Foreign Relations of the United States, 1969–1976, Volume XXXVII, Energy Crisis, 1974–1980

260. Memorandum From the Deputy Assistant Secretary of Defense for International Economic Affairs (Frost) to the Under Secretary of Defense for Policy (Komer)¹

Washington, February 12, 1980.

SUBJECT

• DoD Involvement in International Energy Issues

REFERENCE

• R. W. Komer Memorandum to SecDef/DepSecDef, 24 Dec 1979; (Secret/Sensitive, Tab A)

In response to your memorandum,² we have developed a number of specific follow-up actions. I recommend that you approve them and indicate your priorities. Depending on your decision, we may have to go for some temporary overstrength staff positions. My Office of International Economic Affairs is greatly overburdened as it is. I contemplate as many as two staffers for energy issues plus one administrative assistant serving the entire office.

Ellen L. Frost ³

Attachment

INTERNATIONAL ENERGY INITIATIVES

Summary:

1. Focus Attention on the National Security Impact of High Oil Prices and Tight Oil Supplies.

It may cost the US less to develop alternative energy sources than it would to undertake force build-ups. The former guarantees supply; the latter is high risk and does not. In short, the former may be more cost-effective.

We point out the need to highlight specific NATO stresses and the vulnerability of key producer and consumer nations like Saudi Arabia and Turkey. We suggest a program targeted on communicating the gravity of these factors.

2. Examine the National Security Implication of Western and Eastern European Dependence on Soviet and OPEC Energy Sources. Examine Means to Assure Access to Crude and to Shift Supplies in the Event of Crisis.

We distinguish between crisis capacity and a willingness to produce given that excess capacity exists. We outline a range of potential crisis possibilities involving Soviet, OPEC, OAPEC and other producers, and will develop a matrix of current dependencies and crisis options in and outside the IEA framework.

3. Focus Attention on Increasing the Use of Alternatives to Conventional Petroleum in Military Applications within the US and Europe.

We strongly suggest speeding up the current US oil shale program. If successful, this could fully meet US military needs by 1985; and fully replace the oil now supplied by either Algeria, Libya, or Indonesia. We will investigate other fuel substitution possibilities with an eye toward speed-up.

4. Focus DoD and Interagency Attention on the Question of Energy Technology Transfer.

The US has no clearly defined energy technology transfer policy. PRM 44, which was to develop the US-Soviet policy, was aborted.⁴ Energy technology, despite its specific importance, has been lost in overall technology transfer questions. DoD is strongly supporting development of a US policy which will discriminate between fuels and between national targets.

5. Compare Alternative US, European, Japanese and other National Programs to Restrain Petroleum Demand and to Develop Alternative Energy Sources.

Although this is being given NSC and IEA attention, we are not satisfied with the pace. Nor are we convinced that US domestic planning cannot benefit from a closer look at other nations’ experience both in demand restraint and alternative source development.

6. Review US and Soviet Coal Substitution Opportunities.

The US and Soviet Union each have coal reserves that even at much higher utilization rates can serve for at least a hundred years. Technological problems, but for environmental factors, are more constraining in the Soviet Union. We suggest a comparison of opportunities in the two nations, to include technological cooperation, with the purpose of accelerating the pace of transition to coal.

Discussion:

1. Focus Attention on the National Security Impact of High Oil Prices and Scarcity of Supply.

We will focus on national security arguments understandable to the Congress and the public. These arguments will heighten awareness of linkages between energy and national security. We will seek support for new policy initiatives. We will emphasize the following points, each of which is discussed below:

• New energy sources and conservation as alternatives to force buildup and intervention;

• The impact of high energy prices and inflation on NATO budgets and of energy scarcity on NATO resolve and preparedness;

• The especially vulnerable situations of key producer nations (like Saudi Arabia) and consumer/NATO nations (like Turkey); and

• The need to direct a major effort to the problem of communicating the national security gravity of the energy situation.

OPEC presently exports some 6.3 million b/d to the US, accounting for over 80% of our imports. This comes to about 2.2 billion barrels per year. Assuming a $20 per barrel cost differential between OPEC oil and oil that might be produced from shale, heavy oil deposits or coal, it would cost about $44 billion annually to fully replace OPEC oil, using these non-conventional sources. Incremental defense costs aimed at improving the security of OPEC oil supplies may approach this amount in a few years with no guarantee of assured supply. Further, $44 billion is the upper bound on marginal substitute oil costs; the margin will narrow as OPEC prices rise. Some non-conventional sources even today are considered no more costly than OPEC oil. Thus, an expenditure on alternative petroleum sources could provide a much higher assurance of supply than an equivalent or much higher expenditure on military forces. We have not yet made similar estimates for conservation alternatives but we feel the potential is equally striking.

Inflation is running at some 10 percent in NATO Europe, about 30 percent of which is attributable to energy price increases. With continued dependence on OPEC, and on the Soviets, who account for 5–10% of European oil and gas imports, we may expect further inflationary pressures. NATO military budgets are suffering, making the 3% real growth goal difficult if not impossible. Further, the Alliance is sorely weakened with each direct approach to an OPEC producer by a NATO member seeking a special deal for itself.

The particular vulnerability of key producer and consumer/NATO nations deserves special attention. The Saudis would be vulnerable to pressures from Iraq and South Yemen, not to mention internal pressures directed at the Monarchy. Yet, the Saudi Arabian oil fields are virtually unprotected. It has been said that the oil fields could literally be taken over by an infantry battalion. We have to balance the option of intervening militarily, or at least indicating that we might, which would be of questionable effectiveness in any imaginable circumstance, with that of seeking a greater degree of oil independence.

Turkey is a special circumstance. It occupies a unique and key position on the NATO flank. And it is facing political upheaval borne of intense pressure from both the extreme right and extreme left. Both extremes, for different reasons, would like to see an army takeover. The root of the problem is economic. NATO should help by mobilizing economic assistance from its member nations. Furthermore, NATO members could lend their support to priority IEA oil-sharing for Turkey. Korea and Brazil are also experiencing oil supply problems, and occupy key regional positions.

The above are specific examples of the linkage between energy and security. Unfortunately, although it would seem that this linkage can hardly be doubted, many still pay it only lip service. The US has no orchestrated approach to sensitizing the country and the West to the overriding strategic impact of the energy situation. Practically nothing has been said in a language understandable to the Congress and ordinary people who make up constituencies. The DoD should give thought to an effort aimed at getting the right people involved in this communications job.

We will participate much more intensively in interagency fora dealing with energy initiatives. We are already participants in the NSC study assessing international energy policy actions, are observing and will later testify before Senator Jackson’s Energy and Natural Resources Committee on the geopolitics of energy, and participate in SCC and other White House-directed deliberations on energy technology transfer. We should integrate our international efforts with MRA&L’s participation in the Sawhill Group working on domestic energy policy. We cannot separate US domestic actions from international activity.

(Action: IEA primarily; assistance from USD (P)), LA, MRA&L and other OSD offices as appropriate.)

2. Examine the National Security Implication of Western and Eastern European Dependence on Soviet and OPEC Energy Sources. Examine, in Event of Crisis, Means to Assure Greater Access to Crude from Selected Nations and Possibilities for Shifting Supplies Outside the IEA Framework.

There are two “dependence” issues here: crisis production (willingness to meet a “surge” rate) and crisis capacity (ability to meet “surge” rate). We will examine two cutback possibilities, Soviet and OPEC. Soviet cutbacks may be forced by Soviet shortages or be foreign-policy dictated. (The Soviets currently provide 5–10 percent of Western European oil and gas with gas dependence expected to increase.) OPEC cutbacks may be OPEC-wide, OAPEC-wide, or selective. We will look at:

• Possibilities for increasing OPEC production in the event of Soviet cutbacks

• Possibilities in friendly OPEC nations in the event of selective OPEC cutbacks

• Possibilities in non-OPEC nations (e.g., UK, Norway, Mexico) in the event of Soviet, selective OPEC or OPEC-wide cutbacks

• The current pattern of oil and gas flow, and seek to develop a matrix that might suggest alternatives

We have begun work in this area. We have outlined the nature of Western European dependence on Soviet energy (oil and gas) and begun to shape possible US policy responses. We are less clear on the impact of Eastern European dependence; in particular, the impact of substituting dependence on OPEC for dependence on the USSR. (The Soviets currently furnish about 60% of Eastern European oil and 30% of gas.) We should examine stepping up joint energy projects with the East European moderates (Romania, Poland and Hungary).

As we examine political tradeoffs, we will examine the interrelationship between the major energy sources (oil, gas, coal, possibly nuclear). Possibly, by urging a change in fuel, we may uncover an attractive variant relating to dependence on external sources; e.g., greater European use of Dutch gas might conceivably reduce European dependence on both OPEC and Soviet oil (and Soviet gas).

The following variables will be major inputs to this analysis:

• An assessment of OPEC moderates (perhaps Saudi Arabia, Kuwait, the UAE) willing to build up a capacity to substitute in the event of Soviet export cutbacks. This would not involve Arab-Israeli issues. This would constitute less than a 2% increase in current OPEC production.

• An assessment of nations having unique vulnerability. Korea, Iceland, Turkey, and possibly Brazil would be among these. Korea has been threatened by an Iranian cutoff, Iceland is virtually dependent on Soviet oil at this moment (might Canada substitute?), Turkey’s appalling situation has already been described, and Brazil, which imports 85% of its oil, is dependent on Iraq for about half of that.

• An assessment of productive capacity in key non-OPEC nations. Mexico is currently studying the possibility of moving up to 4 million BD, and Britain and Norway conceivably might be induced, as NATO members, to build crisis capacity.

In short, we will develop a matrix of current dependencies and potential options.

(Action: IEA primarily; assistance from European and other Regions as appropriate.)

3. Focus Attention on Increasing the use of Alternatives to Conventional Petroleum in Military Applications both in the US and Europe.

We will review the impact on NATO forces of petroleum scarcities and high prices. We will emphasize substitution possibilities—to include coal in meeting facilities needs and non-conventional petroleum in meeting transportation needs. Perhaps we and our NATO partners should undertake accelerated programs to develop military fuels from shale, heavy oil or coal.

We will examine boosting exports of US coal to Europe from the current annual rate of 13 million short tons. The NSC and DOE are looking at this possibility.

We will again ask the question, “Are we devoting enough DoD research money to unconventional sources given that within 5 years we may be desperately short of conventional fuels?” Past studies will be noted. Perhaps the Navy has a much more powerful argument for nuclear-powered ships now than it did just a few months ago.

We propose speeding-up the US program to develop oil shale production to meet all US military needs for oil. The US has the clear-cut capability to meet fully its military needs for petroleum from oil shale. The current overall US goal is 400,000 BD of oil shale production by 1990; the US military currently uses some 460,000 BD. Shale oil is now competitive; it can be produced at $30–45 per barrel. The following actions could result in the achievement of the US production goal as much as 5 years earlier.

• a guarantee by DoD to buy the oil. This is cost-free.

• a concerted effort to speed up the “permitting” process.

• procurement priority for production equipment (there is no technology problem).

• relaxing, or adding funds to meet, environmental considerations.

Some DOE representatives are optimistic that this speed-up can be achieved with active DoD support. This is an ongoing program, needing only priority. It has obvious implications for meeting European needs and for replacing the most vulnerable segments of US oil imports. The amount of oil is approximately that now supplied to the US by either Libya, Algeria or Indonesia.

(Action: MRA&L and IEA)

4. Focus DoD and Interagency Attention on the Question of Energy Technology Transfer.

The US has no clearly defined energy technology transfer policy. Energy has never been singled out from technology in general, despite its obvious special importance. PRM 44, which would have done this for transfers to the USSR, was aborted.

We need to establish a set of energy technology transfer policies which discriminate effectively between fuels and between national targets. We need to review possibilities for major collaborative ventures with energy producers around the world, to include the Soviet Union and China. Where appropriate, we should think about strengthening incentives to the private sector to facilitiate transfer. Compensation deals should be explored. We will review the role of domestic and international financial institutions which may provide guaranteed financial incentives.

Secretary Klutznick’s technology transfer review group is recommending an urgent study of US-Soviet energy relationships. We strongly support this recommendation. We will emphasize the gravity of the global energy situation and work to ensure that the study does not get bogged down in abstractions. We will point out that if the Soviets, as predicted by the CIA, begin to import 15–20% of their oil by the late 1980s, the result could be truly catastrophic. Even a significant reduction in current Soviet exports of 3 million BD could trigger a crisis.

(Action: Primarily IEA)

5. Compare Alternative US, European, Japanese and Other National Programs to Restrain Petroleum Demand and to Develop Alternative Sources of Energy.

This is being given some consideration in a current NSC study action, but DoD needs to play a more forceful role. The pace is very slow, made more so by the need to coordinate with our IEA allies. The IEA is considering further import reduction targets. The current US target (8.2 MBD) may be revised as this effort proceeds. We should review other measures being taken, here and overseas, and those not being taken; and examine voluntary and mandatory demand restraint measures and efforts to develop substitutes for conventional petroleum.

The basic purpose will be to generate a series of specific near-term proposals, to be floated via the NSC staff procedure, that draw from the measures taken by the other nations ideas most appropriate to the US. Korea, as one example, has developed a comprehensive program aimed at reducing electric power dependence on oil. We do not expect to uncover a dramatically new approach but we do hope to speed up the current NSC action while culling from other nations’ experience ideas of possible value in US domestic planning.

(Action: Primarily IEA, assistance from Regions.)

6. Review US and Soviet Coal Substitution Opportunities in General.

US and Soviet coal reserves are truly awesome. Even at much higher utilization rates, both nations have the capability, using coal, to reduce dramatically all liquid fuel consumption but for that in transportation. US production constraints, with the single exception of having to meet environmental restrictions, are not nearly what they are in the Soviet Union. The Soviets do not have the gasoline buffer we do; in that sense their need to reduce non-transportation oil consumption is more urgent. Technological cooperation with the Soviets will be investigated as part of the overall technology review.

We should review the arguments as to why coal usage cannot be stepped up quickly and then urge the other Executive Departments to take appropriate specific steps to accelerate the transition to coal. If transition to coal or coal derivatives as our major energy source is inevitable, then the rising national security costs of relying upon oil clearly mandate our accelerated transition.

(Action: IEA, DR&E and European Region.)

1. Source: Washington National Records Center, OASD/ISA Files: FRC 330–82–0263, Box 1, ASD/ISA #2 Policy Files. Secret; Sensitive. Sent through the Assistant Secretary of Defense for International Security Affairs, and a stamped notation indicates that he saw it.
2. Attached at Tab A; printed as Document 253.
3. Frost signed “Ellen” above this typed signature.
4. PRM 44, September 21, 1978, initiated a study of the “Export of Oil and Gas Production Technology to U.S.S.R.” (Carter Library, National Security Council, Institutional Files, Box 2, PRM 44)