286. Memorandum From Charles A. Cooper of the National Security Council Staff to Secretary of State Kissinger1

    • The Energy Crisis and the February Conference

As far as I can tell, nearly everybody in the U.S. Government is beavering away on some aspect or the other of the February Conference.2 For the life of me I can’t figure out what they think they are doing. We need a simple conference to establish a simple political point, not a complex conference which by attempting to resolve a host of technical issues not only fails to make its political point but makes the real problem worse.

The Problem

How serious the energy crisis turns out to be in 1974 depends on when and by how much Saudi Arabia and other Arab oil producers relax their present political constraints on oil production. While it is true that economic growth has now come to a near standstill because of the supply restrictions and their price consequences, once the restrictions are lifted there will be enough oil available to support both substantial price reductions and a return to more normal rates of economic growth by at least the second half of 1974. (See preliminary analysis at Tab A.)3

The U.S. has already made a decisive contribution to resolving the 1974 energy crisis:

  • —First, through your diplomatic efforts in the Arab-Israeli negotiations which, I understand, promise to resolve the political blockage to increased Arab oil production;
  • —And, second, through the President’s apparently successful effort to commit the U.S. to Project Independence4 which, if it can be sustained, will reduce the U.S. claim on OPEC oil supplies as a result of both continued conservation measures and increased domestic production both of which will serve to reduce U.S. import demand in 1974 as well as in future years.

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Even though the short-run market situation is favorable, international cooperation is needed both to avoid unnecessary problems in a very unsettled period and to ensure that favorable market developments translate themselves into lower prices as soon as possible. Prices could be sticky even after production is increased if:

  • —Inventories are permitted to build up.
  • —Conservation measures are prematurely relaxed.
  • —The interaction of international companies and producer companies results in keeping oil in the ground rather than being produced (especially in the U.S.).

What is needed above all in the short run is a continued conservation program in the industrial countries; this requires some rough and ready distribution of the burden since any single country could benefit by relaxing before others do. Our own commitment to Project Independence should give us a political base to sustain conservation efforts here, and other countries should be able to do so as well if the February Conference results in a public commitment to continued conservation efforts. Some discipline also needs to be imposed on the international oil companies—to limit their profit margins, to hold down inventories, and to maintain production in the U.S.

There are also a series of very difficult longer term problems of energy policy. These involve:

  • —Development of a new role for the international oil companies;
  • —Limiting bilateral oil barter deals so they do not disrupt the oil market, the world trading system, or the arms balance;
  • —Some moderate harmonization of energy policies so they do not give one or another country large trade or political advantages;
  • —New arrangements for investments of the Arabs and to help LDCs;
  • —Whatever cooperation is feasible on R and D and investment in energy conservation and oil substitutes and oil production.

All these problems require much more study and analysis before we or others know where we are going. They do not require solutions next month. If we manage this year’s supply/price problem well, they will all be much easier to resolve. If we manage poorly this year, they will be extremely difficult to solve.

We do not need, nor should we want, to develop a common position on price and supply with other major consumers. This would be extremely difficult to do, and were we successful we’d be sorry. The whole notion that we are confronted with a producers cartel is just plain wrong. (See Appendix at Tab B5 if you’re interested in why.)

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We do not now have a producers’ cartel in the economic sense. We have politically motivated production cuts by some countries with all producers taking advantage of this situation for a price increase, part of which was overdue and part of which is excessive and internationally disruptive. Because we want to avoid the types of major economic problems that spill over rapidly into political and security problems, we want to get prices rolled back somewhat even though we are less affected by higher prices than other industrial nations (except Canada). We are in a much better position to do this if we are dealing individually with producers who do not trust one another than if we force formation of an economic producers cartel by appearing to form a consumers cartel.

In short, we should attack the price problem by cooperating with other consumer countries and the companies to make the market work. In an area as essential to our economies as energy it would be both political and economic folly to try to replace the market with administrative decisions and government controlled cartels. It will take careful management to reach agreement in the February meeting on further cooperation to adjust to the new situation that will contribute to maintaining an orderly market and yet avoid the appearance of ganging up on the producers.

The Conference

Since the energy crisis is new, all governments are unsure of what the correct policies are; there is a wide variety of opinions; everyone is concerned that he not foreclose future options on an issue which obviously is very capable of throwing governments out of office. What is right for domestic political reasons may be wrong for international relations. Thus, we should not be too ambitious for the February Conference. The Conference is extremely important as a means of setting an atmosphere and framework for cooperation with our major allies. It should focus on establishing this general principle of cooperation, not at this stage on coming up with specific solutions for problems which are still only poorly defined.

There are two issues which aren’t so clear: what should be said about a broader conference, and what sort of follow-on mechanism should be established (if any).

My own view is that there is little to be gained from another broader conference including producing countries and LDCs. The one area where cooperation among industrial countries, producers, and LDCs is needed is financial management—but here the C–20 group is an almost ideal vehicle and could arrange ad hoc consultations with producers and other LDCs as well as with the World Bank and IMF. My own recommendation would be to be passive about another conference [Page 807] and to urge that the C–20 group continue the efforts it already has underway to chart how Arab surpluses can best be managed.

Another possibility is to endorse the idea of a large UN conference—making 1974 the Year of the Large UN Conference (Food, Population, Law of the Seas, the Energy). This strikes me as a relatively harmless way to occupy a lot of people’s time, but I can’t imagine it actually contributing to solving any real problems.

The idea I like least is a limited conference held within 60 days at which, presumably, consumers, producers, and LDCs would try to resolve all sorts of issues nobody understands very clearly. This one could really go sour: either it would fail and make the situation worse by poisoning the political atmosphere, or it would succeed and result in mutually agreed rules and regulations which at best would be irrelevant and at worst could create real chaos, and at the same time give implicit consumer endorsement to high prices thereby laying the basis for future OPEC production cutbacks.

Even if a decision is made to call a broader conference, I don’t like the idea of an International Task Force to develop a common industrial consumers’ position. If we must have an International Task Force, I think we should go back to the Pilgrim’s Speech idea6 and have some sort of wise men’s group that writes a report on whither the world energy situation which can be duly considered by all concerned.

There is work not being done which needs to be done—namely, improving our ability to manage to day-to-day problems of bunkering, ship speed regulations, stock management, refinery supplies, etc. The right place for this sort of work is the OECD, in spite of all of our prejudices about that institution. Reinvigorating the OECD High-Level Energy Committee and charging it publicly with responsibility for surfacing problems and making sure they are attended to (perhaps in some other institution) could make quite a big difference. In addition, the same Committee could begin to look in earnest at the kinds of longer run problems mentioned earlier, and try to clarify the issues so that they can be dealt with politically.

  1. Source: National Archives, Nixon Presidential Materials, NSC Files, Box 321, Subject Files, Energy Crisis, Nov 73–Feb 74. Secret. Sent for information.
  2. The upcoming Washington Energy Conference.
  3. Attached but not printed at Tab A is a January 21 memorandum from Cooper, “Assessing Probable Conditions in the International Petroleum Market in 1974.”
  4. See Document 237.
  5. Attached but not printed are two short undated unattributed papers, one entitled “The Scramble for Oil: A Red Herring?” and the other “OPEC is Not a Threat—Yet.”
  6. See Document 264.