Foreign Relations of the United States, 1969–1976, Volume E–9, Part 2, Documents on the Middle East Region, 1973–1976

101. Draft Telegram From the President’s Deputy Assistant for National Security Affairs (Scowcroft) and Charles Cooper of the National Security Council Staff to Secretary of State Kissinger¹

Washington, March 1, 1974.

SUBJECT

• Saudi Bilateral

Our interest in a bilateral arrangement with the Saudis is different from the Europeans’ interest and even from our own interest before Project Independence. With our commitment to Project Independence we are taking steps so that we could import less and less Saudi oil beginning within two years, with perhaps no imports by 1980. Thus while the Europeans want to tie up large amounts of Saudi oil for a long period into the future, our immediate economic interest is concentrated in getting Saudi production up in 1974 and 1975 in order to get prices down (while allowing more oil from the Saudis or elsewhere to reach the U.S. in 1974–5).

Because our short-term economic self-interest in Saudi oil is much less than others, we may be in a unique position to broaden and deepen our economic relationship with the Saudis on a basis of mutual self-interest.

We want to expand our exports to the Saudis and we would like for the Saudis to invest a substantial part of their excess earnings in the U.S. We also hope U.S. companies will continue to handle Saudi oil because their earnings are important to our balance of payments. We and the Saudis share an interest in developing a role for the companies that keeps their production and marketing skills available to the Saudis.

Because it is U.S. policy to keep most economic activity in private hands, we have limited legal authority to engage in a bilateral trading deal—oil for goods. At some point we might want to seek broader authority perhaps in the context of an agreement with the Saudis requiring Congressional approval, but at this stage emphasis should be on initiating an economic dialogue with the Saudis.

Initially discussions might be held in four general areas.

1. General economic. We share with the Saudis the objective of avoiding dangerous pressures on western trading and security arrangements arising from the economic consequences of high oil prices. We can discuss such questions as costs of energy from alternative sources and our own plans under Project Independence. We have our own projections on oil supply/demand/prices which we could share with the Saudis. In short, we can help the Saudis decide what prices are in their long-term interest. (We can also lay a basis for subsequent discussions that might result in a secure role for Saudi oil in the long-term U.S. market despite Project Independence.) We have a major interest in their short-run production plans, particularly in getting production up to their present potential of over 10 million b/d. This area would include discussion of the role of the companies. Bilateral discussion with the Saudis would be a way of ensuring that later multilateral producer/consumer discussions would serve later U.S. and Saudi interests.

2. Development, technology. We can offer to be helpful on a government-to-government basis on Saudi development. We can provide experts through AID in most development fields from agriculture and health to petro-chemicals. (Any experts not on AID roles could be contracted through AID.) We can provide assistance in assessing the many offers being made by private firms and other governments. While we do not make investments as a government, we could assist the Saudis in making contact with U.S. investors who would be interested and in working out joint venture arrangements as desired. In view of Saudi income we would expect full reimbursement for development services—but under government-to-government auspices. (The Saudis presumably would not want to appear to be competing with poor developing countries for these resources.)

3. Saudi investment. We would like to have the Saudis invest their funds in the U.S. and we are prepared to work out favorable arrangements for them to do so. We could negotiate a favorable tax treaty. But the most interesting areas for discussion are probably new types of U.S. government obligations tied to a mix of currencies, to gold or to some index to avoid loss of real value through inflation. We have never provided such instruments but Treasury has stated it is prepared to try to work something out with the Saudis (we have considerable legal authority). We can also provide guidance on Saudi investments in our private sector. Although we are not set up as a government to be particularly good in this field, government endorsement of certain Saudi investments might give the Saudis more security.

4. Military supply and training. We have few legal impediments to expanding our military supply and training arrangements. We can make long-term supply contracts. We would welcome greater Saudi participation in R&D costs of new weapons of interest to them—perhaps in exchange for a premium position on deliveries.

The process of developing an economic bilateral, a framework agreement under which specific agreements in the various fields above would be developed, might be for a U.S. mission including technicians in the various fields, with strong overall policy level leadership, to visit Saudi Arabia in the next couple of weeks for an initial general exploration to be followed up by more intensive negotiations in each field with a target for final agreement on the framework bilateral and several key elements by the end of April.

As our discussions develop, it is possible that we might eventually work out a special deal for Saudi oil to have a place in the future U.S. market despite Project Independence. We have the authority needed to work out a special arrangement to give Saudi oil special exemption from import charges on either crude or, probably more significantly, product. We now have a special relationship with Canada. One may be developed with Venezuela. Something special for the Saudis, despite Project Independence, might be held out as a potential benefit as our relationship deepens. A period in which the Saudis reestablish the position of their crude in our market over the next few months would be a prerequisite to any agreement to assure them possible moderation of Project Independence and share of our future market. This idea raises such a fundamental issue regarding Project Independence that I have not yet raised it with Simon.

The attached list of possible USG actions for discussion with the Saudis was prepared by Treasury last fall in preparation for the Simon mission. Most of these items would fall within one of the general categories outlined previously. They provide some specific examples should you wish to draw on them.

—Some expansion of the supply of U.S. military equipment and training,

—The offer of U.S. government advice on the availability and selection of private firms with which contracts might be signed for technological assistance,

—An offer to work with the Congress to obtain an elimination of the existing duty on methanol imported for fuel purposes into the U.S.,

—An expression of interest in setting up regular procedures for high level government-to-government visits and consultations,

—An offer to consider at the forthcoming world-wide trade negotiations reduction of tariffs on products in which the oil producing countries have an interest,

—A civil aviation agreement,

—An offer to work jointly with the Saudi Arabians on credit and technical assistance projects in various less developed countries,

—Negotiation of a tax treaty which would insure in practice exemption for the maximum possible proportion of direct and indirect Saudi Government portfolio investment in the U.S., together with reduced rates for private Saudi investments in the U.S.,

—An offer to discuss the possibility of devising special U.S. Treasury debt obligations which would be of interest to Saudi authorities,

—Expansion of the U.S. government’s commercial representation in Saudi Arabia,

—An offer to facilitate creation of a consultative group which would bring together periodically top level private U.S. and Saudi business and financial executives,

—An offer to enter into an expanded and modernized treaty of friendship, commerce and navigation, and

—An offer by the U.S. government to enter into a direct contract with Saudi authorities for the purchase on the basis of a multi-year commitment of a substantial volume of oil destined primarily, but not necessarily exclusively, for the purpose of building an emergency stockpile of fuels in the U.S.

1. Summary: Cooper submitted for Scowcroft’s approval a set of possible items to propose to the Saudis as part of a plan for an expanded bilateral relationship.

   Source: Library of Congress, Manuscript Division, Kissinger Papers, Box CL 207, Geopolitical File, Saudi Arabia, February 11–28, 1974. Secret; Sensitive. Cooper forwarded the message to Scowcroft under a February 28 covering memorandum, which indicated that he drafted it, in consultation with Quandt and Bennett, at Kissinger’s request in preparation for the Secretary’s March 2 meeting with King Faisal. The telegram, sent verbatim as TOHAK 56, March 1, is ibid., March 2–April 27, 1975. This telegram is also printed in Foreign Relations, 1969–1976, vol. XXXVI, Energy Crisis, 1969–1974, Document 330. On the expanded relationship with Saudi Arabia, see Document 18.