204. Note From Henry Owen of
the National Security Council Staff to the President’s Assistant for
National Security Affairs (Brzezinski)1
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 connection
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 possible counter-measures;
let me talk to Dick Cooper and
Tony Solomon and I’ll be back
to you about this.2
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 production.
[Page 642]
Tab A
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 Staff4
Washington, May 14, 1979.
SUBJECT
- Contingency Plans for Coping with or Countering Severe
OPEC/OAPEC Actions
We have three contingency plans for absorbing a serious interruption
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
conduct a long-term embargo. Nor do we have a contingency plan for
retaliating against a further radical price increase by OPEC or some of its members.
Supply Interruption
The IEP scheme provides for sharing
the burden of either a targeted embargo or a random interruption of
production. It may be triggered 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 consumption average. The IEP has been simulation-tested and its
international 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 framework of USG participation is in place: the
third of three Energy Department regulations required to carry out
mandatory allocations, refinery controls and import-restraints was
published today. OMB now is
reviewing an Energy Department legislative package including
extension 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
[Page 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
limited 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, rationing 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 suggestions 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 populations, 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 consequence as a US
embargo, simply shifting the business to the countries that won’t
join us in concerted price reprisals. An export price surcharge in
the form of a tax on US exports is
unconstitutional; no manageable 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 Palestinian-Jerusalem issues by early in 1980.
You may wish to commission a limited group review of contingency
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 peace process.
[Page 644]
Tab B
Memorandum by James
Cochrane and Henry
Owen of the National Security Council
Staff5
Washington, May 15, 1979.
SUBJECT
- 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 producing 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 imposing a tax on some of the Summit countries’ exports to
OPEC countries, 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. Indeed, 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, pushing 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 involves costly investments. If we can’t
overcome these objections, there is little prospect of devising a
successful long term oil price strategy.
