39. Memorandum of Conversation1
SUBJECT
- Energy Policy
PARTICIPANTS
- Honorable Henry A. Kissinger, Secretary of State
- Honorable Charles W. Robinson, Under Secretary for Economic Affairs
- Honorable Thomas O. Enders, Assistant Secretary/EB
- Mr. Stephen W. Bosworth, Director, Office of Fuels and Energy/EB
- Honorable William E. Simon, Secretary of the Treasury
- Honorable Jack F. Bennett, Under Secretary for Monetary Affairs
- Honorable Charles A. Cooper, Assistant Secretary/OAS/IA
- Honorable Gerald L. Parsky, Assistant Secretary/TE&FR
Kissinger: When are you leaving for Paris?
Parsky: No, Tom and I are going to Paris.2
Kissinger: Somehow I had heard that you, Bill, were going.
Simon: No, I just came back from London. I was there with a group of Congressmen and others taking care of your friend, Dennis Healey, at the Ditchley Conference.3
I thought that with Gerry and Chuck going to Paris for these various negotiations and me testifying on the Hill, we should focus on some areas of our policy that appear to be most unclear. The major question I’m getting, Henry, from all people, is whether we have reversed our price objectives. Are we now trying to keep prices high rather than to get some lower? These are some questions that are growing out of your speech.
Kissinger: I understood that my speech4 had been cleared by Treasury.
Parsky: Oh yes, I read it and cleared it.
Kissinger: I had not planned to give that speech. The President specifically asked me to make it.
Simon: Well, on this price question, the line I’m taking is that higher prices now will bring down prices later.
Kissinger: Plus the fact that if OPEC puts in higher prices the money is lost through the balance of payments. These conservation price increases will be money for the USG and not for the producers.
Simon: So, you agree, our objective is still to bring down prices?
Kissinger: Definitely. The only person I know against lower prices is Enders. Seriously, is anyone against bringing down prices?
Enders: Absolutely not.
Parsky: The issue is really this question of a floor price.
Kissinger: Well, if we got prices down to $7.00, that would be an effective 30 percent decrease. That certainly won’t happen soon in any case.
[Page 129]Simon: Well, I’m not so sure, Henry. I’m personally convinced, though I don’t go around saying this, that prices will come down soon, if we just let the market work.
Kissinger: But how can the market work if the sellers operate as a cartel?
Simon: Well, there’s a lot of oil in the world.
Bennett: The question before us is really whether to go for a floor price or a tariff. The floor price strikes the producers as a completely inflexible position and offers them no incentive to raise production and cut prices.
Kissinger: Well, can’t we put both forward at this time? Either must be geared in any case to a common price. We must also offer some price protection for our investors.
Bennett: Can’t we find a balance between no price protection and no possibility of the market price ever going below the protected price? We don’t need to eliminate all risk for the private companies. Companies are willing to take risks.
Kissinger: Do we have to settle this now?
Simon: The floor price is just one option. I don’t believe a floor price is either politically or economically viable. But we don’t have to settle this here.
Kissinger: Then what is the problem?
Simon: The problem is that in some quarters it is perceived that the floor price is the preferred US position.
Kissinger: But I still don’t see what is the problem.
Bennett: Do you really have in mind using either a floor price or a tariff as options for getting a fixed bottom price?
Kissinger: I thought the tariff, frankly, was just another way of getting a floor price. But what is this sliding scale for a tariff and what does that mean? I’m confident that we can get the consumers to agree on a floor price.
Cooper: But at what level?
Kissinger: Around $7.00. What do you think?
Cooper: I think you could get them at $3 or $4.
Kissinger: But that’s trivial and meaningless.
Cooper: But when you get up to $6 to $7 it’s much more difficult. That’s why $3 to $4 tariff would be much better.
Simon: I for one believe that the future price will be below $7 and when the price falls, the other consumers will say, why a floor price? and then they’ll all fall away.
Enders: But Bill, at $5 we’ll be importing 20 million barrels of oil a day by 1985.
[Page 130]Simon: You economists make me sick. We can get a lot of oil at $5. We can get Alaskan oil at $5. Companies are willing to go do it right now.
Enders: Then why do the companies say that we’ll be importing 15 MMBD by 1985? Jamieson 5 says it’s totally unrealistic to set a dependency figure of 5 million barrels.
Simon: Jamieson said that?
Bennett: I don’t trust Jamieson’s figures. I should know. I used to give them to him.
My feeling is that to sell something we must have a figure with some give in it. We must have some incentive to the Arabs to lower their price. We must strike a balance between protection for US investors and the need for a flexible position with which to begin talking with the producers. We can’t begin to talk with the producers if we just have one set price.
Kissinger: Why not? We can do a 5 year agreement at prices below current levels, but above those which will exist in 10 years.
Cooper: That just says that in the long run you’re going to be crushed. The producers just won’t find that a convincing position.
Enders: At the moment producers don’t believe any of this. They don’t think we are really serious.
Bennett: When we get to a producer-consumer conference we must be able to show them that at a lower price they will get more income.
Kissinger: But even with a floor price, you will have all that area between $7 and $11 to play with in talking with producers.
Enders: Also, Jack, that kind of calculation overlooks the fact that demand is very inelastic. The producers know that and they gear their whole strategy to it. They stand to lose revenues by cutting prices.
Simon: That’s just a short-term argument.
Kissinger: But let me see if I understand this. The major difference between Jack’s proposal and my proposal of today doesn’t exist between $7 and $11. The difference is you would like something with a variable floor price.
Enders: In addition, Jack would also have a tariff above the floor price.
Bennett: We’ve got one now.
Robinson: You are really proposing a variable tariff?
Kissinger: Jack, please give me a description of how your system would work. I’m sorry, but I need a tutorial.
[Page 131]Bennett: Well, there are essentially two versions. Under the first, with a fixed tariff, Arab oil would always be more expensive. Under the second, you would have a variable tariff which would contract as the price fell.
Kissinger: Suppose I thought $7 was the right price, then the price of oil would have to go below $4 before there would be any difference between a floor price and $3 tariff.
Bennett: There’s another issue here. Are we going to guarantee OPEC an outlet for its oil? That’s moving awfully fast toward socialism.
Kissinger: The companies are dumb enough for socialism, that idiot Warner, for example.
Simon: I think Warner 6 is one of the best of the oil people.
Kissinger: But doesn’t he believe the US should import more oil?
Enders: They all do, all the company people.
Jack, we have many alternative sources with known costs or relatively known costs—nuclear energy and conventional oil, for example. Maybe these costs will go down, but it’s very unlikely. We want to give them basic protection.
Kissinger: Well, my first question is what is going to happen at the IEA? The US simply cannot afford another spectacle of our delegation presenting differing views. It would just be disastrous if, two days after my speech, we did something like that. Then the other question is what are we going to say here in town. And then how are we going to decide this question?
Do we have to decide the issue now? Since I don’t believe mid-East oil is ever going below $4, what is the argument against a $3 tariff?
Enders: The question is, which is more negotiable?
Cooper: Well, the tariff could have a trigger point at, say, $7.
Enders: If you have a trigger point, then it’s the same proposal.
Kissinger: I want to prevent a situation in which the US carries all the water. We’ll spend all this money to bring down energy prices and everyone else will reap all the benefits. If we don’t get the Europeans locked onto something now, they’ll take advantage of us in the future. We don’t need them to develop our alternative energy, but my objective has always been to get them locked onto something that will protect us in the future.
Bennett: Exactly, we must have some commonality. That’s essential.
[Page 132]Kissinger: Right now they are weak, and they need us. Five years from now they won’t be weak. When they catch on to how weak this country is domestically, they’ll jump to take advantage of us. Already, as a result of my Business Week statement,7 they are getting special price treatment from the Arabs. I don’t really mind that. It actually helps us in the Middle East. But the people most consistently opposing US initiatives are the Europeans. The Japanese at least move in response to their own self-interest. But the history of Europe is that countries always join together to cut up the strongest nation. Any system we can devise now on energy, which can prevent this from happening to us in the future, is fine with me.
Enders: This was the principle which was set forth in the President’s State of the Union message—the need to provide some price protection for domestic investors.
Kissinger: My concern is that if we don’t go into this meeting this week as though we know what we are doing, we are going to get killed. Can’t we delay for three weeks on our decision on which of two approaches we will use? We could say that they need further technical study. We could also use that same line here in Washington.
Bennett: That’s fine.
Kissinger: Look Jack, I don’t want to try solutions which make no economic sense, so let’s review this further and then, if necessary, we’ll go to the President for a decision.
Enders: But the common tariff will be much more difficult to negotiate.
Kissinger: Perhaps, but you will get a reading on that this week. It’s possible that we won’t be able to sell either approach.
Simon: On another subject, Henry. At Ditchley last weekend there was great discussion of the producer-consumer conference. All the people there thought the conference should be scrubbed. Everyone thought what we should do is encourage more Arab investments in our countries.
Kissinger: Listen, if I can get Parsky and Robinson to run those bilateral commissions as I want, I’m prepared to run a producer-consumer conference bilaterally. We’ve got to come up with ways to soak up their dough. If those Bedouins want to use all of their money to build soccer stadiums, that’s fine with me. I’m rather attracted to the Roosa plan.8 The idea of establishing such mutual funds appeals to me if we can do it bilaterally.
[Page 133]On Pan American, I told Peter Peterson last week that I had no foreign objection to Iranian purchase of Pan American stock.
I definitely think we should use the commissions. I don’t care about a producer-consumer conference. You will all remember that I have never been very enthusiastic about it, and I’ve been stalling as much as possible. The French will just try to make us their straight men in any conference such as that.
Simon: Henry, another issue which is concerning us are the proposals coming out of State to limit OPEC investments to 10% in any one company.
Kissinger: Who has said that?
Simon: Enders.
Kissinger: Ah, Enders! Enders goes around town saying he has never had a Secretary out of whom he has gotten such good work. Let’s get a paper together and get a policy decided. I think we should absorb as much of their money as we possibly can. I have no intention of putting all US interest into a producer-consumer conference.
Simon: Our objective of attracting more Arab money is going to be complicated if the Enders plan surfaces for a 10 percent limit.
Enders: That’s neither a plan nor a proposal. My only objective was to ensure that all feasible options are considered. The original draft issue paper had only one option, and I just wanted to get others included for examination.
Kissinger: Well, can’t we get a policy on this by the end of February? I do want them out of national security industries and those areas where their investment control would be demoralizing to US citizens. But, beyond that, our principal objective should be to maximize their dependence on us.
Simon: I’m glad to hear that. That’s the only reason I’m here—to make sure you have not been brainwashed. I’ve been hearing different sorts of things from levels underneath ours.
Kissinger: Enders does not consider himself beneath any level. His psychological view of our relationship is symbolized by the difference in our heights. Seriously, we must at all cost avoid open dissent. We simply can’t afford that.
Simon: I agree fully. One more point. On the Roosa recycling idea, I don’t think we need the Roosa mechanism.
Kissinger: I’ve asked George Shultz to ask the Shah what he thinks about it. Shultz will simply ask him the question and won’t put it forward as a US proposal. Then we will consider it in the light of the Shah’s reaction. I’m very open-minded on these subjects. I am in favor of anything that will get the job done fast. The advantage I see in the Roosa proposal is that it couples the interest of the producers with the [Page 134] objects of their potential political blackmail. What is your objection to it?
Simon: Just imagine what the Arabs will say if we tell them we will take their money and then tell them what to do with it.
Enders: But Roosa proposes doing that through private companies and through the US Government.
Robinson: I think we must look at this carefully. We have a growing political problem on this issue which might be blunted by something along the lines of the Roosa idea.
Bennett: I don’t think that idea would blunt anything.
Kissinger: I’ll only support it if a major producer such as the Shah says he likes it.
Well, let’s see if we can summarize what we have agreed on. First, on the floor price—we will keep open the two alternatives, a floor price or a tariff—as long as it is a tariff on a sliding scale. We agree that any international agreement must be made now, not put off until the need actually arises. At this week’s meeting we will put forward both concepts as feasible and give them equal exposure. Then, we will proceed with more technical study and, if necessary, go to the President for a decision.
On the investment question, we agree that we must have a short-term policy proposal to take to the President by March 1. I can’t conceive that we won’t agree on this one.
On the commissions, we will push hard to try to get as much done through them as possible. We will try to have a fait accompli at any producer-consumer conference. If we can handle investment through the commissions, so much the better.
Meeting Adjourned.
- Source: National Archives, RG 59, Records of Henry Kissinger, Lot 91D414, Box 10, Classified External Memoranda of Conversations, January–April 1975. Secret; Nodis. Drafted by Bosworth. The meeting was held in the Secretary’s office.↩
- The monthly meeting of the Governing Board of the International Energy Agency convened in Paris on February 5.↩
- The meeting was held February 1–2 at the Ditchley Park estate outside of Oxford, England, to discuss the financial problems stemming from surplus oil revenues. Simon, Burns, and other U.S. officials attended.↩
- In a speech at the National Press Club, February 3, Kissinger outlined the proposal the United States would make at the February 5 IEA Governing Board meeting: “In order to bring about adequate investment in the development of conventional nuclear and fossil energy sources, the major oil-importing nations should agree that they will not allow imported oil to be sold domestically at prices that would make those new sources noncompetitive.” Either the consumer nations could set a common floor price or the IEA nations could establish a common IEA tariff on oil imports. For text, see Department of State Bulletin, February 24, 1975, pp. 237–245.↩
- L. Kenneth Jamieson, Chairman and Chief Executive Officer of Exxon Corporation.↩
- Rawleigh Warner, Chairman and Chief Executive Officer of Mobil Oil Corporation.↩
- See Document 30.↩
- Roosa wanted to establish a giant mutual fund in which OPEC nations could invest their accumulating petrodollars over the long term.↩