Foreign relations of the united states 1969–1976 volume XXXVII energy crisis, 1974–1980 department of state washington
Summary Paper Prepared by Robert Hormats and Robert
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Summary Paper Prepared by Robert Hormats and Robert
Oakley of the National Security Council Staff
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 re-
sources, 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 ac-
tion itself are unclear, a number of possible Arab actions have been ad-
dressed in Section I—Economic Contingencies. These range from low im-
pact situations to those involving the use of maximum economic
Of the embargo contingencies outlined in Part I (A), a selective em-
bargo against the US, an embargo against all participant countries in
the International Energy Program (IEP) at levels which would not trig-
ger 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 em-
bargo 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 con-
flict 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 effec-
tively. Nevertheless, market factors will probably create oil price in-
Source: Ford Library, National Security Adviser, Presidential Subject File, Box 4,
Energy (12). Secret; Nodis. Attached to an April 16 memorandum from Hormats to Scow-
croft, 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 pre-
paredness in the US, particularly on measures to be taken to reduce the impact of an em-
bargo.” 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.
October 1975–January 1977 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 de-
scribed 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 inter-
national financial institutions, if such are required under the
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
to meet these contingencies. In discussing options to counteract Arab
oil actions, this section focuses on programs designed to increase do-
mestic oil production or achieve consumption restraint.
The basic conclusion of this section is that under present circum-
stances, with existing legislative authority, and with the successful application
as required of the International Energy Program and existing domestic and in-
ternational 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 con-
siderable 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 in-
clude 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 ac-
tions against the US or other countries—but all hold the considerable dan-
ger of increasing pressures on and removing restraints from OAPEC to move
immediately to higher and more damaging levels of economic action in
348 Foreign Relations, 1969–1976, Volume XXXVII
Telegram From the Department of State to Secretary of State
Kissinger in Oslo
Washington, May 22, 1976, 2132Z.
Tosec 130192/126380. Subject: Action Memorandum: Possibility of
an OPEC Price Increase. To the Secretary from Robinson and Rogers.
1. The Problem. On May 27 OPEC Oil Ministers will meet in Bali to
discuss, among other things, the possibility of raising oil prices.
earlier approved a recommendation that we instruct our Ambassadors
in key OPEC capitals to make appropriate representations after we had
a chance to assess the effects of your UNCTAD speech.
The question is
whether we should now proceed with those representations.
2. Background Analysis. The non-confrontational atmosphere gen-
erated by your speech in Nairobi has enhanced the possibility of mod-
eration by the cartel in its deliberations on prices. On economic
grounds alone, the cartel might have trouble with an increase because
of the drop in demand for heavy crude and the problem that it has with
price differentials. All these factors will tend to support the OPEC mod-
erates—Saudi Arabia, Kuwait and the Emirates—who are opposed to
an increase at this time.
Source: National Archives, RG 59, Central Foreign Policy Files, D760199–1131.
Confidential; Immediate. Drafted by Sorenson; cleared by Robinson, Katz, and Sober and
in AF, EA, S, and ARA; and approved by Rogers. Kissinger was in Oslo for a meeting of
NATO Foreign Ministers.
On May 28, at the conclusion of the 2-day meeting in Bali, OPEC announced that it
would continue its 9-month-old freeze on oil prices. (The New York Times, May 29, 1976,
p. 1) On May 24, the Embassy in Jidda transmitted a message from Prince Fahd in which
he noted that after his contacts with “all the Gulf countries,” he could say that “no in-
crease in oil prices” would result from the OPEC meeting. Fahd added that he would be
“confronted with difficulties from one or more members, Iran in particular,” but con-
firmed that the Saudi position would “not change.” (Telegram 3703 from Jidda, May 24;
Ford Library, National Security Adviser, Presidential Country Files for the Middle East
and South Asia, Box 24, Saudi Arabia—State Department Telegrams to SECSTATE–
Kissinger’s address before the fourth session of UNCTAD in Nairobi on May 6 in-
cluded this statement on energy: “In energy we strongly support the efforts of oil produc-
ers and consumer from both the industrialized and the developing world to achieve co-
operative solutions at the Conference on International Economic Cooperation. We urge
that our proposal for an International Energy Institute—which would help developing
countries take advantage of their domestic energy resources—receive priority attention
in the months ahead.” For the full text of Kissinger’s speech, see Department of State Bul-
, May 31, 1976, pp. 657–672. Excerpts of the speech were published in The New York
, May 7, 1976, p. 12. Kissinger first proposed an International Energy Institute to
study the availability of energy resources, especially in non-oil-producing developing
countries, in his address to the Seventh Special Session of the UN General Assembly; see
footnote 3, Document 80.
October 1975–January 1977 349
A. We have already made clear our view that new price increases
are not warranted. In April in the CIEC Energy Commission we put
forward a strong analytical case against high oil prices, emphasizing
the particularly severe impact further rises would have on non-oil
higher prices are needed to ration oil for its “non-substitutable” uses.
During his recent trip to the Middle East, Zarb pushed for a continua-
tion of the price freeze.
B. On the other hand, OPEC has clearly sought in the CIEC Energy
Commission to lay the basis for justifying an increase in oil prices. More
recent reports also indicate that OPEC’s Economic Commission Board
has prepared studies purporting to show that import prices from in-
dustrialized countries have increased 15.4 percent over the past nine
months, thus further buttressing the case for an increase. Finally, it is
clear that some of the producers, such as the Iranians and Indonesians,
are determined to press for an increase.
A. Instruct our Ambassadors in key OPEC capitals to make dis-
creet, non-confrontational representations pitched to the circumstances
and views of each OPEC government. (A suggested cable is at Tab A)
—A direct approach would give us the opportunity to explain that
our own studies show the price of OPEC imports from industrialized
countries has gone up only 2.72 percent (instead of 15.4 percent) as al-
leged by OPEC’s experts over the past nine months. We could thus fur-
ther strengthen the hands of the OPEC moderates. In the capitals of the
According to the Mission to the OECD’s summary of the first 2 days of the April
round of the CIEC, the United States tabled a paper in the Energy Commission “which
argued essentially that world is in transition from economy based mainly on
oil-produced energy to economy based on other forms; this transition should be smooth,
not based on crisis atmosphere; sufficient fossil fuels are available to bridge the transi-
tion; danger exists that too rapid concentration on expensive alternatives could lead to se-
rious misallocation of resources; and that oil prices should be at level which encourages
economically efficient use of resources and smooth transition to alternatives.” The G–19’s
response to this paper was “highly critical.” (Telegram 12032 from USOECD Paris, April
23; National Archives, RG 59, Central Foreign Policy Files, D760155–0147) An overview
of the entire April round of the CIEC is in telegram 12482 from USOECD Paris, April 29.
During Zarb’s visit to Saudi Arabia in early May, Yamani informed him that he
thought the OPEC meeting in Bali would result in a price increase. (Telegram 3264 from
Jidda, May 6; ibid., D760175–0884) On May 9, Zarb met with Amouzegar in Tehran, and
the two discussed what might happen at the OPEC meeting. Amouzegar said that “he
was not at all sure what line OPEC would take,” but that Iran would “probably occupy its
traditional position between the price extremists and the price moderates.” (Telegram
4694 from Tehran, May 10; ibid., D760179–0725)
The draft instruction to Embassies in OPEC capitals is in telegram Tosec 130196/
126371, May 22. (Ibid., D760200–0095)
350 Foreign Relations, 1969–1976, Volume XXXVII
hard-liners, we would stress our mutual interest in maintaining the
present constructive atmosphere, in improving economic stability and
in expanding world demand. If done without being abrasive and con-
frontational, it could do some good.
—More importantly, domestic political considerations require that
we do all we can to influence the OPEC decision. DepSec Robinson will
testify before Senator Kennedy’s Energy Subcommittee on June 8. This
will probably be just after the outcome of the OPEC price deliberations
become known. If we are confronted with a price increase it would not
be enough to respond to Congress and to the American people that we
made our case on oil prices in the CIEC and that Frank Zarb raised the
question during his recent Middle East swing. Ambassadorial repre-
sentations would enable us to say that we had gone directly to pro-
ducer governments with our case at a crucial time.
—If the producers decide to continue the freeze or to raise prices
only slightly for any of several reasons (including market conditions),
they could nevertheless contend that they acted in compliance to our
de´marches and that we should in turn make concessions in other areas
(e.g., commodities). This could make our dealings with North/South
economic issues in CIEC and elsewhere more difficult.
—Our position against further price increases is well known to key
OPEC countries through intensive discussions and analysis at the April
CIEC Energy Commission. If additional action is needed, we could re-
emphasize our position unilaterally in a public statement (option B
—A further de´marche at this stage is unlikely to change the posi-
tion of any OPEC government. Moreover, it will make us look like
mendicants and provide another opportunity for OPEC members to
lecture us on the rationale for a possible increase.
—If OPEC raises prices despite our de´marches, we demonstrate
our impotence on oil price issues, which serves neither our domestic
political nor international interests.
Option B: Issue a public statement prior to the Bali meeting that
makes the strong economic case against new price increases. This state-
ment would stress that the prices of OPEC imports have risen less than
three percent since the October price hike of 10 percent, that further in-
creases would endanger the fragile economic recovery that is begin-
ning to be widespread, and that market conditions do not warrant
higher prices. (A draft statement for your consideration is at Tab B).
October 1975–January 1977 351
—The statement would give wide domestic and international ex-
posure to our case against new price increases.
—With this statement, our price arguments in CIEC in April, and
the recent Zarb trip we can demonstrate to the Congress and public that
we made an effort to influence the OPEC price decision.
—The public statement could challenge the credibility of the study
of the OPEC Economic Commission Board and provide ammunition
for the use of the Saudis and other OPEC moderates at Bali as well as
—Should OPEC continue the oil price freeze, the producers could
not assert that it was in compliance to our bilateral de´marches, thus re-
quiring concessions on our side. (They will, in any event, insist in CIEC
and elsewhere that the industrialized nations must take action to match
their “contribution” to global warfare.)
—Would not take advantage of personal influence that our Am-
bassadors might be able to exert on key officials in producers’ capitals.
—If producers raise prices despite our efforts, it would publicly
demonstrate our inability to influence pricing decisions.
—Our statement would probably be characterized by some pro-
ducers as unwarranted interference in OPEC affairs, perhaps making it
more difficult for the moderates to oppose price increases.
Option C: To make de´marches in OPEC capitals and issue a public
statement (i.e., options A & B).
—Will doubly emphasize our opposition to oil price increases and
show Congress we pulled out all the stops to influence the OPEC
—Will give two opportunities to take issue with the OPEC Eco-
nomic Commission Board’s study.
—Same as all cons for option A.
—Same as second and third cons for option B.
—May be seen as over-reaction by the U.S. and result in
non-moderates in OPEC pressing harder for a significant price
Option D: Decide not to take any additional action prior to the Bali
—We have already made our position known in the CIEC and
through the Zarb trip.
352 Foreign Relations, 1969–1976, Volume XXXVII
—Is consistent with non-confrontational approach to oil price
issue through multilateral dialogue.
—Avoids calling attention to our impotence if OPEC decides upon
a price increase.
—Administration open to charge that we made insufficient effort.
—Gives up opportunity to challenge OPEC’s study of import infla-
tion, which will probably be an important element in Bali discussions.
—Could be viewed by producers as acquiescence to “moderate”
D, E, NEA and ARA prefer option C and recommend you approve
the attached cable instructing our Ambassadors in OPEC countries, at
their discretion and only if they believe that it would not be counter-
productive, to make appropriate representations, based upon the cir-
cumstances and views of the governments concerned. The Department
simultaneously to issue a statement, preferably in response to question
at noon press briefing.
As a fallback, D, E, NEA and ARA believe that at a minimum we
should instruct our Ambassadors to make appropriate representations
as in the attached draft cable at Tab A.
EB, EA and AF, on the other hand, recommend option B that you
agree to the Department’s issuing a public statement along the lines at-
tached at Tab B. We will coordinate the final statement with FEA and
Treasury before it is issued.
If you do not favor a public statement, EB, EA and AF recommend
option D—that we rely on the record made already in CIEC and with
the Zarb trip and take no further action prior to the Bali meeting.
4. Approved by ARA–WRogers; cleared by D–Mr. Robinson,
ARA–Mr. Grunwald, NEA–Mr. Sober, EB–Mr. Katz, EA–Mr. Edmond,
AF–Mr. Blake, S–Mr. Aherne.
5. For S/S: Tabs A and B follow in septels.
No record of whether Kissinger approved any of the recommendations has been
October 1975–January 1977 353
Memorandum From Robert Hormats of the National Security
Council Staff to the President’s Assistant for National
Security Affairs (Scowcroft)
Washington, July 14, 1976.
NSSM 237: International Energy Strategy Meeting with Zarb et al, July 14, 1976,
at 6 p.m., Roosevelt Room
NSSM 237 (Tab B)
requested a study of options available to the
United States on international energy policy. A lengthy series of intense
working group discussions has now resulted in a draft response (sum-
mary at Tab C).
The work was done initially by State (chairman), FEA,
Treasury and Defense, under NSC and CIEP guidance; OMB and a per-
sonal representative of Secretary Richardson, head of the Energy Re-
sources Council (ERC), were brought in for the final stages.
We have now scheduled a meeting of the Undersecretaries Com-
mittee, the next stage in the NSSM process; this will be held on July 22
and be chaired by Undersecretary Rogers. In the meantime, however,
Zarb has decided to put a more visible ERC imprint on the study by
holding his own meeting;
it is not clear what his substantive purpose
is, since FEA was one of the principal drafters of the NSSM response
and concurs fully.
Your objective in this meeting is to accommodate Zarb’s desire to
assert ERC involvement without allowing the ongoing NSSM process
to be sidetracked. Talking points are at Tab A.
The NSSM response provides some very useful insights, but has
emerged more as a brief for the current direction of energy policy and a
vehicle for securing its high-level approval, than as an examination of
options or new alternatives. While it may well be that we in fact have
few realistic options, the NSSM response is, in this sense at least,
Source: Ford Library, National Security Council, Institutional Files, Box 41, NSSM
237—U.S. International Energy Policy (1). Secret. Sent for information.
Attached; printed as Document 93.
Attached but not printed. The draft NSSM study is in Ford Library, National Secu-
rity Council, Institutional Files, Box 41, NSSM 237—U.S. International Energy Policy (1).
No record of either Zarb’s meeting or the Under Secretaries Committee meeting
has been found.
Attached but not printed.
354 Foreign Relations, 1969–1976, Volume XXXVII
The study itself is broken down into several lengthy sub-studies.
You need address only the overview paper (Tab C).
The key conclusions of the study are:
—US supply and price vulnerability will remain linked to the vul-
nerability of the other industrialized countries.
—The objective of our international energy policy should be to re-
duce both supply and price vulnerability.
—US import requirements will rise to 7.4–10 million barrels per
day (MBD) by 1980 from the 5.9 MBD of 1975.
—The collective vulnerability of other industrialized countries will
increase slightly by 1980 and significantly by 1985.
—OPEC will remain an effective cartel over the next five years and
probably for some time thereafter.
—Our continued heavy dependence on imported oil requires close
attention to our relations with key producers.
—The US should continue to implement its policies through the
existing oil company supply system.
As noted above, the options section is in fact a series of recommen-
dations. These are as follows:
1. To reduce supply vulnerability, the US should:
—Intensify efforts, domestically and within the IEA framework, to
reduce dependence, going beyond laws and programs already in place.
—Strengthen emergency anti-embargo measures by accelerating
creation of strategic petroleum reserves and pressing the IEA to
strengthen its emergency stockpile program.
—Consider diversifying sources of oil through bilateral deals,
looking closely at Mexico and Saudi Arabia and, less immediately, at
Iran and China.
—Not attempt to negotiate a supply commitment with OPEC in
the CIEC context.
2. To reduce the probability of future price increases, the US
—Intensify efforts to reduce dependency, domestically and in the
IEA, to constrain OPEC price-setting ability.
—Seek to obtain a price discount, directly or indirectly, in any bi-
—Not seek a general price agreement with OPEC in CIEC or
—Continue to “jawbone” bilaterally and multilaterally, particu-
larly in the CIEC.
October 1975–January 1977 355
—Not subordinate our overall relations with key producers to the
oil price issue.
1. The dependency figures contained in the NSSM are at the low end of
the range of probability,
even though FEA agreed to raise their initial fig-
ures, which assumed a fully successful Project Independence. Most
outside projections, and most non-FEA government opinion, suggests
that the 7.4–10 MBD range is very optimistic, even assuming North
Slope oil is available. Projections for 1985 are analytically much more
difficult, but the 5.9–9.4 MBD used in the study is probably even more
optimistic still than the 1980 estimates. By minimizing import depend-
ence, the study exaggerates the possibility of achieving our stated ob-
jective of energy independence.
2. The study underscores that the vulnerability of Western Europe and
as well, given the political imperative of
maintaining our ties with other industrialized nations. The study does
not draw, however, what appears to be the logical conclusion of this
observation—that energy independence is in some ways a hollow goal
for the US. It will help by reducing demand for OPEC oil, and thus re-
ducing OPEC’s ability to raise prices, but since other industrialized na-
tions cannot achieve independence, our vulnerability—indirect but no
less significant—will continue.
3. The study effectively points out the enormous cost of the 1973
embargo and subsequent price increases. The embargo itself cost the
US some $20 million
in lost GNP, increased unemployment by 500,000,
and deepened and lengthened the recession. Higher prices immedi-
ately involve the direct transfer of wealth, and with it, welfare. They
also involve, however, the enormous capital costs of restructuring in-
dustry to accommodate changes in the price of energy relative to other
factors of production, and the continuing drain of using relatively less
efficient means of production. (One model indicates that a $1 barrel
price increase costs the US $60 billion, in 1972 dollars, over a six-year
period. Extrapolation is analytically questionable, but illustratively in-
dicates that the $8 increase since 1973 will eventually cost the US $500
billion in lost domestic production.) Higher prices have also seriously
affected the growth prospects of non-producing LDCs, and added to
our assistance burden. The political cost of the constraints on our Middle
East policy, and of the strains on our relationships with other industri-
alized and developing countries, is not quantifiable.
4. There is a substantial risk, even a probability, of additional increases
in coming years. The cartel is likely to remain viable, and de-
“? billion” is handwritten in the margin.
356 Foreign Relations, 1969–1976, Volume XXXVII
mand estimates indicate that by 1980 total OPEC revenues would be
higher at $16 per barrel than at current prices. Of course this analysis is
based on economic rather than political factors, and it was political fac-
tors which provided the catalyst to make OPEC an effective cartel in the
5. The study abandons CIEC as a means of reaching price of supply
agreement with the producing countries. This leaves us in effect fight-
ing defensive battles in the three other Commissions with no energy
quid to be extracted for progress on quos in other areas. An agreement
in CIEC could probably be obtained only by accepting conditions such
as the indexation of oil prices to the prices of exports of the industrial-
ized countries. Agreement on price could also reduce pressure to im-
prove the supply situation.
6. This generally pessimistic picture on continued dependence has
understandably pushed the working group toward a policy of accommo-
encouraging consumer adjustment to
higher prices and the development of cooperative links to insure
supply. State clearly sees confrontation as contrary to the national in-
terest, and bilateral oil arrangements essentially at current prices as a
means of assuring supply and a useful source of diplomatic leverage.
Higher prices also make FEA’s Project Independence at least a theoreti-
cal goal. Herein lies a major fault of the paper: although in fact there
may be little to support options aimed at breaking up the cartel, wheth-
er by attempting to seduce or bludgeon Saudi Arabia, or through “eco-
nomic warfare” on OPEC generally, an options paper should discuss
the pros and cons of more forceful courses of action, if only to eliminate
them as realistic options. (I have long argued for a closer examina-
tion of US relations with Saudi Arabia, in the oil context as well as in
broader terms. This might be a good occasion to do it.)
7. Another important next step would be a systematic examina-
tion, on a country-by-country basis, of the feasibility and advisability of bi-
Since bilateral deals would be aimed primarily
at reducing supply vulnerability rather than lowering prices, we
should probably be prepared to pay the going price. This is not noted
under the paper’s supply “options”; to the contrary, an optimistic rec-
ommendation that we should push for price breaks in these arrange-
ments is noted under the price “options”. Bilaterals are now being pur-
sued on an uncoordinated—one might even say haphazard—basis,
with little or no attention to the broad conditions under which we
should enter such agreements or to the relative attractiveness of
various partners. First, however, we must have a clear decision made
on whether or not we intend to seek price advantages in these agree-
ments. This, in turn, depends on whether we are focusing on price or
October 1975–January 1977 357
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