97. Summary Paper Prepared by Robert Hormats and Robert Oakley of the National Security Council Staff1

ECONOMIC CONTINGENCY PLANNING

In the event of a deterioration of the Arab/Israeli situation, Arab oil producing states could be motivated to use their control over oil resources, and possibly such economic power as might be available through their financial assets, to place a range of pressures on the United States and the industrial world to achieve political ends in the Middle East. While the circumstances under which these states would move from the threat of economic action against the United States to action itself are unclear, a number of possible Arab actions have been addressed in Section I—Economic Contingencies. These range from low impact situations to those involving the use of maximum economic leverage.

Of the embargo contingencies outlined in Part I (A), a selective embargo against the US, an embargo against all participant countries in the International Energy Program (IEP) at levels which would not trigger the emergency sharing provisions of the Program, and a replay of the last embargo are considered to have about the same likelihood of being applied. Each would have some degree of economic and political impact on the US without the unfavorable political repercussions against the Arabs which would ensue in the event of an all-out embargo against all member-states of the IEP. The latter situation has been addressed, however, as a worst-case contingency.

Part I(B) of Section I outlines oil pricing contingencies which certain Arab member-states of OPEC might consider in an Arab/Israeli conflict situation. It is judged that the Arabs will not resort to the use of oil pricing to attain political ends, for political reasons as well as the fact that selective prices would be virtually impossible to administer effectively. Nevertheless, market factors will probably create oil price in[Page 347]creases if embargo actions are used, but price increases would probably not be of the same order of magnitude as those which occurred in 1973.

Part II of Section I outlines contingencies involving the movement by Arab states of liquid assets. Any or all of the several actions described are considered to be possible within the context of another Arab/Israeli war, although each could do economic damage to the Arabs themselves. A worst-case situation involving massive shifting of assets between countries, banks and currencies is described; actions of this type, however, can be met by existing arrangements between international financial institutions, if such are required under the circumstances.

Part III of Section I lists other possible Arab actions of an economic nature. While all would be some damage to the US, none would have a serious impact on the domestic US economy.

Section II—US Economic Contingency Options outlines approaches to meet these contingencies. In discussing options to counteract Arab oil actions, this section focuses on programs designed to increase domestic oil production or achieve consumption restraint.

The basic conclusion of this section is that under present circumstances, with existing legislative authority, and with the successful application as required of the International Energy Program and existing domestic and international financial safeguards, the United States is capable of mitigating, and in certain cases counteracting, the effects of any foreseen Arab economic actions. However, certain actions, particularly an oil embargo, would do considerable damage to the US domestic economy and would force a reduction in US productive capacity and the US standard of living.

Section III—Retributive Actions discusses possible alternatives for offensive economic measures against those countries using economic action against the US or other industrial or financial states. These include trade actions; the suspension of military assistance and sales; the forced withdrawal of private US firms and individuals dealing with targeted countries; and blocking or confiscation of OAPEC assets. In that they are retributive and not counteractive in nature, they would be used to increase the political and economic cost to OAPEC states of actions against the US or other countries—but all hold the considerable danger of increasing pressures on and removing restraints from OAPEC to move immediately to higher and more damaging levels of economic action in response.

  1. Source: Ford Library, National Security Adviser, Presidential Subject File, Box 4, Energy (12). Secret; Nodis. Attached to an April 16 memorandum from Hormats to Scowcroft, which explains that the paper summarizes an updated version (“earlier this week”) of “a broader contingency study done a year ago.” Hormats wrote: “Greenspan, Zarb, and I have been meeting periodically on the issue of contingency planning for a Middle East embargo. At this point, Greenspan feels extremely uneasy about the degree of preparedness in the US, particularly on measures to be taken to reduce the impact of an embargo.” The updated contingency study is Tab B of Hormats’s memorandum. Tab A is a memorandum from Hormats and Oakley summarizing the broader contingency study that had been done a year earlier. Regarding the earlier study, see Document 34.