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

261. Memorandum From Jan Lodal and Helmut Sonnenfeldt of the National Security Council Staff to Secretary of State Kissinger ¹

Washington, December 4, 1973.

• SUBJECT
  • Next Steps in the European Oil Situation

In preparation for your trip to Europe,² this memorandum describes briefly the European oil situation and then addresses several key questions relating to the next steps we might take with the Europeans: what leverage do we have with the Europeans in this situation; what do the Europeans want from us regarding oil; what do we want from the Europeans?

The European Oil Situation

The current state of the oil situation in major European and other states is summarized in the table below. The “pre-crisis forecast” is the amount of Arab oil these countries had been assuming—prior to the crisis—that they would have available in December. The “post-crisis forecast” is the reduced amount CIA now expects will be available for December as a result of the Arab cutback and embargo.

Reduction in Oil Imports from Arab Sources for December 1973

	Pre-Crisis Forecast (Thousand b/d)	Post-Crisis Forecast (Thousand b/d)	Reduction in Expected Arab Oil (%)	Reduction in Expected Total Oil (%)	Oil Reduction in Terms of Total Energy (%)
France	2,250	2,110	6	4	3
UK	1,550	1,460	6	3	2
Italy	1,765	1,470	20	143	113
West Germany	1,685	1,405	20	10	6
Belgium/Luxembourg	490	410	20	13	8
Japan	2,500	2,075	20	9	7
Canada	200	165	20	2	1
Netherlands	2,900	0	100	3223	1883
Portugal	100	0	100	64	42
U.S.	2,400	0	100	13	6

The table shows that the UK and France, both “favored” states under the Arab oil cutbacks, are losing only some 6% of their expected current imports from Arab sources. The “non-favored” countries, such as Italy (as well as Canada and Japan) are losing some 20% of their expected Arab imports. The Netherlands and Portugal (as well as the U.S., South Africa and Rhodesia) are totally embargoed from Arab sources. Arab oil normally provides only 40% of the EC energy supplies.

The international oil companies are diverting some oil from “favored” countries, such as the UK and France, to embargoed countries, such as the Netherlands, but the amounts cannot be determined by the USG. There are also signs of diversions away from Japan.

In return for pro-Arab statements, the Arab producers have exempted the EC states (except the Netherlands), Japan and the Philippines from their 5% production cutback in December. At the recent Arab summit meeting in Algiers, a secret decision was apparently made to stabilize future production at the November level, 25% below September production. Such a step would postpone, but not prevent, serious economic disruption in most oil importing states. Unless the Arabs increase production, the West European countries and Japan will face by mid-1974 recessions ranging from no economic growth in the case of the UK and France to very serious losses of output in the other industrialized countries.

As we noted in our memorandum to you on assistance for the Dutch (Tab A)⁴ the basic problem for the Dutch is not an oil shortage for themselves. They normally consume less than 20% of the oil that passes through the Netherlands. If the Dutch passed on the effects of the embargo to those states that depend on them for supplies, the main energy loss would fall on West Germany, Belgium and Luxembourg. However, the Dutch would lose the foreign exchange and GNP which come from producing and exporting refined products.

The Saudis have just informed the Germans and Belgians that they would order shipments destined to them through Rotterdam delivered instead through non-Dutch ports such as Hamburg and Antwerp. However, these ports are not now capable of handling much more oil than at present rates. The Germans and Belgians would still face serious shortages in the event of a Dutch cutoff. There are indications that the Saudis will permit bonded shipments of crude oil to Belgium and Germany through Rotterdam. In any event, the percentage reduction figures listed in the above table for West Germany and Belgium/Luxembourg are likely to prove optimistic. In the worst case—assuming a Dutch cutoff and a delay in circumventing the Rotterdam obstacle—the reduction in expected Arab oil imports could approach 40% for West Germany and 50% for Belgium/Luxembourg.

The embargo on Portugal should not cause major difficulties because of its access to Angolan oil.

All Western European countries are taking energy-saving measures. In most cases, these measures will be inadequate to counteract these countries’ mid-winter supply shortfalls, which will range between 10% and 40% if the Arab cutbacks continue. However, the moderate steps taken so far will help prepare the public for the more stringent actions that may be necessary in early 1974.

Our Oil Leverage With the Europeans; What Do They Want From Us?

The unique role of the U.S. in the current oil crisis and in the longer term oil situation gives us some leverage with the Europeans. We have the power to make their oil situation better or worse.

This leverage derives from a multiplicity of political, economic and technical factors:

• —We are the sole possessors of sufficient political leverage on the Israelis to pressure them to accept a satisfactory peace settlement. Without a settlement the cutbacks may not be restored totally.
• —Except for possible voluntary actions such as oil sharing, we have been hurt as much as we’re going to be by the Arab embargo, while the European situation can grow considerably worse.
• —We can get by in energy without any help from the Europeans, whereas they will need our help if matters get much worse. For example, if the situation deteriorates for them, the Europeans may become very interested in an emergency oil sharing arrangement with us. Beyond this, they will need our cooperation if economic or military countermeasures are to succeed. (We are continuing to analyze the feasibility of various countermeasures.)
• —Most international oil companies are U.S. owned and could be manipulated by the USG to the disadvantage of the Europeans.
• —We have a real option and the makings of a long-range plan for self-sufficiency in energy, unlike almost all Europeans, which eventually will permit a “go-it-alone” policy.
• —We still retain considerable economic and political influence with Saudi Arabia, an influence unmatched by the Europeans.
• —Our influence with the Saudis, Iranians and the U.S. oil companies will be very important in working out long term arrangements between producers and consumers for ensuring adequate supplies of oil at reasonable prices.
• —We are well ahead of the Europeans in most fields of energy-related technology, especially those dealing with new sources of energy.

This, 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 more to offer than gain from such an effort.

Except for the Dutch, the Europeans do not appear for the moment to want much from us regarding the oil situation. They are counting on U.S. pressures on Israel and on their appeasement of the Arabs to make matters better. Aside from a desire for these pressures, the Europeans appear most anxious for us not to exercise our ability to make matters worse than they are. For example, they do not want USG manipulation of American companies so as to divert oil from Europe; they do not want U.S. pressures for actions—such as overt sharing with the Dutch—which could lead to further confrontation with the Arabs.

What Do We Want From the Europeans?

There are two areas where we want some help from the Europeans at this time:

• —To help solve the Dutch problem;
• —To resist further Arab pressures.

A third—and much less pressing—area where we could make some progress with the Europeans is in laying the groundwork for longer-term cooperative steps in energy.

Our leverage is pertinent to all three areas.

Solving the Dutch Problem

We have previously sent you a memorandum (Tab A) with recommendations on how to proceed bilaterally with the Dutch to help solve their immediate problems.

In the Alliance-wide context our basic objective is to get the Allies to help the Dutch so as to reduce divisiveness in the Alliance and help reestablish solidarity. Our main leverage at the moment—which we are not recommending that you use—is our potential ability to manipulate U.S. oil companies to obtain de facto sharing to help the Dutch. We could offer to pressure the U.S. companies to divert non-boycotted oil (e.g., oil from Iran intended for France or the UK) to the Netherlands. This arrangement, along the lines of what Walter Levy advocates, would help make up the Dutch foreign exchange shortfall resulting from reduced exports to oil products. It would also result in more oil going to the Belgians and Germans, who are heavily dependent on crude oil imported through Rotterdam.

We do not believe that the French or British are likely to agree with this arrangement at this stage of the crisis; they probably could prevail on the Dutch not to go along. This arrangement would further increase divisiveness in the Alliance if put into effect against the wishes of the French and the UK. The manipulation of oil companies by the U.S. would serve to augment fears of diversion of supplies to the U.S., further increasing Western divisiveness. Finally, the arrangement is severely limited by the fact that all U.S. oil company shipments from non-Arab producers to the UK and France amount to only about 80,000 barrels per day, compared to a potential Dutch shortfall of some 2,900,000 barrels per day. Moreover, the U.S. companies have a large stake in refining and distribution in these countries which they would be reluctant to jeopardize.

The Dutch want to preserve the appearance of EC unity to the extent possible. Given this and the lack of useful U.S. leverage with regard to our Allies at this time, we should take our cues from the Dutch on the question of solving the Dutch oil problem.

In discussions with our Allies, however, we should impress upon them that our support for the Dutch should not only aid the Dutch but the Germans and Belgians as well, insofar as our help permits Dutch oil exports to them to be maintained. Our help should also reduce the likelihood of Dutch countermeasures against their EC partners. Thus, our support for the Dutch is a significant effort to help regain solidarity in the Alliance and should be recognized as such.

Resisting Further Arab Pressures

Our objectives in stiffening the Allies against further Arab oil pressures are (1) to prevent further divisiveness in the Alliance, and (2) to avoid further caving, which would both encourage the Arabs to pursue further their oil strategy and make it more difficult for us to play a constructive role in the peace negotiations.

We can draw on our leverage to help attain both objectives. By pledging to ensure that U.S. companies will not divert oil to the U.S. from our Allies, we can avoid making matters worse for them.

In discussions with our Allies, we can hold out hope for matters getting better by noting our willingness to apply pressure on the Israelis to achieve a just peace, as long as the Europeans do not extend the utility of the Arab oil strategy by caving further.

We can say we would be willing to use our leverage with the Saudis to attempt to lift the embargo on the Europeans, which would likely be sooner than the lifting on the U.S. We can note that the oil situation for us has gotten about as bad as it’s going to get. We can get by on our own from now on. For the Europeans, however, if matters get much worse they will need us for effective action against the Arabs and for sharing arrangements. We should note that our willingness and ability to enter into emergency cooperation with the Europeans if things for them get worse will be directly related to how they behave now with regard to the Dutch and the Arabs.

The Europeans are obviously very sensitive about being caught in bed with us at this time. Moreover, two key European countries in any emergency scheme, the UK and France, don’t feel much of a pinch as yet. This may change if Arab exports to them do not increase over 1974, or if there are renewed Arab pressures—to which they do not submit—as a result of faltering peace talks or of new fighting. This makes it unlikely that the UK and France, among others, would agree to contingency planning at this time. However, we believe that it would be worth trying to get consultations underway on such planning. By proposing quiet, high level consultations on the conditions under which joint countermeasures of all types might be taken, we would be emphasizing our leverage in the oil situation and, hopefully, lead into useful consultations. Some Allies are likely to leak this proposal to the Arabs, but this has positive pressure aspects itself.

Longer-Term Cooperation

Neither we nor our Allies are in position to begin serious discussion of where we want to be in the longer term in energy. However, at the moment, we can both highlight our longer term leverage and help stiffen our Allies’ backs by proposing high level consultations (say, in late January, if conditions warrant) on longer term aspects such as:

• —An OECD-wide sharing arrangement. (Our leverage is low at this time, since we would stand to gain much more now from a sharing plan than would our Allies. If this situation reverses, which would happen several months after the Arabs resumed their cutbacks, our leverage to get a sharing plan more attractive to us would greatly increase.)
• —Cooperation regarding energy R&D (a memorandum from Dave Elliott on this subject is attached at Tab B).⁵
• —Cooperation in backing up companies, limiting oil prices, and in constructive assistance to the producers to ensure adequate oil supplies at reasonable prices.
• —An Atlantic-Japanese energy policy reflecting the above aspects.

As long as we remain on the “partnership” track with the Europeans, we should also have a posture of favoring longer-term cooperation in energy. However, because of their current sensitivities, the Europeans may not want to do more than have quiet consultations on this subject. Our approach should be that energy may be as much of a challenge for the Atlantic community in the seventies and eighties as the security threat was in the forties, fifties and sixties and that we stand ready to do our share.

Japanese Aspects

The Japanese are as hard-hit by the Arab cutbacks as most Europeans. Indeed, there are signs that the oil companies are diverting oil away from Japan. For at least these reasons, you should bring in the Japanese on any high level consultations that you arrange with the Europeans on possible joint countermeasures and on longer-term cooperation in energy.

Recommendations

That in your consultations with the Europeans you:

• —Encourage assistance to the Dutch, but take your cues from the Dutch themselves on what specific assistance to push.
• —Note that our support for the Dutch is a significant effort to help regain solidarity in the Alliance and should be recognized as such.
• —Offer, if necessary to stiffen the Allies against further Arab pressures, assurances on non-diversion of oil by American companies.
• —Emphasize that further European concessions to the Arabs would encourage the Arabs to pursue their oil strategy and make it more difficult for us to play a constructive role in the peace negotiations.
• —Note that our willingness and ability to enter into emergency cooperation with the Europeans if matters for them get worse will be directly related to how they behave now with regard to the Dutch and the Arabs.
• —Emphasize our leverage by proposing quiet, high level consultations with the Europeans and Japanese on possible joint countermeasures against the Arabs and on longer-term cooperation in energy.

1. Source: National Archives, Nixon Presidential Materials, NSC Files, Box 321, Subject Files, Energy Crisis, Nov 73–Feb 74. Secret. Sent for action. Concurred in by Saunders, Cooper, Elliott, and Jack Froebe of the NSC Staff. An unidentified hand wrote “Action taken” in the upper right hand corner.
2. See footnote 4, Document 247.
3. “Total Oil” and “Total Energy” calculated in terms of domestic consumption. The Netherlands re-exports some 80% of its imports. Italy re-exports some 20%. [Footnote in the original.]
3. “Total Oil” and “Total Energy” calculated in terms of domestic consumption. The Netherlands re-exports some 80% of its imports. Italy re-exports some 20%. [Footnote in the original.]
3. “Total Oil” and “Total Energy” calculated in terms of domestic consumption. The Netherlands re-exports some 80% of its imports. Italy re-exports some 20%. [Footnote in the original.]
3. “Total Oil” and “Total Energy” calculated in terms of domestic consumption. The Netherlands re-exports some 80% of its imports. Italy re-exports some 20%. [Footnote in the original.]
4. Not attached. Presumably a reference to their memorandum of November 27; see footnote 3, Document 247.
5. Not attached.