vth
Eighth Draft
11/12

[Y]

UNIVERSITY OF CHICAGO

November 14, 1974

A generation ago the Western World faced an historic
crisis -- the breakdown of international order in the wake of
an economic breakdown
world war. In the face of economic dislocation and political
upheaval, the nations of the West mobilized themselves and
built a system of security relations and economic institutions
that have nourished our safety, our prosperity and our freedom
ever since. A moment of grave crisis was turned into a moment of great creation.

We face another historic moment today. The stakes are
as great as they were twenty-five years ago. The challenge to
our courage, our vision, and our will is as profound now as it
was then. Our opportunity, too, is as great. What will be
our response?

-2-

I speak, of course, of the energy crisis. I want to discuss
with you tonight how we see this problem, the course we have
done
been pursuing and the further steps now to be taken. I will
stress two themes as this government has been doing for a year
and a half: The inescapable necessity of international collaboration
particularly
and the particular importance of cooperation among the industrial
nations of North America, Western Europe and Japan.

The economic facts are stark. By 1973, worldwide industrial
expansion was already outstripping energy supply; the threat
of shortages was already real. And then, without warning we
were faced with a political embargo, followed quickly by
massive
completely unrealistic increases in the price of oil. In the course
of a single year the price of the most strategic commodity in
the international economy was raised 400%. The impact has
been massive and global.

-- The industrial nations now face a collective payments deficit

-3-

of 40 billion dollars, the largest in history, and beyond the experience
or capacity of our financial institutions, to manage. We now suffer
simultaneously a slowdown of production and a speed-up of an
inflation that was already at the limit of the ability of governments
to control.

-- The nations of the developing world face a collective yearly
deficit of 15 billion dollars. This exceeds the total flow of external
aid they receive for their development. In other words, their
new oil bill soaks up, for this one commodity alone, all their hopes
for progress and advancement. For countries already so heavily
dependent on outside resources, the price of oil makes it impossible
to finance basic human needs, manufactures, goods and services, or food.

-- The oil producers now enjoy a surplus of 55 billion dollars, far beyond their payments or development needs and manifestly more than they can invest. Enormous unabsorbed surplus revenues now threaten the stability of national economies and indeed the functioning of the international monetary system itself.

-4-

Yet this is only the first year of inflated oil prices. The
full brunt of the petrodollar flood is yet to be felt. If current
economic trends continue, there will be serious worldwide
shortages, unemployment, poverty and hunger. No nation, East
or West, North or South, consumer or producer, will be spared
the consequences.

An economic crisis of such magnitude ~~will~~ world\>Inevitably produce
profound and dangerous political consequences. <ins>Running</ins>
Inflation and
consumption
recession - brought on by remote decisions over which they have
everyday lives
no influence - will fuel the frustration of groups whose expectations
for a share in the <ins>economic</ins> <u>proposals</u>
are now suddenly and
is cruelly rebuffed. This makes fertile ground for social conflict
and political turmoil. Moderate governments and moderate
government will <ins>sure</ins> <u>will</u>
solutions will be under severe attack. Democratic societies <ins>will</ins>
present
become vulnerable to extremist <ins> proposals </ins> from right or left. To a
degree not experienced <ins>since the</ins> <u>Twentieth</u>century.
Tales.

-10-

as well all the political and social dangers I have described.

Finally, the energy crisis cannot be solved by persuasion.

The price of oil will come down only if objective

economic conditions warrant a reduction. At present pro-

ducers are able to manipulate prices at will and with impunity.

They are not persuaded by our protestations about damage to
our societies and economies, because we have taken scant

action to defend them ourselves. They are not persuaded by

our alarms about the health of the Western world which never
included them in the past and sometimes exploited them.

Even if the producers learn gradually that their long-term

interest requires a cooperative adjustment of the price structure,

concessions are likely to be too small and too late to solve the

problem; in any event, it would be foolhardy to count on them

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effort in
endeavor -- conservation efforts, cooperative research and
development programs, a broad new concept of action in
nuclear enrichment, investment in new energy supplies, and
elaboration of consumer positions for the consumer-producer
dialogue.

The International Energy Program and the International
Energy Agency are the first results of our efforts. Only a
year since the embargo, we have begun to act in concert
through new means and with new determination.

But they are only foundations.
We must now build on these achievements, bring these
new living are blueprinted in the lives
programs to fruition and take the hard political decisions
required to see them through.

The Program of Action

Let me describe now in detail the program of action
which we are now called upon to complete. The consuming

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international agreement to achieve even further savings if that
planning of savings
proves necessary to reach our common goal.

We propose that we set as a goal for the end of 1975 that
by the industrialized countries reduce their consumption of oil by
3 million barrels a day. This reduction can be carried out
without prejudice to economic growth and jobs, if we concentrate
on wasteful, personal and inefficient uses of energy. The United
States is prepared to assume its share of the total reduction.
Such a cut would be equivalent to approximately 10 percent of
current oil imports of the group. The principal consumer nations
earl year appropriate annual
should meet annually to determine the targets.

A. New Supply:

Conservation measures are essential. They must be supplemented by the long-term solution to the oil crisis lies in the development of alternative energy sources. All countries must make a major shift toward nuclear power, coal + gas

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To assure substantial amounts of new energy in the 1980's
we must start now.

Under Project Independence, the United States plans a massive effort to develop domestic energy sources. This is a technological challenge of the kind we are preeminently able to master--a program costing hundreds of billions of dollars, and, public and private, dwarfing our moon-landing program and the Manhattan Project, two previous examples of American technology mobilized for a great goal. Project Independence will call for an extended national commitment of capital, technology and manpower, but it will demonstrate that the United States will never permit itself to be held hostage to close trading a quasi-monopoly over politically or economically important strategic commodities.

President Ford will submit a detailed program to the new Congress. This is the Administration's task; the Congress will accordingly.

In particular we must work together on a broad and urgent basis to develop the *resource* which may ultimately solve most of our energy requirements: controlled thermo-nuclear fusion. If successfully developed, fusion will make abundant energy available with the promise of virtually inexhaustible fuel resources. But it depends critically on successful materials research, and the facilities necessary are very expensive, ranging from $10 to 20 million for a gas target source to $150 million for a proposed beam-driven fusion reactor.

The U.S. is prepared to join with other IEA members in a broad program of joint planning, exchange use of facilities, exchange of scientific personnel, and the development of joint facilities to accelerate the advent of fusion power.

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governments; in the long run it would reduce the necessity
for official financing, ~~which is rapidly being replaced~~ *

A mutual commitment to financial support would also
reinforce our undertakings in conservation and the develop-
ment of alternative sources. It would assure cooperating
governments that their efforts will not be thwarted by the
absence of external finance on acceptable terms. Each
country could assure its people that their efforts and sacrifices
are being shared equitably and supported jointly.

Therefore, the United States proposes that a common loan
and guarantee facility be created to provide the means for
recycling up to $25 billion in 1975, and as much again the next
year if necessary. This would correspond to half of the current
collective oil deficits of the industrialized countries. The facility

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the poorest developing countries. The membership of the
International Monetary Fund, for its part, would guarantee the
repayment of these funds to the producers. Members could
also agree to cover a second third of the interest cost by
authorizing the Fund to sell some of its gold holdings. The
developing countries themselves would pay the other third of the
interest cost, amounting to three percent or less.

## Relations with Producers:

Conservation and the development of new supplies promise a durable solution to the energy problem. Emergency planning and financial solidarity guarantee our protection in the interim.

When the consumers have agreed on steps towards these goals, we will then be ready for a constructive dialogue with producers.

on our long-term relationship.

-36-

4. <u>Relations with Producers:</u>

Once the consumers have agreed on the steps we can
take together toward a durable solution -- conservation and
development of new supplies -- and for our interim protection
-- emergency planning and financial solidarity -- then we will
be in a position to have a constructive dialogue with producers
on our long-term relationship.

For we do not see consumer cooperation as antagonistic
as in a necessary preparatory step to a constructive
dialogue among the nations to consumer-producer cooperation. The producers nations
who have urged the consumers to take steps to curb
inflation, conserve energy, and preserve financial stability have required
that these things have to be done, and consumer cooperation is a
effort requiring new means to doing it more effectively.

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of such a dialogue. It is clear that the consumers require lower

the prices for the stability of an economic system on which

ultimately the economic health of even the producers depends

a price reduction must also take account of an equitable solution, but it should also respect the producers' need for long-term

income security and economic growth. (The producers in turn must realize that a further increase in prices while this dialogue is going on would be considered a highly irresponsible act.)

The producers in turn would be considered a highly irresponsible act. On this basis -- of consumer solidarity in conservation, there will be the basis of a constructive dialogue:

alternative supplies and financial security, and of producer

policies of restraint and responsibility -- a consumer-producer dialogue will produce mutually beneficial results.

In such a dialogue, a consumer's price use would be disintegrative + dangerous.

## The Next Step

It is now a year and a month since the oil crisis began.

We have made a good beginning, but the major test is still ahead.

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been a heavy burden, which we did not seek and which we have
often been tempted to put down. But we have not done so, and we
cannot afford to do so now — or the generations that follow us
will pay a heavy price for our indulgence.

We must begin with discipline and exertion at home — to
eliminate waste, to develop alternative sources and to mobilize our
science and technology for the benefit of mankind. This is not a
time for business as usual, for government as usual, or for politics
as usual. This is not a time for rivalry among old allies or
suspicious maneuvering for petty advantage. It is a time for
dedicated effort at home and cooperation abroad, for peace
domestically and conciliation internationally.

For more than a decade, America has been torn by war,

-38-

The threat we face now, as compared to the 1940's, is that we are at once more subtle and more profound. The context in which we act is more complex. Where once we drew inspiration from stewardship we must now find it in partnership. Where once we and our allies drew urgency from an external military threat, we must now find it in positive tasks of ensuring the well being of our people and of the rest of the world.

Alexis de Tocqueville once noted: "There is a propensity that induces democracies to obey impulse rather than prudence and to abandon a mature design." Let us prove him wrong.

Second Draft

10/31/74

UNIVERSITY OF CHICAGO

November 14, 1974

Throughout history men and nations have achieved
their finest hours in the face of grave crises.

Today the energy crisis confronts us with the
potential for disaster, the necessity for choice and
the opportunity for great creation. Not since the
Second World War has the world's political stability
been so threatened. Not since the Depression have the
prospects for economic growth been more uncertain.

We are already acutely conscious of the economic
consequences. The inflated price of oil contributes to
all the world's economic ills -- inflation and stagnation;
threatened financial collapse in some developed countries
and the danger that the poorest developing countries will

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be completely overwhelmed.

But its corrosive effect goes far beyond, sapping
the force behind the political laleadership of world
society and supplanting cooperative approaches to security
and prosperity with a new impulse to go it alone, to seek
national advantage at the expense of community. Industrial
civilization, which in the last generation seemed to
achieve an enduring vision of its oneness, is now endangered
in its very structure.

Many have not wished to see the danger. Others
have preached quick and automatic adjustments. But the
danger is self-evident and there are no easy solution.

-- It is tempting to hope that a resolution of the
Middle Eastern conflict will somehow solve the oil problem.
This is not the case. The two problems reached the flash
point at roughly the same time, and the focus of world

- 3 -

attention on the conflict perhaps lowered initial resistance
to the rise in oil prices. But as the oil producers
themselves have made clear, the two problems have separate
lives and must be addressed separately.

-- The price of oil is also unlikely to decline in
response to diplomatic pressure alone. The rise in price did
result from a political decision, but not a capricious one.
It derived from objective political and economic conditions
among producing and consuming states. The decision will
not be reversed until these conditions are changed. Until
they are, any attempt to negotiate prematurely with the
producers might worsen rather than improve our position,
or at best tend to perpetuate an unsustainable burden.

-- It is also wrong to view the economic effects of
this crisis as a temporary problem of adjustment. The

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forces of supply and demand cannot reassert themselves
in the face of political obstruction. A potentially long-
term drain on our resources challenges us to action, not
patient reliance on an invisible helping hand.

THE PROBLEM

A problem frequently considered only in its economic
dimension has an over-riding political significance. The
fundamental reality is that a transfer of economic power
of the magnitude now taking place must inevitably mean
a transformation of international political relations as
well. The United States took over a century to acquire
$65 billion worth of investments in other industrial
countries -- the oil producers financial holdings in the
industrial world will increase by that much in a single
year. This is the most sudden, massive and destabilizing

- 5 -

transfer of resources in history.

It has profound significance for international _peace_,
 cooperation and justice.

The hemorrage of financial resources entails an ominous
weakening of the industrialized nations' capacity to help
shape a more peaceful world. It weakens the economies on
which our strength ultimately depends. It weakens our
ability to devote resources to our defense and to aid
developing countries. Thus it weakens our capacity to defend
our interests and the interests we share with others.

The transfer of wealth threatens not only our
individual but our collective contribution to peace. There
will be a great temptation for each country to conclude
agreements with the producers at the expense of other
consumers. Such a course would only lead to higher prices
and catastrophe for us all. It would also weaken the

- 6 -

solidarity we depend upon to obtain our other objectives
in world affairs. The process of easing tensions with
the Soviet Union and the People's Republic of China requires
our unity. The spectacle of allies confronting one another
over such a basic necessity as oil would weaken our people's
support for alliances and tempt our adversaries to intervene.
The world's hopes for a more secure peace would be dealt
a heavy blow.

The oil crisis endangers as well the emergence of
a more cooperative world. The bipolar structure deriving
from the cold war is giving way to a more interdependent
structure, one in which nations are coming to be more equal
in their power and prospect, their responsibilities and
opportunities. But in a world where power is dispersed,
where the ability of nations to affect one another is so total,

- 7 -

the necessity for cooperation is vastly increased. No
nation or group of nations is invulnerable to the
consequences of their own actions. The attempt by one
nation or bloc to achieve unilateral advantage now forces
other nations to counter with their special strength. A
small group of countries cannot capitalize on the world's
growing interdependence to assert its own power without
itself paying a heavy price. The forces of trade
and the exchange of resources which should tie all nations
to the cause of cooperation cannot be exploited to the
advantage of a few. Pushing control over one resource
beyond the limit of the international system dooms the
prospects for global cooperation on the entire range of
global challenges.

But the most tragic consequence of the energy crisis
is to man's hopes for a world of justice, a world free of

- 8 -

want and free of fear. Inflation eats away the well-being
of nations on the verge of development and of whole classes
at the margin of society. Economic stagnation or recession
will feed the frustration of groups whose expectations
for a share in the prosperity they see around them are
suddenly and cruelly rebuffed. The inability to buy the
energy and fertilizer required to prevent starvation will
shatter the hopes of developing nations for progress and
a positive international role. Thus this crisis threatens
to magnify the discontent and ungovernability of all
societies and the harmony of international relations.

## THE CHOICE

The United States has understood the nature of the
energy problem for some time. A year and a half ago we set
forth the new relationship it requires between Europe, America
and Japan. A year ago in London we called for a conference

- 9 -

among these nations to develop a common approach. At
the Washington Energy Conference in February the
industrialized nations agreed upon a global strategy. And
in recent months we have made steady progress towards its
implementation.

At a time when the temptation to take unilateral
action was substantial, the Conference stimulated an
awareness of the consequences of "going it alone." We
established an Energy Coordinating Group to provide a
continuing focus for cooperation.

The Group's immediate objective was to reduce our
political and economic vulnerability to interruption of
oil supplies. We have now agreed upon an unprecedented
International Emergency Program as a first step in that
direction. By agreeing to share our energy supplies in
another crisis, we have made fundamental progress toward

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protecting our solidarity.

And we are now establishing an International
Energy Agency for collaboration across the entire spectrum
of the energy problem -- from conservation of existing
energy to finding alternative sources of supply.

These measures were essential but they are not
sufficient.

We have made a good beginning but we face a long-term
problem. Now we must ask what further steps are required.

In the present situation, the United States, Europe
and Japan have only three choices, three courses of action
to deal with the problem.

_First, there is the path of inflation._ We could
attempt to inflate the value of all goods so that the
industrial countries could cover that two and one-half
percent of their consumption represented by oil imports.

- 11 -

This would be a grotesque type of adjustment in which all
elements of balance in our political and economic structure
would be destabilized to balance one -- the oil bill. And
there is every reason to believe that the oil producers
would respond, launching a competitive spiral of ever-
higher prices.

A prolonged high rate of inflation involves unacceptable
risks for Western democracies. Class conflicts would rise
and the stability of governments would fall. Our disorder
at home would be as great as the disorder in the world.

Inflation is not the way out of our difficulties.

Second, there is the path of growing political and
economic dependence on the producers. We could attempt
to pay for oil by going into ever deeper debt to the
producers, transferring the major share of the world's

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financial and political power to them in the process.

A decision to place the political future of Europe, Japan and America in the hands of a few oil producers would represent a total shift in political relations. But if oil deficits in the industrialized countries continue at the present rate level, many of these countries will inevitably be dependent on the producers' nations which are becoming their creditors.

This is healthy for neither consumers or producers.

Nations which for a quarter century have been preoccupied with the definition of their national identity cannot be expected to suddenly assume responsibility for world order. Nations long concerned with domestic stability and growth cannot overnight assume the burdens of global stability and growth. And we cannot assume that these nations will share our values or be sensitive to the needs of our societies.

- 13 -

In short producer financing is not a final answer
for the industrial countries if we want to preserve our
sovereignty and strength.

Third, there is the path of accelerated cooperation
among the major consumers to preserve our solidarity and
reduce our dependence on imported energy.

The energy problem is soluble if we are willing
to exert the effort it requires. The cooperation of
Europe, America and Japan has secured our prosperity and
collective defense for a quarter century -- it must be
the basis of our response to the greatest challenge this
group has faced since post-war reconstruction. To meet
this challenge we need that same tough self-discipline and
willingness to accept collective sacrifice now for a
stable and prosperous future. We are not hapless, we can

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meet our energy needs. The basic choice for consuming
countries is whether we will allow others to impose
their solutions on us or act to master our own fate.

THE PROGRAM OF ACTION

Alexis DeTocqueville once noted: "There is a
propensity that induces democracies to obey impulse rather
than prudence and to abandon a mature design." At the
Washington Energy Conference we agreed upon a global strategy.
Nothing that has occurred since has cast doubt upon its
wisdom. Now the challenge is to proceed with translating
that strategy into a concrete program of action. We must
give life to our common conception. The increasingly dangerous
situation summons us to undertake even more comprehensive
collaboration.

Our action program must have five objectives:

- 15 -

- First, to reduce our vulnerability to interruption of oil supplies;

- Second, to create the objective conditions necessary to assure us adequate energy at a price we can afford;

- Third, to deal with the actual and potential problems of recycling in a manner which preserves the basic cohesion of Europe, America and Japan;

- Fourth, to lessen the burden imposed by higher oil bills on the developing world; and

- Fifth, to establish the basis for a cooperative dialogue with the oil producing countries.

- 16 -

Most importantly, we must carry out this action
program within a well-organized framework of consumer co-
operation, one in which individual parts reinforce each
other both politically and economically.

**Vulnerability.** The International Emergency Program is the first fruit of our cooperative endeavor. It substantially reduces our political and economic vulnerability to arbitrary reduction in supply.

**Conservation and Supply.** Our next most pressing objective is to create the preconditions within our countries required to reduce the cost of energy and increase its supply. We must demonstrate that:

-- We are prepared to accept the self-discipline and

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sacrifice necessary to limit our consumption of energy,
particularly our consumption of imported oil; and that

--We are determined to commit the capital and
technology required to accelerate the development of
alternative sources of supply.

Meaningful energy conservation offers the most
immediate prospect for relief from the crushing burden of
high oil prices. It would:

-- Further reduce vulnerability to future
interruptions in supply;

-- Limit the burden being placed on our economies
by the necessity of paying either currently for costly
imports or ultimately for the debt we incur;

-- Reduce the dangers of potential interruptions to

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the world's economic and political structure from the
concentration of financial assets in the hands of a few
nations;

-- Demonstrate to the producers more promptly the
damage which will be done to their economic welfare by
attempts to prolong high oil prices.

Already higher prices have reduced oil consumption.
The five to ten percent increase forecast earlier for con-
sumption growth in 1974 have not taken place. Equally
important recent consumption levels have been running five
to ten percent below the levels before the oil embargo of
1973. But additional measures are required to assure that
a resurgence of economic growth does not bring with it a
return to wasteful energy habits.

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The United States has already set a national goal of reducing oil imports by one million barrels per day by the end of 1975. Other countries have begun similar programs. We are prepared to join in achieving further savings if that is necessary to achieve our goal.

We are convinced that to be truly effective conservation must be addressed on a multilateral basis. The austerity efforts of any one consuming country can be negated unless all major consumers pursue complementary goals. It is probably neither practical nor desirable to expect governments to commit their countries now to specific maximum amounts of oil imports in 1975. But individual country programs for 1975 should be collated into a total international program to ensure that we are collectively and

- 20 -

individually doing enough.

As our common goal we propose by the second half
of 1975 a further ten percent reduction in consumption.

Combined with the reduction which has already taken place,
the industrialized nations would then be consuming one-fifth
less imported oil than in 1973.

The development of new energy sources does not
promise the same immediate benefit as does conservation.

But its long-term promise for economic growth is even greater.

Only by starting now can we ensure that we will have
substantial amounts of new energy in the 1980's. And we
must demonstrate to the oil producing governments that we will
respond to their political decision to raise prices astronomically
by developing our own energy resources.

The United States has begun under Project Independence