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

65. Memorandum of Conversation¹

Washington, June 10, 1975, 8 a.m.

SUBJECT

• Foreign Economic Policy

PARTICIPANTS

• Senators
• Henry Bellmon, R. Oklahoma
• James B. Pearson, R. Kansas
• Carl T. Curtis, R. Nebraska
• Paul J. Fannin, R. Arizona
• Bill Brock, R. Tennessee
• Howard H. Baker, Jr., R. Tennessee
• Bob Packwood, R. Oregon
• Representatives
• John J. Rhodes, R. Arizona (Minority Leader)
• William C. Wampler, R. Virginia
• William S. Broomfield, R. Michigan
• Clarence J. Brown, R. Ohio
• Barber B. Conable, Jr., R. New York
• Albert H. Quie, R. Minnesota
• The Administration
• The Secretary of State
• L. William Seidman, Assistant to the President for Economic Affairs
• Charles W. Robinson, Under Secretary of State for Economic Affairs
• Julius L. Katz, Deputy Assistant Secretary of State for Economic and Business Affairs
• Alexander F. Watson, EB (notetaker)

The Secretary: Gentlemen, I have to go in about an hour to a meeting with the President and I know you have very busy schedules today. So I’d like to begin our discussions during breakfast if you don’t mind. I’ve invited you here to give us a chance to discuss what we are trying to do in foreign economic policy. Frankly, when I read the newspapers I can’t tell what we are doing. There seems to be more in the papers about what various parts of Government are doing to each other than there is about the substance of the policies.

Today I want to explain our overall strategy and then get your views on it. Let me begin with strategy. The basic problems we face in foreign economic policy are:

First, the high cost of energy. The OPEC cartel pushed prices far beyond the level that economics would dictate. This price rise has been brought about by a political decision rather than an economic decision. This political decision was made possible by the political cohesion of the oil producers group. The real problem is Saudi Arabia and the other less developed oil producing states. Saudi Arabia can cut production to maintain prices without hurting itself because it is underdeveloped and has a very small population. The energy crisis has brought home dramatically to many countries their dependence on the oil producers. It has brought home the interdependence of the world. The energy crisis has brought on or at least contributed significantly to the inflation and recession that many countries are suffering.

Second, the group of 77, which has more than a hundred members now, under the leadership of Algeria is politicizing economic issues. It is forming a block which links the various economic issues to each other. This has the objective tendency to produce other cartels. As the LDCs stick together, economic decisions will increasingly be made for political reasons. The impact of this is profound. Objectively you would think that the poorer LDCs would be on our side. India for example sees its economic gains wiped out by rises in the price of petroleum. But the most seriously affected LDCs always come down on the side of those pushing up the prices.

When we started to deal with the energy crisis we wanted to get all of the consumers together and then to meet with the producers. But we now see that the most seriously affected, poorest consumers remain on the side of the producers. The result of all this is that Europe and Japan are terrified of confrontation with the producers. The pressure of the producers is enormous and affects other types of decisions made by Europe and Japan. This then is the situation that we are trying to deal with.

Our basic strategy is to bring about a different market situation so that the terms of bargaining are shifted in our favor. Secondly, we are trying to get cohesion among the consumers so they can’t be picked off individually by the producers. We are trying to break up the LDC coalition so that we can deal with each issue separately.

Let me talk about oil first. I’ve read in the papers that within the Administration there are various groups: those who are soft on energy and those who are hard on energy; those who want to bring the price of petroleum down and others who don’t give a damn about the price of petroleum. An interesting thing about the newspapers is that the battles are more fierce in the papers than they are in the Cabinet Room. Everyone wants the price of petroleum to come down, but it won’t come down until we create new market conditions whose impact is stronger than the political ties among the producing countries. To do this several steps are required. First, all industrial consuming countries must cut consumption. Second, we must create new energy sources, we must develop alternative energy sources. Third, we must try to absorb the resources of the oil producers.

Senator Curtis: Can you explain that; that last one about absorbing the resources of the oil producers?

The Secretary: If we can get them to invest in large scale development projects—I see Chuck Robinson has some already lined up—as long as we can get them to invest in large scale development projects, production cuts that produce revenue losses will hurt the producing countries seriously. Large scale development projects and other projects will put the Shah, for example, in a position where he must sell oil in order to sustain the commitments he has made. There will be a limit below which he cannot cut production or else sustain unacceptable losses. The problem is Saudi Arabia. It only has 5 million population and virtually no industrial base. It can cut production down to 2.5 million barrels per day and still meet all its commitments. Libya, Saudi Arabia, Algeria and Iraq are the weak points for us.

Mr. Katz: The Libyans are actually trying to increase production and exports now.

The Secretary: My point is that the point is approaching where they’ll get into production problems and where they won’t be able to cut any further. That is, they would not be able to cut as far back as they did during the embargo. During the embargo they were producing about 6 million barrels.

Mr. Robinson: 5.5 million.

The Secretary: They are already down to 5.5 million right now. Another thing I would like to mention is that the argument is made that we are too gentle with the Shah. Now I don’t know what being tough with the Shah means. But most people seem to be talking about cutting off military sales or something like that. We’ve seen in Turkey what happens when we cut off military sales. We cut off military assistance to them 6 months ago and in that 6 months absolutely nothing has happened. In fact we got a letter from the Turkish Foreign Minister the other day saying that unless the House takes some action, they won’t do anything. So cutting off military sales to Iran probably would not produce any results. Secondly, the leverage we’ve gained through military sales would be lost, as would future business. Third, it would hurt a non-embargoing country. If an embargo came, Iran might be less willing to remain out of it.

So cutting off arms: one, would not bring prices down; two, would be counterproductive in other areas and three, because he needs the money most, the Shah will be the most susceptible to a deal at a certain point which is approaching. Now if we could get our hooks into Algeria and Saudi Arabia that would help us a lot. However, we still need a domestic energy program. We must have a domestic conservation program. But, I want to make it absolutely clear that we want to crack the oil cartel and bring oil prices down.

Senator Curtis: You’ve done an excellent job. You’ve done a fine job in the Middle East. I have a question, however. Getting the OPEC countries to have these development projects that you mention, how much time would it take until they will do it? That’s not the situation now, is it?

The Secretary: Well we can’t be as explicit about this in public as we can here among ourselves. But it seems to be operating very well in Iran. We already have 26 billion in investment in Iran. In Saudi Arabia it’s much more difficult. Chuck knows, I’ve been giving him hell about it every day. It hasn’t been his area until very recently. The problem is that the United States has a missionary streak. Whenever the Saudis have development projects we send six missions over there to explain to them why they don’t need them. To explain why they don’t need to spend the money.

Senator Curtis: Could you send one of those over to Congress? (Laughter.)

The Secretary: It is picking up in Iran. Chuck is going there next week with about 6 more projects. And Algeria, for all its big talk, is getting to the point where it can’t cut production without hurting itself. Libya—all of them are down to their production limit. This has not been translated into price cuts as yet. But if we crack one and can fix a lower price with him don’t jump all over us. We’re trying to crack the cartel and bring the price down.

Senator Bellmon: But, Mr. Secretary, isn’t the long range solution increased domestic production?

The Secretary: You’re right. I recommended quite a while ago, and there’s been some misunderstanding about this and confusion in the press, but I recommended several months ago what is called the floor price. This would protect American domestic production. We must protect domestic production by tariffs or a floor price or some other mechanism. We’ve worked an agreement out in the IEA for a common approach to some sort of protective price. You’re quite right. If the international price drops below the domestic price then our domestic producers will be badly hurt. If OPEC uses economic warfare, dropping the price that low, it would make us more dependent on them and wipe out our investment in alternative sources. Then they would raise the prices again and we would be more dependent on them than ever. I believe that examination will show that we must have a protective price for imported oil. This would not mean that we have to pay the protective price to the producers if the international price dropped below the level, but just that we could not sell it domestically for less than that price.

Cong. Rhodes: Don’t we have an international agreement which does that?

The Secretary: Yes. But we must set up our own protective price mechanism here or we could lose billions in investments in alternative sources of energy. If we don’t act now we could end up producing cheap energy for Europe and Japan and be stuck with higher cost energy for ourselves. Now is the time to set up a protective price, before we undertake massive investments in alternative energy sources. Later on, prices will fall and we must be protected before that happens.

Cong. Rhodes: Isn’t now the time to act on that?

Cong. Brown: It’s premature to set the specific price now isn’t it?

The Secretary: We can set a price range now. Let me emphasize that a protected price is not designed to hold up the OPEC price but rather to protect our investment in alternative sources of energy. To get the Europeans and Japanese to invest in alternative energy sources now.

Cong. Brown: But my point was that all the costs of alternate energy sources are not clear yet.

The Secretary: That’s true. We can’t get a commitment now for more than about $7.50. Which is below some alternative energy sources but is better than nothing.

Mr. Katz: We don’t want to protect all alternative energy sources. For instance, if we want to protect synthetics and shale we would have to have a price of around $14–$15 a barrel. What we want to do is protect the additional investment in conventional energy sources, such as coal, outer Continental Shelf, Alaska.

Cong. Conable: I have the impression that some of our allies are ahead of us in investment in alternative energy sources. For instance, it seems that France and Canada are ahead of us in nuclear energy.

The Secretary: Some of our allies have made greater commitments than we to alternative energy sources and conservation.

Senator Curtis: We have the political situation in the Middle East and we have the energy issue and I’m wondering how does the energy issue relate to the settlement in the Middle East? Which is stronger in your view?

The Secretary: Well. Let me give you two answers. There is the formal answer and the more practical answer. First the formal answer. Formally, we refuse to permit any linkage between energy and the Middle East political situation. But we must keep in mind that war in the Middle East is a possibility. So we have to be very careful of those who did not join the embargo. Of Nigeria, Iran, those who probably will not join an embargo. In the second place, we are trying to limit the freedom of movement of Saudi Arabia. The more the tensions are lowered in the Middle East, the easier it is for Saudi Arabia to work with us and the better for us in energy. The more tense the situation, the more likely the oil producers will use the energy weapon against us. Saudi Arabia is more influential than Iran. Saudi Arabia has 5 million barrels surplus production and Iran has less than 1 million surplus now. Saudi Arabia can reduce production more easily than Iran. If we can get Saudi Arabia to commit itself to more development projects, it will have less flexibility in adjusting production.

Senator Pearson: One sees in the press and elsewhere figures of the Arabs’ monetary reserves and investments that they can make, and have made, those in the US and elsewhere. You can find almost any figures you want. Do you know what the size of their reserves are and on what level their investments are?

The Secretary: The present level of the Arabs’ monetary reserves and investments? (To Mr. Katz:) Do you have those figures?

Mr. Katz: There was a big surge in reserves last year. They increased by over 50 billion dollars. But we expect some reduction in the surplus in 1975.

Senator Pearson: And little investment in the US?

Mr. Katz: Some, but not much. There has been a big rise in imports by the OPEC countries. There was a 50% rise in imports last year.

Senator Fannin: Mr. Secretary, what is your reading of Dr. Akhdar’s view that has been in the press lately that if the US doesn’t want to deal with Saudi Arabia the Saudis will go elsewhere?

The Secretary: I don’t know the present King very well. I knew Faisal well. I know Fahd. They have a sentimental Bedouin attachment to the US. All else being equal, they will shade toward us.

Senator Baker: True, but the King, the Crown Prince, and the others are solid to the core. They know who they are. They are nationalistic and they know what they want to do with their money.

The Secretary: That is true and it is a vital point.

Senator Baker: They told me that they were going to use their money—

The Secretary: They don’t talk about money with me. They just want to talk about politics.

Senator Baker: Well they talked about money with me and told me they had $30 billion a year for investments.

The Secretary: Well, that’s good for us. We don’t care where they spend their money as long as they put it in development. These are more modern types. They’ll use their money more aggressively and nationalistically than Faisal. It may turn out to be a disaster for them because they are not strong enough to play such an exposed role, as Faisal knew so well. But this could be very helpful to us, if we don’t kick them around three times a month. These press stories certainly don’t help.

Senator Fannin: But Mr. Secretary what is your reading of Dr. Akhdar’s view that if we kicked them around they will go to somewhere else with their money?

The Secretary: All things being equal they still want to favor us. They want to do their development and their military training with us.

Senator Baker: The new team, notwithstanding the embarrassment, still want to be our friends more than friends of anyone else.

The Secretary: I agree with Howard, but the new group won’t be as understanding as Faisal.

Cong. Quie: The oil producers will have a problem continuing to pump oil in the future, but if they pump it out now without waiting for the future they can invest that money now, then forget about whether or not they have any oil in the future. For instance, if I can get my money out of my farm right now, I’ll get it out as fast as I can and invest it in something else and won’t worry about the farm in the future.

The Secretary: That’s one reason we must have alternate sources of energy. It will take, I’m not quite sure how long—I think it’s about ten years—for them to build up their industrial sector. Then they won’t need to export as much petroleum.

Mr. Katz: Iran is already in a budgetary squeeze this year. They can alleviate this by a price increase to some extent, but they also want to keep up their oil exports to increase their revenue.

The Secretary: That is right.

Cong. Rhodes: Mr. Secretary, what do you see as the significance of the decision announced yesterday by the OPEC countries to figure the price of petroleum in special drawing rights rather than in dollars?²

The Secretary: There’s no significant difference at this time. Maybe a few cents.

Cong. Rhodes: But I mean how about on the future price of petroleum?

The Secretary: I don’t think it will make much difference. Only in the case of a sharp devaluation of the dollar.

Cong. Brown: The impact of another increase in petroleum prices by the producing countries, which the producers have announced they will make later this year, on the political stability of other countries will probably be greater than on us.

The Secretary: That’s right. I want to make absolutely clear that we are strongly opposed to oil price increases even when that effort is not visible. There is always the question of tactics. And I do not happen to believe that yelling at the Shah is good tactics. When you do that, you get into the issue of prestige. But we will oppose efforts to increase the price of oil very, very vigorously. Schmidt told me recently that he and others like him are very worried that, just as their economies are pulling out of the present situation, they will be hit by a price rise which will send them into another recession or depression. If the producers increase the price by the amount that has been mentioned in the press, that is, by $4 a barrel, we would have to resist very energetically. It would have very, very serious effects.

Cong. Brown: This could hold the consumer nations together, however.

The Secretary: I want to make it clear that we do not want a price increase. I don’t think they will increase it—I think it’s psychological warfare that they are using—I do not think that they will increase it by as much as has been reported.

Cong. Quie: It seems to me that there are two ways to have the floor price that you’re talking about. First, if we were big enough we could buy all the petroleum or second we could make an agreement with other countries.

The Secretary: We have made an agreement with the other countries but each country can prescribe its own methods for maintaining a protective price.

Senator Bellmon: Do you have any information which would indicate that the OPEC nations have been using some of their resources which they have accumulated recently to help the poorer nations?

The Secretary: Yes, they have. But this creates political linkages which can work against our interests in the long run.

Let me now talk a little bit about commodities and grain. First, I want to say that we have no interest in a super cartel that will fix all prices. That’s farthest from what we want. But on the other hand, if we don’t break the bloc of 77 countries, that’s what will happen. If we don’t adopt the proper approach, the proper tactics, we can force the unity of the LDCs and bring about further cartelization. We are moving to try to avoid this. The British and the Germans have moved on commodities and the Japanese have recently moved on the commodities issue.

We want to create a forum where commodities issues can be discussed. Where we can discuss the things which are going on in various forums on commodities, such as in the IMF. Our major thrust would be for increased investment in the production of raw materials and greater assurances of supplies and not to try to fix market prices for a range of commodities. If we can get a few of the members of the Group of 77 to discuss with us in other forums commodities issues of interest to them then we can break up the strength of the Group of 77.

If we can shift from the issue of prices to earnings stabilization, we can do better than just pouring our aid out. If we don’t do this, we are setting ourselves up for a tremendous shellacking in world forums. All the LDCs, European Socialists and even the Japanese, who are for us but are afraid of the Group of 77, and the OPEC countries will end up against us.

Our commodity policy is designed to prevent the OPEC nations from using the energy issue to link all the LDCs together on a platform of redistribution of wealth. We can’t fight this very well in the abstract. But if we can fight on specific issues and get the key countries to act in terms of their real self interests, we will have weakened their solidarity. We do not want to find ourselves fighting the LDCs on the general, abstract issue of redistribution of wealth in the UN General Assembly Special Session that’s coming up soon and then go into the energy conference with everyone accusing us of being willing to talk only about the one issue that’s of interest to us. Schmidt warned me about the dangers of such a confrontation and said that we could end up isolated.

On the other hand, we do not wish to discuss every commodity. We want to talk about 2 or 3 that are of interest to a group of nations that we could split off from the others. We are interested in fostering further investment in the production of raw materials. We could use the aid that we now give for income stabilization. That is our commodity strategy.

[Omitted here is discussion on agricultural trade policy.]

1. Source: National Archives, RG 59, Records of Henry Kissinger, Lot 91D414, Box 11, Classified External Memoranda of Conversations, June 1975. Confidential; Exdis. Drafted by Alexander F. Watson (EB). The meeting was held in the Jefferson Room at the Department of State.
2. The 44th OPEC Ministerial conference was held in Libreville, Gabon, June 9–11. This announcement was made on June 10. (Telegram 881 from Libreville, June 10; ibid., Central Foreign Policy Files, D750204–0070) According to the Embassy, the “biggest result” of the meeting was “to avoid any type of price increase before October 1, 1975, thus sticking to the letter of OPEC promise made in December 1974 to freeze prices for nine months.” (Telegram 891 from Libreville, June 12; ibid., D750205–0796)