224. Memorandum From Henry Owen of the National Security Council Staff to the President’s Assistant for National Security Affairs (Brzezinski)1
- Coping with OPEC
You asked for an annotated inventory of carrots and sticks for coping with OPEC or some of its members.2 In responding I will indicate briefly the possible utility of a measure or countermeasure in serving either our price or supply security objectives, but closer examination based on actual circumstances would be essential. I will deal only with economic measures, leaving to others such considerations as US policy on the West Bank or Jerusalem, security assistance or military intervention.
A. Indexed bonds could be offered by the USG or by all the industrial nations to oil exporting countries to protect their financial proceeds against inflation. In the US, at least, such bonds also would have to be offered to the US public as well, raising enormous fiscal and structural problems. Treasury is, understandably, adamantly opposed.
B. Immunity to US seizure of assets could be proffered by treaty with a major oil supplier such as Saudi Arabia in exchange for increased production. Such a treaty might waive a potential US claim for inadequate compensation of ARAMCO owners or guarantee Saudi Arabia against US reprisals for other acts, such as price increases. A big enough supply increase could warrant such a deal. The problem of precedents would be limited because other OPEC countries could not offer a comparable quid pro quo. Its appeal to the Saudis would be limited in comparison with their presumed political price for a major increase in oil capacity and output. A war exception also would reduce its value to the Saudis.
C. Indexed oil price increases linked to agreed broader price levels and monetary values could be offered by the US or a group of indus[Page 715]trial countries in the form of a “commodity agreement”. In today’s tight oil market and the prospective seller’s oil market of the future, it is unlikely that we could negotiate with OPEC an oil price index acceptable to the US public, and we could not be sure it would survive a sharp change in the oil supply-demand balance. Discrimination in favor of the oil cartel relative to all other suppliers of commodities would be highly contentious.
A. We could impose a requirement that all suppliers must pay for the right to sell oil to the US. The Energy Department would sell “entitlements” at auction to suppliers of foreign oil. In a soft market, this would give us a discount equal to the amount of the payments for entitlements, or access tickets. This is Prof. Adelman’s3 concept. It does not seem promising in the present and prospective tight market. If nobody offered to pay for the tickets, we would quickly have to issue free entitlements, with red faces.
B. We could nationalize the business of importing oil, confronting foreign government sellers with a government buyer. If the US oil monopoly (read President) had the will to hold out for a break in the cartel’s price by the hungriest OPEC countries, we might temporarily reverse the upward price spiral. OPEC’s action might be further restriction of production, so as to destroy our bargaining power.
C. We could reverse traditional US Justice Department positions and support the IAM anti-trust suit against OPEC members.4 In order to assure that a court judgment imposing penalties on OPEC countries could be enforced, we would need to move promptly to get a court order freezing OPEC country assets in the US. This series of actions would evoke OPEC counter-measures, including withdrawal of assets from foreign branches and affiliates of US banks, suspension of the flow of new assets to the US, and possibly an embargo. The IEA emergency sharing system might unravel in the face of such a provoked embargo unless the initial US action were cleared in advance with our IEA partners. The impact on the US balance of payments and the dollar would be very adverse.
D. We might set up an OECD counter-cartel and fix discriminatory prices on our major exports to the OPEC countries or to any country imposing unacceptable prices on oil. (The variant of a lone US stand of [Page 716] this sort clearly would not work.) Our participation probably would require some form of export tariff, which raises constitutional questions. None of our discussions with other OECD countries encourages expectation that they would go along. Even if wide participation were achieved, leakage through intermediary countries and competition by advanced developing and communist countries would reduce the counter-cartel’s effectiveness.
E. Unilateral economic warfare measures could be adopted in reprisal against confiscatory OPEC price increases, severe withholding of vital oil supplies, or acts we judge to be violations of international law. The President has broad discretion under the Emergency Economic Powers Act of 1977 to declare a national emergency and impose a selective export embargo or selectively seize foreign assets. Like a counter-cartel, this extreme measure would need to be orchestrated with similar action by other countries to have much chance of achieving the desired change in policies by oil producers. It would carry the same extreme risks as the chain of events flowing from anti-trust prosecution.
None of these carrots and sticks is promising in today’s circumstances. The cure would be worse than the disease. Some of the positive measures and counter-measures would be worth closer consideration, however, in the event acts of economic warfare, including an embargo, were threatened or imposed by some OPEC countries. In the meantime, I believe we are on the right course with the Tokyo Summit policies to reduce demand and increase supply. The recent Saudi production decision5 probably reflects, in part, a favorable reaction to these policies. The practical outcome should be a cushion against oil shortages and some relative softening of prices.
- Source: Carter Library, National Security Affairs, Brzezinski Material, Subject File, Box 48, Oil, 7/79. Confidential. Sent for information.↩
- Owen had sent Brzezinski a shorter memorandum on July 5 entitled “Coping With OPEC: What Else Can We Do?” It begins: “You asked for a quick review of possible means of improving our leverage on OPEC or some of its members in trying to persuade them to moderate price increases and increase production. I deal only with economic actions to this end. I don’t consider such issues as the West Bank or military and other forms of security support.” (Ibid.)↩
- Morris A. Adelman, professor of economics at the Massachusetts Institute of Technology.↩
- The International Association of Machinists and Aerospace Workers sued OPEC and its member nations in December 1978, alleging that their price-setting activities violated U.S. anti-trust laws.↩
- See Document 223.↩