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IEA

Fifteen months ago the Washington Energy Conference was convened in response to the global energy crisis brought by oil embargo and an enormous increase in oil prices. We recognized then that the energy crisis was the most severe challenge to industrial civilization since the Second World War.

In the months since we have provided ourselves with the means to overcome that challenge. Despite great disparities in our countries' energy endowment and potential, we have 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 cooperation between the industrialized democracies in the past decade.

To protect against emergencies we established sharing programs to cope with new embargoes, and created new mechanisms to protect ourselves from financial disruption. We can be satisfied with our achievements in these areas.

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 alterna-
tive 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 conserva-
tion 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 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 pro-
ducers 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 eco-
nomically 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. 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

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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 re-
main 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 oppor-
tunity to strengthen our alternative source policy,
particularly 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
OPEG. 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' Republic of China to lessen the pre-
sent 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 addi-
tional 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.

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 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.

We can now estimate cost ranges for the major invest-
ments 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 every-
where 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 afford-
ded should be sufficient to encourage the major con-
ventional energy investments needed to redress the
market balance.

Nuclear Power

Nuclear power represents our most important and promising
near term substitute for the inevitably declining supply
of fossil fuel.

8

EYD

# 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 generate 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;

-- 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 commercial 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 participation 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

consideration to ways that our governments, acting
both individually and cooperatively, can assist in
meeting these requirements.

-- Evaluate the economic necessity, plant requirements, and safety implications of plutonium reprocessing and storage. We need to assure the timely and orderly 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 whether the achievement of adequate energy
supplies in our own economies justifies preferential

11

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 coopera-
tion. As needed and desired, we can use this frame-
work 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 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 develop-
ment effort can have a major effect on energy use
and production in this century. But for the period
beyond the year 2000, 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 US
program. Since each converts to electricity, we
will devote significant 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 and aspects of nuclear power, we have
intensified our cooperation in the area of hydrogen
production from water and we are moving rapidly toward
agreement on an important joint program in coal technology.

We began this cooperation on research and development
with an analysis of existing and potential energy technologies.
Now we must estimate when these technologies can be
realized, their production potential and the implications
for our societies of the kind of energy they will produce.

Therefore, I believe that we should agree today that our
leading research and development officials should meet
in early summer as a special session of the governing board.

Their goal would be to complete the design of a joint energy
research and development program that will receive high
priority in all our national policy and budget decisions.

No country will give away valuable technical knowhow
without compensating access to know-how it does not
possess. Yet in countries as diverse and as endowed as
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.

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 relation-
ship 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
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.

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 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 world market could be included. In raw materials, countries whose exports of other raw materials exceeded a certain percentage of their GNP could be included, along with the main

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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 consul-
tations. In the IEA we must discuss and coordinate any
formal steps toward the convening of a second preparatory
meeting, the substance of which approach

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 possib le
to plan for a full producer-consumer conference capable
of achieving real and mutually beneficial progress.

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<table><tr><td>DISTRIBUTION</td><td>XXK E. O. 11652:<br/>TAGS: OVP (Kissinger, Henry A.)<br/>SUBJECT: JEA Speech<br/>ACTION: SECSTATE WASH DC IMMEDIATE OVP<br/>CONFIDENTIAL SECTO 01794<br/>THREE-STATEMENTS NODS</td><td>7</td></tr><tr><td colspan="3">FOR ENDERS, LORD AND EAGLEBURGER FROM COMPET</td></tr><tr><td colspan="3">1. Secretary's comments on latest draft follow. They may be difficult to follow since text you sent did not have paragraphs numbered and we had to guess where paragraphs began. Secretary wants new draft upon his arrival tomorrow morning Friday night.</td></tr><tr><td colspan="3">2. Top margin of first page quote. This speech is not much better -- basically reordering of paragraphs previous speech's paragraphs. Major effort should be made to rewrite and to elevate this speech. UNQUOTE. QUOTE. This speech introduces weak of meetings of industrialized countries. It needs adequate time and create impetus for action. Much worse than OECD speech. UNQUOTE.</td></tr><tr><td>ORIGINATED BY</td><td>S:DCGONERT.JH</td><td>DATE</td><td>7/21/75</td><td>TELE</td><td>S: M.J. Gomert</td></tr><tr><td>RECEIVED</td><td></td><td>CONFIRMATION</td><td></td><td></td><td></td></tr><tr><td>CLOSURES</td><td colspan="5">9/2</td></tr><tr><td>FORM</td><td colspan="5">65-419</td></tr></table>