209. Memorandum From Secretary of the Treasury Blumenthal and Henry Owen of the National Security Council Staff to President Carter 1

SUBJECT

  • Oil Prices

You asked us for preliminary thoughts about possible approaches to the oil-pricing problem.

We met Thursday2 with Zbig and a group of your senior advisers to discuss prospects and remedies. This memorandum summarizes that discussion, and outlines how we intend to proceed.

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Oil prices are rising rapidly and the rate of their rise could increase still further. The exporters have learned how to earn more by producing less, and the oil importers haven’t yet acted to reduce their reliance on oil imports. US inflation, unemployment, and external accounts could be worse than our present “worst case” projections suggest. Effects on the world economy would also be highly adverse.

Possible responses to this problem include:

I. Measures by Oil Importers to Affect the Market

1. Measures to restrain demand. Such measures are, as you know, being considered as part of preparations for the Summit, notably an extension of the IEA 5% cut into 1980 and a specification of the measures that each country will take to achieve this cut.

2. Measures to increase production. This involves national actions, e.g., moving ahead with nuclear power and tempering environmental regulations to permit increased use of coal; some of these actions could have early effects. It also involves international cooperation to mobilize resources for development of alternative energy sources; most of these actions would have only long-term effects. (As part of Summit preparations, we have given you a Treasury–DOE–State proposal3 to this end.)

3. Control over purchasing. This could include unilateral efforts to improve the US position, e.g., centralized purchasing of oil imports. It could also include agreement by the oil-importing countries to boycott the spot market; this would involve a deeper cut in oil imports for some countries than envisaged under the presently pledged 5% reduction. It would, therefore, have to be accompanied by a decision to set in motion the agreed international contingency plan for allocating scarce oil supplies among industrialized countries, which none of the other oil-importing countries want. Each of these actions would run into very serious legal, administrative, and probably political obstacles.

II. Agreements with Oil Exporters

4. Separate bilateral deals with individual oil-exporting countries to guarantee supplies for the United States. This would violate IEA rules and risk triggering self-defeating competition among oil-importing countries.

5. Separate agreement with Saudi Arabia, to assure higher levels of present production and of investment to increase capacity for future production. This agreement could be sought by the United States alone, or by several industrial countries together. It is at least uncertain whether such an agreement could be secured without giving Saudi Arabia assurances regarding the West Bank and Jerusalem.

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6. A long-term collective agreement between oil-importing and exporting countries, which would guarantee adequate oil exports in return for gradually rising real prices and possibly other specified economic favors from the industrial countries. It will be difficult to persuade the main oil exporters to join such an agreement unless they become worried about the possibility of a future softening in the oil market. This will only happen if the industrial countries reduce their oil imports. Domestically, it would be difficult to sell an agreement that would guarantee OPEC the kind of steep price increase that would probably be involved.

III. Joint Counter-Action By Industrial Countries

7. The industrial countries might collectively tax or embargo certain categories of exports to the OPEC countries, relating such actions to OPEC price increases. (Export taxes raise constitutional problems in the United States.) It is possible to think of other actions along these lines. Any such measures would only be effective if virtually all industrial countries joined in. So far, other industrial countries have been unwilling even to contemplate “confrontation”.

As you can see, the obstacles to these measures, other than those to reduce demand and increase output—which we are already considering, are very great. Most of them have been examined, or discussed with other countries, in the past. Nonetheless, we believe that the situation is sufficiently serious to warrant close examination of every possibility.

We will submit to you within ten days a paper outlining prospects and possible courses of action. Ed Fried, whom you may remember from the campaign (he was then at Brookings) and who is now US Executive Director of the World Bank, will work full time on its preparation. He will work closely with Jack O’Leary, Tony Solomon, Dick Cooper, Henry Owen, and others under the supervision of Mike Blumenthal. We will consult outside experts, as well.

Proposals for vigorous action will be hard to sell other industrial countries. If we come up with such proposals, we should plan to talk to Schmidt when he is here; and to the French Energy Minister who will visit Washington at the same time. We may also want to visit Thatcher and Giscard thereafter, in an effort to secure their agreement to any proposals that look promising.

  1. Source: Carter Library, National Security Affairs, Staff Material, Special Projects File, Box 11, Henry Owen, Chron, 5/18–28/79. Secret. Sent for information.
  2. May 24.
  3. See Document 205.