190. Memorandum of Conversation1
- Walter Levy
- Dr. Henry A. Kissinger, Assistant to the President for National Security Affairs
- Philip Odeen, NSC Senior Staff
- William Quandt, NSC Staff
- Kathleen Anne Ryan, NSC Staff Notetaker
Dr. Kissinger: I have not seen you in a long time.
Mr. Levy: Yes, I hate to impose on your time.
Dr. Kissinger: No, on the contrary, you are doing me a favor. I know nothing about the subject.
Mr. Levy: I doubt that.
Dr. Kissinger: Humility is not a problem of mine. [Laughter]
Mr. Levy: There are two reasons. The problem is overwhelming.
Secondly, this is a time that you are entitled to whatever I can give you.
Dr. Kissinger: I am not entitled, but I need it.
Mr. Levy: We are obligated at this point to work with you. I am a consultant at State. I don’t use it though.
Dr. Kissinger: Why?
Mr. Levy: It is hard for certain problems. I am also, as you know, a consultant to the Common Market. Can I say something?
Dr. Kissinger: Nothing you say will ever leave this office.
Mr. Levy: I will never say anything that I am not entitled to say. If I do, you may ask yourself why am I talking to this man. I spent a considerable amount of time with Heath.
Dr. Kissinger: On the energy problem?
Mr. Levy: And also on other things.
Dr. Kissinger: What happened?
Mr. Levy: He was quite confident just before the problem of the labor union.2[Page 503]
I am also a close friend of Victor Rothschild and consultant to many companies.3
Dr. Kissinger: I know what you are doing. You did an outstanding paper at the Bilderberg Conference.4 I could have learned a lot.
Mr. Levy: I think in the time at our disposal there are a few major issues. First there are the problems of international companies in terms of formulating policy and negotiating.
Dr. Kissinger: I am convinced most of the companies are idiots.
Mr. Levy: You confirm my judgment.
Dr. Kissinger: Last year Standard Oil or whoever it was working with the Saudis—Jamieson.…
Mr. Levy: Jamieson is Exxon.
Dr. Kissinger: They are interested in the principle of compensation. It was the first time in ten years that the U.S. government brought relative pressure on the Saudis to pick up a nickel. They used my intervention for chicken feed. I would never have done it for a one to two year contract.5
Mr. Levy: What happened of course was that the participation agreements affected equity interests. But the profits on foreign oil have never been as large as before; they are unbelievably high. Secondly, the main interest in participation is to keep control of the oil. Even the oil that now belongs to the Saudi government they have bought and they resold it to them. The way they in fact started pricing it to consider the profit margin was the same as that on the old oil. There is some compensation, they buy back, obtain twenty-five percent and sell most of the oil that belongs to the other party as a profit as if it was their own oil.
Dr. Kissinger: They have put themselves into hock on an escalating ladder.
Mr. Levy: The agreements won’t last another year. The buy-back price has become so large that before the year is out the Saudis will ask that the buy-back price be revised.
Dr. Kissinger: That is technical.
Mr. Levy: Yes. Later on I will talk about the settlement on devaluation and inflation. You have a situation where after profits are made [Page 504] in foreign countries, you have little profit made anywhere else. You cannot expect the companies to stand up to King Faisal. The crux of the problem is that the companies cannot play an advisory role for you. Their profit interests might not be the same as U.S. national interests.
Secondly, the oil companies will agree to most price increases as long as they are sure they can pass them on to the customers. Their basic position on foreign policy is that they want you to stay out, unless their equity position is threatened. We have right now in Libya an example of concessions obtained by corrupt means. There are many examples of individuals associated with the U.S. government who have used corrupt means.
Dr. Kissinger: Let’s talk about the concessions in the Soviet Union.
Mr. Levy: They will cost us plenty. Whatever deals are now made will involve government credits. It could be a political problem.
We have a problem of who speaks for whom in terms of oil; it is a serious problem. Let me add that there are two negotiations coming up. Just a few weeks ago there was the devaluation negotiation. The oil companies negotiated on devaluation. It will affect twenty-five percent of world trade by 1980. They made a settlement on devaluation so that price increases are based on an arithmetical average of eleven currencies. It is a crazy definition. In any movement of devaluation, if the dollar goes down eleven percent it doesn’t mean the purchasing power is down, but the price is up by eleven percent. If Austrian currency goes up eleven percent the price of oil is up one percent more. If the Danish currency goes up eleven percent the price of oil goes up one percent.
Dr. Kissinger: In other words it is cumulative, whenever one country goes up it is pegged on to the others.
Mr. Levy: Yes, when one goes down it works the opposite way. The principle is crazy. It works to protect the purchasing power of producing countries. It was negotiated on an added inflation factor. The producing countries get a two percent increase now and will ask for a six to eight percent increase in price shortly.
Heath asked who gives directions to the companies. I answered that nobody does.
Dr. Kissinger: How could it be done?
Mr. Levy: If for instance you would form with the British, French and the Germans a reasonably permanent group which would study the problem and make recommendations. Casey is not able to do it.
Dr. Kissinger: Is it the fault of Casey?
Mr. Levy: No, the problem is too large and the big companies won’t listen.[Page 505]
I discussed a problem with Irwin when he was Under Secretary. This was when the companies made a six cent increase to Libya and eighteen–twenty cents was justified. Six cents was an insult. They said six cents is all we can afford. I then went to Irwin. He agreed with me but asked me to talk with the companies.
Dr. Kissinger: Was this in 1970?
Mr. Levy: Yes, in 1970.
Dr. Kissinger: But then Qadhafi was already in office.
Mr. Levy: Yes. But Libya would have accepted it. Irwin said, “You are right, couldn’t you tell the companies to do it?” I told him, “I don’t have the power to do it. You have the power as Under Secretary,” I said. I felt it was up to State. They said it was up to private industry.
Faisal has indicated that he might not produce more oil. This is when everyone wants to induce the Saudis to produce more to cover any possible occurrences. First, I believe that the only leverage which we have with the producing countries is that they are dependent on the power position of the United States and the Western World. We don’t have anything else.
Dr. Kissinger: What do you mean?
Mr. Levy: For both internal and external security.
Dr. Kissinger: What producing countries, even Libya?
Mr. Levy: Forget Libya, but include Saudi Arabia, Iran, Kuwait.
Dr. Kissinger: Iraq?
Mr. Levy: Iraq maybe. We could work that out with deals with the Soviets in Iraq rather than in the Soviet Union. And that would be a tremendous factor in the whole area. It would take the wind out of the Saudis.
If things go the way I project, by 1980 the Saudis will have to produce 18–20 million barrels per day. I don’t think they will. They will have accumulated 100 to 120 billion dollars. You know our whole investment is less than that worldwide. Our total foreign investment is 86 billion dollars. Stocks and bonds are another 20 billion. This amount cannot be replicated.
Some say it is difficult but manageable, and I believe that it is difficult and unmanageable.
Dr. Kissinger: Who says manageable?
Mr. Levy: The oil companies.
Dr. Kissinger: How is it manageable?
Mr. Levy: All real estate and oil will net 100 million dollars in new investments, they say. The Arabs will not go into investments of that sort. And they are assuming that the Arabs will be satisfied with a four [Page 506] percent return a year. They can keep the oil in the ground, because the oil value will go up much more than that.
The irony is that the less the Saudis produce, the more money they will make. They are the predominate supplier.
Dr. Kissinger: In the 19th century it should have been taken over and carved up.
Mr. Levy: What happened in the 19th century won’t happen in the 20th. But we shouldn’t remove this fear entirely. Take away the fears and uncertainty and the oil will stay in the ground. I don’t see any other factor to use as leverage.
The Japanese are bidding up the oil price. They are panicky. I talked to the Japanese Foreign Minister. Did you talk to him? He said if we are in an emergency and if your country is only willing to share the oil supplies passing over international waters, it is no good. If you talk about genuine sharing.…
Dr. Kissinger: What is that?
Mr. Levy: We produce 60 to 70 percent and import about 25 percent. The Japanese import 100 percent. The country that will be the best off is Great Britain.
Dr. Kissinger: Because of the North Sea?
Mr. Levy: Yes, the North Sea.
Dr. Kissinger: How did they get a stranglehold on the North Sea?
Mr. Levy: Division of territory and a large part fell in their area. Norway will export a large part of that.
In my view if there is to be a crisis in international oil affairs, the sooner the better. I would rather have a crisis when our imports are limited. We can count on Iran. I have had dealings with the Shah.
Dr. Kissinger: Then the oil consuming countries ought to get together. What do you mean by crisis.
Mr. Levy: Miller fears a cutback because of the Arab-Israeli dispute.
Dr. Kissinger: If we say that, it will happen. It is insane to tell the Saudis that. What does Jamieson say?
Mr. Levy: Miller’s approach could have the effect that Faisal feels he should support Miller.
Dr. Kissinger: We can convince the Saudis that it is suicide to get in the Arab-Israeli dispute. It is absolutely necessary to make sure any peace agreement is signed by the radical Arab countries, not by the conservative ones. It will not be a favorable settlement, if you look at the Israeli position.
Mr. Levy: One thing I believe strongly is that maybe there should be a settlement with the UAR.
Dr. Kissinger: That is fine, we have to keep the Saudis out.[Page 507]
Mr. Levy: Once you have a settlement, the Saudis’ political position will collapse.
Dr. Kissinger: Concerning the producing nations and cooperation, what should we do?
Mr. Levy: In the consuming nations there should be an international commission. Like the OECD with new rules of reference. It should be established because anything that consuming countries do is a confrontation. But confrontation by OPEC is bad. If the consuming countries show any desire to cooperate it would be beneficial. To show a minimum desire would be considered by the oil companies as interference. My position is that this is the largest international problem. We haven’t even looked at the problem of developing countries and the balance of payments.
Dr. Kissinger: What can the Saudis do with their money?
Mr. Levy: Place it in international organizations.
Dr. Kissinger: But what would they get out of that?
Mr. Levy: Bonds. There was a proposal and the Foreign Minister (of Saudi Arabia) said nobody can tell us what to do with our money.
Dr. Kissinger: Why is there a shortage?
Mr. Levy: Partly because of the Libyan and Kuwaiti cutback. A large part is the lack of refining capacity at home. Our companies, each one in the last four or five years, have not added one barrel of refining capacity. Not necessarily because of collusion but rather because of a conscious parallelism. As long as there was spare refining capacity, they didn’t want to build new refineries. They have been selling at three times the price to independent companies. They said they were not going to build any new capacity.
Dr. Kissinger: Are we now building any?
Mr. Levy: Yes, now we are. The international companies are financing them. We are heavily dependent on gasoline and fuel oil. We have driven up the price in Europe from 30 cents to one dollar for gasoline. We have practically forced the Europeans to introduce domestic price controls. Maybe export controls, too. Balance of payments will occur because of the dramatic cost of these imports.
I talked to Simonet and asked if he has considered international consultation. He said we are transferring our refining capacity. It could result in a very distorted price system.
Dr. Kissinger: The French Foreign Minister, Jobert, told me there is no shortage.
Mr. Levy: Except for the United Kingdom, Europe is sufficiently supplied. But they fear that the U.S. companies would first take care of the United States. As a matter of fact, the problem of a shortage is more serious here than abroad, as they can more easily handle the [Page 508] problem. The companies are not afraid that the consuming nations will not pay. They are afraid the producing countries will become difficult if they do not agree. You cannot assume that American companies talk with one voice. The companies have to act as negotiators but they can’t.
Dr. Kissinger: What do you do with the Japanese?
Mr. Levy: With the Japanese there is really an emergency. It goes further than sharing of supplies over international waters. That is a key issue.
If we want to work with the Soviets, let’s do it in Iraq. The Japanese bought into Abu Dhabi. Maybe they should go into Oman.
The point is that in any case no agreement concluded now will last more than a year or two. To allow an agreement that has been concluded to be cancelled by legislation has whet their appetite. The only counterprevailing force is the oil companies.
As Yamani says, there are three factors: the consuming countries, the oil companies and the producing countries. The only problem is with the consuming countries. The oil companies make their profit. If the consuming countries organize, this is war. That is war and in a confrontation we will show them.
Dr. Kissinger: How can you have an organization of consuming countries? Will they stick together in a crisis?
Mr. Levy: It has to be tried. I, too, am sceptical.
Dr. Kissinger: I am not sceptical. Odeen is.6
Mr. Levy: Jamieson has made a statement that consuming countries should not get together offensively. He wants an interdependence of interests where good will and good sense will work it out. I told him, “You cannot conduct a Billy Graham prayer meeting.”
The meeting could be operated through OECD and set up with new terms of reference which could have an effect on the bureaucracy.
[Dr. Kissinger leaves the room for a moment. Mr. Odeen, Mr. Quandt and Mr. Levy talk. Mr. Odeen says that Mr. Levy should give his views on the Soviet oil deals. They then talk about Mr. Levy’s speech and the Japanese. Then Dr. Kissinger reenters.][Page 509]
Mr. Levy: Let me conclude. I have some serious misgivings about our Soviet gas deal. It might be extremely helpful politically. I do not address myself to that aspect. On gas supply I have worked closely with Peterson. I don’t know if he has told you.
Dr. Kissinger: No. [He then leaves the room again, and returns.]
Mr. Levy: On the Soviet gas deal, what we really do is finance a huge Soviet natural oil deal. We will see a return in Soviet gas of three to four to five percent. A relatively high price in 1980 may leave them with a great deficit in the internal Soviet economy. It is a deal where the Soviets will benefit until 1978 then we draw some of the gas, at a relatively high price. Will the deal be lived up to? I doubt it. It is bound to be broken.
The second thing is that after the loans are repaid they assume what our consumers pay will be timed better now than in 1995.
Dr. Kissinger: Will you do three things for me? Could you give me your analysis of the nature of the so-called energy crisis, your idea on how the consuming countries, in a crisis, can get together? I need that to beat my staff down. [Laughter]
Mr. Levy: I disagree with myself on that issue.
Dr. Kissinger: I would like to know how to do it. Be precise.
Mr. Levy: When I saw Heath about two months ago and Peter Walker, Heath was on the point of calling a summit meeting of four or five countries to deal with the oil problem. It was then interfered with by the Common Market initiative. You could call tomorrow, Heath, Brandt, Pompidou, and Tanaka, to try to work something out.
Dr. Kissinger: Before calling them I want to know what to say. It is dangerous to call heads of state together. How do we organize it?
Thirdly, I would like your observation on the Soviet gas deal.
Mr. Levy: On the gas deal I may not have enough concrete data.
Dr. Kissinger: Odeen can give it to you.
Mr. Levy: If the Soviets are so keen on joint deals, maybe we can tie up a joint oil deal in Iraq.
Dr. Kissinger: Maybe you better tell me what that means.
Mr. Levy: I will now have to think it through.
Dr. Kissinger: If I am hard to reach you can deal with these two. [Odeen and Quandt.]
[The meeting then ends.]
- Source: National Archives, Nixon Presidential Materials, NSC Files, Box 251, Agency Files, National Energy Office, Vol. III. Top Secret; Sensitive; Exclusively Eyes Only. The meeting took place in Kissinger’s office. Brackets are in the original.↩
- On May 1, approximately 1.6 million British workers joined the Trades Union Congress’ call for a one-day strike to protest the government’s policy of limiting wage increases to control rising inflation. The worst affected industries were the railways, car manufacturing, newspaper production, mining, and docks. The strikes were accompanied by huge protest rallies in London, Birmingham, Manchester, Liverpool, and Glasgow.↩
- Victor Rothschild was head of the British Central Policy Review Staff from 1970 to 1972.↩
- The Bilderberg Conference is an annual three-day conference for European and North American bankers, economists, politicians, and government officials, conducted in great secrecy to provide a forum for open discussion of common problems. The conference takes its name from the Bilderberg Hotel in The Netherlands where the first meeting occurred in May 1954.↩
- See Documents 133, 135, and 137.↩
- In an August 8 memorandum to Kissinger, Odeen noted that Levy’s advice for extensive consumer cooperation to counter higher oil prices would be difficult because the Japanese “recoil” at any hint that cooperation might lead to a confrontation with the producers, the Europeans are “not much more interested,” and the French take “almost as negative a view as the Japanese.” Even cooperation for emergencies, the sharing of R&D information, and stockpiling seemed “beyond the level of acceptability to the consumer nations.” He concluded that a “far reaching cooperative effort (e.g., control over price and production negotiations) would require considerable interference with the operations of the major multi-national companies” and was “almost totally alien to the Administration’s economic philosophy.” (National Archives, Nixon Presidential Materials, NSC Files, Box 251, Agency Files, National Energy Office, Vol. III)↩