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

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

Washington, August 15, 1973.

• SUBJECT
  • Energy-related Foreign Policy Objectives

An SRG meeting on Energy (NSSM 174)² is scheduled for Thursday, August 16, 1973.

The purpose of the study is to:

• —Provide a broad overview of the current and projected energy situation through 1985 with special attention to those aspects affecting national security.
• —Define the national security and foreign policy issues that flow from the energy situation.
• —Inventory the government’s knowledge on these issues and specify where more work needs to be done before we can make policy judgments.

A. Background Considerations and our Objectives

Energy and, in particular, oil is a critical new element in the security equation. It will be a prime determinant of relations between major countries for at least the next five years. The introduction of U.S. oil demand onto the world market, combined with the sharp growth in other consumer nations’ demand has thrust the Middle East producer nations (and, in particular, Saudi Arabia) into a unique position in the forefront of relations between the industrialized nations.

In this unique position, key Arab producers will accumulate considerable power and leverage over the relations between industrialized nations. They are in a position to play off one industrialized nation against another. Their economic power will grow rapidly, and they could seriously disrupt the world’s monetary system, for example. Without oil, industrialized economies cannot function, and this, of course, raises the specter of a competitive scramble for Middle East energy that could disrupt our Alliances (as well as Common Market).

They also are being placed in a uniquely vulnerable position. Since sufficient reserves exist to meet world needs, strong pressure could be created to force production should the Saudis overplay their hand.

Obviously, the Soviets will be aiming to utilize oil to their own advantage, both to emphasize divisive influences and break up our alliances and also to gain a source of hard currency to support their own economy’s development. In fact, whoever can capitalize on the increasing world dependence on Middle East (e.g., Saudi) oil will enjoy a position of strength and leverage in the coming five years. The major problem is, of course, to develop an understanding of this leverage, how it will operate and the measures needed to minimize divisive impact on our alliances and prevent the Soviets from using it against us.

Against this background, certain critical aspects of our national approach to energy should be addressed at the meeting. Briefly, these six broad national objectives provide the conceptual basis for our approach to energy:

• —to ensure adequate and stable world oil production to meet U.S. and allied needs;
• —to keep world oil prices as low as possible and to minimize the potential disruption to the world monetary systems which large accumulated Arab reserves could cause;
• —to limit the impact of our growing oil needs on our other Middle East foreign policy goals—in particular, our approach to the Arab-Israeli conflict;
• —to capitalize on any leverage which energy-related factors can contribute in our total relationships with the allies while preventing energy from being a divisive force in U.S.-allied relations;
• —to capitalize on energy in our relations with the Soviets and to keep the Soviets from using energy to their advantage; and,
• —to reduce the economic and military vulnerability that will accompany increased dependence on imported oil.

B. Domestic Energy Policy

The international aspects of the energy problem are closely linked to our domestic policies—especially in the period beyond 1978. In the next five years there are few alternatives to sharp increases in imports. Beyond the late 1970s, however, projected levels of imports differ greatly and depend critically upon the rate at which we develop domestic energy alternatives.

Alternative U. S. Levels of Imports³

(millions of barrels per day)

	1975	1980	1985
Hi Projection	10	19	19
Mid-range Projection	8	11	15
Lo Projection	7	6	4

To the degree that domestic policies slow the rate of growth of imports at acceptable cost, they will contribute greatly towards the accomplishment of foreign policy/national security objectives.

Broadly, the components of enhancing self-sufficiency include:

• —Developing existing domestic resources more fully (natural gas and offshore oil resources).
• —Development of alternative non-fossil fuels, such as nuclear power.
• —Development of fuel substitutes for oil or gas (e.g., coal liquification and gasification) and removal of environmental inhibitions to the use of coal—our most plentiful domestic resource.⁴
• —Energy conservation, which has a magnified impact on import needs (e.g., a 10 percent reduction in demand could reduce imports 20 percent in 1980).

Progress is being made on all these. A $10B, five-year R&D program has been started and conservation is getting a new (but late) push. Deregulation of natural gas has run into difficulties on the Hill, however.⁵

C. Ensuring Adequate World Oil Production

Saudi Arabia will hold the key to meeting world production needs through 1980. She accounts for 24 percent of the world’s reserves and it is Saudi production which will fill out world oil production to meet total world needs.

However, by 1980 the Middle East producer countries could be earning as much as $40B annually and these revenues could grow to 8 to 10 thousand dollars per capita. Without an economic incentive (given the social disincentive), there is considerable doubt that Saudi production will expand sufficiently.

To address this production problem, several initiatives could be pursued:

• —We should strive to widen our relations with Saudi Arabia and to make oil one component of broader U.S.-Saudi relations. Insofar as possible, we should seek a relationship in which oil is one component of a mutually beneficial political and economic relationship in which U.S. (and Allied) oil needs are met. We should convince the Saudis that oil production levels cannot be allowed to fall short of U.S.-Allied needs without disrupting other elements of our relations they value.⁶
• —We should seek to improve economic ties, consider economic policy changes which accord to Saudi needs and generally seek a better understanding of Saudi economic desires as their production expands. These questions are being addressed in preparation for the Saudi economic mission.⁷
• —We should seek closer military ties with the Saudis and be responsive to the growing Saudis’ vulnerability to attack from Arab guerrillas, Iraq, and greater Soviet Union influence.
• —We should develop (with our Allies) a comprehensive analysis of our projected oil needs and discuss them with the Saudis and other producers. I question the advisability of relying on the oil companies to do this.
• —We should seek to diversify away from Middle East sources and away from Saudi Arabia. Western Hemisphere sources (Canada and Venezuela) do not look promising but some relief might be gained by pressing for increasing Iranian output. Another possibility for diversification is Iraq, which some believe could have reserves almost half the Saudis’. For political reasons, these reserves have not been developed nor fully explored, however.
• —In addition, we should seek an understanding with Iran that in the event of a selective Arab boycott of the U.S., Iranian production would be shifted to meet U.S. needs leaving Arab oil for Europe and Japan to replace Iranian oil.⁸
• —Insofar as possible, we should try to disassociate oil from our Israeli policy and dampen the growing Saudi tendency to consider oil for political ends. (Further discussed below.)

Development of this broader relationship requires initiatives in several areas, economic and military. We should continue to be forthcoming in meeting Saudi arms and other security needs. The economic mission planned by Treasury for November is one component of developing closer economic relations. (A copy of the draft agenda currently being developing by the working group is enclosed.)⁹

D. Controlling World Oil Prices

The selling price of a barrel of Middle East oil is 15 to 20 times production cost and has increased since January almost 30 percent largely because of the tight world oil market, the united front of the OPEC cartel and other factors such as the participation agreements that have severely weakened the companies’ negotiating position. Some believe (e.g., Adelman) that future price rises might be dampened in a rush to bring new oil to market as the OPEC cohesion weakens under the strain of differences in economic and political objectives of the member countries.

However, there is no sign of this occurring and I seriously doubt future price increases will be controlled without more active government intervention by consumer governments. Faced with a choice between the possibility of losing supplies and accepting an increase in price, the companies will continue to accept price increases (profits are largely insensitive to price increases but profits disappear if oil is not available). Since a one dollar increase in the price of a barrel of oil will add about $5.0B annually to our import bill, there is a wide divergence between the companies’ interests in countries and our national interest.¹⁰

Some of the initiatives we could pursue to hold down rising prices include:

• —Forming an organization of consumer countries which could discuss and agree on ways to control unnecessary competition and bidding up of oil prices.
• —Controlling the companies’ negotiations with the producer countries

Some form of consumer cooperation will be needed as a minimum to help avoid the potential for competition between consumers. Agreements should be pursued first to create an environment of confidence between the consumer nations and to establish an understanding that competition for oil should not be allowed to disrupt our relations. Once established, this confidence could support a confrontation with OPEC.

The key problem is to avoid the appearance of confrontation until the arrangements have been successfully formed. The risk is that certain key consumer nations like the Japanese will be scared off or we will encounter producer retaliation before we are ready to deal with it. The Japanese feel especially vulnerable because of their 100 percent dependence on oil imports and the major projected increase in their import needs. The major oil companies would also shy away from a confrontation and the risk of a supply cutoff even if there is a possibility of price reductions.

As an alternative to consumer cooperation, we could limit ourselves to purely defensive measures aimed at controlling prices. In fact, these should be pursued regardless of our success in forming a union of consumer nations. For example:

• —We should consider divergencies in the economic and political objectives of OPEC nations and seek ways of driving wedges in its cohesion. CIA is developing an improved information network which will help.
• —We should stress to the Saudis that price (as well as political relations) will determine whether or not we exploit domestic alternatives which will become available in the late 1970s. If domestic alternatives are exploited, demand for this oil will be lost. The time may be limited during which they can earn dollars and diversify their economy.
• —We should stress the upper limit on price which these alternatives set for international oil prices in the future. Oil shale, tar sands, etc., might cost about $5 per barrel and with very substantial reserves available, this would be adequate to greatly reduce our future import needs.
• —We should otherwise press for ways to increase the competitiveness of the oil market.

E. The Israeli Problem

Although there are significant economic problems which could hinder Saudi expansion of production, political problems are emerging as the most immediate reason for cutbacks. Our overriding concern must be to discourage Saudi Arabia from placing herself politically in the forefront of the Arab-Israeli problem. A political strategy aimed at accomplishing this would be partially composed of personal discussions with Saudi leaders stressing the danger of such a course and would also include enhancing the position of the responsible elements of the Saudi political power structure (Fahd and Sultan).

The Saudis could be reminded of their delicate position and the need to chart a moderate course. If it becomes clear that Saudi oil and pressure are disrupting U.S. support for Israel, the Israelis might consider overt military action. On the other hand, the Saudis must avoid too close identification with the U.S. (and Israel) because of their vulnerability to guerrilla attack. We should stress to the Arabs that none of the Arab countries have benefitted from being in the forefront of the Israeli problem.

Since State and others seem to feel we should press on the Israeli problem to encourage Saudi cooperation, you may want to describe your general approach to keeping oil and Arab-Israeli problems as separate as possible.

F. Energy and Relations with the Allies

Energy is an area in which the U.S. has significant leverage and the Allies need our cooperation. Our leverage in energy matters results from several factors:

• —We have considerable economic and political influence with the two richest oil nations—Saudi Arabia and Iran. Without U.S. participation, it is doubtful that the proper economic environment can be created that will bring about these increases.
• —Our technological advantages also give us leverage. We lead in most fields of energy-related technology, especially new nuclear energy sources. (R&D is discussed below.) The Japanese are extremely interested, for example, in gaining access to our uranium enrichment technology and a project in which the Japanese would finance a plant located in the U.S. is under detailed study. The key problem is maintaining control over this sharing so adequate diplomatic compensation is made.
• —A final factor is large domestic resources which could reduce our future demand for oil imports. 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 will find it difficult to maintain prices at the current level 15 to 20 times cost. 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.

These general sources of strength in energy matters translate into specific sources of leverage in issues currently being discussed within the OECD and elsewhere. Examples are cooperative emergency sharing schemes, research and development, and consumer country cooperation.

(1) Emergency Sharing Schemes

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 arrangements.

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

In addition, 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.
• —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.

The OECD is preparing a paper on sharing which will be completed in October and negotiations will then be started.¹¹

(2) 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.¹²

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.

We are about to sign an “umbrella” agreement with the Japanese which would allow detailed projects to be agreed to on a case-by-case basis. State is heading up a study effort aimed at developing specific projects—the key problem will be maintaining control and ensuring adequate compensation is received (the uranium enrichment project is a good example).

(3) Consumer Country Cooperation

As discussed above, some form of cooperation is needed to provide the confidence needed to avoid competition. The real issue is the nature of the cooperative effort and the feasibility of getting the major consumers to agree to work closely together.

There are wide differences between consumer nations 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 Germans¹³ are each going their separate ways seeking their own sources and the British are hoping North Sea oil will solve their problem. The Japanese have a strong interest in cooperation but are deeply concerned over the risks.

Greater government backing is needed for the international oil companies and perhaps a direct government role in negotiations should be aimed at. To be effective, it would require deep involvement in company affairs which may not be acceptable to the U.S.-owned firms. But the rapid growth of producer country participatory arrangements argues for some new steps to improve the bargaining position of the oil companies.

If any cooperative effort is going to be successful, the U.S. must play a key role. This provides some leverage with the allies who are aware of the need for cooperation and need U.S. leadership.

G. Vulnerability to Supply Cutoffs

If imports increase from today’s 30 percent of total oil consumption to the projected 60 percent in 1985, we will clearly become more vulnerable to cutoffs and production slowdown. This will not have a major impact directly on our military requirements which make up only about ten percent of domestic production—the real danger is the economic disruption that would result from a supply cutoff.

To meet these contingencies, we could develop voluntary and mandatory rationing plans, enlarged oil stockpiles, import sharing plans, and the like.¹⁴

This 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 provide (in theory) adequate quantities of oil to maintain consumption levels for about three months against 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, ensuring refining capacity is fully utilized and distributing the stored oil throughout the country. Companies now hold stocks because it is in their economic interest to do so (we have no formal stockpile plan) and there would be major difficulties getting them to part with them in an emergency. Getting a better understanding of the national oil distribution system is a high priority problem for further study.

To counter a shortfall caused by a producer country limitation of production, several remedial steps could be taken including voluntary energy conservation and mandatory rationing. These measures could be relatively effective, reducing demand by as much as 10 percent and providing some time to begin shifting to other supply sources. As mentioned above, 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.

H. The Soviet Union

A potential supplier of major quantities of oil and gas, the Soviet Union lacks the technical expertise and capital to develop her resources.

Our objective with respect to the Soviets should be to utilize this leverage in the broader context of U.S.-Soviet relations. This requires that we keep control over the several large LNG and oil projects currently under consideration by U.S. companies and the Soviets. We do not know now the areas where USG cooperation is needed and this is one reason I have proposed a systematic study of the projects. My previous memo describing the projects in more detail is in your book.¹⁵

In addition to these specific projects, we should prevent the Soviets from using energy against our interests. For example, the Soviets are now buying oil from Iraq and reexporting it to Germany. The Soviets would obviously like to expand their role as a middleman in handling Middle East oil.

I. The Meeting

As you know, the government is still inadequately organized to effectively handle the energy problem. Our approach is haphazard and uncoordinated with each agency pushing its pet project.

Thus, in addition, leading a general discussion of the issues, you should focus the discussion towards the areas where coordination of our policies is needed and emphasize your broad views on how these issues should be addressed. In particular:

• —Insulating our oil and energy policies from the Israeli problem.
• —Developing a coherent political, military and economic approach to the Middle Eastern producer countries, designed to provide continued stability and adequate oil production to meet world needs.
• —The need to fully integrate energy into our diplomatic approach to the Europeans and Japanese in areas such as R&D cooperation, import sharing, and general questions of consumer cooperation.
• —The importance of getting some control over the oil companies in their negotiations with producing states.
• —The importance of coordinating our approach to the Soviets and, in particular, controlling the progress on the LNG project.

Talking points in your book are written to aid you in accomplishing these objectives. Also in your book are:

• —A copy of the NSSM 174 Executive Summary.¹⁶
• —A previous memo on energy and the Atlantic Alliance.¹⁷
• —A covering memo to the NSSM 174 Executive Summary outlining other major issues.
• —Saudi economic mission agenda.
• —A memo on a proposed study of the Soviet LNG projects.

1. Source: National Archives, Nixon Presidential Materials, NSC Files, NSC Institutional Files (H-Files), Box H–68, Senior Review Group Meetings, SRG Meeting, Energy NSSM 174 8/16/73. Confidential. Sent for action. A handwritten notation by Kissinger at the top of the page reads: “total/partial cooperation.” This memorandum served as the analytical summary of the response to NSSM 174 and reflected Kissinger’s comments on an earlier draft, Document 192.
2. See Document 194. NSSM 174 is Document 171.
3. Based on estimate made by the National Petroleum Council, for hi and lo. [Footnote in the original.]
4. Domestic reserves of coal could provide over 350 years supply if environmentally acceptable. [Footnote in the original.]
5. Congress is not convinced that an actual shortage exists—some members believe it is solely caused by the actions of gas companies withholding gas from market in anticipation of a price increase. [Footnote in the original.]
6. A handwritten notation by Kissinger in the margin next to this paragraph reads: “such as?”
7. The Japanese enjoy a competitive advantage since the GOJ can offer package deals combining sales agreements with industrial diversification in Saudi Arabia. Because of historical USG-business relations, we are somewhat limited in this regard. [Footnote in the original.]
8. Kissinger placed a checkmark in the margin next to this paragraph.
9. Attached but not printed at Tab A is “Economic Mission to Saudi Arabia, Suggested Agenda for Discussions,” undated.
10. This is illustrated by the formula recently agreed to by the companies for adjusting the price of oil after currency devaluations. Currently, prices are raised if any one of 11 major currencies is devalued—no account is taken of the relative importance of the currency in world trade. In addition, the producers are now seeking to include an “inflation factor” that would perk up prices each year regardless. [Footnote in the original.]
11. A handwritten notation by Kissinger in the margin next to this paragraph reads, “reduced pol. leverage.”
12. Kissinger placed a checkmark in the margin next to this paragraph.
13. The Germans recently formed their own government backed oil company. [Footnote in the original.]
14. A handwritten notation by Kissinger in the margin next to this paragraph reads, “How.”
15. Attached but not printed is an August 1 memorandum from Odeen and Sonnenfeldt to Kissinger, on the Yakutsk and North Star LNG Projects. The memorandum noted that because of the potential problems, such as Congressional hearings to clear Ex-Im Bank financing and Maritime Administration guarantees for construction of LNG tankers, and potential Congressional opposition, a study was needed. On another copy of this memorandum Kissinger approved this suggestion and handwrote: “Can Sonnenfeldt or Odeen chair?” (National Archives, Nixon Presidential Materials, NSC Files, Box 251, Agency Files, National Energy Office, Vol. III)
16. See Document 192 and footnote 2 thereto.
17. Document 187.