MEMORANDUM

2701

NATIONAL SECURITY COUNCIL

INFORMATION

April 25, 1975

MEMORANDUM FOR: SECRETARY KISSINGER

FROM: ROBERT HORMATS AH

SUBJECT: Followup to Consumer/Producer
Preparatory Conference

Based on the experience of the prepcon, it is clear that for both political and economic reasons the US must more seriously address issues of raw materials and development. From an economic point of view, the US will be in a weaker position to secure favorable arrangements when our economy begins to achieve higher rates of growth, generating increased demand for raw materials and upward pressure on prices, particularly oil where several key producers are eager for another big increase. Politically, it is clear that the solidarity among producers and between producers and developing countries is strong enough to overcome their differences. This solidarity is very likely to continue, as is the basic policy thrust of opposition to the US, unless and until we find a means of meeting some of their basic concerns.

Several key points emerged from the abortive preparatory conference in Paris:

- Cohesion between the oil producers (including those with such divergent views as Algeria, Saudi Arabia and Iran) was extremely strong as was that between the oil producing countries and the participating developing countries.

- The fact that a number of conferences involving OPEC and LDC's had previously taken place--and had reached agreement at the Chief of State level on "solemn declarations"--provided a strong precedent and an intellectual basis as well as an important political rallying point for these countries at the prepcon. Some of them, although uncomfortable, felt bound by these previous positions.

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-- Most of the OPEC delegations appeared to have little negotiating flexibility. They were either unwilling or unable to deviate significantly from previously adhered to "declarations" or their instructions, even when doing so might have enabled them to win considerable concessions from the industrialized countries.

-- The ultimate objective of the OPEC countries was, apparently, to achieve a political victory--obtaining a commitment from the consumers to discuss energy, raw materials and other development issues on an equal basis, if not necessarily simultaneously. This would have diverted the attention of the full conference from the problems of energy and have strengthened political solidarity between, and Algerian leadership over, OPEC and other Third World countries.

-- The developing countries were willing to adhere to the OPEC line--despite the adverse impact on them of higher energy prices--because of a long-standing, politically powerful sentiment of "Third World solidarity," because OPEC was willing to support their desires for inclusion of other raw materials and development issues on the agenda, and because they were unwilling to incur OPEC wrath, seeing the oil producers as more likely future sources of economic benefit than the industrialized countries.

-- The consuming countries (except France), under strong pressure from the OPEC and developing countries, became more united. Clearly the months of work in the IEA and the patterns of cooperation developed therein had borne significant fruit. There were no major signs of deviation on such issues as de-emphasis on energy, indexation, investment guarantees, etc.

-- Our previous bilateral contacts with producers, and the close contacts maintained with them by the US delegation in Paris, helped diffuse any possibility of a confrontation and contributed to a surprising degree of cordiality.

The prevailing view in Paris among the developed country delegations was that further strengthening of IEA cooperation was necessary to defend common interests and that with the failure of the "multilateral" approach, as embodied in the prepcon, additional emphasis on bilateral relations between consumers and individual producing countries was likely.

Neither course of events is, at least in the short term, inimical to US interests. Any additional incentives to stronger cooperation in the IEA are helpful; and the groundwork has been prepared, through our joint economic commissions, for our own bilateral relationships with at least two of the major producing countries--although substantially closer bilateral economic ties need to be developed with Venezuela, Nigeria, and Indonesia.

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But there are serious longer-term problems resulting from the failure of the conference. Many industrialized countries were able to cooperate effectively in the IEA because they could convince domestic constituencies sensitive to implied confrontation with producers that the IEA was not confrontational but was in part designed to facilitate an eventual conference between producers and consumers. If there are no prospects for such a conference, those opponents of consumer cooperation might weaken domestic support for the IEA in weaker nations by attacking it as confrontational and claiming that adherence to the IEA "position" caused the breakdown of the consumer/producer prepcon. The producers have the ability to exert considerable economic pressure toward the same end, and will be more apt to do so since the IEA might appear still more confrontational to them as prospects for producer-consumer cooperation fade. The US might also be criticized, however unfairly, as having sabotaged the consumer/producer dialogue and forced other consumers to go along with the treachery. A resurgence of emphasis on bilateralism would be a major problem for the US not because we are unable to play this game but because the resulting devisiveness might weaken relationships among industrialized countries. We have long opposed such unbridled competition among the OECD countries for just this reason.

With respect to developed-developing country relations, the future is likely to be rife with confrontation. The Third World has put enormous political emphasis on the raw material issue. Objectives range from the desire for price stability, to a wish to utilize commodity arrangements to bring about a transfer of resources from developed to developing countries, to an attempt to obtain a larger percentage of ownership and domestic processing capacity. While many in the USG argue strongly against commodity arrangements on economic grounds--and it is true that there are a number of difficult technical questions--the desirability of diffusing political confrontation requires our taking a serious look at the commodity issue. Moreover, the upsurge in oil prices has produced overwhelming public and Congressional demand for a means to stabilize the price of this vital commodity--an idea which is not consistent with the food market ideology. While we clearly cannot give all that the Third World countries want, there are likely to be areas in which American concessions can be made without harming US interests, and areas where greater stability of prices and supplies would actually be supportive of our interests. It is possible, although very doubtful, that some arrangement could be worked out which would result in a lowering of oil prices. At any rate, it is imperative that between now and the Seventh Special Session of the General Assembly, the US government have a forthcoming position on, or at least be engaged in serious discussions about, specific commodities. Such efforts, in the proper fora, would enable us to maintain greater control

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over events, permit a dialogue with countries having a specific interest in commodities, reduce the influence of countries which merely wish to recite political rhetoric, and strengthen our ability to resist both radical proposals and efforts to discuss raw materials on an equal footing with energy in any future consumer/producer meeting. Our recent initiative on coffee was a psychologically important step in the right direction.

We also need to move quickly to follow up your World Food Conference initiatives. I have sent you a proposal on reserves which, although having some rough edges, is responsive to the needs of the developing countries and--unlike the two options with which you have been presented earlier-- has a reasonable chance of securing broad support within the bureaucracy and the country at large. Your food speech will give you an opportunity--either by articulating this plan or another--to demonstrate a responsible US position vis-a-vis the LDC's with respect to our main export commodity--food.

A strengthening of bilateral ties with key non-Arab oil exporters and mineral producers is also needed. Primary candidates for attention are Brazil, Venezuela, and Mexico in Latin America; Nigeria, Zaire, and Zambia in Africa; and Indonesia and Malaysia in Asia. Latin America is especially important. The Paris conference demonstrated clearly the sad state of our relationship with Venezuela. Attention to these countries could serve to make them more reliable suppliers, or at least minimize their hostility and the possibility that they will collude with other countries in promulgating disruptive price-setting arrangements.

The above measures could significantly strengthen the US political position, and put us into a posture more conducive to a reasonable dialogue on DC/LDC issues. Concurrently, we must begin to clearly define--in cooperation with IEA countries and the OPEC and LDC moderates (Iran and Saudi Arabia)--the best way of reconvening a prepcon which can lead to the results we seek. If we can agree to a meeting on "energy and directly related issues," followed up by a separate meeting on raw materials and development questions (with the same general structure of the prepcon--i.e., 20-24 participants representing DC's and LDC's--but not necessarily the same countries) we might be able to achieve a consensus which would result in serious discussion of energy.

As a first step we would attempt to develop a consensus in the IEA that we would resume the prepcon only if we could reach agreement with the OPEC countries in advance to have a conference centered on energy, an agenda free of prejudiced portrayals of issues for discussion, and attendance of the IEA as an observer. If the OPEC countries agree to this, the

prepcon could reconvene in July, with a full energy conference to take
place in September. To set the stage for a raw material conference,
perhaps in October or November--after the results of the Special Session
of the General Assembly had been digested--we would begin to develop
more solid cooperation among OECD countries on raw material issues.
You could take the initiative at the OECD Ministerial; this could be followed
up with a smaller working group building on the work already being done
in the OECD on commodities. With such a framework, developed countries
could more easily decide on the commodities which might lead themselves
to agreements, how to proceed in developing such, and how broader
ideological issues relating to commodities are to be dealt with.

["TELEGRAM INCOMING", "[Lc]", "Page 2 Control 3539", "CONFIDENTIAL", "AMEMBASSY BONN", "DECLASSIFIED", "CHALLENGE TO INDUSTRIAL CIVILIZATION SINCE THE SECOND WORLD\nWAR.", "IN THE MONTHS SINCE WE HAVE PROVIDED OURSELVES WITH THE\nMEANS TO OVERCOME THAT CHALLENGE. DESPITE GREAT DISPARITIES\nIN OUR COUNTRIES' ENERGY ENDOWMENT AND POTENTIAL, WE\nHAVE FOUND A WAY TO SERVE THE INTERESTS WHICH WE ALL SHARE.", "WHAT WE HAVE ACHIEVED SINCE THE WASHINGTON ENERGY", "CONFERENCE REPRESENTS ONE OF THE MAJOR SUCCESS STORIES OF\nCOOPERATION BETWEEN THE INDUSTRIALIZED DEMOCRACIES IN THE\nPAST DECADE.", "-- TO PROTECT AGAINST EMERGENCIES WE ESTABLISHED\nSHARING PROGRAMS TO COPE WITH NEW EMBARGOES, AND CREATED\nNEW MECHANISMS TO PROTECT OURSELVES FROM FINANCIAL DISRUP-\NTION. WE CAN BE SATISFIED WITH OUR ACHIEVEMENTS IN THESE", "AREAS.", "CONFIDENTIAL"]

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-- TO TRANSFORM THE MARKET CONDITIONS FOR OPEC OIL

BY LESSENING OUR VULNERABILITY TO PRICE AND SUPPLY MANIPULATION, WE SET CONSERVATION GOALS AND REACHED PRELIMINARY AGREEMENT ON THE DEVELOPMENT OF ALTERNATIVE SOURCES.

-- AND FROM THE BEGINNING WE TOOK AS OUR ULTIMATE PURPOSE A NEW RELATIONSHIP WITH THE OIL PRODUCERS WHICH WOULD TAKE INTO ACCOUNT THE NEEDS AND ASPIRATIONS OF BOTH CONSUMERS AND PRODUCERS.

THE MEANS TO OVERCOME THE CHALLENGE ARE AT HAND, BUT WE HAVE NOT YET FULLY GRASPED THEM. AS OUR CONSERVATION CAME TO THE POINT OF DECISION, WE HAD EACH TO TURN FROM THE ENERGY PROBLEM TO THE SHARP CHALLENGE OF THE MOST SERIOUS RECESSION IN TWO GENERATIONS. THE RECESSION COMBINED WITH A WARM WINTER

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AND STOCK DRAWDOWNS, IS ENABLING US TO MEET OUR CONSERVATION GOALS FOR THIS YEAR, AND MORE. BUT IT HAS BLUNTED AND DELAYED, IN AMERICA AND ELSEWHERE, THE DRIVE TO ADOPT MEDIUM AND LONG-TERM CONSERVATION MEASURES AND ALTERNATIVE SUPPLY POLICIES NEEDED TO LESSEN OUR VULNERABILITY.

FOR THE MIDDLE-TERM, WE MUST FACE THE POSSIBILITY THAT OPEC'S MARKET POWER MAY GROW. DURING THE CURRENT DECLINE IN DEMAND FOR OIL, THE OIL PRODUCERS HAVE APPORTIONED THE PRODUCTION CUTS NECESSARY TO KEEP SUPPLY IN LINE WITH DEMAND, LEAVING THE BASIC PRICE STRUCTURE INTACT. AS GROWTH RESUMES IN THE INDUSTRIAL ECONOMIES, AND WITH A NORMAL OR COLD WINTER, PRODUCERS WILL ENJOY A SOMEWHAT STRONGER MARKET THESE TWO YEARS. INDEED, WE ALREADY HAVE BEEN WARNED OF NEW PRICE INCREASES. THESE WOULD BE ECONOMICALLY

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UNJUSTIFIED, FOR MUCH SURPLUS PRODUCTION CAPACITY IS

AVAILABLE, INFLATION IS SLOWING, AND PRICES ALREADY ARE AT

HISTORIC HIGHS. YET, WE CANNOT DENY THAT THE PRODUCERS

MAY HAVE THE MARKET POWER TO ENFORCE SUCH INCREASES OVER

THE SHORT AND EVEN MID-TERM, IF WE DO NOT ACT NOW.

FOR THE LONGER-TERM, WE MUST REALIZE THAT THE COST TO

OUR ECONOMIES WILL GROW IF OPEC RETAINS THE POWER TO SET

PRICES. NOW WE ARE PAYING OUT ONLY A FRACTION OF OPEC'S

INCREASED INCOME IN GOODS AND SERVICES: THE REST BENEFITS

US AS INVESTMENT IN OUR CAPITAL MARKETS. BUT THE REAL

COST WILL GROW RAPIDLY AS OPEC'S IMPORTS MOUNT. IF

OPEC'S PRICE STRUCTURE HOLDS, BY THE END OF THE DECADE

OIL WILL COST US AT LEAST ONE PERCENT OF OUR NATIONAL

OUTPUT MORE PER YEAR THAN IF THE CARTEL DID NOT EXIST.

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AND HIGH PRICES WILL SLOW OUR GROWTH IN THIS PERIOD.

THESE ARE ENORMOUS COSTS TO ACCEPT AT A TIME WHEN WE ARE
UNCERTAIN OF RESTORING GROWTH AND CANNOT MEET OUR
SECURITY AND SOCIAL NEEDS FULLY. THE FACT THAT THESE
COSTS BY THEN WILL BE UNTRACEABLE TO OIL--indeed WILL BE
DISGUISED AS EXPORT GAINS--MAKES THEM NONE THE LESS REAL.

AND THROUGHOUT THIS PERIOD, IF THE CARTEL HOLDS, OUR
ECONOMIES WILL REMAIN VULNERABLE TO MANIPULATIONS; AND
THE POLITICAL COSTS OF THAT POTENTIAL SUBJUGATION WILL
MOUNT.

WE MUST USE THIS MEETING TO RECOMMIT OURSELVES TO THE
CONSERVATION EFFORT THAT WILL PROTECT US WHEN THE ECONOMIC
UPSWING BEGINS. AND WE MUST TAKE THIS OPPORTUNITY TO
STRENGTHEN OUR ALTERNATIVE SOURCE POLICY, PARTICULARLY

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IN THE AREA OF NUCLEAR POWER AND RESEARCH AND DEVELOPMENT,

SO AS TO CREATE CONDITIONS WHICH WILL PERMIT THE ULTIMATE

RESTORATION OF EQUILIBRIUM PRICES.

AND WE MUST USE THIS MEETING TO REORIENT OUR APPROACH

TO THE PRODUCERS.

CONSERVATION

THE MOST CRITICAL YEARS OF VULNERABILITY ARE 1976 AND

1977. THE RECESSION HAS ENABLED US TO SURPASS OUR 1975

CONSERVATION GOALS, AND THE PRESSURE IS NOW ON OPEC.

THIS IS THE RIGHT RESULT--FOR THE WRONG REASON. BUT

BETWEEN NOW AND 1978 ONLY CONSERVATION CAN PREVENT OUR

VULNERABILITY TO A NEW OIL INTERRUPTION FROM INCREASING.

AFTER THAT, WE CAN EXPECT PETROLEUM FROM THE NORTH SEA,

ALASKA AND SUCH NEW PRODUCERS AS MEXICO AND THE PEOPLES'

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REPUBLIC OF CHINA TO LESSEN THE PRESENT PATTERN OF VULNERABILITY.

THE UNITED STATES REMAINS COMMITTED TO THE GOAL

PRESIDENT FORD SET OF 2 MILLION BARRELS A DAY SAVINGS BY

THE END OF 1977. THE ACTIONS THE PRESIDENT HAS JUST

ANNOUNCED -- PHASED DECONTROL OF OIL AND AN ADDITIONAL

IMPORT FEE -- WHEN ADDED TO MEASURES ALREADY TAKEN AND IF

VALIDATED BY THE CONGRESS--WILL YIELD 2 MILLION BARRELS A
DAY SAVINGS IN IMPORTED OIL BY THE END OF 1977. BY 1985,

THESE SAME MEASURES WOULD YIELD OVER 4 MILLION BARRELS A

DAY. WE BELIEVE THE IEA SHOULD CONTINUE TO IMPLEMENT

BALANCED PROGRAMS OF CONSERVATION IN WHICH THE UNITED

STATES--BECAUSE IT HAS HALF THE OIL CONSUMPTION--WILL

COMMIT ITSELF TO HALF THE SAVINGS.

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ALTERNATIVE SOURCES

MOST OF OUR COUNTRIES WILL IMPORT SOME, EVEN MUCH OF
THEIR ENERGY, INDEFINITELY. BUT THE TERMS OF THESE IMPORTS,
AND OUR VULNERABILITY TO SUPPLY AND PRICE MANIPULATION,

WILL DEPEND CRITICALLY ON WHETHER OPEC RETAINS ITS ABILITY
TO SET PRICES. IF IT DOES, IT WILL BY THAT VERY FACT HAVE

THE POWER TO ENFORCE A NEW EMBARGO. IF IT DOES NOT, A
NEW EMBARGO WOULD BE LESS EFFECTIVE, OR INEFFECTIVE.

IEA COUNTRIES THEREFORE MUST AIM TO PRODUCE ENOUGH
ENERGY WITHIN THEIR OWN ECONOMIES TO REDUCE OPEC'S MARKET
TO THE POINT WHERE IT CAN NO LONGER EFFECTIVELY DISTRIBUTE

PRODUCTION CUTS.

WHERE THAT POINT IS WILL DEPEND ON THE RAPIDITY WITH
WHICH INDIVIDUAL PRODUCERS INCREASE INPUTS AND ON THE

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WILLINGNESS OF COUNTRIES WITH LOW IMPORT NEEDS TO TAKE

MORE THAN THEIR SHARE OF PRODUCTION CUTS. BUT CLEARLY

IT SHOULD BE SUBSTANTIALLY BELOW THE PRESENT OPEC MARKET

OF 25 MILLION BARRELS A DAY, A LEVEL TO WHICH THE PRODUCERS

HAVE ADJUSTED EFFECTIVELY.

WHETHER THAT TARGET CAN BE REACHED IN THE NEXT TEN

YEARS ABOVE ALL WILL DEPEND ON THE DEVELOPMENT OF OIL, GAS

AND NUCLEAR POWER. ULTIMATELY, RESEARCH AND DEVELOPMENT

OF NEW FUELS WILL BECOME THE DOMINANT FACTOR.

MINIMUM PROTECTED PRICE

THE PURPOSE OF THE MINIMUM PROTECTED PRICE MECHANISM

IS TO PROVIDE SOME ASSURANCE THAT THE CONVENTIONAL ENERGY

INVESTMENTS REQUIRED IN THE NEXT TEN YEARS TO REDUCE OPEC'S

MARKET WILL BE MADE.

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WE CAN NOW ESTIMATE COST RANGES FOR THE MAJOR INVESTMENTS REQUIRED. WE KNOW THAT INVESTMENTS IN NORTH SEA OIL AND GAS, NEW ALASKAN NORTH SLOPE OIL, THE U.S. OUTER CONTINENTAL SHELF, AND NUCLEAR POWER EVERYWHERE WILL BE UNDERTAKEN AT PRESENT OR SOMEWHAT LOWER PRICES. BUT THEY MAY BE DELAYED, OR CANCELLED, IF OIL PRICES WITHIN OUR ECONOMIES FALL OR SEEM LIKELY TO FALL TO SUBSTANTIALLY LOWER LEVELS. ENTREPRENEURS WILL BE WILLING TO TAKE SOME OF THE PRICE RISK, AND GOVERNMENTS DO NOT HAVE TO COVER IT ALL. BUT THE PROTECTION AFFORDED SHOULD BE SUFFICIENT TO ENCOURAGE THE MAJOR CONVENTIONAL ENERGY INVESTMENTS NEEDED TO REDRESS THE MARKET BALANCE.

NUCLEAR POWER

NUCLEAR POWER REPRESENTS OUR MOST IMPORTANT AND

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PROMISING NEAR TERM SUBSTITUTE FOR THE INEVITABLY
DECLINING SUPPLY OF FOSSIL FUEL.

COLLECTIVELY, IEA COUNTRIES RELY HEAVILY ON NUCLEAR
POWER TO ACHIEVE GREATER SELF-SUFFICIENCY. BY 1985 THE
EUROPEAN COMMUNITY HOPES THAT NUCLEAR STATIONS WILL GENE-
RATE ABOUT ONE-QUARTER OF ITS ELECTRICITY; JAPAN A THIRD;
THE U.S. PERHAPS A THIRD.

BUT THERE ARE MAJOR CHALLENGES ASSOCIATED WITH THE
ORDERLY, SAFE AND PRUDENT INTRODUCTION OF THIS IMPORTANT
NEW TECHNOLOGY, INCLUDING:

--LACK OF CONFIDENCE THAT SUFFICIENT URANIUM AND

THE FACILITIES FOR ENRICHING IT WILL BE AVAILABLE WHEN
NEEDED;

-- A SHORTAGE OF CAPITAL TO BUILD REACTORS;

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-- UNCERTAINTY OVER WHETHER, WHEN, AND UNDER WHAT CONDITIONS REACTOR FUELS WILL BE REPROCESSED AND RECYCLED INTO THE NUCLEAR ENERGY SYSTEM; AND

-- RESISTANCE BY THE PUBLIC AND LEGISLATORS TO THE WIDESPREAD CONSTRUCTION OF NUCLEAR FACILITIES OF ALL TYPES.

WITHIN THE IEA IT IS ESSENTIAL THAT WE WORK TO OVERCOME THESE PROBLEMS. WE SHOULD:

-- ENSURE THAT NEEDED URANIUM ENRICHMENT FACILITIES ARE CONSTRUCTED ON SCHEDULE. IN THIS REGARD, THE PRESIDENT ASKS ME TO ANNOUNCE THAT TO SERVICE EXISTING AND EXPECTED ORDERS STARTING IN 1982, THE UNITED STATES GOVERNMENT WILL CONSTRUCT A 5 MILLION SWU ADDITION TO EXISTING GASEOUS DIFFUSION PLANTS. AS A PARALLEL PROGRAM THE UNITED STATES WILL LOOK TO THE CONSTRUCTION OF COMMER-

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CIAL CENTRIFUGE PLANTS BY PRIVATE ENTERPRISE. THREE

SUCH PLANTS ARE IN THE PLANNING STAGE AND EXPECTED TO
BE OPERATIONAL BY THE EARLY 1980'S. IT WILL BE THE POLICY
OF THE UNITED STATES GOVERNMENT TO ENCOURAGE FOREIGN PARTI-
CIPATION IN BOTH THESE ENTERPRISES.

-- DEVELOP AGREED ESTIMATES OF THE FUTURE DEMAND AND
SUPPLY OF FUEL, INCLUDING ASSESSMENTS OF THE AVAILABILITY
OF URANIUM RESOURCES;

-- PROJECT THE CAPITAL REQUIREMENTS OF THE NUCLEAR
SECTOR FOR THE NEXT TEN YEARS AND GIVE URGENT CONSIDERA-
TION TO WAYS THAT OUR GOVERNMENTS, ACTING BOTH INDIVIDUALLY
AND COOPERATIVELY, CAN ASSIST IN MEETING THESE REQUIREMENTS.

-- EVALUATE THE ECONOMIC NECESSITY, PLANT REQUIRE-
MENTS, AND SAFETY IMPLICATIONS OF PLUTONIUM REPROCESSING
AND STORAGE. WE NEED TO ASSURE THE TIMELY AND ORDERLY

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EVOLUTION IN THIS IMPORTANT AREA.

- DEVELOP BALANCED EDUCATIONAL PROGRAMS TO BRING PERCEPTIONS OF THE RISKS AND BENEFITS OF NUCLEAR ENERGY IN LINE WITH REALITY. THESE MUST BE REINFORCED BY CONTINUED INTENSIVE EFFORTS ON OUR PART TO IMPROVE THE SAFETY AND SECURITY OF NUCLEAR MATERIALS AND EQUIPMENT.

IN PROPOSING THIS EXPANDED PROGRAM OF WORK IN THE NUCLEAR FIELD, WE ARE FULLY AWARE THAT SEVERAL OF THE TECHNICAL ISSUES INVOLVED ARE ALREADY BEING DEALT WITH BY OECD'S NUCLEAR ENERGY AGENCY. THAT WORK SHOULD CONTINUE; THE IEA SHOULD NOT AND NEED NOT DUPLICATE IT.

FINANCING

ACCESS TO FUNDING IS LIKELY TO BE THE CRITICAL

CONSTRAINT IN THE YEARS AHEAD. EACH COUNTRY MUST DECIDE

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WHETHER THE ACHIEVEMENT OF ADEQUATE ENERGY SUPPLIES IN OUR OWN ECONOMIES JUSTIFIES PREFERENTIAL ACCESS TO CAPITAL MARKETS. IN VIEW OF PROSPECTIVE CAPITAL SHORTAGES THROUGH THE INDUSTRIAL ECONOMIES, LARGER QUESTIONS OF ECONOMIC AND SOCIAL POLICY ARE INVOLVED.

MEANWHILE WE SHOULD PROCEED TO PUT IN PLACE THE AGREED IEA FRAMEWORK FOR PROJECT-BY-PROJECT COOPERATION. AS NEEDED AND DESIRED, WE CAN USE THIS FRAMEWORK TO PROVIDE JOINT GUARANTEES OR OTHER ASSISTANCE TO THE FINANCING OF LARGE PROJECTS.

ENERGY RESEARCH AND DEVELOPMENT

LOOKING BEYOND THE EARLY YEARS OF THE NEXT DECADE, IT IS CLEAR THAT NEW, NON-CONVENTIONAL ENERGY SOURCES MUST BE MADE AVAILABLE TO MEET A GROWING PROPORTION OF OUR ENERGY DEMAND. IT IS IN DEVELOPING THESE NEW SOURCES

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THAT IEA'S COOPERATIVE PROGRAM MAY MAKE ITS MOST IMPORTANT
AND LASTING CONTRIBUTION.

OVER THE PAST YEAR-AND-A-HALF IEA MEMBER COUNTRIES
HAVE UNDERTAKEN EXPANDED NATIONAL PROGRAMS IN ENERGY
RESEARCH AND DEVELOPMENT. IN THE UNITED STATES, FOR
EXAMPLE, THE ENERGY RESEARCH AND DEVELOPMENT AGENCY WILL
SPEND MORE THAN TWO BILLION DOLLARS IN THE FISCAL YEAR
BEGINNING NEXT MONTH. ERDA'S PROGRAM INCLUDES EMPHASIS
ON INCREASING THE EFFICIENCY WITH WHICH ENERGY IS GENERATED
AND USED; ON INCREASED ENERGY PRODUCTION THROUGH THE RECOVERY
OF MORE OIL AND MORE USE OF COAL; AND ON THE CONVERSION OF
COAL TO SYNTHETIC OIL, GASOLINE, AND NATURAL GAS.

THESE ELEMENTS OF OUR DOMESTIC RESEARCH AND DEVELOPMENT
EFFORT CAN HAVE A MAJOR EFFECT ON ENERGY USE AND PRODUCTION
IN THIS CENTURY. BUT FOR THE PERIOD BEYOND THE YEAR 2000,

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THERE ARE JUST THREE KNOWN POTENTIAL SOURCES OF ENERGY

THAT ARE, FOR ALL PRACTICAL PURPOSES, INFINITE. THEY ARE

THE BREEDER REACTOR, NUCLEAR FUSION, AND SOLAR ENERGY.

ACCORDINGLY, THESE HAVE A HIGH PRIORITY IN THE U.S. PROGRAM.

SINCE EACH CONVERTS TO ELECTRICITY, WE WILL DEVOTE SIGNIFICANT

FICANT RESOURCES TO RESEARCHING METHODS TO ACHIEVE MORE
EFFICIENT STORAGE OF ELECTRICITY, AND TO LOOKING AT THE
PROBLEMS AND OPPORTUNITIES OF ADAPTING A NATIONAL

TRANSPORTATION SYSTEM TO ELECTRICITY.

IN THE IEA, WE HAVE DECIDED TO LINK OUR NATIONAL

R&D PROGRAMS THROUGH COORDINATED PLANNING, INTENSIFIED

INFORMATION EXCHANGE, AND--MOST SIGNIFICANTLY--BY

JOINT PROJECTS TO POOL OUR CAPITAL, INDUSTRIAL SKILLS,
AND TECHNOLOGY. THE EARLY RESULTS ARE PROMISING. IN

ADDITION TO JOINT PROJECTS RELATED TO ENERGY CONSERVATION

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["TELEGRAM INCOMING", "Page19 Control 3/5/89", "CONFIDENTIAL", "AMEMBASSY BONN", "DECLASSIFIED", "AND ASPECTS OF NUCLEAR POWER, WE HAVE INTENSIFIED OUR\nCOOPERATION IN THE AREA OF HYDROGEN PRODUCTION FROM WATER\nAND WE ARE MOVING RAPIDLY TOWARD AGREEMENT ON AN IMPORTANT\nJOINT PROGRAM IN COAL TECHNOLOGY.", "WE BEGAN THIS COOPERATION ON RESEARCH AND DEVELOPMENT\nWITH AN ANALYSIS OF EXISTING AND POTENTIAL ENERGY TECHNO-\nLOGIES. NOW WE MUST ESTIMATE WHEN THESE TECHNOLOGIES CAN\nBE REALIZED, THEIR PRODUCTION POTENTIAL AND THE IMPLICA-\NTIONS FOR OUR SOCIETIES OF THE KIND OF ENERGY THEY WILL\nPRODUCE.", "THEREFORE, I BELIEVE THAT WE SHOULD AGREE TODAY THAT\nOUR LEADING RESEARCH AND DEVELOPMENT OFFICIALS SHOULD MEET\nIN EARLY SUMMER AS A SPECIAL SESSION OF THE GOVERNING BOARD.", "THEIR GOAL WOULD BE TO COMPLETE THE DESIGN OF A JOINT ENERGY\nRESEARCH & DEVELOPMENT PROGRAM THAT WILL RECEIVE HIGH", "CONFIDENTIAL"]

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PRIORITY IN ALL OUR NATIONAL POLICY AND BUDGET DECISIONS.

NO COUNTRY WILL GIVE AWAY VALUABLE TECHNICAL KNOW-
HOW WITHOUT COMPENSATING ACCESS TO KNOW-HOW IT DOES NOT
POSSESS. YET IN COUNTRIES AS DIVERSE AND AS ENDOWED
TECHNOLOGICALLY AS OURS, THE SCOPE FOR BUSINESS-LIKE
EXCHANGE IS ENORMOUS.

THE AGREED DEADLINE FOR ELABORATION OF THE OVERALL
ALTERNATIVE SOURCES SYSTEM IS JULY 1. WE MUST MEET THAT
DEADLINE. PRESIDENT FORD HAS ASKED ME TO UNDERLINE THE
URGENCY WITH WHICH THE UNITED STATES APPROACHES THIS
TASK. WITHOUT CLEAR INCENTIVES TO MAJOR NEW ENERGY
INVESTMENTS, IEA COUNTRIES CAN NEVER HOPE TO END THEIR
VULNERABILITY.

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RELATIONS WITH PRODUCERS

SINCE ITS START, IEA HAS BEEN COMMITTED TO SEEK A NEW RELATIONSHIP WITH THE PRODUCERS WHICH WOULD TAKE INTO ACCOUNT THE NEEDS AND ASPIRATIONS OF BOTH PRODUCERS AND CONSUMERS. HOWEVER, IT IS NOW CLEAR THAT WE CANNOT CARRY IT FAR WITHOUT ADDRESSING BASIC PROBLEMS OF THE RELATIONSHIP BETWEEN DEVELOPING AND DEVELOPED COUNTRIES. WE WILL DISCUSS THESE ISSUES TOMORROW, IN THE OECD.

THE SOLIDARITY WE HAVE ACHIEVED AS MEMBERS OF THE IEA IS A NECESSARY CONDITION FOR BUILDING THE BROADER STRUCTURE OF RELATIONSHIPS AMONG CONSUMERS AND PRODUCERS.

THIS STRUCTURE IS CRUCIAL, FOR NO SOLUTION CAN LAST THAT DOES NOT DERIVE FROM A NEW AND STABLE WORLD ECONOMIC BALANCE.

BY NOW WE KNOW THAT THE WORLD ECONOMY IS A SENSITIVE SET

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OF RELATIONSHIPS: INFLATION ERODES THE CAPACITY TO IMPORT;

STAGNATION REDUCES EXPORT PROSPECTS; EXCESSIVE PRICES LOWER
CONSUMPTION AND SPUR ALTERNATIVE PRODUCTION. THUS EACH
ACTION SETS OFF A CHAIN OF COUNTERACTIONS. ULTIMATELY WE
MUST ACHIEVE A NEW EQUILIBRIUM RELATIONSHIP.

OUR EFFORTS TO MOVE TOWARD THIS GOAL AT THE PARIS

MEETING LAST MONTH REVEALED A WIDE DIFFERENCE OF VIEW

BETWEEN PRODUCERS AND CONSUMERS ON THE SCOPE AND STRUCTURE
OF THE DIALOGUE. THE REPRESENTATIVES OF THE OPEC COUNTRIES
AND THE DEVELOPING COUNTRIES ENVISIONED A CONFERENCE TO
DEAL WITH THE BROAD RANGE OF ECONOMIC ISSUES CONFRONTING

THE INDUSTRIALIZED NATIONS AND THE REST OF THE WORLD. WE
WANTED A CONFERENCE THAT FOCUSED ON ENERGY. SOME RECONCILIATION OF THESE VIEWS MUST BE ACHIEVED.

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TO BEGIN THIS PROCESS WE MUST DEMONSTRATE SERIOUS

DETERMINATION TO ADDRESS NON-ENERGY AS WELL AS ENERGY ISSUES. I RECENTLY SET FORTH OUR IDEAS ON WAYS TO BEGIN DISCUSSION OF RAW MATERIALS AND COMMODITIES PROBLEMS-- WITH MULTILATERAL TRADE NEGOTIATIONS, IN INDIVIDUAL

COMMODITY GROUPS, IN THE WORLD BANK--IN THE EXPECTATION THAT THESE IDEAS WOULD BE A BASIS FOR PROGRESS TOWARD MEETING MANY OF THE CONCERNS RAISED AT THE PARIS MEETING.

I WILL HAVE FURTHER IDEAS TO PUT FORWARD TOMORROW.

WE BELIEVE A SUCCESSFUL DIALOGUE ON RAW MATERIALS AND COMMODITY ISSUES SHOULD MAKE MAXIMUM USE OF EXISTING MULTILATERAL FORUMS. AN EXPEDITIOUS WAY TO BEGIN SERIOUS DISCUSSIONS WOULD BE FOR THE COUNTRIES INVOLVED IN THE PREPARATION EFFORT TO REQUEST CONSIDERATION OF THESE AND OTHER PROPOSALS BY THE APPROPRIATE INTERNATIONAL BODIES THROUGH JOINT INITIATIVES. ANOTHER POSSIBILITY IS FOR THE

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PREPARATORY MEETING TO AGREE ON THE CREATION OF THREE
MINISTERIAL COMMISSIONS; ONE ON ENERGY, ONE ON RAW
MATERIALS, ONE ON THE PROBLEM OF THE POOREST. THE
COMMISSIONS COULD MEET CONSECUTIVELY OR SIMULTANEOUSLY
BUT WITHOUT AN ARBITRARY DEADLINE. RATHER THAN SUPPLANT
THE ALREADY SUBSTANTIAL WORK DONE ON RAW MATERIALS AND
THE PROBLEM OF THE POOREST, THESE COMMISSIONS WOULD
MONITOR AND SUPPLEMENT EXISTING WORK.

MEMBERSHIP IN THESE COMMISSIONS WOULD, OF COURSE,
HAVE TO BE LIMITED IF THEY ARE TO BE EFFECTIVE. I WOULD
SUGGEST THAT OBJECTIVE CRITERIA BE ESTABLISHED FOR EACH.

IN ENERGY, FOR EXAMPLE, COUNTRIES EXPORTING OR IMPORTING
MORE THAN A CERTAIN VOLUME OF ENERGY IN THE WORLDMARKET
COULD BE INCLUDED. IN RAW MATERIALS, COUNTRIES WHOSE

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EXPORTS OF OTHER RAW MATERIALS EXCEEDED A CERTAIN PERCENTAGE OF THEIR GNP COULD BE INCLUDED, ALONG WITH THE MAIN IMPORTERS. FOR THE POOREST, COUNTRIES REPRESENTATIVE OF THOSE WITH THE LOWEST PER CAPITA INCOME COULD BE INCLUDED, ALONG WITH TRADITIONAL AND NEW DONORS.

BY DEMONSTRATING OUR WILLINGNESS TO DEAL WITH NON-ENERGY ISSUES, I BELIEVE WE CAN REMOVE A ROADBLOCK TO A PRODUCER-CONSUMER CONFERENCE CONCENTRATED ON ENERGY MATTERS. THE UNITED STATES IS PREPARED TO ATTEND A SECOND PREPARATORY MEETING TO PLAN SUCH A CONFERENCE. WE WILL CONSULT BILATERALLY WITH THE GOVERNMENT OF FRANCE AND WITH PRODUCERS REGARDING SUCH A MEETING. WE WILL, OF COURSE, KEEP THE IEA FULLY INFORMED OF THESE CONSULTA-

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TIONS. IN THE IEA WE MUST DISCUSS AND COORDINATE ANY
FORMAL STEPS TOWARD THE CONVENING OF A SECOND PREPARATORY

MEETING, MEETING

FROM ITS INCEPTION, THE IEA HAS BEEN COMMITTED TO
DIALOGUE BETWEEN OIL CONSUMING AND PRODUCING COUNTRIES.

IF THE OTHER PARTICIPANTS IN THAT MEETING SHARE OUR COMMIT-
MENT TO DIALOGUE, I BELIEVE THAT IT WILL SOON

BE POSSIBLE TO PLAN FOR A FULL PRODUCER-CONSUMER CONFERENCE

CAPABLE OF ACHIEVING REAL AND MUTUALLY BENEFICIAL PROGRESS.

MAY 20, 1975

INGERSOLL

BT

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