Foreign Relations of the United States, 1969–1976, Volume XXXVI, Energy Crisis, 1969–1974

295. Memorandum of Conversation¹

Washington, February 1, 1974.

• SUBJECT
  • Energy

• PARTICIPANTS
  • Egon Bahr, FRG Federal Minister without Portfolio
  • Ladisaus Von Hoffman, Vice President, International Finance Corporation (IBRD)
  • Berndt Von Staden, FRG Ambassador to US
  • Walter Gehlhoff, FRG UN Ambassador
  • The Secretary
  • The Deputy Secretary
  • Counselor Sonnenfeldt
  • Assistant Secretary Hartman

Secretary: I would like to go over some of our thinking on the energy situation and what we plan to do in the meeting next week. There is a large political component in that we must decide whether or not we are going to live in a cooperative world system. On the energy problem, demand has been going up faster than the incentive to produce. Bilateral agreements cannot be any solution to the problem. No country can solve its balance of payments problems by increasing trade. We can come close to handling the problem but Europe and Japan cannot.

What we need from this meeting is a common understanding on consumer restraint, tactics on prices, and an agreement to cooperate on research and development and the bringing-in of new energy sources. We also need to talk about emergency allocations and the monetary problem. We will put forth a detailed analysis as to how we see the present situation. We want to take the mystery out of the way the problem seems to be viewed around the world. There has been near panic which we believe is based on ignorance of the basic facts.

At present world prices it is clear that the world system will not work; even if prices are reduced somewhat, there will be future crises. We can survive. But Europe, Soviet, and the LDCs have no chance unless cooperative arrangements are developed. We take the lead, not because of any egotism on our part, but because we realize what the impact would be if friendly nations around us were to collapse. The only alternative to international cooperation is a policy of “beggar thy neighbor.” Bilateral agreements support the present price level and therefore compound the problem. This will be difficult to organize and if we fail to achieve agreement on a cooperative effort, we will have to go our own way and make our own bilaterals. We are in a far stronger position to do this.

We hope to organize some task forces to continue examining the problems after the February 11 meeting. Then we should invite some LDC consumers to join us before the next conference, perhaps by mid-March. After mid-March, we should invite the producers to make contact with this group.

Bahr: (He began in German and then switched to English.) The Federal Republic can also afford these prices for a short time but cannot afford them in the long run, but unlike the US we cannot afford to become autarkic. We depend on Arab oil. If we cannot receive adequate supplies it can produce real resentment against the Arabs and the multinational companies. The question is, can the consumers agree on the necessity of cooperation to protect their basic interest? Will they share, or no? The Soviets can afford autarky but the remainder of the world must depend on cooperation and solidarity. I am not sure that the producers will continue their unity.

Secretary: We are divided internally on this matter of sharing. From a domestic political point of view, sharing is obviously not a popular measure. But, from the foreign policy point of view, an organization of cooperation is a necessity, particularly to assure emergency allocation. Cooperation among the consumers ought to be possible if we can show the producers are engaged in blackmail.

Rush: Yamani is now saying that they will not export above certain levels.

Secretary: Yamani must be controlled. There is no reason why seven million Bedouins should dictate to the industrialized world on a matter of such vital importance. Yamani does not necessarily reflect the views of the King. When I visited Saudi Arabia, he seemed to be relegated to a position far from the King (physically), somewhere in the ranks of the technicians. He is not a policy maker.

Bahr: We seem to help him by paying so much attention to him during his trips.

Secretary: The Europeans and the Japanese exhibit an abject posture.

Bahr: We agree with your analysis of the problem. The key is the possibility of organizing a system of solidarity in emergencies. If we can do this, we will have success at the conference. Otherwise, we should consider this a first step in the process so that we do not give the appearance of a setback.

Secretary: There is no reason why we cannot get together as consumers with a serious problem. This is not a confrontation with the producers. We are trying to bring about constructive efforts which will benefit all.

Bahr: I was in Paris in November and Jobert expressed his doubts about whether Europe could unite to deal with this problem. He was worried about a possible German reaction and therefore seemed to be of the opinion that France would have to go it alone. But we know the French will not be successful. We must look at the bilateral problem.

Secretary: Present prices are unworkable from a technical point of view. There is no way to run deficits of this size for very long without destroying the world system.

Bahr: The French floated the franc in order to protect themselves.

Secretary: But that will produce a monetary crisis.

Bahr: The French are interested in selling Mirage aircraft.

Secretary: You can also pay for a commodity that has no price, but that is not enough to carry even the French for very long. They are engaging in a policy of beggaring others. I have received a recent message from the British that they are not going to go ahead beyond their Iranian agreement with any more bilaterals because they believe this to be a losing proposition.²

Von Staden: What about a price rollback?

Secretary: This depends on the solidarity we are able to achieve. The Saudis talk of reducing prices but that is only a form of economic warfare. I think that in the end the Saudis will realize that they have no alternative to political relations with us. It is imperative for their own political stability. They know that revolutionary pressures on the King will increase. This presents them with difficult choices. It is the same in Iran.

Bahr: All of Europe has a maximum dependence on Arab oil.

Secretary: We cannot afford present prices. Germany can perhaps afford them more than others, but in the end no one can benefit; there will be economic chaos. Cooperation is an absolute necessity. No country, except the US, can come close to taking care of itself.

Rush: The US and the Soviets are in a strong position compared to Europe and Japan.

Secretary: We must end the Arab-Israeli confrontation as a first step. Then we can begin to get at the problem of inducing additional oil supplies from the area.

Bahr: If you decide to go it alone, it would destroy NATO.

Secretary: That is why we don’t want to go the route alone, but if we can’t get multilateral cooperation, we have no choice. If we are forced to go it alone it is suicide for all of us. It would destroy the whole post-war system and undo 25 years of effort, but above all Europe and Japan would suffer the most. Therefore, we are making a general offer of full cooperation. This is of critical importance. We do not have all the answers; certainly not on the price issue. But, we believe we can achieve cooperation in consumer restraint, finding new sources, and R.&.D. Our studies show that the situation is not hopeless. We want to be able to stabilize it. We should not make our plans on the basis of complete Arab unity. Kuwait and the Saudis have not yet a clear perception of the problem. We are not going to go the bilateral route unless we are forced to. We hope for German cooperation in instituting a multilateral plan. The UK has agreed to go with us. The Japanese will come along. The three of us ought to be able to bring others.

Bahr: And the French?

Secretary: I am almost certain that they will come along because they will realize they will have no alternative. I told Jobert that we must move in this direction.

Bahr: We must keep in close contact.

Secretary: I have not spoken as frankly to others as I have to you today.

Gehlhoff: Aren’t the less developed countries suffering most? Can’t we make them our allies?

Secretary: That is what we should do in the next phase. We thought about trying to invite some LDCs but who would they be? You can’t begin to deal with this problem in a large meeting. What concerns the LDCs is the financial problem. They do not have much to contribute in the areas of greater concern to the developed consumers, but the LDCs will benefit by our cooperation.

Von Hoffman: The IMF has concluded that there is no way to solve the financial problem of these high price levels through institutional means.

Secretary: That is right. You could only ease the problem, not cure it.

Von Hoffman: We are with you on the price issue.

Secretary: The problem with the LDCs is that they might be bought off by a two-tier price system or large amounts of aid.

Von Hoffman: The Arabs lack the unity to apply a two-tier system. It is very difficult to do. As far as aid is concerned, the OPEC countries are only offering development bank one billion dollars in capital. This is a drop in the bucket.

Secretary: What we are anxious to do is to draw in quickly, in the first phase, the countries which consume 85 percent of the world’s supplies.

Rush: We would want, of course, to inform the LDCs of what we are doing.

Gehlhoff: The first phase should be to pressure for low prices. The majority of the LDCs can apply political and psychological pressures.

Secretary: All they can do is exhort.

Gehlhoff: There is a growing alliance between the Arabs and the LDCs, particularly in Africa. The Africans are under pressure not to cooperate. The LDCs should be a potent ally to get prices down.

Bahr: The Arabs are making some loans to Africa in order to achieve Israeli expulsion. Thus, they are able with our dollars to replace development aid. This is a very great danger.

Secretary: The Arabs may very well achieve a greater position in aiding LDCs but we want to be able to convince the LDCs that it is a better bet to follow us. Libya is too uncertain a partner and what about Amin?³ Every time he insults us we throw out another of his diplomats. He is now down to three.

Rush: The Arabs seem to be subsidizing votes in the UN, but what good will that do them?

Secretary: We were tempted to invite LDCs from the beginning but decided that we could not get the high degree of consumer cooperation we need if the LDCs were present from the beginning. There is no disagreement about the next phase.

Von Hoffman: It is important not to let the impression grow that aid is linked to oil. The Arabs will be able to buy off the LDCs.

Secretary: If Congress gets the idea that these new price levels are being forced on us with the cooperation of LDCs, Congress will eliminate all aid. All aid amounts to $2 billion today but the LDCs are going to have to pay out $29 billion this year. Aid will be impossible after a year or two. To have some idea of the impact of what these price increases have done: if you had abolished the IBRD and rolled prices back to September levels, the LDCs would be better off than they are today. The Arabs have done that and yet these greater consequences seem to be hardly noticed by the LDCs.

The problem is 15 times greater than previous aid levels (2 billion versus nearly 30 billion).

Von Hoffman: The LDCs cannot pay. The new prices are unworkable. What they demonstrate is that no country can solve this problem alone. Certainly not Europe.

Rush: Bilateral barter deals will not solve the problem either.

Secretary: Our analysis shows that the French may be able to afford this sort of thing for another year but they can’t afford it for longer. Even if they are successful for a short time their neighbors will suffer.

Von Staden: What about the Shah?

Secretary: I don’t understand his position at all. He is the only world statesman in the area. These prices will in the end ruin the producers as well. Constant devaluations are no solution. If Yamani gets his way and production is cut further, there will be an even more serious crisis.

Rush: If the Arabs industrialize subversion will grow.

Secretary: That’s what they are doing in Saudi Arabia, building for a revolution.

Von Hoffman: They have all these billions of dollars and yet there is no commercial teletype in Saudi Arabia.

Bahr: Why can’t they invest their money in the US?

Secretary: I don’t think they will to any great extent, but if they would we could let them invest here and then expropriate their assets. That’s really our secret plan. I hope you will go back and convince your colleagues of the absolute necessity of achieving results at this conference.

[The luncheon ended with discussion on German football and the coming World Cup matches.]

1. Source: Library of Congress, Manuscript Division, Kissinger Papers, Box CL 142, Geopolitical Files, Germany FRG, Chron Files, Jan–Feb 1974. Secret; Nodis. Drafted on February 2 by Hartman. Brackets are in the original.
2. Telgram 1376 from London, January 30. (National Archives, RG 59, Central Foreign Policy Files)
3. Idi Amin, President of Uganda.