80. Paper Prepared by the National Security Council Staff1

NSSM 114, WORLD OIL SITUATION JANUARY 24, 1971

I. Introduction: The Problem

A. Overview

Abundant oil supplies at relatively low cost have long been taken for granted in the non-Communist countries. Consumption of energy has increased enormously in recent decades, and oil has increasingly displaced coal in Europe, Japan and the United States.

The present world oil situation involves the probability of a significant increase in the payments made by oil companies to the oil producing countries—and consequent increased costs to the consumers and the oil companies—and the possibility of interruption or cut-back in supplies imposed by some of the OPEC countries. In the current bargainings with OPEC, the threat of interruption of supplies will clearly affect the willingness of the companies (and consuming countries) to meet some or all of the OPEC demands.

The immediate issue for the USG is the avoidance of serious disruption of, or damage to, the economies of Western Europe, Japan and, possibly, the United States—as a result of an interruption of supply or, conceivably, very large and sudden increases in the cost of oil. Important longer-term issues are the continued availability of oil to consumers on reasonable terms, the potential threat of cut-backs in supplies by the OPEC producers acting in concert, the ever increasing dependence of the US on imported oil, and, conceivably, the use of oil for political purposes by some producers.

Substantially higher payments to OPEC countries will in large part be borne by countries other than the United States. A portion will be borne by the United States, through higher costs of imported oil (especially residual fuel oil) and the reduced profitability of US international oil operations (to the extent higher payments cannot be shifted to consumers) which will adversely affect the US balance-of-payments. [Page 200]We do not have a meaningful analysis of how higher payments would be shared between consumers, through higher prices, and the companies, through reduced profits.

An important point is that there are strong common interests shared by the producing countries, the companies and the principal consumers. These interests assure that an agreement will be reached. The issue now is one of price and whether a settlement can be reached without an interruption of supply. However, the long-term objective of at least several of the producing governments is one of progressively greater control over production and, probably, the eventual nationalization of oil operations in these countries.

The increases in oil revenues demanded by the OPEC meeting at Caracas, December 7–12, 1970,2 might well cost the producing companies on the order of $2 billion annually. (Total payments to producers—Persian Gulf, Libya, and Venezuela—reached some $6 billion in 1969 as compared with some $2.3 billion ten years earlier). If these demands are not met, the OPEC countries may impose short or long-term interruption of supplies.

The companies involved are primarily US, but also there are UK, Dutch, French, Italian and other corporations involved. The companies are prepared to accept relatively substantial increased payments, particularly if coupled with a multi-year arrangement which assures stability of cost and supply. The attitude of the consuming countries appears to be a similar willingness to accept some higher costs.

A key question is the nature and extent of USG (and other consuming countries) involvement in the negotiations with OPEC. Because of the US antitrust laws, some US involvement in the discussions is inevitable, and the Foreign Petroleum Supply Committee would have to be activated if a shortage of supply develops.

Over the years the US has developed a pattern of consultations with Europe within NATO and the OECD. The European governments (and Japan) are generally conscious that the majority of companies involved are US-owned and controlled. On the other hand, while participating in the coordination of international oil supplies during emergencies, the United States has not in the past taken a substantial role in the negotiations between the companies and producing governments.

[Omitted here are 80 pages of material: the remainder of the Introduction; Section II, Analysis of OPEC Demands; Section III, Legal Aspects; Section IV, U.S. Objectives in the Short Run; Section V, Implications of the Oil Problem for U.S. Interests; Section VI, Leverage on [Page 201]Producing Governments; Section VII, The Dilemma of Separate Negotiations; and Section VIII, Options.]

IX. Long-Term Implications of the Present Oil Situation

Even before the current problem of OPEC negotiations on oil arose, there was grievous concern in the US and in Europe about the extremely rapid increase in demand for energy in the non-Communist world and the difficulty which countries might experience in obtaining vital supplies. Govenments have studied this problem from the standpoint of all energy sources: oil, gas, coal, nuclear energy, gasification of coal, development of shale oil and tar sands, experimentation with solar energy, etc.

The demand for energy in the non-Communist world is rising at such a rate (more than 8 percent annually) that it will require action with respect to all forms of energy to enable supply to keep up with demand. In the US the concern over this energy gap has centered in the Energy Subcommittee of the Domestic Council: the joint statement of September 29 by Chairman McCracken of the Council of Economic Advisors and General Lincoln of the Office of Emergency Preparedness3 highlighted that concern.

Of primary importance in the long run is the need to assure the US and its allies of an uninterrupted supply of oil. Although production in other world areas will increase, most of the world’s old reserves available for export are located in the Middle East and North Africa. Europe’s dependence on those two areas will continue, and in the absence of impressive new discoveries in the US we will also become more dependent on imports from these areas. Atomic power is expected to supply only about 7 percent of our energy demand by 1980. The US has the opportunity to develop shale oil reserves, but such oil would be high in cost.

Middle Eastern and North African oil producing countries clearly plan to take advantage of their control over vital supplies of oil to extract more revenue from the consuming countries—and, possibly to extract political concessions as well. The current problem of negotiations with OPEC must therefore be seen as a trend which will continue. It [Page 202]would be a mistake to expect a return to the situation which existed prior to the Libyan oil settlement of September, 1970. Even if Tapline were to be restored to full operation and the Suez Canal opened, the oil exporting countries would attempt to hold prices at the highest level possible and to increase their control over their principal natural resource.

It is quite possible that by 1980 American and other foreign oil companies will no longer be operating in concession areas on the tax and royalty payment basis which is the framework of the present negotiations but may simply be employed on a contract basis to produce oil for the host government at cost plus a fixed fee. No one can predict just how long US oil firms will continue to have the involvement in production which they now have. As for the transportation and bulk marketing of oil, it is safe to say that US firms will be better able to maintain their control of this sector than they will be able to maintain control of either the production end or the retail marketing end of the business.

Given the uncertainty of the position of US companies in oil exporting countries of the Middle East and North Africa, it is imperative to give advance consideration to steps which can be taken to assure the US of access to vital oil supplies. As a start it may be helpful to arrange a meeting with oil company representatives after the current problem of negotiations with OPEC producers is dealt with to discuss the roles of the companies of the US in this matter of vital national interest.

As a matter of policy it could be the United States will have to consider whether to minimize its dependence on Eastern Hemisphere oil, even from the relatively reliable countries of that hemisphere since Europe would in time of crisis be heavily dependent on them. In any event, contingency plans will be required for the event that one or more key producers might cut fuel oil supplies for economic or political reasons.

A further question concerns US maritime policy. For example, an issue is whether the US Government should assist in the maintenance of a reserve of modern super-tanker capability to provide foreign policy flexibility for coping with world oil and other type emergencies. Possibilities include government outright ownership, i.e., ships could be chartered to operators, with agreement to recall for specific situations; or the provisions of a Construction Differential Subsidy (CDS) to encourage private construction of more super-tankers. For example: Commercial interests are available today to contract US yards for 1 million dead-weight tons (DWT) of super-tankers (120,000 to 230,000 DWT range) for delivery about 3 years from time funds are available. This would cost the government approximately $100 million in additional Construction Differential Subsidy (CDS).

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A related matter which might also be the subject of industry-government meetings is a possible program to develop alternative sources of energy at a faster rate. Gasification of coal, development of shale oil, and tar sands are three areas that could well receive priority attention. Although some research efforts are already underway, a massive government-industry program may be necessary.

The lack of security of Eastern Hemisphere oil in an emergency can also be used to argue that oil imports should be increased, to preserve existing supplies in the US. Thiss question was studied in the Cabinet Task Force Report, The Oil Import Question.4

[Omitted here are 11 Appendices.]

  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. According to a January 25 covering memorandum from Trezise to Kissinger, the Departments of Justice, Commerce, State, Treasury, Defense, and Interior, the Office of Management and Budget, the CIA, the Council of Economic Advisers, and the Office of Emergency Preparedness contributed to the paper. The paper was a response to NSSM 114, Document 71, and was scheduled for discussion at a February 2 SRG meeting. (Memorandum from Davis to SRG members, January 18; ibid.) The meeting never occurred.
  2. See Document 74 and footnote 5 thereto.
  3. In a joint statement issued at a press conference on September 29, McCracken and Lincoln announced that the Nixon administration was adopting measures to avoid potential shortages in the supplies of natural gas, residual fuel oil, and bituminous coal during the winter. Among the steps they announced were the relaxation of quotas to allow doubling of home heating oil imports from Canada, the exemption of natural gas from the Canadian crude oil quota limitation, and the unlimited importation of liquefied petroleum gas from Western Hemisphere sources. (Wall Street Journal, September 30, 1970, p. 3)
  4. See Document 32.