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

299. Paper Prepared in the Office of Economic Research, Central Intelligence Agency¹

Washington, February 4, 1974.

[Omitted here are a title page and table of contents.]

A BRIEFING BOOK FOR THE WASHINGTON ENERGY CONFERENCE

Overview

Most consumer countries will come to the Washington conference with a positive attitude toward some form of international cooperation on energy matters. Although some consumers have joined in the race to make bilateral deals with oil producers, they still support cooperation regarding oil prices and other issues. Even the Japanese, who are highly cautious toward joint consumer action, now believe that some form of cooperation between exporting and importing countries on oil prices is desirable.

The more receptive attitude toward cooperation that has developed recently does not mean that foreign participants will necessarily follow US initiatives. Still too shaken by recent events to risk antagonizing the oil-exporting countries, these representatives will avoid provocative words or actions. Some countries, notably France, will resist making any commitments on major policy issues.

Several countries believe that a Washington-led group is not the best forum for consumer cooperation. They view the Washington meeting only as an opportunity to exchange ideas and believe that the thornier problems will have to be hashed out at a consumer-producer conference. The French, unwilling to support any initiative that may strengthen US influence in Western Europe, have suggested a UN-sponsored world conference to deflect attention from the US-sponsored meeting. Several EC countries oppose this suggestion, preferring to avoid the bureaucratic clutches of the United Nations. Nevertheless, most countries would like to see either the Washington conference group or an OECD group of consumers join together with oil producers and representatives of the less developed countries to decide major policy issues.

The European Community—to be represented at Washington by EC Commission President Ortoli and by West German Foreign Minister Scheel, who is the current president of the EC Council—has been unable to develop a common energy policy. Because disagreements among members probably will not be resolved at the 4–5 February meeting of the EC Council, the Community is unlikely to speak with one voice in Washington. The West Germans and the Dutch would prefer to see the EC divided than give in to French intransigence on such issues as oil-sharing. The EC Commission itself has long advocated consumer cooperation.

Several of the West European participants will favor cooperative action to make oil supplies more secure. The Netherlands, still embargoed and with little hope of arranging bilateral deals with Arab states, is likely to push hardest for a united consumer front on the matter of assuring adequate oil supplies. West Germany has been visibly irritated by its EC partners’ unwillingness to cooperate in solving energy problems and will come to Washington hoping to find a common course of action. Other countries that are unable to compete with the major industrial nations in making bilateral agreements also will support cooperation in obtaining supplies.

Nevertheless, an increasing number of industrial nations now are following the French and British examples in negotiating bilateral arrangements with oil producers. In response to domestic political pressures, even some countries that had adamantly opposed such deals—notably West Germany and Denmark—are joining in the scramble (see Table 1). Through bilateral arrangements, the governments are seeking not only to line up reliable oil supplies but also partly to offset their rising oil costs by expanding exports. France’s Foreign Minister Jobert has delayed acceptance of his invitation to the Washington meeting until his current round of visits to Arab capitals in search of oil is complete. The British already have negotiated a deal with Iran, but a recent government mission to Saudi Arabia apparently returned empty-handed.

Table 1

Bilateral Proposals by Major Oil Consumers

Consumer	Producer	Details
France	Saudi Arabia	Agreement signed for 200,000 b/d for Arabia 3 years in exchange for a French-built refinery with Saudi ownership.
	Abu Dhabi	Agreement reportedly concluded for Dhabi France to provide 35 Mirage aircraft for crude oil to cover the value of the transaction.
	Kuwait	Offer of French arms and industrial investments for long-term oil deliveries.
Japan	Iran	Agreement in principle to provide $1 billion loan for a 500,000 b/d refinery in Iran in return for most of the output.
	Iraq	Agreement initialed providing $1 billion loan for Iraqi refinery, an LPG plant, a petrochemical plant, and other projects in return for 180,000 to 200,000 b/d of crude oil and products and natural gas for 10 years.
	Saudi Arabia	Economic cooperation agreement to be Arabia signed in mid-February. Japan hopes to line up long-term supplies of crude oil in return.
	Algeria	Negotiations in progress for credits for industrial projects in return for crude and LNG.
	Kuwait	Kuwait says it is ready to negotiate oil sales as soon as a new participation agreement with Gulf/BP is signed.
United Kingdom	Iran	Agreement confirmed for 100,000 b/d Kingdom of crude oil for one year in exchange for textile fibers, steel, paper, and other industrial products.
	Saudi Arabia	Negotiations in progress for 200,000 Arabia b/d for an unspecified period. Payment is through commitments for development contracts.
	Kuwait	Kuwait say it is ready to negotiate oil sales as soon as a new participation agreement with Gulf/BP is signed.
West Germany	Iran	Agreement in principle by the West Germany German government on behalf of a German oil consortium to construct a refinery in Iran for $1.2 billion in return for the output.
	Iran	Negotiations in progress for delivery of 10 billion cubic meters of natural gas annually for an unspecified period. The deal involves Iranian deliveries to the USSR in exchange for Soviet deliveries to Germany.
	Iran	Proposal for 22 industrial projects in exchange for oil.

Most of the participants in the energy conference will favor discussion of a new oil pricing system and a non-provocative attempt to roll back the recent large price increases. For instance, most consumers would endorse a public statement emphasizing the potential of higher oil prices to cause a worldwide depression, damaging producers and LDCs as well as major consumers. Japan and several other countries favor postponing substantive work on a new oil pricing system until a joint consumer-producer task force can be formed.

Nearly all conference participants will favor discussion of oil company profits and of ways to channel massive Arab dollar holdings to consumer countries. All consumers, even the recalcitrant French and Japanese and the energy-rich Canadians and Norwegians, support cooperation in the development of new energy sources, in sharing energy technology, and in fostering energy conservation.

Although few countries now expect serious oil supply constraints, the extraordinary October and December oil price increases provide considerable motivation for international cooperation. The oil price increases will add between $2 billion and $6 billion to the import bills of most consumer countries. For Japan, the increase is $11 billion, threatening the first trade deficit in a decade. Because of the deterioration in their trade accounts, the main consumer nations now face large current account deficits in 1974 instead of the near balance most were forecasting in October (see Table 2).

[Omitted here is Table 2: Changed Outlook for the Trade and Current Account Balances in 1974.]

The oil price increases also will slow economic growth and intensify inflation. The industrial nations were expecting slower growth and accelerating price increases in 1974 even before oil prices rose. With consumers facing the choice of curtailing living standards or escalating their wage demands to offset higher fuel bills, 1974 prospects for growth and prices are much dimmer now than before the oil crisis (see Table 3). Japan will be hard hit. The oil price increases will contribute to an expected 17% increase in consumer prices and to a decline in the economic growth rate to only about 4%, as against the 9% forecast earlier. The United Kingdom will come close to matching the Japanese rise in consumer prices and will probably experience a decline in overall output.

[Omitted here are Table 3: Changed Outlook for Economic Growth and Inflation Rates in 1974; and material on Country Situations and Attitudes.]

1. Source: Central Intelligence Agency, Office of Economic Research, Job 79–T01092A, Box 2. Secret; No Foreign Dissem. An encapsulation of the positions of the major countries involved in the conference is in telegram 21240 to Saigon, January 31; National Archives, RG 59, Central Foreign Policy Files.