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

68. Memorandum From the Assistant Legal Adviser for Economic Affairs (Carter) to the Legal Adviser (Stevenson) and the Assistant Secretary of State for Economic Affairs (Trezise)¹

Washington, January 14, 1971.

• SUBJECT
  • OPEC/Oil Company Negotiations

This memorandum is prompted by two concerns:

a) that the joint oil company approach to OPEC will not produce an agreement with the OPEC countries in the immediate future, and

b) the USG has not thought through carefully enough the courses of action it should take in several foreseeable contingencies following the lack of success of this initial effort.

My concern that the joint effort will fail is based upon several apparent facts: The OPEC countries have a very good case, on both economic and equitable grounds; Libya wants to negotiate in Libya while the other OPEC countries are trying to negotiate in Iran; the independents and majors apparently cannot agree on how the independents should be protected in the event of Libyan action against them; the independents will, therefore, probably cave-in to Libya; if the independents don’t cave to Libya and if Libya is faced by a coordinated company position our Embassy in Libya seems to think that the Libyan response will be an embargo on all exports of all participating companies rather than a coordinated OPEC response; and, as a political matter, I don’t see how the OPEC countries can accept the conclusion of the oil companies, in their message to OPEC, which will be made public, “that we cannot further negotiate the development of claims by member countries of OPEC on any other basis than one which reaches a settlement simultaneously with all producing governments concerned” without appearing to be knuckling under to the power of the oil companies.²

My concern that there has been no detailed planning for possible contingencies following an OPEC rejection of the oil company demand is based on the fact no one I have talked to knows of any such planning.

It seems to me our contingency planning should proceed with several hypotheses in mind:

a) OPEC’s rejection may well be accompanied by production limitations threatening at least European fuel supplies.

b) OPEC action may be either against all oil companies, or centered on those who sign the communication and possibly those being negotiated with in Libya.

c) the degree of OPEC solidarity in the days and weeks ahead may vary depending upon

• —the degree of solidarity facing them—solidarity on the part of the oil companies and on the part of the consuming countries—with solidarity on one side producing offsetting solidarity on the other side.
• —the degree to which Libya (and possibly others) try to make the confrontation a “political” issue related to the Middle East situation, as one of the cables from Libya indicates Libya intends to do.

d) Europe and Japan can afford to pay more for oil; and it would be equitable to OPEC to collect more and Europe less of the total tax take from the present trade.

e) the major risks to be avoided by the United States could affect our balance of payments and our political relations with Europe as well as the OPEC countries; we want to avoid:

• —OPEC nationalization of United States company owned production facilities, and
• —the decision by one or more Western European countries that they should make a deal directly with one or more producing countries and not rely on the United States companies to perform all functions—from production to distribution—involved in meeting their petroleum needs.

f) the Europeans will be forced to reach agreement that will allow their petroleum needs to be met.

g) if the majors threaten not to transport or refine petroleum from OPEC countries, the USG will be forced to persuade or order them to perform these tasks.

h) we have little leverage on the OPEC countries.

i) the United States should assure, to the extent possible, that following the current transportation/supply shortage, competitive forces should have an opportunity to have the greatest feasible effect in the international petroleum area.

One other general consideration seems relevant in analyzing how we should approach this problem: most of our information comes from the oil companies; the other agencies around town have to rely upon this information and our assessment of how various foreign governments will react to various situations; and we have not established any reliability checks on the various lines of communication that have been established.

I don’t have any bright suggestions for policy decisions; it seems to me that, with some minor exceptions (such as not toning down the offensiveness of the Company message to OPEC), we have done what had to be done. But in these circumstances I think we should begin to approach this problem more systematically and do some hard contingency planning. Otherwise I think we risk hurting some larger long-range interests for the sake of dealing with what probably will be a fairly short-range (1–2 year) problem.

1. Source: National Archives, RG 59, Central Files 1970–73, PET 3 OPEC. Secret. A copy was sent to Deputy Legal Adviser John B. Rhinelander and Katz (E/ORF).
2. The letter was transmitted in telegram 7012 to Tripoli, January 15. It proposed “all embracing” negotiations between one group representing the oil companies and one group representing OPEC members. The companies proposed that the posted price be revised and that the new price levels be subject to a moderate annual adjustment against the yardstick of “world-wide inflation.” It also proposed a temporary transportation adjustment for Libyan crude. The letter rejected any further increases in the tax rate percentage, retroactive payments, and obligatory investment. It suggested that the resulting agreement last five years. (Ibid.) According to telegram 1546 to Tripoli, January 6, this package deal had been developed under Shell’s leadership. (Ibid., PET 14 LIBYA)