262. National Intelligence Estimate1
THE WORLD OIL CRISIS: ECONOMIC AND POLITICAL RAMIFICATIONS FOR PRODUCERS AND CONSUMERS
Part I: The Producers
The Arabs have finally used oil as a political weapon—declaring an embargo against the US (and a few others) and instituting major production cuts to drive their point home. This program has and will hurt the oil-consuming states. At present it works as follows:
- —Total production has been cut 25 percent, and the Arab producers threaten to go on cutting five percent a month until Israel [Page 736]withdraws from all territory captured in 1967 and the rights of the Palestinians are restored.
- —Until then; favored countries may buy Arab oil at the pre-October quantities; embargoed countries get no Arab oil; neutral countries will have to divide up what is left.
This combination of embargo and production cuts by Arab oil producers has had an immediate and strong impact on the main oil-consuming countries. The Arabs seem both surprised and pleased at their success.
Saudi Arabia and Kuwait, which together account for about 60 percent of Arab oil exports, have been the leaders in implementing this program. Other Arab producers have been somewhat less enthusiastic about using oil as a weapon, but have for the most part joined in. Because of the recent price increases, Arab oil producing states have plenty of revenue to run their governments and give aid to poorer Arab states. And, solidarity between Saudi Arabia and the states that did the fighting is strong.
The Saudis and their followers will require major and substantial progress on the Egyptian-Israeli front before they would restore much of the production cut or ease the embargo. Saudi Arabia will rely heavily on Sadat’s judgment and suggestions in this situation. For King Faisal, the future status of Jerusalem will be the key problem. But the Arab oil producers will hesitate to cut output so much that major neutral or favored consumers would be severely crippled. Saudi Arabia and Kuwait respect the power of the major consuming states and, more importantly, do not wish to tear down the whole structure of relations with Western Europe, Japan, and the US.
The Arabs have a number of powerful options in employing oil as a weapon:
- —they can shift consumers from the neutral to the favored class
- —they can shift countries into the embargoed class
- —they can vary the rate of application of production cuts
- —they can restore production selectively or across the board.
The Arab oil producers will be flexible and selective in exercising their options, but they will insist on progress. We judge that the Arabs will maintain a squeeze on oil supplies until there is real progress on the negotiations, which includes substantial Israeli withdrawals from occupied territory. We do not think that, in the circumstances following this relatively favorable round of hostilities, the Arab states are going to let the opportunity to win a victory at Israeli expense slip out of their grasp.
If serious fighting breaks out again, the restraints on Arab use of oil as a weapon would be reduced. Reason would yield greatly to emotion, damaging effects on neutral states would carry less weight, and [Page 737]concern about good relations with the US would diminish, since the latter would be held responsible for failing to restrain Israel.
Part II: The Consumers
Europe and Japan see no realistic short-term alternative to making the best possible deals they can with the Arab oil producers to get through the next few months. Their need for Arab oil has brought a general scramble to protect national interests, accompanied in Europe by a widespread desire to strengthen its longer-term bargaining position towards the Arabs and the world.
The general strategy for the next few months will probably be characterized by the following:
- —An official policy along the lines of the November EC declaration,2 but accompanied by less overt warnings to the Arabs not to go too far.
- —Looking to the US to carry the burden toward an Arab-Israeli settlement accompanied by persistent endeavors by the French and also by the British, to obtain a seat in any international conference on a settlement.
- —More or less quiet efforts, through the oil companies and in negotiations with the Arab producers, to ease the oil pinch—including attempts to ameliorate the lot of those allied states on the embargoed list. In this connection, the more favored nations, Britain and France, will argue that a pro-Arab official line on their part will be indispensable to these efforts.
European governments will also be considering other measures to diminish their vulnerability.
It is unlikely that they will use force or, at least under present circumstances, threaten it.
There are, however, other measures lying between appeasement and the threat or use of force.
- —Most obvious, and least risky, are assorted steps to limit consumption and increase availability of alternatives to Arab oil. The first can provide only limited relief and the second, relief only in the long term. Both, however, have some use as political and psychological gestures.
- —An organized consumer-producer dialogue is a step which both sides could contemplate as realistic and desirable. But Europe will probably not be prepared to explore this with any effective unity until the immediate crunch is over.
- —Both the technological and negotiating strategies would require cooperation with the US and the major oil companies. Lacking such collaboration, the negotiating strategy would invite destructive competition among consumers.
Japan is walking an uncomfortable line between the conflicting imperatives of close ties with the US and a vital need for Arab oil. How long Japan can balance these contradictions depends on the Arabs and the US. On the whole, the odds favor Japanese movement toward meeting Arab requirements, at least in the short run, because the prospect of losing so large a percentage of oil imports looms as a more clear and present danger than does some increase in political strains with the US.
Canada’s problems are, immediately at least, due more to geography and an inadequate distribution system than over-all shortage. Its eastern provinces are dependent on imported oil. The crisis will accelerate development of the trans-Canada pipeline. In general, the energy crisis will give new urgency to Canadian policies aimed at better husbanding Canadian resources.
The Middle East crisis has aggravated existing problems between the US and its allies across a broad spectrum. During negotiations, and so long as the oil crunch is on, it will be difficult to enhance a sense of shared common interests among the US and its allies. Various inducements might help but would not eliminate some sharp conflicts of interest. The allies would still be dependent on Arab oil. Attempts to bring the Europeans and Japanese along with the US by economic or security threats, e.g., threats to withdraw US troops from Europe, would affect different allies differently but would be of dubious value in getting them to support US policy in the Middle East. If such threats were used, they could generate reactions causing lasting damage to the alliance.
[Omitted here is Part I, “The Producers,” including sections on OAPEC Fears, the Cease-Fire, Arab Goals, Renewed Hostilities, and the Longer Term.]
Part II: The Consumers
I. Dimensions of the Problem
- Most of the world’s major oil consumers appear not yet to have grasped the magnitude of the crisis triggered by the Arab oil cutback. The measures taken to curtail consumption in the face of declining imports have been minimal; consumers seem unable to perceive as real the potential impact of sustained oil cutbacks on their usual daily routine. At the same time political leaders are estimating the likely impact of reduced Arab oil supplies under varying scenarios. Soon—if they haven’t already—they will conclude that continued cutbacks will begin to be seriously felt within a few months and have a rapidly accelerating [Page 739]effect thereafter. Political leaders will be influenced more by their perception of the potential vulnerability of their countries than by the precise timing of the supply crunch itself.
- The analysis that follows assumes that after December, the five percent monthly cutbacks (announced by the Arabs on 5 November and since modified somewhat) will continue to be made. It is possible that the Arabs will decide to postpone some of the cuts now planned for next year. If they do, the economic consequences that are now foreseen for late winter or early spring will be moderated and stretched out to early summer. The key point, however, is that unless the Arabs increase production, the West European countries and Japan ultimately face recessions ranging from no economic growth in the case of UK and France to even more serious losses of output in the other industrialized countries.
- If the Arabs continue to hold down oil production and especially if they cut output further, pressures on West European political leaders somehow to restore oil supplies will rapidly intensify. Although the supply crunch will come sooner in some nations than in others, Arab oil accounts for such a large portion of total EC energy supplies—42 percent—that Arab cutbacks clearly will have consequences for production and employment within the next several months sufficient to jolt consumers into an awareness of the seriousness of their situation. Even France and the UK—exempted from cutbacks by the Arabs—will probably experience, at best, negligible economic growth by about mid-1974. The other EC nations could postpone the economic consequences of the oil cutbacks until early spring only by drawing down oil stocks to unacceptably low levels. As stocks reach dangerous levels, pressures will mount to do something to restore Arab oil supplies, and France and the UK will be increasingly urged by their partners to share their more ample oil supplies.
- West Germany will be one of the first major countries to face severe economic hardship. If the Germans lose the oil they normally import through Rotterdam in addition to their direct share of the cutback, West German oil stocks by February would be 50 percent depleted even with rationing, and economic output would begin to fall off. Continued receipt of supplies through Rotterdam would merely delay this impact by a few months. Italy, despite its more ample stocks will be hit still harder because it is even more dependent on imported oil.
- France and the UK will be hurt by Arab oil policies. Even though they are in the preferred category, they will still not get all the oil they need. By drawing on stocks and instituting conservation measures, both nations can maintain consumption at near normal levels for more than a year, provided they do not lose their favored status or a [Page 740]substantial portion of their non-Arab imports. However, because of their dependence on foreign trade—particularly with other EC nations—disruptions in export sales to their harder hit trading partners and in imports of energy-intensive raw materials will cause economic losses. At best, Britain and France will forfeit growth, although later than the other states. At worst, the trade losses will cause some drop in GNP and employment. These losses, however, would be small in relation to those suffered by their EC partners.
- In Japan industry will bear almost the full brunt of the oil shortfalls because they have less room for conservation possibilities in other sectors. By March, the Japanese anticipate at least a 12 percent reduction below the current level even with a substantial drawdown in petroleum stocks. To cope with the situation, the government has ordered a 10 percent reduction in oil and electric power consumption in all major industries by the end of December and plans a further five percent cut during January–March. The industries hit hardest, including steel, transport equipment, and chemicals, account for about two-thirds of total industrial output.
- Canada’s eastern maritime provinces and Quebec stand to lose about 20–25 percent of their total crude imports. The Portland, Maine, to Montreal pipeline has been denied all of its Arab oil. There is no present threat to Canada’s large imports of Venezuelan oil, but these could also shrink as other consumers compete for Venezuelan oil. Because of the lack of oil transport facilities, the supply problems in eastern Canada cannot be alleviated by the crude production centers in western Canada.
- All of the less developed countries (LDCs) will suffer from Arab oil cutbacks to some extent. Even those countries on the Saudi preferred list—such as Brazil, India, Turkey, Pakistan, and most African nations—will be hurt indirectly by Arab oil policies. At best these countries will forfeit some growth. The other LDCs stand to lose a substantial portion of their oil supplies. Those LDCs that are rapidly industrializing and that have little or no domestic production will be among the hardest hit by the supply shortfalls, whatever their magnitude. Most prominent in this group are Brazil, Taiwan, and South Korea. Unemployment and loss of output could be especially severe in the latter two. Although Third World oil imports are relatively small compared with those of the industrialized nations, the LDCs generally depend on oil for a far greater share of their commercial energy needs than do the developed countries. Thus even relatively small shortfalls in oil needs could have pronounced economic effects. The embargo of the US has severely reduced oil supplies to Laos, Cambodia, and South Vietnam since the US military plays the role of an intermediary in supplying these countries.
USSR and Eastern Europe
- The Soviet Union will neither suffer from the Arab cutback, nor is it in a position to greatly alleviate the sufferings of those who will. Through 1975, the USSR should produce enough oil to meet its domestic needs and to export sizable quantities to Eastern and Western Europe. In the 1980s, however, unless major production problems are solved, it may have to rely on Arab oil to meet part of its steadily growing domestic demand. In 1972, Soviet net exports of oil totaled about 2 million barrels per day, almost one-fourth of total production. Nearly half of these exports went to non-Communist countries, and earned about $580 million in hard currency. Oil exports are the USSR’s largest single source of hard currency.
- East European countries, with the exception of Romania, are heavily dependent on imported oil, primarily from the USSR. Arab countries now provide about one-seventh of Eastern Europe’s imported oil. Reliance on this source is scheduled to increase as the USSR has encouraged Eastern Europe to seek a larger share of its oil from other producers. Although the USSR values its reputation as a reliable supplier to the West, the current crisis has forced it to give priority to the needs of Eastern Europe. Consequently, the Soviets have reduced deliveries to Italy, probably in part to compensate for reduced Iraqi deliveries to Bulgaria, which depends on Iraqi oil for about half of its supply. Iraqi and Syrian deliveries to the Mediterranean were cut off during the October war. The export ports were badly damaged and still have not been repaired. Recent reports also have indicated that Soviet oil deliveries to France and Germany are running behind schedule.
II. Remedies Available to Western Europe and Japan
- The West-European countries and Japan apparently feel that they have little or no influence over the course of events in the Middle East. Most of them are prepared, however, to go far toward supporting the Arabs’ political demands. Their immediate aim is to persuade the producers to drop their embargoes and restore production cutbacks, or to give preferential treatment to additional countries.
- Both Western Europe and Japan have begun to encourage fuel conservation. Rationing will follow, although there is reluctance to quickly adopt strict controls. None of the governments have adequately prepared their publics for drastic steps to curb consumption. Such measures would stretch available supplies through the winter, but they would not avert serious shortfalls after that.
- The possibilities for substituting other fuels are minimal in the short run. Those countries with coal or natural gas reserves will try to make additional use of them. However, the decline of the coal industry cannot be quickly reversed, nor in most cases can installations [Page 742]using oil be quickly converted to natural gas or coal. Except in a few countries, such as West Germany, which have large stocks of coal already mined, these measures will be of little short-term utility.
- More efficient use of coal—including the development of coal liquifaction and gasification, accelerated exploration for oil on the continent or offshore, increased reliance on nuclear energy, and other more exotic technologies are certain to receive more attention, but their immediate value would be primarily psychological and political: an assurance to worried consumers that measures were being taken to prevent a long-term energy disaster and hopefully, a warning to the producers that the oil weapon will in time lose effectiveness. However, such moves are unlikely to give the oil producers reason to pause.
- Non-Arab oil supplies are scarce and the US and other nations compete with Western Europe and Japan for what is available. The oil majors have said they will shift non-Arab supplies to help the embargoed and neutral states, but it is unclear how effective such shifting will be in practice. It may help now to correct marginally the imbalance of supply between preferred and neutral countries. Given a progressively tighter squeeze, the shifting of supples will only spread the shortfall.
- The oil companies face an excruciating dilemma between their source, their customers and their home countries. The international oil companies are attempting to divert some oil—both Arab and non-Arab—from the preferred to the neutral consumers. Such action is in line with the companies’ interest in keeping their Dutch refineries operating and maintaining their marketing position in the major consuming countries. However, these diversions may be jeopardized by the extensive press coverage that they are receiving in Europe and by possible complaints from British and French consumers. In the event of a showdown over this issue, we believe that the companies would bow to producer demands and halt or greatly reduce such diversions.
- “Europe” is still too divided to mount a serious collective response to the Arab oil cutbacks, despite a common resentment against Arab high-handedness. The community members have shown a greater inclination to look out for themselves. The governments fear the long-term consequences should divisive Arab tactics be successful, but they have thus far lacked the consensus to go beyond mildly cautioning the Arabs not to overplay their hand.
European Collection Measures
- Such oil sharing as is now going on in Western Europe is being carried out “under the table” by the international oil companies. [Page 743]There is little prospect of any formal or official agreement on sharing among the European Community members within the next several months. There may in fact be an understanding that the oil companies’ efforts are conditioned on the avoidance of any appearance of a common European front and on a continued declaratory policy that is more or less satisfactory to the Arabs.
- As oil shortages begin to bite, pressures will mount within the community for a more serious approach to oil sharing. But the pressures in France and Britain to avoid the risk of harming their economies for the sake of their less-favored partners will also be strong. Over the longer period, the spill-over effects of the recessions that could hit their Common Market partners would intensify the French and British dilemma about oil sharing. In that event, France especially, would try to extract a price from its EC partners for any concessions it might make.
- The French are already pressing the community to invest in a new uranium enrichment plant using the French-engineered gaseous diffusion process. They also now argue for moving ahead with the long-debated common EC energy policy. France presumably hopes to get agreement to organize the community energy market along cartelized French lines.
- None of the main elements of the EC Commission’s energy policy proposals would alleviate the community’s problems in the short- and medium-term. Arguments for joint bargaining with the oil producers will probably get a boost from the present crisis. Invitations from the OPEC producers to engage in talks about future supplies and prices may encourage a joint European response. But the community still lacks the cohesion and basic mechanisms for a common approach to the producers, despite the considerable appeal of the idea of a systematic producer-consumer dialogue.
- Should the situation evolve toward an out-and-out European confrontation with the Arabs, it seems doubtful that Europe alone would have much leverage. Use of the community’s so-called Mediterranean policy3 is unlikely to be effective; the EC’s present offers are not, in fact, very generous. Boycotts of Arab exports other than oil would not hit the hardest at the more important oil producers and would cloud for a long time the community’s claim to a special relationship with the Mediterranean world. Embargoes of technical assistance and goods, to have a remote chance of success, would have to be [Page 744]coordinated by Western Europe, Japan, and the US, and the chances of this degree of cooperation seem remote. Such an embargo would also be circumvented by the Soviets.
- The use or threat of force against the producers may be
increasingly talked about if the oil shortage produces desperation.
We doubt that any European government, however, will seriously
contemplate this course unless or until other possibilities had been
exhausted and certain essential conditions had been met, e.g.:
- —Such drastic action, or the threat of it seemed necessary to the British and French (the only two states with anything approaching the requisite military muscle) to stave off serious economic depression;
- —Full US support and participation were assured, both to provide adequate force to do the job and to prevent Soviet interference, and
- —It was determined that joint use of force could in fact achieve the objective of securing the oil flow, i.e., that physical sabotage and other countermeasures would not result in a further reduction.
- On the whole, it seems very unlikely that all these conditions will be met, and consequently remote that Western European states will consider the use of force as a feasible option under presently foreseeable circumstances. Some of them may try to use the threat—as well as hints of more believable economic countermeasures—as a bargaining lever, on the argument that without some fear of drastic sanctions there will be no curbing of Arab appetites. This impulse will be countered by nervousness lest such threats, especially if not very convincing to the Arabs, simply serve to increase their intransigence.
West European-Japanese Cooperative Measures
- Cooperative arrangements between the two largest deficit areas do not appear a promising prospect. Competition for available supplies is in fact more likely. Even were Japan and Europe not competitors, both would fear that overt cooperation would be interpreted by the Arabs as a hostile act. Prime Minister Tanaka tested and found these waters very cold earlier this fall when he tried to interest European leaders in joint, long-term energy ventures, such as trading Japanese investment in British North Sea development for access to British sources of oil in the Middle East.
- Whatever else it does, Japan will be intensifying its search for alternative oil supplies in Indonesia, the USSR, China, off-shore exploration, joint ventures with South Korea, Canadian tar sands, and Alaskan oil. Because of Japan’s expanding requirements, however, its dependence on Arab oil is not likely to decrease.
III. What Europe and Japan Will Expect of the United States
- The Europeans and Japanese appreciate that the US is no longer self-sufficient in oil. But they also probably feel that the US has [Page 745]more room for energy saving. For the time being, at least, they are not anxious to engage in oil-sharing talks because this would conflict with their present efforts to appease the Arabs. Even if they were of a mind to seek US help now, they would fear a rebuff that would only worsen the already tender relations among themselves and with the US. US-owned companies, however, will continue to be pressed not to divert available oil supplies from intended destinations.
- If the Arab squeeze continues beyond next March, demands for sharing among the OECD importing countries will surely increase. The loudest calls are likely to come from the embargoed and “neutral” countries. In the event that the French and British remain uninterested in involving themselves in a sharing scheme with Washington, any assistance the US might offer to other European countries would reduce the pressures on Paris and London for solidarity with their partners.
- If OECD oil sharing becomes a realistic prospect, there will be problems in working out the ground rules. The US and the major oil-importing countries have long been at odds on whether to base any sharing scheme on a country’s over-all consumption or on imports only. Since imports will now constitute an even smaller portion of US supplies, the other consuming countries will press even harder to base sharing on over-all consumption.
- The Europeans and Japanese, despite their own hesitancy about imposing stringent energy-conserving measures, will expect rigorous consumption curbs in the US, arguing not only that the US is far nearer to self-sufficiency than any other major consumer, but also that its per capita consumption is also so much greater. They will on the other hand welcome closer cooperation with the US in research and development as part of a common long-term effort to expand energy sources. They may also show interest in an eventual multilateral response to Arab feelers for consumer-producer country talks. In general, the Europeans and Japanese have very little specific leverage to induce positive US responses beyond the fact that neither they nor the US want to see the destructive effects of non-cooperation.
IV. Impact of the Oil Situation on Other United States, European, and Japanese Objectives
- European Unity. The Nine4 are hoping that peace prospects will improve sufficiently that the Arabs will lower the oil weapon before [Page 746]European solidarity is really put to the test. The Arabs’ best hope for encouraging the present European “neutrality” or even further concessions to Arab positions is judicious use of oil cutbacks—maintaining them at the current level or offering occasional respites to keep consumers hopeful and on their side. Such a policy, however, will not prevent the surfacing of differences among the EC members and within them over the wisdom of submitting to Arab demands.
- Nevertheless, if the crisis has shown the present limits on European unity, it has also strengthened, in many quarters, the impulse toward unity. In calling for a European summit meeting next month, Paris has taken the lead in this—partly because it accepts the need for greater unity, partly because it sees an opportunity to exploit that need to advance its own concepts of an acceptable European organization. Pompidou’s initiative has received general endorsement, but the sharp differences of national interests argue against the achievement of any great leap forward at the summit meeting. The forthcoming summit and other high-level meetings may, however, lead to a more cooperative atmosphere, some improvements in the mechanisms for political consultation among EC members, compromises which would permit the community to initiate a regional development program, and token advances toward closer monetary and economic union.
European and Japanese Relations with the United States
- The Middle East crisis has had the contradictory effect of heightening the Europeans’ sense of dependence on the US while at the same time increasing their feelings of vulnerability and relegation to a bystander’s role. The oil component of the crisis may crucially affect the US-European relationship in several ways. Should the worst estimates of continued oil deprivation prove true, the Europeans would view the US response to requests for some form of sharing as a direct test of the meaningfulness of the US-European relationship. US failure to provide help would be taken as an indication of US indifference and could “tilt” the Europeans even further toward Arab positions, even at the cost of greatly aggravating differences with the US. (It could also bring to a crisis the differences that have developed within the EC itself on oil sharing.)
- On the other hand, a positive US response would not, of itself, produce a dramatic reaffirmation of Atlantic ties. At best, these would be restored only to the uneasy status quo ante. Even the patent demonstration of US-European interdependence inherent in the oil problem would still leave unresolved the basic issues which stem from the unequal Atlantic partnership that the Middle East crisis has unbalanced still further.
- The military implications of the Middle East war for NATO is an assessment that the allies
are only just beginning to make. Their first requirement is for more
intelligence and analysis. The threat that an enlarged Soviet
Mediterranean presence could pose to the southern region of NATO will call for a reevaluation of
Europe’s role in the common defense of that area, including a clear
look at where Europe’s interests lie in relation to those of the
US. At a minimum there will
probably be a franker acceptance that those interests are not
identical, and in some respects, are not even parallel. On the other
hand, in facing up to these facts, Europe and Japan will also
probably have to acknowledge that they do share with the US a common interest in keeping the
Middle East free of Soviet dominance and in preventing further
outbreaks of war. In coming months, they will have to strike some
balance between these considerations. No confident estimate can be
made about how “Europe” or its principal members will come out in
these calculations. It will depend on major variables including
- —whether Soviet behavior adds to Europe’s apprehension or allays it,
- —whether US efforts to move Israel are convincing and effective in the European view. If such efforts are, this would add to a feeling of congruence in US-European interests, or at least would strengthen the idea of shared goals despite different roles. If they are not, this would further drive Europe and the US apart.
United States and European Cooperation
- The Arab strategy (of inducing Europe to pressure the US to move the Israelis) takes account of the fact that the European governments have for some years urged the US to lean on Israel to make concessions, e.g., on Resolution 242. Such European pressures will no doubt intensify. But there is probably a limit to how far the Europeans jointly, or even singly, can go in espousing pro-Arab positions. European opinion would not, for example, support a Middle East settlement that seemed to pose an unmistakable threat to Israeli integrity. The complaints that are now heard in some quarters about “blackmail” would become a chorus if the Arabs should not accept terms that were generally regarded as “reasonable” and seek to keep Europe’s economy in hostage to the achievement of their maximum demands.
- The Europeans recognize that the peacemaker’s role belongs primarily to the US, which alone retains influence in both camps. France and Britain cling to a belief in their diplomatic influence in the area, but the Nine as a whole probably lack the unity required to play a direct role as guarantors of a peace agreement. They also lack the necessary credit with the parties to the conflict. The British and the French [Page 748]will nevertheless want a role in an international conference on settlement, and support for their bid will be implied in European calls for a conference “in the UN context.” If movement toward a settlement in the Middle East develops, the prospects for an indirect role for Europe—in cooperation with the US and UN efforts—would be brighter. Economic and technical cooperation with the Arabs, as well as financial contributions to the resettlement of Palestinian refugees, would be well within Europe’s capabilities.
- In sum, Europe can do little or nothing by itself to bring about a settlement in the Middle East, but once the Arabs and Israelis were on the road to agreement, Europe could make a contribution that might help to stabilize the peace.
- Détente. The Middle East conflict—despite the Soviet role in it—will probably not dramatically change European attitudes toward détente. Their attitudes were already a mixture of caution about Moscow’s ultimate aims in Europe and awareness that European vulnerability would not, in any case, permit direct confrontation with the Soviets. Moscow’s role in the conflict has served to cast further doubt on the USSR’s intentions, and Soviet support of Arab use of the oil weapon has also reinforced Europe’s sense of vulnerability—not only to loss of its energy supplies, but also to the consequences of isolation from the US.
- The conflict has resulted in deepening European apprehension that the US is, deliberately or willy-nilly, in the process of cutting its commitments to Europe. For those already inclined to question the extent of US-European “interdependence,” the positions taken unilaterally during the war and the scramble for oil supplies since then will be taken as further evidence that both sides are increasingly preoccupied with independence and self-interest. The consequent impulse is to begin casting around and gradually to develop alternative arrangements—even though this runs up against Europe’s unpreparedness to go it alone for many years to come. Should Europe be thrown into a deep recession as a result of oil deprivation, clearly the whole delicate balance of East-West relations will be put to a critical test.
Multilateral Trade Negotiations and Monetary Reform
- Recent, dramatic increases in oil prices will place substantial burdens on payments balances of oil importing countries. This fact alone has important implications for both multilateral trade negotiations and monetary reform. If, in addition, the oil squeeze is maintained to the extent of creating world-wide recessionary conditions, the effect could be to retard or even halt progress toward multilateral trade liberalization. Even in the absence of such a recession, the expected impact [Page 749]of the oil situation on their trade balances will probably cause the Europeans and Japanese to be even more concerned that any multilateral trade negotiations yield them some net advantage.
- In the area of monetary reform, the uncertainties of the oil situation have had at least two effects—there is general acceptance that a longer “transitional” period of floating may be required before any return to “stable but adjustable” parities; concomitantly, considerable interest has arisen in prompt development of a code of conduct or set of rules for floating. In addition there is a heightened feeling that controls of various sorts must remain available as policy instruments to deal with the possibility of some disruption of international money markets.
- Most foreign governments share the view of the exchange markets that the US may be less hard-hit than the Europeans and Japanese, and thus that the dollar may strengthen still further, perhaps excessively. A related concern is that countries hard-hit by the oil squeeze and/or price rise may resort to “competitive devaluation,” which also in part underlies the desire to establish a set of rules for floating.
- The oil squeeze, however, need not lead to general resort to competitive devaluation. To the extent that a recession is induced by the oil squeeze, it would be the result of supply shortages and bottlenecks rather than inadequate levels of aggregate demand. In these circumstances, any effort to increase net exports would simply exacerbate domestic shortages and inflationary pressures.
- US-European Partnership. The Middle East crisis has clearly added new substance to the trans-Atlantic debate over “partnership.” Although the crisis furnished new evidence of US-European interdependence, it has also brought forth new mutual recriminations. The Europeans will argue that the crisis demonstrated a disparity of US and European priorities that should be frankly acknowledged. They will cite the US alert of its military forces5 to prove that prior consultation does not always take place. Moreover, while the Europeans may come to regard oil-sharing as desirable, at the moment they are more worried that such a demonstration of Atlantic solidarity would do more to harm relations with the Arabs than it would to alleviate Europe’s energy shortage.
- For the French, who believe partnership implies a contractual relationship which amounts to European subservience, “partnership” has become a dirty word. France’s fellow community members are less [Page 750]exercised over enshrining the word in an Atlantic declaration but they, too, harbor suspicions that acknowledgement of partnership would bind them to something more than the proposition that the US and Europe are interdependent.
- The Arab selection of Japan as a special target for the oil weapon is based upon its extreme dependence on imported oil and its ties with the US. Japan is uncomfortably walking a tightrope between conflicting imperatives. The Japanese are acutely aware of the damage they can do to US-Japan relations if they shift their policy in the Middle East radically toward the Arabs. They are also concerned that obvious expediency on the issue will damage an image of integrity in international dealings.
- The Japanese leadership is presently divided on the issue of how to respond to the next round of Arab pressures—which seem to be in the direction of a diplomatic and economic break with Israel. Most top leaders—e.g., Finance Minister Fukuda and Foreign Minister Ohira—would oppose further concessions to the Arabs. Prime Minister Tanaka is a less certain quantity, more susceptible perhaps to the public pressures that will arise as oil supplies dwindle and national production slows. The resultant economic and social dislocations will pose a severe test for modern Japanese society as well as for the Tanaka administration.
- Possessing little political leverage in the Middle East, Japan will attempt to utilize its economic strength in lobbying among the Arabs to preserve the flow of oil. Tokyo is already trying to buy off the Arabs with promises of heavy investment in and aid to the several Arab economies. How long Japan can play this game and balance the contradictions depends on the Arabs and the US. On the whole, the odds favor Japanese movement toward meeting Arab requirements because, to Japan, the prospect of losing Arab oil imports looms as a greater danger than does an increase in political strains with the US.
- From the Canadian viewpoint, the Canadian-American relationship has changed considerably over the past decade. The shift first occurred in public opinion and is now manifesting itself in official relations. The change involves a sloughing off of the national inferiority complex and a gradual movement toward a distinct national identity vis-à-vis the US. At the same time there exists a reservoir of genuine respect and friendship for the US that finds expression in many ways. The current crisis in the Middle East is one of these areas. After some initial groping—particularly over what caused the US [Page 751]military alert—the Trudeau government has adopted a position quite similar to the US. The pro-Israeli tilt in Ottawa’s outlook has always been evident, and when Canada’s outspoken and politically ambitious energy minister began to suggest that Ottawa was going to shift its foreign policy because of the Arab oil stance, Trudeau acted quickly to correct the situation.
- Until recently the Canadian Government required refineries east of the Ottawa valley to operate on imported crude oil, reasoning that it was cheaper to bring in crude from overseas than to ship it across Canada. The uncertain supply situation and the rising costs of the world oil market led the government even before the Middle East war to begin to take steps to protect Canada against such vagaries. The Arab cutbacks have accelerated the process of formulating a national energy policy that is certain to be more active in protecting Canadian interests.
- Canada has no ability to increase oil production in the short term. Its immediate goal is to mitigate the effects of a reduction in Arab oil deliveries to eastern Canada. The measures taken to date include calls for voluntary cutbacks in energy consumption and preparation of plans for fuel rationing; the use of the Canadian Commercial Corporation (a government-owned company) to purchase oil on the spot market, especially refined products; diversion to the domestic market of a small percentage of current crude exports to the US; and applying diplomatic persuasion to convince the Arabs that Canada should remain exempt from the oil embargo.
- Over the long-term Ottawa is heading for an energy policy that has a distinct Canada-first flavor. The Trudeau government or any possible successor would not take action in this area without serious considerations of the impact on Canadian-US relations. Nevertheless, the major influence will be the needs of Canadian consumers. Over the next two or three years, the present Alberta-Ontario pipeline will be extended to Montreal, thus diverting to the domestic market a large part of the 1.2 million barrels of oil per day now exported to the US. Ottawa is also likely to proceed with the creation of a government-owned company to buy, sell, and set prices for Canada’s energy resources.
V. Opportunities and Risks in Dealing With Europe and Japan
- As noted earlier, the intent of Arab pressures on West European countries, Canada, and Japan is to intensify tensions between them and the US until the US shifts its position on the terms of an acceptable Middle East settlement. The Arabs may judge that unity of the “Western” world will ultimately prove of greater importance to the US than support for Israel. If the Arabs are astute enough in the [Page 752]manipulation of their oil policy, tensions between the US and the others are indeed likely to persist throughout the long and difficult Middle East negotiations regardless of the pressures the US may attempt to exert on both sides of the table.
- US attempts to work together with Europe and Japan will have only a marginal effect on the resolution of the conflict in the Middle East itself. Their main purpose would be to limit damage to the alliance. Although the US has unique influence for purposes of effecting a settlement between the Arabs and Israelis, over-emphasis on this fact—or on the US’ capability of withstanding an oil shortage—would conflict with the overall objectives of maintaining cohesion in the alliance. They may resent it, but both Western Europe and Japan remain aware that the US security role is indispensable and that there is a broad interlocking of our economic interests. Hence manifestations of a US go-it-alone policy would undercut this recognition of interdependence and tend to polarize pro- and anti-US feelings within each country.
- It will be difficult to enhance a sense of shared common interest among the US and its allies. Various inducements—improved consultations, information exchanges, and possibly energy sharing—would help, but would not eliminate some sharp conflicts of interest. The allies would still be dependent on Arab oil. Conversely attempts to bring the Europeans and Japanese along with the US by economic or security threats (e.g., threats to withdraw US troops from Europe) would affect different allies differently. But they would be of dubious value in getting the allies to support US policy in the Middle East. If such threats were used, they could generate reactions causing lasting damage to the alliance.
[Omitted here is the Annex, including illustrative tables.]
- Source: National Archives, Nixon Presidential Materials, NSC Files, Box 362, Subject Files, National Intelligence Estimates. Secret. A title page and table of contents are not printed.↩
- On November 6, the European Community called on Israel and Egypt to return to the lines held on October 22, before Israeli forces surrounded the Egyptian Army’s III Corps, and for a return to the 1967 borders. The EC members also agreed to hold a meeting in Copenhagen December 14–15 to discuss Middle East issues.↩
- A reference to the EC practice of granting certain Mediterranean countries privileged access to the EC market.↩
- The European Community: Belgium, Luxembourg, France, Italy, Netherlands, West Germany, Great Britain, Ireland, and Denmark.↩
- See Document 244.↩