69. Memorandum From C. Fred Bergsten and Harold H. Saunders of the National Security Council Staff to the President’s Assistant for National Security Affairs (Kissinger)1

  • SUBJECT
    • The Developing International Oil Crisis

At Tab I is an information memo on the developing international oil crisis conveying a State memo to the President on the subject.2 Our memo is addressed to the President in case you wish to send it forward, as you should. The situation could blow over, but the odds favor a potentially serious situation developing within the next few days. At Tab III is a more detailed cable on the background which State has sent you.3

At this point, we are deeply concerned about the procedural aspects of this issue. The State Department is charging ahead tactically with a task force,4 without any clear notion of its own basic objectives let alone an agreed U.S. position. The issue is loaded, in terms of our [Page 175]relations with Europe and Japan, the major oil consumers; our relations with the Arab producing countries; our role in the Arab-Israeli dispute.

No one is thinking about the broader and longer range issues involved, while getting the U.S. increasingly deeply committed in the tactics of the confrontation between the companies and the Arabs. However, there is a strong case for non-involvement by the U.S., or at least our playing no more than a clearly secondary role:

  • —The sharp increase in Middle East oil prices which would result from “Arab victory” would have little direct impact on the U.S. economy, since we import so little oil from them. This is essentially a European/Japanese problem, so why shouldn’t they take the lead?
  • —There is a strong chance that our companies will lose the confrontation, whatever the USG might do. We would therefore use up a great deal of political capital for no reason if we were to intervene significantly, as we have already done in Iran and are about to do in all the producing countries.
  • —If we involve ourselves heavily on the side of the companies (and therefore the consuming countries), we might ultimately have to ration oil domestically since only such a step would provide meaningful U.S. participation in an all-out effort to beat the Arabs. Since I cannot see us taking such a step politically, it would be a mistake to imply to the Europeans that we might do so.
  • —It would also be a mistake to lead our companies to think we would support them all the way. Since at least Libya views the oil effort as largely directed to softening our support for Israel, we can envisage our companies putting great political pressure on us to do just that if we lead them along.
  • —Our adopting a leading pro-company role on the issue would sharply increase our anti-Arab image, increasing the difficulty of our position in the Arab-Israeli dispute.
  • —Finally, there is a crass but very important commercial consideration: sharp increases in European and Japanese energy prices would significantly help the international competitive position of the United States, and could therefore sharply improve our trade balance and overall balance of payments.
  • —Our taking a pro-Arab position, such as urging the companies to accede to the Arab demands, would therefore deeply damage our relations with the consuming countries.

There are thus significant arguments against deep U.S. involvement. However, there are also important arguments in favor:

  • —A prolonged shutdown of Arab oil could reduce Europe’s oil stocks drastically, jeopardizing NATO’s military capability.
  • —The earnings of our oil companies provide a significant contribution to our balance of payments, on the order of $1 billion annually.
  • —We as a government of course have an obligation to defend U.S. companies, though we traditionally do so only if their legal rights are being violated—not simply because they are being extorted by other countries in a strong economic position to do so.
  • —The UK balance of payments could be forced into crisis, with significant repercussions throughout the international monetary system, if the position of its companies are sufficiently threatened and its oil costs sufficiently increased.
  • —The short-term disruption, and possible long-term slowdown, of economic growth in Europe and Japan which might be caused by higher oil prices would indirectly affect our own prosperity, by reducing their imports from the U.S. and their attractiveness for U.S. investment.

The point is that there are serious considerations on both sides of the issue which have not been thought through. We have no high-level decision based on a weighing of the advantages and disadvantages. The situation has not yet become critical, because State has not yet gone too far in its initiatives, and there is time to provide direction to the exercise. However the situation is developing very fast and State might be tempted to commit us irrevocably even within the next week, so you will have to move immediately if you are going to do so.

We therefore recommend that the Senior Review Group, augmented to include OEP, Interior, Treasury and CEA, address the issue urgently. The interagency task force chaired by State could provide the staffing, but would have to be forced to address the fundamental issues rather than simply the tactical considerations of each unfolding step in the crisis. Since State has been running with the ball, however, you would undoubtedly want to discuss the matter with Irwin before bringing it into the SRG—especially since Irwin set up the task force as a subcommittee of the Under Secretaries Committee.

Recommendations

1.
That you sign the information memo for the President at Tab I, bringing him up to date on what has happened so far and laying out a possible scenario of future developments.5
2.
That you sign the NSSM at Tab II, calling for a paper by the middle of next week and setting up a SRG meeting on the subject.6
  1. Source: National Archives, Nixon Presidential Materials, NSC Files, NSC Institutional Files (H-Files), Box H–180, National Security Study Memoranda, NSSM 114. No classification marking. Sent for action. Concurred in by Sonnenfeldt. A notation on the memorandum reads: “Changes being made in NSSM by Kennedy.” On January 15, Bergsten informed Kennedy that he had discussed this memorandum with Kissinger, who proposed that the issue be discussed at an SRG meeting. (Ibid.)
  2. Not attached. The State Department memorandum was apparently a January 13 memorandum to Nixon in which Rogers detailed Libyan and Iranian demands for increased oil prices, following the December OPEC resolutions. In it, Rogers commented, “We may be faced with a delicate situation if the companies are caught in a squeeze between OPEC demands for price increases and strong resistance to price increases from consuming countries.” He added, “the possibility cannot be ruled out that consuming countries might try to make separate deals with the producing countries over the heads of the oil companies in order to maintain their vital oil supplies.” (Ibid., RG 59, Central Files 1970–73, PET 3 OPEC) In telegram 6271 to San Clemente, January 14, Rogers also informed Nixon that the situation in Libya “does not look at all good,” that cutbacks in Libyan shipments to Western Europe should be expected, that the Shah was prepared to shut off production, and that Irwin had established an interagency Oil Task Force. (Ibid., PET 14 LIBYA)
  3. Not attached. Tab III is circular telegram 4436; see footnote 1, Document 67.
  4. In a January 13 memorandum for the record, Irwin wrote that in accordance with the procedures established by the Under Secretaries Committee, he ordered the formation of an interagency Oil Task Force to coordinate the government’s response to the current oil situation. Trezise, the Task Force Director, appointed Akins to head a Working Group, located in the Operations Center, which would meet daily. (National Archives, Nixon Presidential Materials, NSC Files, Box 1271, Saunders Files, Middle East Oil, 1/1/71–2/1/71)
  5. Printed as Document 73.
  6. Attached but not printed. Kissinger approved the NSSM with minor changes; see Document 71.