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

SUBJECT

  • Security Implications of the Energy Crunch

You recently asked for an analytical paper on the security implications of the energy crunch2 that might be sent to Under Secretary Newsom, along with the cover memo at Tab A.3

Attached, next under, is a draft memorandum prepared by Don Goldstein that builds on your earlier thoughts on this issue.4

We have coordinated the draft with Major General Boverie.

Ellen L. Frost5

Attachment

ENERGY AND SECURITY

Summary

The global energy squeeze poses multiple threats to the security of the United States and the maintenance of international order. It contributes in a major way to international economic problems such as inflation, balance of payments deficits, slowed growth, and rising unemployment. In addition to the social and political strains they cause, these effects impair the ability of the US and our allies to marshall the resources necessary for the defense of the non-communist world. The impact of rising energy prices and the concomitant economic slowdown is burdensome enough in the industrialized countries, but it is even more serious for the developing countries. The resulting instabilities constitute a danger to the entire Third World, including the major oil producers.

[Page 878]

More profoundly, the dependence of most of the non-communist world on access to Persian Gulf oil affects the way we must think about our security relationships. Because only the United States can even attempt to guarantee the security of the free world’s major oil supplies, new demands will fall on us. Because we cannot do that job alone, new demands will also be placed on others. We must convey the mutual responsibilities growing out of the energy crunch in a clear and consistent way to our allies, the countries in the Persian Gulf region, and our friends in the Third World. Our basic message must be that we intend to assume much of the additional burden of safeguarding access to Persian Gulf oil, but we expect others to share in these burdens as appropriate. We especially hope that those who will benefit from our acceptance of new responsibilities will not pursue separate courses of action that make our efforts more difficult.

The Threat to Supply

Both the importance and the vulnerability of Persian Gulf oil can hardly be overstated. The eighteen million or so barrels of oil that flow out of the Persian Gulf every day comprise nearly forty percent of non-Communist oil production. This figure is roughly equal to the total crude oil imports of the seven largest OECD consumers. Some states, like France and Japan, depend on the Gulf for over two-thirds of their crude imports. Despite intense efforts by consumers to diversify their sources of supply, no other region could substitute totally for the loss of Persian Gulf oil. While some individual oil importers, such as the United States, may not currently depend on the Gulf for the bulk of their supplies, it would be impossible for them to insulate themselves from the direct or indirect effects of a major cutoff for any great period of time.

Dependence on Persian Gulf oil is not new. What is new is the graphic and continuing demonstration of the vulnerability of access to that oil. The Soviet invasion of Afghanistan, whether or not it was part of a conscious strategy to increase influence in the Gulf, constitutes fair warning. The Soviets showed that they are willing to use military force in the pursuit of their interests in a region of vital importance to the West. The boldness of their action is especially sobering when considered in the light of the very real prospect that the Soviets may also face a substantial oil shortfall in the coming decade. We can hardly count on the Soviets to pass up opportunities in Southwest Asia which may help improve their situation or worsen ours. Indeed, the evolving situation in Iran may provide a pretext for a new “phase” of Soviet policy in this part of the world.

The shocks set off by the Iranian revolution have not yet been contained and still reverberate throughout the region. Perhaps the greatest effect is the heightened awareness of the fundamental weaknesses of [Page 879] the Persian Gulf regimes. They are susceptible to both internal challenges—religious, tribal, and factional—and external threats—regional rivals and external powers. Their domestic weaknesses hamper their ability and willingness to seek the aid we can provide to help meet foreign challenges. This makes it difficult for us to prepare to meet threats originating within the region or arising from outside of it. Even those states that are willing to cooperate with us do so in a cautious and tentative manner.

The Threat of Rapidly Rising Energy Costs

We all recognize that higher energy costs are inevitable. Indeed, some have gone so far as to argue that higher oil costs may even be desirable over the long term. More specifically, it is suggested that high priced oil eventually will lead us to alternative fuels and more efficient energy use, and will provide additional incentives to reduce current levels of dependency on imported oil. Whether or not one accepts these propositions, it is true that increasing prices are one factor contributing to the transition away from oil—including that from the Persian Gulf. The nature of this transition is critical, however. If it does not take place smoothly (i.e. without sudden interruptions of production or jumps in price), the economies of both the developed and the developing world could sustain severe damage. The major oil producers must concern themselves with this damage since it has direct and serious consequences for their security.

The rapid increases in oil prices (some 130 percent) over the last 18 months, far in excess of what economic conditions could justify, poses a very real strain on the global economy and ultimately international peace and security. In the first place, the economic foundation on which our defense effort rests has been hard hit by slowed growth and high rates of inflation spurred in part by surging oil prices. According to the IMF, about one-third of the total inflation affecting the major industrialized nations is directly attributable to higher oil prices. The indirect effects on related prices is believed to raise that fraction even more. A number of strategically important LDCs find themselves in even more desperate straits. A major cause of the economic difficulties of South Korea, Thailand, Pakistan, and Turkey, for example, is the huge growth in their oil bills. Non-OPEC LDC debt as a whole is predicted to surge in 1980 to $109 billion, up from $58 billion in 1979. In 1981 the strain will be even worse. Even though we may be able to scrape through the enormous recycling difficulties presented—if OPEC countries are cooperative—it is clear that politically destablizing belt tightening will be necessary in many LDCs.

The economic problems caused by the surge in oil prices and the accompanying wealth transfers affects international security in several ways. First, it reduces the sum of resources available to meet the Soviet [Page 880] challenge. It is difficult to devote increasing amounts to defense when the overall economies of the West are constrained by a rapidly rising energy tax. Also, because of inflationary effects partly derived from oil, not to mention the higher cost of fuel itself, we simply get less military strength from the nominal defense dollar. The net result is that the West’s defense effort falls short of what it should be in the face of the long-term buildup of the Warsaw Pact and more immediate crises such as Afghanistan. This is not the only reason, of course, why our military strength is not what it should be, but it helps explain the difficulties in redressing our problems.

Secondly, the worsening economic plight of the non-oil producing LDCs increases the likelihood for internal instability and perhaps regional conflicts. The trade and finance aid efforts of the West are more than offset by rising oil import costs. As an illustration, Turkey’s oil bill in 1980 is estimated to be $2.7 billion, totally overwhelming U.S. ($295 million) and other OECD ($866 million) 1980 economic aid pledges. The entire fabric of international trade, aid, and finance is being stretched to the limit by the effects of oil price increases. It is impossible for the West, itself transferring enormous amounts of funds to the oil producers, to underwrite the oil bills of the LDCs as well. To some extent the gravity of this problem has been recognized by OPEC in the creation of recycling facilities. But much more needs to be done if instability is to be contained in the Third World.

The Response of Consumers

A concerted response is required to meet the challenge presented by vulnerable supplies and surging energy prices that includes the industralized democracies, the major producers, and the threatened LDCs. The OECD countries have taken some effective steps forward in the energy economic area, as the Venice communiqué shows. We have adopted measures aimed at reducing our energy consumption. We have established mechanisms to mitigate the effects of market disruptions. We have agreed to coordinate oil stock policies, and the US is moving toward renewed fill of the SPR. We are seeking to diversify energy sources, including greater use of coal. But more needs to be done in the energy security arena, especially if the military dimension becomes paramount.

The United States is committed to defending the oil producing region of the Persian Gulf. We have increased our presence in the region and will do more as time goes by. What is required is an equivalent commitment on the part of our allies in Europe and Asia. This means we need to urge our allies to shoulder more of the burden of European and Asian defense. Our European and Asian allies should be queried about what economic and security assistance responsibilities they could take on. Increased host nation support for regional and South[Page 881]west Asian contingencies is also required. Cooperation and understanding regarding the measures we may need to take to prepare to fight in Southwest Asia, if need be, is also necessary. For example, overflights for ourselves or in support of our friends in the area should not be a matter of contention. Independent diplomacy on the part of our allies that pretends that their access to Middle East oil can be divorced from our ultimate guarantee of Western security should be discouraged. In other words, we must impress upon our fellow industrialized democracies that the burden of protecting the West’s oil supplies must be responsibly shared.

The friendly oil producers, particularly in the Persian Gulf, also must be constantly reminded of the mutuality of our interests and our vulnerabilities. As the Secretary of Defense has noted, it is not reasonable to believe that the oil producers could continue to profit from their most precious natural resource if the Soviet Union succeeded in using its massive military power to envelop the Persian Gulf. Given the weakness of the regimes there, they must realize they could not withstand even serious regional threats without our help. Only the United States is equal to the task of providing for their security. No other non-Communist power or combination of powers could provide the sustained support that they would need if seriously threatened. However, we need their cooperation if we are to protect them. We must prepare sufficiently in advance so that our efforts will be quick enough and massive enough to deter, if possible, and defend, if necessary. This means we need access to facilities, prepositioned supplies, assurances of military coordination, including assured local fuel supplies, and a general tolerance of our activities related to providing an effective defense.

As for the LDCs, we want to work with them to minimize the economic damage they are suffering. We wish to join with them and the oil producers in finding new ways to cope with the taxing effects of higher oil bills and the accompanying panoply of economic problems growing out of the energy crunch. The LDCs can help here by more forcefully bringing home their plight to the oil exporting countries. Additionally, the LDCs must realize that a Persian Gulf crisis precipitated by a regional conflict would have devastating effects on them. Oil prices would explode and the LDCs would be the first pushed out of the market. They have a very real and direct stake in our guarantee of the free flow of Persian Gulf oil. Therefore, they should at least show forbearance for our efforts to secure free access to that oil and tolerance of our attempts to maintain the necessary military presence in the area.

  1. Source: Washington National Records Center, OASD/ISA Files: FRC 330–82–0263, Box 1, ASD/ISA #3 Policy Files. Secret. Sent through Assistant Secretary of Defense for International Security Affairs David E. McGiffert.
  2. Komer requested the paper in a June 21 note to McGiffert. (Ibid.)
  3. The unsigned and undated cover memorandum from Komer to Newsom is attached but not printed.
  4. See, for example, Document 271.
  5. Frost signed “Ellen” above this typed signature.