112. Memorandum From the Chairman of the Council of Economic Advisers (Schultze) to President Carter 1

SUBJECT

  • Import fee on crude oil: Secretary Blumenthal’s memo2

I have talked to Jim Schlesinger and Frank Moore about this. We agree on the following approach:

1. First, get the natural gas compromise nailed down;

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2. Then, immediately assess the prospects for COET;

3. If it appears either that a long delay will occur or that the chances are against getting COETat all, we should be prepared to impose a fee on oil imports as a means of seizing the initiative on energy.

The import fee should be set so as to imitate as closely as possible the effect of COET on petroleum prices and consumer incomes. Too large a fee would raise prices sharply, and drain income from consumers, thereby raising inflation and reducing economic growth. We should also be prepared to modify our tax proposals to return the proceeds of the fee back to consumers, as we promised to do with the net proceeds of COET. (Unfortunately, we can’t begin returning the funds until October—the effective date of the tax bill.)

Several other considerations have to be taken into account.

• Before we move we should inform the Saudis; we need to be sure they won’t react the wrong way—i.e. “why shouldn’t we get the higher prices instead of the U.S. Treasury.” With the proper explanation they will, I believe, react favorably.

Blumenthal and Solomon think there is at least an outside chance we can use such an action to influence the Germans—i.e. we take strong action, via the fee, to help the dollar; they take some action to promote greater German economic growth.

Much technical work needs to be done: What is the proper size of the fee; should it apply to petroleum product imports as well as crude oil; etc.? We also need to think through the political ramifications, the timing, the specific conditions under which it should be invoked, and how we sound out the Germans without a leak.

Recommendations

I suggest you ask Eizenstat, Schlesinger, Moore, Blumenthal, Vance, and Schultze to submit to you, by Tuesday, March 7, a paper which spells out:

• a specific scheme for an import fee;

• an assessment of the conditions under which it would be desirable to impose one and the timing of the action;

• an evaluation of the political, legislative, and economic consequences;

• a scenario for international consultation, including an assessment of the possibility of a German “deal.”

I am attaching a draft directive to the above-named people.3 Either Schlesinger, Blumenthal, or I could chair the group. The draft names Schlesinger, but it’s a close call.

  1. Source: Carter Library, Records of the Office of the Staff Secretary, Presidential File, Box 74, 2/27/78 [2]. Administratively Confidential. Sent to Carter under cover of a February 25 note from Hutcheson (ibid.), which also forwarded Owen’s February 22 memorandum, Document 109.
  2. See Document 108.
  3. Attached but not printed is an undated draft memorandum. Carter signed a retyped version of the memorandum, which is dated February 27. (Carter Library, Records of the Office of the Staff Secretary, Presidential File, Box 74, 2/27/78 [2])