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210. Memorandum From the Military Assistant to the President’s Assistant for National Security Affairs (Odom) to the President’s Assistant for National Security Affairs (Brzezinski)1

SUBJECT

  • Oil Policy: Sense and Nonsense

The staff meeting discussion on oil today2 provokes me to make some points which have been lost in a lot of nonsense talk.

Supply and demand. These remain the key variables. We cannot affect supply greatly in the short turn, but decontrol will not reduce supply, and it might increase it. Demand, therefore, is the key variable for our policy in the coming months and year. We can affect demand in the following ways: (a) pricing; (b) administrative allocation system.

—Administrative ways to allocate: First, gas rationing can be used, but that will affect only auto transport, not other types of demand. Second, we could use the French approach, set a maximum import level and disallow imports above that quantity. This would limit use by all kinds of consumers. There are other possibilities, but these are the familiar administrative tricks for regulating demand administratively. Administrative approaches are unlikely to induce a rational domestic economic adaptation to decreased supply.

—Pricing: If the price goes high enough, demand will drop. There are two ways to push up the price rapidly. First, let the present OPEC dynamic drive up the price. Second, use present statutory authority under which the President can impose an import tax on oil. We cannot easily avoid the first effect of OPEC’s actions and the probable drop in world oil production (Iran, etc.) We have a choice, however, about use of the second way.

If the President were to impose an import tax on all oil, and a large one, two-to-five dollars per barrel, it would have the following highly desirable effects:

(a) It would cause a large price rise which at some point would reduce domestic consumption, driving out the least profitable consumption.

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(b) It would reduce the flow of dollars abroad. It would put them into the U.S. Treasury rather than into foreign bank accounts. This advantage is of enormous importance. The tax receipts might well make it possible for the President to balance the budget, and in any event, it would put large fiscal power into his hands (for Defense, HEW). At the same time, it would reduce the trade deficit.

(c) The impact on our allies would be strong and positive: we would signal our seriousness about the problem, our seriousness about international monetary affairs, and about our concern with vulnerability to foreign supply.

(d) It could, after a time, cause some OPEC producers to reduce prices. It might even break up OPEC.

(e) It should expedite the search for alternate sources of energy—gas from coal, shale, etc.

There are a number of counter-arguments but none very compelling. For example:

(a) An import tax would fuel domestic inflation. Not so. To tax is to take money out of circulation. That is deflationary. Inflation could only come from the “transfer” of this money through government spending.

(b) It would penalize the “wrong” people. This argument begs the larger issue: everyone is being punished by inflation and the growing trade deficit. How do we best attack that structural problem? By a market-wide price adjustment for oil, forcing an economic rationalizing response throughout the economy. Protecting the “right” people through gas rationing, etc., retains the dysfunctional structural rigidity.

(c) It will induce a recession. This is a valid argument, but it has become a moot one. We are heading into a recession this summer or fall. The unhappy reality of the energy crisis is that economic recession is inevitable until new sources of energy are found.

Of course, de-regulation must accompany a policy of taxing oil imports. Finally, the most politically compelling feature of this oil import tax approach is that it combines its simplicity and boldness with a comprehensive solution. It hits everyone and allows no one, not the Arabs, not the oil companies, not the consumer, to escape the reality of an energy shortage. At the same time, it increases the premium on new energy sources and gives the Government more fiscal control.

  1. Source: Carter Library, National Security Affairs, Brzezinski Material, Subject File, Box 48, Oil, 3–6/79. Confidential. Sent for information. Brzezinski wrote “good” at the top of the first page.
  2. No record of this meeting has been found.