Foreign relations of the united states 1969–1976 volume XXXVII energy crisis, 1974–1980 department of state washington
Note From Henry Owen of the National Security Council
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- Tab A Memorandum From Rutherford Poats of the National Security Council Staff to the President’s Assistant for
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- 205. Memorandum to President Carter
204. Note From Henry Owen of the National Security Council
Staff to the President’s Assistant for National Security
Washington, May 15, 1979.
You asked for two memos:
1. A memo on contingency plans for reacting to OPEC use of its
pricing power as a means of short-term pressure on the US, e.g., in con-
nection with the Arab-Israeli dispute. Such a memo (by Rud Poats) is
attached at Tab A. It describes the ways in which we would cooperate
with other countries to cushion the effect of oil shortages. It does not
describe how we would counterattack; neither Rud nor anyone else has
any good idea as to how to do this. Rud suggests a group review of pos-
sible counter-measures; let me talk to Dick Cooper and Tony Solomon
and I’ll be back to you about this.
2. A memo on our long-term response to continually rising oil
prices. Such a memo (by Jim Cochrane and me) is attached at Tab B. As
you will see, although this memo mentions possible counter-actions, its
main emphasis is on the need to reduce demand and increase
Source: Carter Library, National Security Affairs, Brzezinski Material, Subject File,
Box 48, Oil, 3–6/79. Confidential. Sent for information.
Brzezinski wrote “OK” next to this sentence in the margin.
Owen initialed “HO” above this typed signature.
642 Foreign Relations, 1969–1976, Volume XXXVII
Memorandum From Rutherford Poats of the National
Security Council Staff to the President’s Assistant for
National Security Affairs (Brzezinski) and Henry Owen of
the National Security Council Staff
Washington, May 14, 1979.
Contingency Plans for Coping with or Countering Severe OPEC/OAPEC Actions
We have three contingency plans for absorbing a serious interrup-
tion of foreign oil supply: the “International Energy Program” (IEP)
agreement for allocation of an oil shortage among the 20 IEA member
countries; withdrawals from the US Strategic Petroleum Reserve; and
domestic crude and product allocations. In all likelihood, the three
measures would be combined in a severe, prolonged shortage.
We have no agreed contingency plans for taking counter-measures
against various combinations of oil producing nations that might con-
duct a long-term embargo. Nor do we have a contingency plan for re-
taliating against a further radical price increase by OPEC or some of its
The IEP scheme provides for sharing the burden of either a tar-
geted embargo or a random interruption of production. It may be trig-
gered when either a member or the entire group faces a loss of more
than 7% of total oil supply as compared with a recent 12-month con-
sumption average. The IEP has been simulation-tested and its interna-
tional aspects have been de-bugged. A refresher training program is
scheduled next month for oil company officers who would work with
the IEA secretariat in operating the program. The regulatory frame-
work of USG participation is in place: the third of three Energy Depart-
ment regulations required to carry out mandatory allocations, refinery
controls and import-restraints was published today. OMB now is re-
viewing an Energy Department legislative package including exten-
sion of authority expiring June 30 for US oil companies to get anti-trust
clearances to cooperate in the IEP supply allocations.
Plans for domestic execution of the IEP may need re-thinking in
the light of the Congressional action rejecting three of the four DOE
Confidential. Sent for information.
January 1979–January 1981 643
mandatory conservation programs and the rationing plan. However,
the basic US response plan is built on mandatory DOE allocations of
crude to refineries and control of refinery slates. The allocation plan
leaves end-user shares to the option of private distributors, with lim-
ited exceptions, probably meaning long lines and shortened hours at
gas pumps and supply of oil to homes and other customers based on a
fraction of last year’s use. At a level of 15–20% gasoline shortage, ra-
tioning would be necessary to minimize outrage and mayhem.
At least annually since the 1973 OAPEC embargo there have been
reviews by State, Energy, Treasury and other USG staffs of proposed
countermeasures against embargoing nations. Recently several sugges-
tions for retaliating against a further radical increase in OPEC prices
have been examined. A US counter-embargo of key exports such as
grain, arms and machinery has been judged likely to be futile because
the principal perpetrators of an oil embargo have very small popula-
tions, great financial reserves, and very little need for our key exports;
in most foreseeable situations they could get substitute supplies from
non-US sources. A USG export price surcharge equal to a further OPEC
price increase or oil surcharge probably would have the same conse-
quence as a US embargo, simply shifting the business to the countries
that won’t join us in concerted price reprisals. An export price sur-
charge in the form of a tax on US exports is unconstitutional; no man-
ageable alternative to an export tax has been found.
Systematic contingency planning on active countermeasures has
not been undertaken since 1975, to my knowledge. Energy policy
makers have considered the risks of military or extreme political
countermeasures as disporportionate to the costs of foreseeable oil
price increases. The probability of a further Arab oil embargo has been
discounted heavily in recent years, but this optimism could change if
the Israeli-Egyptian negotiations fail to produce movement on the Pal-
estinian-Jerusalem issues by early in 1980.
You may wish to commission a limited group review of contin-
gency measures in this field, bearing in mind the small likelihood of
finding a usable reprisal tool and the risk of leaks during Phase II of the
644 Foreign Relations, 1969–1976, Volume XXXVII
Memorandum by James Cochrane and Henry Owen of the
National Security Council Staff
Washington, May 15, 1979.
Long Term Response to Rising OPEC Oil Prices
Ever since the embargo of 1973, there has been discussion within
the United States about how to deal with the long-term pricing problem
posed by the OPEC cartel. It is easy to think up gimmicks, but most of
these don’t get to the core of the problem: how to ease the world oil
market, by increasing supplies of energy and reducing demand. Unless
progress is made on these fronts, “dialogues” between crude oil pro-
ducing and consuming countries will not get very far, since we will
lack needed bargaining power.
Nor are threats of the industrial countries acting as a monopoly—
either in purchasing oil or in boycotting exports (e.g., of food) to
oil-producing countries—apt to be credible, given the evident distaste
of Japan and European countries for such policies. The only idea along
this line that may be worth exploring is Charlie Schultze’s notion of im-
posing a tax on some of the Summit countries’ exports to OPEC coun-
tries, in an amount sufficient to offset the effect of any future increase in
oil prices. Even this would probably be objectionable to European
countries and Japan.
In the end, we come down to the plain fact: OPEC decisions are
shaped largely by judgments of what the world oil market will bear. In-
deed, the OPEC price of oil is now probably a bit below the price that
would clear the world oil market. Market forces are, if anything, push-
ing upward instead of downward on the Saudi market price.
So the question is how to affect these market forces. We will submit
to the President specific proposals to increase production and reduce
consumption, which could be acted on at the Tokyo Summit. Each of
these proposals will run up against powerful domestic objections, since
restricting consumption is unpopular and increasing production in-
volves costly investments. If we can’t overcome these objections, there
is little prospect of devising a successful long term oil price strategy.
January 1979–January 1981 645
205. Memorandum to President Carter
Washington, May 17, 1979.
Economic Summit Energy Initiative: International Energy Finance Corp.
At your direction, we have begun exploratory discussions with
our Summit partners on Economic Summit initiatives to attain greater
energy supply security for all nations. The Tokyo meeting, coinciding
with likely OPEC decisions on further price increases, will be expected
by world public opinion to come up with specific and important initia-
tives to this end.
We need to submit to the Preparatory Group meeting here Friday
Summit governments if we are to get agreement at Tokyo. One of our
draft proposals needs to be reviewed by you before we ask the other
governments to consider it thoroughly.
We propose to initiate consultations with other Summit gov-
ernments and members of Congress looking to a possible Tokyo
Summit decision to establish an International Energy Finance Corpora-
It would pool resources of Summit and other interested gov-
ernments to provide long-term capital financing for the first generation
of projects using commercially unproved technologies in large-scale
production of energy. It would be limited to projects that cannot obtain
sufficient private financing. By including some OPEC countries (e.g.,
Venezuela) it would create a practical partnership of producing and
consuming countries to expand the world’s energy supplies.
This decision could save what may be a critical number of years in
launching additional energy production processes that the world will
need by the 1990s.
Source: Carter Library, National Security Affairs, Staff Material, International Eco-
nomics File, Box 45, Rutherford Poats File, Chron, 4/12–30/79. No classification marking.
Sent for action. The memorandum is on White House stationery.
646 Foreign Relations, 1969–1976, Volume XXXVII
It also would save money as compared with present plans for fi-
nancing energy demonstration projects. First, capital would be raised
internationally; we would be mobilizing subscriptions from other
countries on a scale about double our own. Second, the Corporation
would borrow its project-financing funds in relatively low-cost
markets. Third, by financing projects largely on a loan basis, a larger
portion of risk would be assigned to project sponsors than would be the
case with either US Government equity financing or ad hoc interna-
tional equity funding by several governments. This more efficient
system would yield more projects for the same amount of gov-
ernmental capital outlays.
Paid-in US subscriptions to support a lending-only program
would be $100 to $150 million annually for each of the first three years.
Appropriations would be the same unless appropriation of callable
capital also were required, in which case callable capital might be sub-
scribed and appropriated incrementally over three or four years.
The Corporation would speed the application of processes coming
out of our intensified energy R&D programs—initially using heavy
crude, shale oil, tar sands, coal (in solid, liquid, and gaseous forms),
wood and other biomass, and ultimately direct solar and other technol-
ogies. Projects supported by this corporation would produce fuels us-
able in existing combustion and transport or transmission systems. The
Department of Energy lists many promising technologies (Tab A),
some of which are ready now, some likely to be ready in the early 1980s
for commercial demonstrations.
The IEA Secretariat predicts that, even with optimistic assump-
tions about Mexican and other oil production and with heroic assump-
tions about nuclear and coal production, the world will need to create
the equivalent of another Saudi Arabia by the early 1990s. The alterna-
tive is increasingly severe and damaging energy price increases.
We believe it would be imprudent, perhaps recklessly so, to wait
until private companies and banks are likely to finance fully the initial
production scale projects demonstrating promising energy technol-
ogies in commercial settings. These pioneer projects’ billion dollar
costs, coupled with great uncertainties as to actual production costs,
virtually preclude full private financing, at least so long as projections
of oil prices are subject to widely varying estimates.
Dependence on wholly private financing thus guarantees years of
delay, so that commercial-scale models will not be available during the
January 1979–January 1981 647
1980s, when private investment decisions must be made to assure
large-scale production using new technologies in the 1990s. The Energy
Department believes that promising technologies, now or soon to be
available, will require a substantial number of large-scale commercial
demonstrations in the 1980s.
Three alternative mechanisms for international public financing of
such commercial demonstration projects have been considered:
1. An ad hoc consortium for each project, primarily with equity
contributions by interested governments. This single-project consor-
tium approach is being used in the US-German-Japanese public
funding of SRC–2, the coal liquefaction demonstration project. DOE be-
lieves that it is unlikely we could put together additional ad hoc consor-
tia, in view of the laborious and lengthy negotiations, as well as multi-
ple national budgetary and/or appropriation action, required on each
2. An international energy technology fund providing both capital
financing and subsidies to projects selected for support by its interna-
tional board of directors. We believe that international pooling of sub-
sidy costs would involve greater US appropriations and capital sub-
scriptions than necessary. Other governments will probably take the
same view. Host governments and sponsoring companies should share
those risks not covered by capital financing which require subsidies be-
cause these risks depend partly on host government policies.
3. An international finance corporation confined to financing part
of the capital costs of projects, largely in the form of long-term unguar-
anteed project loans at market interest rates. We believe that this alter-
native is preferable and that consultations about it should be initiated.
Such a corporation would greatly enlarge international participation in
cost-sharing. It would be the least costly of the three options in budg-
etary outlays, assuming an equal set of energy projects. Any subsidy re-
quirements would be borne by host governments. Moreover, the cor-
poration’s long-term loans would marginally reduce the required scale
and duration of public subsidies as compared with alternative fi-
nancing by DOE loan guaranties in today’s market.
The alternative of an international group without financial com-
mitments, disposed to consider joining consortia on a project-
by-project basis, may be proposed by some other countries. We believe
it has most of the disadvantages of the ad hoc approach indicated
The Corporation would enable us to get international financing for
some of the planned DOE commercialization projects and would thus
free up US budget funds for support of a more extensive global effort to
create new energy capacity. For example, it would provide a politically
acceptable vehicle for certain international projects such as the initial
648 Foreign Relations, 1969–1976, Volume XXXVII
commercial scale use of new technologies for extracting and processing
Venezuela’s vast deposits of heavy crude. DOE believes, however, that
over time a larger proportion of the Corporation’s funds would be de-
voted to US-sponsored projects than was subscribed by the US, because
we have more diverse technological and resource potential than other
The Corporation would not duplicate planned DOE support of
projects. Rather, it would give us a means of lowering the DOE capital
outlay and/or lowering DOE budget subsidies to some projects.
Ideally the US subscription should be drawn from the Energy
but this decision need not be made immediately.
The Corporation would normally require a sponsoring company
or group to raise at least 25% of the capital as equity and to obtain re-
quired legal and other clearances, host government floor price guar-
antees or other subsidies before obtaining a loan from the Corporation.
The Corporation would lend to a project and in some cases take a minor
equity position when desirable.
Fears have been expressed that an international corporation would
foster “white elephant” projects, whose production costs would far ex-
ceed oil or natural gas prices. This risk is inherent in any action,
whether national or international, to commercialize new technologies.
A corporation controlled by an intergovernmental board, weighing
risks and balancing national interests in different technologies and
feedstocks, seems at least as likely to be prudent about risking limited
funds as individual governments acting singly in pursuit of locally pro-
There also are fears that the US would be forced, in such a corpora-
tion, to support technologies and projects that do not commend them-
selves to us. Our experience in international financial institutions to
date suggests that we will have little difficulty in blocking unsound
projects. It also suggests that we will be able to mobilize substantial re-
sources from other countries for projects that we do favor.
Critics also may assert that the proposed corporation would tend
to support projects sponsored by the biggest international energy com-
panies, because only they have the capacity to meet requirements for
large amounts of risk capital, alongside the corporation’s loan funds.
On the contrary, the fact that the corporation would increase the
amount of loan capital that could be offered to sponsors over what
would otherwise be available, and would provide it directly to project
See footnote 7, Document 196. The Energy Security Trust Fund was part of the
second National Energy Plan submitted to Congress on May 7. See Public Papers of the
Presidents of the United States: Jimmy Carter, 1979,
January 1979–January 1981 649
enterprises without requiring parent companies to guarantee repay-
ment, would make possible sponsorship of projects by a broader uni-
verse of companies than seems likely otherwise to be involved.
The corporation would be established by international agreement
among the Summit governments, which would subscribe about 70 per-
cent of the stock. By objective criteria, the US share should be about
30–40 percent. The remaining 25–30 percent of shares would be offered
to other industrial and OPEC countries. Subscriptions would be 90 per-
cent callable capital and 10 percent paid in over a period of two or three
Initial capitalization might be $10 billion—sufficient to permit fi-
nancing 12–18 large projects over the first four to five years of opera-
tion. If this capitalization were agreed, the nominal US share would be
$3–4 billion, requiring annual pay-in of $100 million to $150 million
over the three initial years. If defaults requiring additional pay-in of
capital occurred in some projects, the net additional pay-in after liqui-
dation should not be so large as to alter the above orders of magnitude.
Recovery on failures would be higher in a loan program than in the al-
ternative of grant/equity financing.
As you know, we hope to persuade the Congress to approve a pro-
cedure to require appropriations only for paid-in capital of established
international financial institutions. In this case, however, the likelihood
of calls being made on some part of the callable subscriptions is greater
than in the multilateral development banks.
If appropriations were also required in this case to establish the
portion of a new international corporation’s capital, incremental
capitalization could be adopted so as to spread appropriations over
three or four years.
We request your authorization to propose active preparatory con-
sideration of this initiative in the Summit Preparatory Group, reserving
your personal decision on it pending our securing preliminary reac-
tions of the Summit governments through this Group and pending fur-
ther exploration of the idea in the Executive Branch and in consulta-
tions with key Members of Congress.
Carter did not check either the Agree or Disagree option, but wrote: “This pro-
posal leaves me cold. OMB idea has some merit. I’ll read NSC ideas. Consultations should
be conducted on a very tentative basis—JC” The OMB proposal has not been found.
650 Foreign Relations, 1969–1976, Volume XXXVII
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