dependent on foreign oil, have a strong interest in cooperation, yet feel very vulnerable and are deeply concerned over the risks.

The most obvious concern is that efforts to develop a “counter cartel” will harden producer country attempts to break up the cooperative arrangement and make it less likely production requirements will be met. Even if a cooperative agreement is created, the first oil crisis or price negotiation will create pressure for each country to make separate deals. This is especially true for countries like Japan which are almost totally dependent on foreign oil.

Greater government backing for the international oil companies and perhaps a direct government role in negotiations has also been widely suggested. Just what the government’s role would be and how it would work is unclear. To be effective, it would require deep involvement in company affairs which may not be acceptable to the U.S. owned firms and indeed may not even be legally feasible. But the rapid growth of producer country participatory arrangements argues for some steps by the consumer countries to improve the bargaining position of the oil companies.

Despite the above problems, if any cooperative effort is going to be successful, the U.S. must play a key role. This provides us considerable leverage with the Allies who are aware of the need for cooperation but sorely need U.S. leadership.

These problems of general consumer market cooperation will be under discussion in future meetings of our working group. I will also stress the need to factor energy matters into relations with the Allies in other areas. I have taken steps to ensure that Casey’s speech at the OECD emphasizes energy as another opportunity for enhanced U.S./Allied cooperation that should be pursued to revitalize relations in the broader context of the President’s Year of Europe.

1. Source: National Archives, Nixon Presidential Materials, NSC Files, NSC Institutional Files (H-Files), Box H–197, National Security Study Memoranda, NSSM 174 (Response). Confidential. Urgent; Sent for information. Kissinger initialed the memorandum. All brackets are in the original.
2. Document 171.
3. Members: Casey, Simon, Dam, DiBona, Flanigan, Hoskinson, Odeen (Chairman). [Footnote in the original.]
4. See Document 177.
5. Saudi Arabia and Iran account for over 30 percent of the world’s cheapest reserves. [Footnote in the original.]
6. See footnote 9, Document 184.
7. A handwritten notation by Kissinger next to this paragraph reads: “How?”
8. 40–50 days for U.S. reserves, 75–80 for Europe and Japan. [Footnote in the original.]
9. At its June 12 meeting, the High Level Group of the OECD Oil Committee accepted the U.S. suggestion to establish an informal working group to develop and evaluate the various options for extending and adapting the OECD mechanism for apportionment of oil supplies in an emergency. A report was to be circulated no later than October 15. (Telegram 16689 from USOECD Paris, June 18; National Archives, RG 59, Central Foreign Policy Files) Casey’s address to the HLG on the evening of June 12 was entitled “Possible Areas for Cooperation Between Member Countries on Oil Questions.” (Telegram 16178 from USOECD Paris, June 15; ibid., Central Files 1970–73, OECD 3)