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

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

Washington, August 11, 1973.

• SUBJECT
  • NSSM 174 Executive Summary

Attached for your information is the penultimate draft of the Executive Summary of the Energy NSSM (174).² The changes in the final version are likely to be minor and I recommend that you read this version.

The paper defines the major national security and diplomatic issues arising from the energy problem and summarizes the relevant data and analysis. It sets our broad goals relating to the national security aspects of energy and specific tasks for attaining those goals.

The study addresses the following major issues:

• —How greater dependence on oil imports will affect our vulnerability to suply cutoffs (e.g., Arab boycotts, or oil stoppage due to an Arab-Israeli war) and what measures will be available to deter and cope with such cutoffs.
• —How greater dependence on oil imports will affect our vulnerability to supply shortfalls (e.g., caused by a Saudi decision to limit production) and what measures will be available to deter and cope with such shortfalls.
• —The importance of energy in our relations with the Japanese and Western Europeans, the leverage we have with them in the energy field, and how we could enhance cooperation with them in this field.
• —The impact of the Arab-Israeli problem on the energy situation.
• —Problems arising from American participation in the Soviet LNG projects.

The Changing Energy Situation

As background to the substantive discussion of these issues, Section II (pp 3–14) gives a comprehensive but brief summary of the major changes expected in the energy situation through the mid 1980s:

• —An increasing U.S. dependence on imported energy sources, especially oil. Today we import almost a third of our oil. By 1985 we may be importing almost 60 percent.
• —Very large increases in total world oil demand. Most of our Allies are almost totally dependent on oil imports. Japanese oil imports will increase by a factor of five by 1985 while Western European imports increase by 50 percent. Among our Allies, only the UK and Norway will enjoy an increasing self-sufficiency, as North Sea deposits go into production.
• —These major increases in world oil demand can only be met by rapidly expanding Middle East production. By 1985 the necessary increase in Saudi Arabia, the key producer for the U.S. is projected to be a factor of four over current oil production.
• —Increasing oil imports will strain consumer nations’ balance of payments. Balance of payments deficits are not unavoidable for the U.S., however, and would depend to a large extent upon the extent we can attract producer country spending into the U.S. and on the extent of repatriated profits of American oil companies.
• —Increasing oil production will provide producer countries with unprecedented earning potential. For Saudi Arabia, Abu Dhabi and Kuwait, domestic needs will not absorb these revenues, which by 1980 could exceed $20B annually for the three states. This could lead to a decision to limit production, causing a shortfall in world oil supplies.
• —The role of the oil companies will be changing from their current position of control over oil production to one of providing technical expertise (for exploration and production) under oil purchase arrangements with producer governments. Their negotiating positions will be weakened by the tight supply situation and the participation arrangements already agreed to with producer governments. In this context, an expanded role for consumer country governments may be necessary to provide needed support and control in negotiations between companies and producer governments if excessive price increases and destructive competition for scarce oil supplies are to be avoided. Developing the mechanism for providing this support and control and adjusting to the implied new government-company relations, is a major challenge for the future.

Vulnerability to Supply Cutoffs and Shortfalls

Pages 15 through 39 discuss our vulnerability to supply cutoffs and production shortfalls as well as feasible preventive or remedial actions.

As imports increases from today’s 30 percent of total oil consumption to the projected 60 percent in 1985, we will clearly become increasingly vulnerable to cutoffs and production slow-downs. However, this vulnerability will not affect our capability to meet basic military needs. Throughout the time period military needs could be met even if all imports were cut off since they account for only ten percent of domestic production. The real danger is, therefore, the economic disruption that would accompany cutoffs in oil imports either because of a Middle East conflict or a politically motivated boycott by a producer country.³

To meet these contingencies, the study finds that voluntary and mandatory rationing plans, enlarged oil stockpiles, import sharing plans, and the like would give us a significant hold out capability against even a total cutoff of all oil imports well into the 1980s. For example, the stocks normally held by the oil companies in theory provide adequate quantities of oil to maintain consumption levels for about three months if we encountered an all-Arab boycott in the 1980s. Rationing and surged domestic oil production could also significantly enhance our hold out capabilities.

Major real world problems, however, would be encountered in effectively utilizing the stored oil and ensuring refining capacity is fully utilized. There are major differences between the dependence of various regions of the country on imports and current stocks are not situated geographically to meet these differential needs. Getting a better understanding of the national oil distribution system is given a high priority for further study.

To counter a shortfall caused by a producer country decision to limit production, the study considers several remedial steps which could be taken including voluntary energy conservation and mandatory rationing. The study finds that these measures could be relatively effective, reducing demand by as much as 10 percent and providing time to begin shifting to other supply sources. Our capability to diversify to other countries or develop their sources of energy is a major unknown. A study effort aimed at seeking ways of diversifying oil supplies is also recommended as a high priority follow-on study effort.

Possible Self-Sufficiency

In addressing the basic issue of whether we should eventually aim at drastically reducing our future oil imports and vulnerability by developing complete self-sufficiency, the study concludes (pp 50 bottom–52) that:

• —Over the next five years or so we have essentially no alternative to increasing oil imports; and that
• —During this period, we should take specified steps to develop options for minimizing future imports and should continue on-going efforts to create domestic alternatives.

Whether or not these domestic resources should actually be exploited (at increased economic cost) would depend upon the future situation as it develops politically and economically. Large imports are not necessarily incompatible with maintaining our national security, as vulnerability could be reduced through storage, rationing, and other pre-planning. However, we are not yet in a position to make such a choice and, in fact, could not choose until the political and economic situation is known.

Energy and U.S.-Allied Relations

Pages 40 through 43 address the energy-related factors which will influence our relations with the Allies.

The growth of Japanese oil imports will be double that of Western Europe and be equal to that of the U.S. Japan is essentially without any domestic production or the benefit of international oil companies and is, therefore, extremely concerned that her needs will not be met. As a result she has been aggressive in bidding for oil as it comes under the control of producer governments and has taken advantage of the close government-industry relationship to offer package investment/oil purchase deals aimed at helping with Saudi economic diversification.

France, Italy, and Germany also appear to be adopting to go it alone policy. Germany has recently created a government-backed oil firm for this purpose.

The need to avoid the potential competition is acute. The study finds that, without U.S. leadership, the possibility of attaining needed cooperation is low. The Allies need U.S. leverage provided by:

• —Our domestic energy resources;
• —Our special relation with Iran and Saudi Arabia, who hold over 30 percent of the world’s oil reserves;
• —Our economic and military influence.

There are also factors which would tend to push in the other direction and undermine U.S. leadership. Our Israeli policy is an example, as is the likelihood that we would be singled out in an Arab oil boycott.

Finally, there is the danger that overt consumer cooperation will be interpreted as confrontation by OPEC and work to further erode the position of the consuming countries. This is a major Japanese concern.⁴

As first steps in building cooperation, the study concludes that focus should be given to areas to which OPEC countries should not object:

• —Import and emergency sharing. We would strongly prefer to share imports only while our Allies would prefer sharing on the basis of consumption, which could result in diversion of some U.S. domestic production.⁵ Since the most likely threat may be a boycott directed solely against the U.S., we may be willing to compromise on the terms of an agreement in order to obtain the deterrent associated with having an agreement. The elements of such an agreement are being developed in the OECD, while associated U.S. policy is developed by the Committee on International Aspects of Energy. We should work to ensure these negotiations are coordinated with the other elements of our policies with the Allies.
• —R&D cooperation. We are proceeding, both in the OECD and in independent talks with the Japanese, on cooperation in energy R&D.

The more fundamental questions of coordinating our energy policies—comparing and coordinating our national needs and sources of supply, determining acceptable rules for competition, and perhaps ultimately developing a union of consumer countries—might be attempted as an outgrowth of these on-going efforts with our Allies.

Arab-Israeli Problem

The effect of the Arab-Israeli problem on the energy situation is treated, although inadequately, on page 44. We will improve this section in the final version. It concludes that U.S. policy must seek to avoid a situation where the moderate Arabs use oil as a means to pressure the U.S. on its policies with respect to the Arab-Israseli problem. The essential of such a policy could be to:

• —“Show some movement” on the Arab-Israeli problem (the standard State position).
• —Enhance the stake of moderate Arabs in continued cooperation with the U.S. by creating policies to accommodate their security needs and economic concerns.
• —Have a policy of supply diversification towards Iran.
• —Build domestic energy supply alternatives.

We will revise this section to note that the overriding concern in this area is to prevent our key supplier, Saudi Arabia, from becoming radicalized or falling under the control of a Quaddafi. For this, we will have to keep them out of the forefront of the Arab-Israeli problem.

U.S.-Soviet Relations in Energy

On pages 44–49, the study addresses energy in the U.S.-Soviet context. It stresses the Soviet need to get access to U.S. capital for development of their natural gas resources and raises major issues concerning American participation in the two proposed Soviet LNG projects:

• —Will U.S. national security interests be jeopardized by either of the LNG projects?
• —Should major amounts of U.S. capital and technical expertise be directed to developing Soviet energy resources, thereby diversifying future U.S. supplies somewhat?
• —Will the domestic demand for the LNG at its projected high price be large enough to justify its being imported?

The study deals only tentatively with these complex issues. Accordingly, I am proposing by separate memorandum to you that we undertake a much more extensive analysis of the issues involved in the Soviet LNG projects.

Next Steps

The study sets out broad goals and specific tasks for dealing with the international aspects of the energy situation. Pages 50–56, which deal with these goals and tasks for the future, are worth your while reading. The four goals are (1) ensure that adequate and stable supplies of oil and gas are available from foreign sources, at the lowest feasible prices; (2) make provisions to protect against interruption of foreign supplies; (3) develop the option to reduce our dependence on foreign supplies as quickly as feasible; and, (4) cooperate with other major consumers to achieve the above goals. Specific tasks are then prescribed for attaining each goal.

We will issue the final draft of the Executive Summary early next week. Based on your discussion with Governor Love, we can schedule a meeting of principals for late next week. It would be held under the umbrella of the SRG, and we will keep to a minimum the number of agencies represented.

Recommendation

You already have a SALT VP scheduled for Wednesday and a DPRC meeting set for Thursday. Both meetings should be held. Therefore, I recommend that you schedule an SRG meeting for Friday, August 17, to discuss the NSSM 174. If a meeting is not feasible, I will schedule a meeting of the Interagency Committee on the International Aspects of Energy, which I chair, to discuss the NSSM report and follow-on tasks.

Schedule a meeting for Friday.⁶

Odeen hold meeting of his committee.

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. Sent for urgent action. Concurred in by Kennedy. Kissinger initialed the memorandum.
2. Attached but not printed is the 60–page response to NSSM 174, dated August 14, entitled “Executive Summary.” A full response to NSSM 174, other than the Executive Summary, has not been found. NSSM 174 is Document 171.
3. In the margin next to the last sentence of this paragraph, Kissinger wrote: “What is it?”
4. In the margin Kissinger wrote: “Nonsense.”
5. In the margin next to this sentence, Kissinger wrote: “Means what?”
6. Kissinger initialed his approval of a Friday SRG meeting; see Document 194.