Foreign Relations of the United States, 1969–1976, Volume XXXVII, Energy Crisis, 1974–1980

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

Washington, July 26, 1976.

SUBJECT

• NSSM 237 and US Energy Policy

Developing the response to NSSM 237 has been an unsettling process,² primarily because it reveals the sorry state of US domestic energy policy and its very dubious foundation in Project Independence. In short, there appears to be grounds for a complete rethinking of US energy policy.

The early stages of the NSSM study brought out again what we have known all along—that while FEA’s ambition to achieve “energy independence” may be useful as a rhetorical goal, it is neither an attainable objective nor a basket in which we should put many of our eggs. FEA’s import targets are simply unreachable, at any reasonable cost, even under FEA’s extremely optimistic assumptions about our ability to conserve energy and increase production from alternate sources. In the course of the study, FEA revised its likely import requirement figures upward considerably, but they are still 10%–20% lower than those of most other analysts. When somewhat more realistic import requirements are used, it becomes evident that over a 10–15 year period energy independence has almost no meaning for us in terms of decreasing our vulnerability to supply interruptions; we are going to remain very vulnerable for the foreseeable future. Perhaps more important in the short run, we will remain politically vulnerable through the irreversible dependence of our industrialized allies no matter how independent the United States may become. (On the price side, however, reducing demand does make it more difficult for the OPEC cartel to set prices, since it increases the excess of supply over demand.)

As meetings have progressed toward the policy level, it has also become increasingly apparent that there are questions of the most basic sort about our oil policy for which we do not have adequate answers, and that as a result our energy policy is built on what are at best unfounded assumptions. The major assumption was that an international energy policy should be based on the understanding that domestically we would be making steady progress toward reduced dependence, which in turn would decrease our vulnerability and indirectly that of our allies, and exert downward pressure on prices. FEA has now openly admitted that progress toward independence is a questionable proposition at best and that they do not know whether it is in our interest to see oil prices rise or fall. FEA is now telling us that we on the international side should work through our analysis and tell them how to revise their Project Independence blueprint.

Furthermore, it has become apparent that purely economic analysis is inadequate to the study. The NSSM analysis shows that the oil-producing countries will maintain their ability to set prices, at even higher levels, as long as the producers with small populations, and therefore limited capacity to absorb revenues, are willing to provide financial support—either directly or by restricting production—to those producers which need or believe they need greater income. Whether they will continue to do this is a political rather than economic question.

The implications are sweeping. If everything we do economically is at once uncertain, unlikely to produce any results, and at the margin of political events, then there are a number of political actions which we will have to consider more seriously. One key question is how we can induce moderation in OPEC cartel members and build relationships which avoid price or supply disruption. We are not now examining this systematically. (Accepting increased vulnerability may also raise the cost of holding to our preferred—and frequently negatively perceived—positions in the North-South dialogue, and argue instead for a more accommodating U.S. position.)

It would be useful to you to confront Zarb with a number of key questions so that he can either persuade you that the problems do not exist or agree that we must trace through their implications. Such questions would center on the issue of whether we must now adjust our international policy to the probability that our dependence in imports will increase over the next decade or more. Then we must decide whether the thrust of U.S. policy should shift to a more calculated policy of encouraging the oil producers to exercise restraint, adopting a more accommodating view on commodity issues, diversifying our energy sources on a priority basis, building strategic reserve stocks more rapidly (which, as you know, I believe to be our best economic means of coping with, and deferring, an embargo), or more actively seeking agreements to reduce the possibility of arbitrary supply and price action.

1. Source: Ford Library, National Security Council, Institutional Files, Box 41, NSSM 237—U.S. International Energy Policy (1). Secret; Eyes Only. Sent for information.
2. See Documents 93, 99, and 101. Scowcroft wrote in the margin: “But what do we do about the study? Use it as a vehicle to surface those questions?” Hormats responded in an August 9 memorandum to Scowcroft: “The answer is yes. We are now addressing both the types of changes which might be necessary to strengthen our domestic attempts to reduce oil imports and the international issues of price and security based on the assumption that we will be more dependent on imports than we had earlier anticipated in view of the optimistic forecasts of Operation Independence.” He added: “Everyone now appears satisfied that the new orientations of the study are more consistent with the policy needs of the USG over the next several years.” (Ford Library, National Security Council, Institutional Files, Box 41, NSSM 237—U.S. International Energy Policy (1))