47. Memorandum From Robert Hormats of the National Security Council Staff to Secretary of State Kissinger 1
SUBJECT
- Report on Meetings in the Middle East
Under Secretary Robinson’s trip2 was a valuable step toward strengthened cooperation with OPEC and Middle East countries. Introducing Robinson to key officials as your representative gave the trip significant momentum. Robinson’s meetings gave credibility to the position that we are genuinely interested in stronger bilateral ties and elicited a positive response by Arab and Iranian officials. The visit furthered our policy of “constructive cooperation” with OPEC countries on broader consumer/producer oil and financial issues, and removed much of the suspicion which had built up in Arab circles that the US was seeking a confrontation.
Several significant points emerged from our meetings. The decline in demand for oil is putting strains on OPEC. These will lead to greater friction among OPEC countries. But the common desire to maintain remunerative oil prices, and a common recognition that a price-cutting free-for-all harmful to all members could occur without some degree of organization still provides enough incentive to ensure cohesion sufficient to maintain OPEC as a viable organization.
But OPEC has lost some of its confidence. It is now searching for ways of dealing with the adverse impact on it resulting from the international economic problems it has in large measure caused. There is a possibility that, as a result of downward pressure on oil demand and thus on prices (resulting in part from conservation and new production in response to price increases of the past year, and from the worldwide recession) and of erosion of the value of reserves and oil receipts through inflation and the depreciation of the dollar, OPEC countries will take disruptive actions such as unilateral indexation, tying oil payments to SDR’s, arbitrary cutbacks in production by major producers, and shifts in reserve holdings. Some countries, anxious to translate economic power into political power, will be attracted to investments which provide influence and leverage. Some will receive attractive offers from consuming countries attempting to minimize the adverse ef[Page 160]fects of their present economic circumstances by increasing exports and securing investment.
Our policies toward key OPEC countries should aim at achieving the following objectives: (a) reduction of the possibility of disruptive behavior by OPEC countries and their potential for separating other oil consumers from the US, (b) developing orderly international arrangements to ensure that OPEC financial resources are used constructively, (c) making other consumer countries more comfortable with an intensification of consumer cooperation by quieting fears about confrontation and easing OPEC pressures on the one hand while, on the other, letting them understand that we can beat them in competition for bilateral deals should they refuse to cooperate in a multilateral approach and indulge in excessive efforts to work out their own bilateral deals with producers and (d) complementing your political efforts to normalize relations with Arab nations and help to bring about a Middle East settlement by forging strong ties of economic self-interest.
In order to achieve the above results we should concentrate, in the following ways, on Iran, Saudi Arabia, Egypt and Algeria.
Iran, of the above mentioned nations, is politically, and economically, closest to us. It has no interest in using its oil to make life difficult for the US or the West (on the contrary, it wants to move closer to us) or to exert political pressure vis-à-vis Israel; and it has no interest in leading a crusade in behalf of the Third World. Iran wants to develop its economy and to play a growing and stabilizing political and military role in West Asia. While Iran clearly wants to prevent a decline in the purchasing power of its oil revenues (and thus has proposed indexation and a possible link of oil prices to SDR’s), it is prepared to discuss with us the best method of achieving this rather than lead a unilateral OPEC effort to increase prices. Our interests lie in (a) sharing our analysis of these oil price proposals with Iran in order to avoid giving the impression that we do not take seriously Iranian concerns and (b) to find, if possible, common ground to meet our needs for oil price stability, reliable access to supplies, and constructive use of OPEC financial resources. Iran has tabled a constructive proposal for developed, developing, and OPEC cooperation to assist the poorest nations, and is willing to marry its proposal with our proposal for an IMF Trust Fund for LDC’s.
In investing its own surplus revenues (which Iran expects will decrease substantially, with Iran suffering a deficit by 1977), Iran has demonstrated a genuine desire to work closely with the US. (A notable example was its ready agreement to our suggestions on how to handle the PanAm issue.) We clearly want to encourage an Iranian commitment to consult in a similar fashion before major new investments.
[Page 161]An ongoing process of assisting key areas of the Iranian economy (nuclear energy development, industrial projects, management and technology needs) building on the Joint Commission, and Robinson’s relationship with Ansari and Amuzegar, will help strengthen our ties with the Iranians. At key points, you would want to keep the bureaucracy moving to develop specific proposals rather than generalities, and to be in touch with the Shah to stress the political context within which we are developing this relationship.
Saudi Arabia is less able to deliver the other OPEC countries behind price reductions and other constructive proposals than Yamani likes to have us believe, but is still the key actor in OPEC. Because of its huge oil reserves and excess producing capacity it will, for the next several years, be the one country which can, acting alone, significantly affect the oil market by increasing or decreasing production. It will also generate huge payments—half of total OPEC surpluses over the next decade. As a result, it will have an enormous capacity to reward or punish developed and developing countries alike through trade and financial policy. No international agreement on oil pricing or on use of OPEC reserves can have any meaning without Saudi support. If, on the other hand, we can reach agreement with the Saudis on issues of price and use of financial reserves, other countries will find it extremely difficult to disrupt the oil or financial market with any degree of success or for any significant length of time.
The key to dealing with Saudi Arabia in these areas lies in (a) constructive participation in Saudi development through the Bilateral Commission, particularly in improved cooperation between the USG, Saudi Arabia, and private US firms in manpower training and education, industrial development and agriculture, (b) ensuring a safe, profitable outlet for enormous Saudi payments reserves, giving the Saudis a stake in the health of US and other Western economies and a responsible role in the international financial system, (c) protecting Saudi Arabia from countries such as Algeria, Iraq and Libya, which can apply political pressure on the Saudis to take disruptive actions, (d) working discreetly to obtain parallel if not joint action by Saudi Arabia and Iran so the two are mutually reinforcing rather than competitive, (e) encouraging the Saudis to support constructive positions for the consumer/producer dialogue, and maintaining an ongoing bilateral dialogue on economic issues of mutual interest, (f) anticipating and developing constructive responses to criticism of Saudi policies such as the boycott, religious exclusions.
[Omitted here is a section on Egypt.]
Algeria’s importance results in significant measure from its ideological leadership role. It has established itself as the policy leader for the so-called Third World, to the point where even the Saudis and Ira[Page 162]nians have difficulty in opposing outright its demagogic appeals. It is able to incite other developing countries to engage in inflammatory rhetoric or to take actions which are disruptive of the established economic order. In a political context it can put pressure on other OPEC countries to use their financial resources as policy instruments of a harder Arab position vis-à-vis Israel. And it is able to place substantial pressure on the Saudis vis-à-vis Israel. While Boumediene’s depth of conviction makes it unlikely he can be “bought off,” he is a pragmatist highly concerned with Algeria’s domestic interests. A strengthening of our bilateral effort to support Algerian development would to some extent produce a trade-off in diminished Algerian opposition on world economic and, perhaps, political issues. Algeria’s strong concern that we are seeking to push oil prices down to harm its economy, and therefore its strong resistance to any policy aimed at lower prices, might also be allayed by an effort to assist Algerian economic development. While one cannot but have serious doubts about the wisdom or the viability of certain aspects of Algeria’s costly and ambitious development policy (which will lead to a $2 billion trade deficit in 1975) there are areas in which we could make a limited contribution. We might also find ways of channeling Saudi and Kuwaiti capital into Algeria. These countries might see it in their interest to provide capital if it were helpful in bringing about a more constructive Algerian position on international political, economic, and energy problems.
Recommendations. The consumer/producer conference represents a psychologically important step toward a more constructive relationship with producers as well as an ideal opportunity to begin a dialogue which can prevent both producers and consumers from taking disruptive actions. Preparations within the USG for the conference should reflect not only the views of those immersed in IEA activities but also of those who are conversant with issues relating to the producers. They should focus on using the conference to begin a dialogue which places special emphasis on dealing with the most constructive and moderate producers in order to strengthen their influence and minimize that of the more radical countries. In order to do this and to have the best chance of achieving constructive understandings, the time devoted to the plenary session should be minimized; the emphasis should be placed on working groups established to deal with special issues—recycling, investment by producers in developed countries, development of producer nations, aid to developing countries, long-term security of oil supply, and a mutually acceptable understanding on oil prices (including a dialogue on inflation—i.e., how producers and consumers can cope with and minimize it—which would avoid commitments to indexation or unilateral action). In virtually all of the working groups, the Saudis and Iranians would be able to play the key role. With them [Page 163] we could create a manageable atmosphere conducive to constructive solutions rather than rhetoric.
Your personal prestige will be called on increasingly to ensure progress both on bilateral cooperation (which is essential given the tendency of technicians to debate endlessly on many of these issues) and the multilateral energy and financial issues. Careful preparation and increased coordination within the USG will be necessary. It would be extremely useful for Chuck Robinson to assume responsibility for, and to work directly under you on, supervision and coordination of our various initiatives with producers. He is in a strong position to coordinate bilateral and multilateral initiatives, to ensure that these initiatives proceed in step with your political initiatives, and to maintain consistency between our evolving relationships with producers and preparations for the consumer/producer dialogue. Using the Under Secretaries Committee and other interagency and intradepartment apparatus, Robinson is in an excellent position to pull together the various policy threads and to develop a balance among our economic interests within your established political framework.