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

94. Memorandum From Robert Hormats of the National Security Council Staff to the President’s Assistant for National Security Affairs (Kissinger)¹

Washington, October 20, 1971.

• SUBJECT
  • Oil Companies Faced with New OPEC Negotiating Demands

At a meeting of an Organization of Petroleum Exportation countries (OPEC) held last month in Beirut, the member nations called for negotiations with the oil companies on:

• —Compensation to the producing countries for loss in income caused by recent changes in currency values.
• —Acquisition by producing countries of a participating share in the production activities of the concessionary companies.²

Issues

The companies, claiming that the contracts made with the producing countries in Tehran and Tripoli last year³ guaranteed 5 years of stability, are likely to resist both OPEC demands. However, it is true that, because the price of a barrel of oil is denominated in dollars and the value of the dollar vis-à-vis major world currencies such as the mark, yen, and the pound has decreased, the oil producing countries receive less dollars in terms of other currencies than previously. Thus the oil companies might sell OPEC produced oil in, say, Germany, receive marks, sell marks for dollars (more of which can now be bought per mark than before August 15) and pay dollars to the producing countries. As the result the companies realize windfall profits. A satisfactory solution for handling this problem can probably be worked out.

The question of participation, which is more vital to the companies in that it is tantamount to forced nationalization of a share of their operations against minimal compensation financed by foregone profits, will present a more difficult problem on which a confrontation is possible.

In any such confrontation, the companies have more leverage than last year. Fuel stocks in Europe are higher. The tanker shortage has eased. In addition, the producing countries know that the companies are the only viable instruments for marketing oil in either Western Europe or Japan, and the nationalization effort will be extremely unprofitable unless the companies agree to market the oil.

Future Scenario

The OPEC countries are not united in tactics. The more radical states such as Libya might threaten nationalization of all oil interests, and will probably drive the hardest bargain. As in the negotiations earlier this year, it will be difficult for Iran, Kuwait, and Saudia Arabia to hold a moderate line if Libya secures all its demands.

The first round of negotiations may settle the monetary question but will probably end inconclusively in the participation problem. On the latter issue it appears as if a prolonged set of negotiations will take place. A crisis similar to that we faced earlier in the year is a distinct possibility.

1. Source: National Archives, Nixon Presidential Materials, NSC Files, Box 367, Subject Files, Oil 1971. No classification marking. Sent for information. A handwritten notation on the memorandum indicates Kissinger saw it. This memorandum was based on an October 18 memorandum from Eliot to Kissinger, which provided more detailed information on the new OPEC negotiating demands. (Ibid.)
2. These OPEC demands were analyzed in INR Intelligence Note RECN–22, “Oil: OPEC Demands Participation, New Price Increases,” October 13. (Ibid., RG 59, Central Files 1970–73, PET 3 OPEC) Additional information on OPEC Resolutions XXV.139 and XXV.140 of September 22, on parity and participation respectively, is attached to Saunders’ copy of RECN–22. (Ibid., Nixon Presidential Materials, NSC Files, Box 1271, Saunders Files, Middle East Oil, 2/1/71–12/31/71)
3. The Tehran agreement is described in Document 86 and the Tripoli agreement is described in Document 88.