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

73. Memorandum From the President’s Assistant for National Security Affairs (Kissinger) to President Nixon¹

Washington, January 18, 1971.

• SUBJECT
  • International Oil Situation

A confrontation between the major international oil companies, most of them U.S. owned, and the major oil producing countries in the Middle East could soon provoke a world oil crisis (State memo at Tab A).² There could be political overtones affecting the Arab-Israeli dispute, particularly if we were drawn into the confrontation in support of the companies.

The Problem

The basic problem stems from a recent series of stiff revenue-raising demands formulated by the major producing countries at a meeting last month of their Organization of Petroleum Exporting Countries (OPEC). Because of limited world supply and shipping capacity, the producing countries are for the first time in recent history in a good position to extract major increases in their tax take from the U.S.-dominated petroleum industry. The result would be sharp price increases in the major consuming countries (Western Europe and Japan), which could range as high as $5 billion in 1971 and much higher later.

Negotiations between the companies and an OPEC committee collapsed on January 12, when the committee refused to deal with low-level officials sent by the companies. Meanwhile, the Shah has privately denounced the oil companies for their delaying tactics and has threatened that Iran, Iraq, and Saudi Arabia will shut down production if the companies do not agree to an acceptable settlement.³ OPEC will meet in emergency session next Tuesday⁴ to work out its next move.

In a related development, Libya has raised the ante by increasing its own demands on the companies operating there even beyond the level decided on by OPEC last month—a total of about 40%. They have demanded immediate acquiescence and threatened to shut off production—and perhaps expropriate the companies’ properties—if their demands are not met. The Libyans are concentrating first on the smaller and more vulnerable companies, in hopes of picking them off one-byone and eventually forcing the major companies to cave. This was essentially the strategy the Libyans followed successfully last year when they gained substantial revenue concessions, serving as a model for the new OPEC demands. If the Libyans succeed again, they could well trigger even higher demands from the other OPEC members.

The problem primarily affects the Europeans and Japan, which are highly dependent on Middle East oil and which would have to bear the main burden of shortages and sharply rising prices. Our interests, however, are also substantial: the profits of the U.S. companies, disruptions to the international economy, and possible impairment of European security caused by shortages of oil available to NATO.

Positions of the Companies

The companies have adopted a common front in their negotiations with OPEC and Libya, receiving the necessary approval from Justice, and plan to inform the Libyans and other OPEC countries that they will not negotiate with them as individuals but will rather negotiate collectively with OPEC. There is a strong possibility, however, that at least some of the OPEC members—who control about 85% of the world’s oil supply—will stop production if the companies do not give in the negotiations. The Libyans, who have huge foreign exchange reserves and supply about 30% of Europe’s oil, are in an especially good position to do this and may cut off the production of two of the smaller companies for a start as early as Saturday if their demands are not met. A substantial cutback in production would immediately drive up European prices, and raise the possibility of severe rationing and a sizable draw down of oil reserve in Europe.

To improve their bargaining position in Libya, the companies are formulating a scheme—which would have to be approved by Justice—for the larger companies to sell oil to the smaller companies so that they may meet their contract obligations if Libya cuts off their production. This would enable the smaller companies, which are extremely vulnerable to Libyan pressure because Libya is their only source of oil, to better resist being picked off one by one. On the other hand, this strategy may ultimately cause Libya to curtail all production and result in a request by the Europeans and the companies for U.S. government intercession with the moderate Middle East regimes to prevent them from doing the same.

Possible Scenario

There are several potential turning points in the crisis, which will probably evolve in the following order:

• —Will the companies stick together and hold the line against the Libyan demands? It now looks like they will.
• —Will Libya stick to its extreme demands and stop the flow of Libyan oil if they are not met? It looks like they will.
• —Will the other Arabs then stick with Libya and shut down their production as well? Iraq probably will. It is uncertain what the other Arabs will do, but it must be remembered that significant European shortages will result from even a Libya/Iraq shutdown, in view of the global tanker shortage. It is at this point that the companies may seek U.S. Government intervention with the moderate Arabs.
• —Will the European governments panic at the potential shortages and attempt to strike their own government-to-government deals with Libya, circumventing the companies? This is certainly a possibility, and fits with the long-range interests of some of the European governments in removing the Anglo-Saxon companies as intermediaries in the oil trade.
• —Or will the Europeans join forces to staunchly resist the Arabs? They could, for example, block Libyan and other Arab foreign exchange holdings and refuse to send spare parts for the oil wells. (However, there would not be much need for spare parts if the wells weren’t producing, and the financial play could cut both ways since the Arabs might first withdraw their massive sterling balances and thereby bring on a new sterling crisis.)
• —And will we then ration oil domestically to help the Europeans withstand the Arabs, and/or bring new pressures on Israel to buy off the Arabs politically?

Governmental Actions

State has been consulting with the Dutch, French and British⁵ in order to coordinate our efforts and to ensure full support for the present company position. We have also informed the major importers (Japan, India, Latin America), who may have influence on the OPEC countries, of the developments. We have informed the Libyans that their tactics, which we have learned are based on an attempt to put pressure on the U.S. and the Europeans in order to influence our policies in the Arab-Israeli dispute, will not succeed. We plan to tell Iran this as well, and ask them to influence other OPEC countries to ensure that they do not become a party to these tactics. And State has instructed our Embassies in the Arab world to tell their host governments that we view the joint industry proposal as a basis for a reasonable settlement.

An inter-agency task force, under the chairmanship of Assistant Secretary of State Trezise and including Defense, Interior, and the Office of Emergency Planning, has been formed to design and coordinate our response. My staff is working with the group and will keep me constantly informed on the situation.

However, all of the activity so far is completely tactical and reactive. I have therefore called for a quick study of our basic objectives in the situation, and an analysis of what role we should be playing in trying to help solve it.⁶

1. Source: National Archives, Nixon Presidential Materials, NSC Files, NSC Institutional Files (H-Files), Box H–180, National Security Study Memoranda, NSSM 114. Secret; Exdis. Sent for information. A stamped notation on the memorandum indicates the President saw it.
2. Not attached. Tab A is presumably Rogers’s January 13 memorandum to Nixon. See footnote 2, Document 69.
3. In telegram 182 from Tehran, January 13, the Embassy relayed the information that the Shah had criticized the Consortium for dilatory tactics and refusal to send a team empowered to negotiate despite sufficient advance notice. The Shah added that there would be an OPEC meeting whether or not the companies sent a first team of negotiators; that Iran, Saudi Arabia, and Iraq were in absolute unity on tactics required for settlement; and that if the companies did not agree to an acceptable settlement, the three states would shut down production. (National Archives, RG 59, Central Files 1970–73, PET 3 OPEC)
4. January 26.
5. See Document 66.
6. Document 71.