- 16 -

invulnerable to a transformation of the market. Because of the reduced consumption in the past year, OPEC has already shut down a fourth of its capacity, equaling nine million barrels a day, in order to keep the price constant. New oil exploration, accelerated by the fivefold-higher price, is constantly discovering vast new reserves outside of OPEC. The $10 billion in new energy research in the U.S. -- on the scale of the Manhattan Project and the moon-landing program -- is certain to produce new breakthroughs sooner or later.

As the industrialized nations reduce consumption and increase their supply, it will become increasingly difficult for OPEC to allocate the further production cuts that will be required among its members. Even now, some OPEC members are shaving prices to keep up their revenue and their share of the market. Indeed, it is not too soon

- 17 -

in this decade of energy shortages to plan for the possibility
of energy surpluses in the 1980's.

The strategy we have been pursuing with our
partners since the Washington Energy Conference has
linked our domestic and international energy policies into
a coherent whole. We have made remarkable progress,
but much remains to be done. The question now is whether
the industrialized countries have the will to sustain and
reinforce these promising initiatives. Conservation and
the development of new sources of energy are the next
priorities on our common agenda.

Conservation

Unconstrained consumption of cheap oil is the
principal cause of the present vulnerability of the industrial
countries. Neither the U.S. nor other consumers can

- 18 -

possibly reduce their dependence on imports until they
reverse the normal -- which is to say wasteful -- growth
of consumption.

There is simply no substitute for conservation.

Alternative energy supplies will not be available for five
or ten years. In the next few years conservation, and only
conservation, will enable us both to absorb the present
burden of high energy costs and to begin to restore
the balance of consumer/producer relations.

Only a determined program of conservation can
demonstrate that we and our partners have the will to
resist pressures. If the industrialized nations are unwilling
to make the relatively minor sacrifices involved in
conservation, then the credibility of all our other efforts
and defensive measures is called into question.

- 19 -

Some say we face a choice between conservation and restoring economic growth. The contrary is true. Only by overcoming exorbitant international energy costs can we achieve reliable long-term growth. If we doom ourselves to 50% dependence on imported energy, with the supply and price of a central element of our economy subject to external manipulation, there is no way we can be sure of restoring and sustaining our jobs and growth. These decisions will depend on foreign countries for whom our prosperity is not necessarily a compelling objective.

To be sure, conservation -- by any method -- will have an economic cost. The restructuring which it entails away from production and consumption of energy-intensive goods incurs shortrun production costs. At a time of recession, this must concern us. Yet these costs

-20-

are small compared to what will be exacted from us if
we do not act. Without conservation, we will perpetuate
the vulnerability of our economy and our national policy.
And we will perpetuate as well the excessive international
energy prices which are at the heart of the problem.

At present, the United States -- in the midst of
recession -- is importing 6.7 million barrels of oil a day.
When our economy returns to full capacity that figure will
rise by 1977 it will be 8 or 9 million barrels a day in the
absence of conservation. Imports will continue to grow
thereafter. Even with new production in Alaska and the
outer continental shelf, this import gap will remain if
we do not reduce consumption significantly and rapidly.

-21-

With these prospects in mind, President Ford has
set the goal of saving a million barrels a day of imports
by the end of this year and two million by 1977. That
amounts to the increase in dependence that would occur
as the economy expands again if there is no conservation
program.

Our conservation efforts will be powerfully reinforced by
the actions of our IEA partners and of other interested
countries such as France. Their collective oil consumption
equals ours, and they are prepared to join with us in a
concerted program of conservation; indeed some of them
have already instituted their own conservation measures.
But any one country's efforts will be nullified unless they
are complemented by other consumers. This is why
the United States has proposed to its IEA partners that they

-22-

match our respective conservation targets. Together we
can save two million barrels a day this year; and at least
four million barrels in 1977.

If these goals are reached, under current economic
conditions OPEC will have to reduce its production further;
even when full employment returns, OPEC will have
surplus capacity. More reductions will be hard to distribute
on top of the existing cutbacks of 9 million barrels a day.
As a result, pressures to increase production or to lower
prices will build up as ambitious defense and development
programs get under way. By 1977 some oil producers will
have a payments deficit; competition between them for the
available market will intensify. The cartel's power to
impose an embargo and to use price as a weapon will be
greatly diminished.

-23-

But if America -- the least vulnerable and most profligate consumer -- will not act, neither will anyone else. Just as our action will have a multiplier effect, so will our inaction stifle the efforts of others. Instead of reducing our collective imports by two to four million barrels a day, we will have increased them by a similar amount.

OPEC's ability to raise prices, which is now in question, will be restored. In exchange for a brief respite of a year or two, we will have increased the industrialized world's vulnerability to a new and crippling blow from the producers. And when that vulnerability is exposed to public view through a new embargo or further price rises, the American people will be entitled to ask why their leaders failed to take the measures they could have when they should have.

-24-

One embargo-- and one economic crisis -- should be
enough to underline the implications of dependency.

## The Importance of New Supplies

Conservation measures alone, crucial as they are,
cannot permanently reduce our dependence on imported oil.

To eliminate dependence over the long term we must
accelerate the development of alternative sources of energy.

This will involve a massive and complex task. But for
the country which broke the secret of fusion in five years
and landed men on the moon in eight years, the challenge
should be exciting. The Administration is prepared to
invest in this enterprise on a scale commensurate with
those previous pioneering efforts; we are ready as well to
share the results with our IEA partners on an equitable
basis.

-25-

Many of the industrialized countries are blessed with
major energy reserves which have not yet been developed --
North Sea oil, German coal, coal and oil deposits in the
United States and nuclear power in all countries. We have
the technical skill and resources to create synthetic fuels
from shale oil, tarsands, coal gasification and liquefaction.
And much work has already been done on such advanced
energy sources as breeder reactors, fusion and solar power.

The cumulative effort will of necessity be gigantic.

The United States alone shall seek to generate capital
investments in energy of $500 billion over the next ten
years. The federal government will by itself invest $10
billion in research into alternative energy sources over the
next five years, a figure likely to be doubled when private
investment in research is included.

-26-

But if this effort is to succeed, we must act now to deal with two major problems -- the expense of new energy sources and the varying capacities of the industrialized countries.

New energy sources will cost considerably more than we paid for energy in 1973 and can never compete with the production costs of Middle Eastern oil.

This disparity in cost poses a dilemma. If the industrial countries succeed in developing alternative sources on a large scale, the demand for OPEC oil will fall, and international prices may be sharply reduced. Inexpensive imported oil could then jeopardize the investment made in the alternative sources; the lower oil price would also restimulate demand, starting again the cycle of rising imports, increased dependence and vulnerability.

-27-

Thus paradoxically, in order to protect the major investments in the industrialized countries that are needed to bring the international oil prices down, we must ensure that the price for oil on the domestic market does not fall below a certain level.

The United States will therefore make the following proposal to the International Energy Agency this Wednesday:

In order to bring about adequate investment in the development of conventional, nuclear and other new energy sources, the major oil importing nations should agree that they will not allow imported oil to be sold domestically at prices which would make those new sources non-competitive.

This objective could be achieved in either of two ways:

The consumer nations could agree to establish a common

-28-

floor price for imports, to be implemented by each
country through methods of its own choosing such as import
tariffs, variable levies, or quotas. Each country would
thus be free to obtain balance of payments and tax benefits,
without restimulating consumption, if the international price
falls below agreed levels. Or, IEA nations could establish
a common IEA tariff on oil imports. Such a tariff might
substitute in some countries for existing taxation; it could
be set at moderate levels and phased in gradually as the
need arises.

President Ford is seeking legislation authorizing him
to use a floor price or other appropriate measures to
achieve price levels necessary for our national self-
sufficiency goals.

-29-

Intensive technical study would be needed to determine
the appropriate level at which prices should be protected.

We expect that they will be considerably below the current
world oil price. They must, however, be high enough
to encourage the long-range development of alternative
energy sources.

These protected prices would in turn be a point of
reference for an eventual consumer-producer agreement.

To the extent that OPEC's current high prices are caused
by fear of precipitate later declines, the consuming
countries, in return for an assured supply, should be prepared
to offer producers an assured price for some definite
period so long as this price is substantially lower than the
current price.

-30-

In short, the massive development of alternative sources by the industrial countries will confront OPEC with a choice: they can accept a significant price reduction now in return for stability over a longer period; or they can run the risk of a dramatic break in prices when the program of alternative sources begins to pay off. The longer OPEC waits, the stronger our bargaining position becomes.

The second problem is that the capacities of the industrialized countries to develop new energy sources vary widely. Some have rich untapped deposits of fossil fuels. Some have industrial skills and advanced technology. Some have capital. Few have all three.

Each of these elements will be in great demand, and ways must be found to pool them effectively. The consumers, therefore, have an interest in participating in each other's energy development programs.

-3'-

Therefore, the United States will propose to the IEA this Wednesday the creation of a synthetic fuels consortium within IEA. Such a body would enable countries willing to provide technology and capital to participate in each other's synthetic energy projects. The United States is committed to develop a national synthetic fuel capacity of one million barrels a day by 1985; other countries will establish their own programs. These programs should be coordinated, and IEA members should have an opportunity to share in the results by participating in the investment. Qualifying participants would have access to the production of the synthetics program in proportion to their investment.

In addition, the United States will propose the creation of an energy research and development consortium within IEA.

-32-

Its primary task will be to encourage, coordinate
and pool large scale national research efforts in fields
-- like fusion and solar power -- where the costs in
capital equipment and skilled manpower are very great,
the lead times very long, but the ultimate payoff in low-cost
energy · potentially enormous.

The consortium also would intensify the comprehensive
program of information exchange which -- with respect to
coal, nuclear technology, solar energy, and fusion -- has
already begun within the IEA. We are prepared to earmark
a substantial proportion of our own research and development
resources for cooperative efforts with other IEA countries
which are willing to contribute. Pooling the intellectual
effort of the great industrial democracies is bound to produce
dramatic results.

- 33 -

When all these measures are implemented, what started
as crisis will have been transformed into opportunity; the near
panic of a year ago will have been transformed into hope;

vulnerability will have been transformed into strength.

The Mutual Interests of Consumers and Producers

Consumer solidarity is not an end in itself. In an inter-
dependent world, our hopes for prosperity and stability rest
ultimately on a cooperative long-term relationship between
consumers and producers.

This has always been our objective. It is precisely
because we wish that dialogue to be substantive and constructive
that we have insisted that consumers first put their own house
in order. Collective actions to restore balance to the inter-
national economic structure, and the development in advance of

- 34 -

common consumer views on the agenda, will contribute enormously
to the likelihood of the success of the projected consumer-producer
dialogue. Without these measures, discussions will only find us
restating our divisions, and tempt some to seek unilateral
advantages at the expense of their partners. The result will be
confusion, demoralization and inequity, rather than a just
reconciliation between the two sides.

A conciliatory solution with the producers is imperative
for there is no rational alternative. The destinies of all countries
are linked to the health of the world economy. The producers
seek a better life for their peoples and a future free from
dependence on a single depleting resource; the industrialized
nations seek to preserve the hard-earned economic and social
progress of centuries; the poorer nations seek desperately to

- 35 -

resume their advance toward a more hopeful existence. The
legitimate claims of producers and consumers, developed and
developing countries, can and must be reconciled in a new equili-
brium of interest and mutual benefit.

We must begin from the premise that we can neither
return to past conditions nor tolerate present ones indefinitely.
Before 1973, market conditions were often unfair to the pro-
ducers. Today they are unbearable for the consumers; they
threaten the very fabric of the international economic system
on which, in the last analysis, the producers are as dependent
for their well-being as the consumers.

As the consumers approach their preparatory meeting
with the producers, what are the basic principles that should guide
them?

The United States will propose the following approach

- 36 -

to its partners in the IEA:

First, we should explore cooperative consumer-producer action to recycle the huge financial surpluses now accumulating. The oil producers understand that these new assets -- which are far greater than they can absorb -- may require new management mechanisms. At the same time, the industrial nations know that the stability of the global economic structure requires the constructive participation of the producers.

Second, and closely related to this, is the need to examine our internal investment policies. The oil producers need productive outlets for their revenues; the industrial democracies, while they should welcome new investment, will want to retain control of essential sectors of their economies. These needs can be reconciled through discussion and agreement between consumers and producers.

- 37 -

Third, we must help the producer nations find productive use for their wealth in their own development and to reduce their dependence on a depleting resource. New industries can be established, combining the technology of the industrialized world with the energy and capital of the producers, for their own benefit and that of the poorer nations. The creation of fertilizer and petrochemical plants is among the more promising possibilities.

Fourth, the oil producing countries and the industrial consuming countries share a responsibility to ease the plight of the poorest nations, whose economies have been devastated by CPEC's price increases. Technology and capital must be combined in an international effort to assist those most seriously affected by the current economic crisis.

- 38 -

Fifth is the need to provide consumers with a secure
source of supply. Another attempt to use oil as a weapon
would gravely threaten the economies of the industrial nations
and destroy the possibilities of consumer-producer cooperation.

Oil-sharing arrangements by the consumers would blunt its
impact at first, but over time an atmosphere of confrontation
would be inevitable. Thus, if the producer-consumer dialogue
is to be meaningful, understandings on long-term supplies are
essential.

A central issue, of course, will be price. It is vital
to agree on prices for the long run which will satisfy the needs
of consumers and producers alike. The balance of payments
crisis of the consumers must be eased; at the same time, the
producers are entitled to know that they can count on a reasonable
level of income over a period of time.

- 39 -

The United States is ready to begin consultations with
the other major consuming nations on this agenda. We will be
prepared to expand on these proposals; and will welcome the
suggestions of our friends, so that we can fashion together a
common and positive program.

In sum, consumers and producers are at a crossroads.
We have the opportunity to forge new political and institutional
relationships, or we can go our separate ways, each paying
the price for our inability to take the long view. Mutual
interest should bring us closer together; only selfishness can
keep us apart. The American approach will be conciliatory.

The implications for the structure of world politics are
profound. If we act with statesmanship we can shape a new
relationship between consumer and producer, between developed

- 40 -

and developing nations, that will mark the last quarter of the Twentieth Century as the beginning of the first truly global, truly cooperative international community.

## The Need for United Action

The United States will soon celebrate the 200th anniversary of its independence. In those two hundred years Americans have gloried in freedom, used the blessings of nature productively, and jealously guarded our right to determine our fate. In so doing, we have become the most powerful nation on earth and a symbol of hope to those who yearn for progress and value justice. Yet now we sometimes seem uncertain of our future, disturbed by our recent past, and confused as to our purpose.

But we must persevere, for we have no other choice. Either we lead, or no one leads; either we succeed, or the world

- 41 -

will pay for our failure.

The energy challenge is international; it can only be met
by the cooperative actions of all the industrial democracies.
We are far advanced with our partners toward turning a major
challenge into bold creation and determined response.

But our hopes for the future rest heavily on the decisions
we take on our own domestic energy program in the days and
weeks ahead. Our example -- for good or ill -- will chart the
course for more than ourselves alone. If we hesitate or delay,
so will our partners. Undoing measures already instituted,
without putting an alternative program in their place, will have
implications far transcending the immediate debate.

The United States bears world responsibility not simply
from a sense of altruism or abstract devotion to the common
good -- although those are attributes hardly deserving of apology.

- 42 -

We bear it, as well, because we recognize that America's jobs
and prosperity -- and our hopes for a better future -- decisively
depend upon a national effort to fashion a unified effort with our
partners abroad. Together we can retain control over our affairs
and build a new international structure with the producers. Apart
we are hostages to fate.

A domestic program that will protect our independence;
a cooperative program with other consumers; and accommodation
with producers -- these are the indispensable and inseparable
steps toward a new equilibrium of interest and justice. No one
step can succeed in the absence of the other two.

More than two decades ago Dean Acheson stood before a
Senate Committee and said, "In long days and years which
stretch beyond that moment of decision, one must live with one's

- 43 -

self; and the consequences of living with a decision which one
knows has sprung from timidity and cowardice go to the roots
of one's life. It is not merely a question of peace of mind,
although that is vital; it is a matter of integrity of character."

It is the glory of our nation that we have never been timid
or cowardly; when challenged, we have always stepped
forward with spirit and a will to dare great things. It is now
time to do so again, and in so doing to reaffirm to ourselves
and to the world that this generation of Americans has the
integrity of character to carry on the noble experiment that
began two centuries ago.

Eighth Draft

February 2, 1975

ENERGY: THE NECESSITY OF DECISION

National Press Club, February 3, 1975

Ladies and Gentlemen:

I appreciate this opportunity to speak to you on the question of energy.

This week marks an important time in both the national and international debate on the policies we and the other industrial nations should adopt to meet the energy crisis.

The subject is timely, for two reasons. On Wednesday, The Governing Board of the International Energy Agency is scheduled to convene in Paris for its monthly meeting. This organization, which grew out of the Washington Energy Conference, represents one of the major success stories of cooperation among the industrialized democracies in the past decade. In

-5-

and over one percent of national output; added at least five percentage points to the price index, producing the worst inflation we have experienced since World War II; set the stage for a serious recession; and expanded the oil income of the CPEC nations from $23 billion in 1973 to a current annual rate of $110 billion, thereby effecting one of the greatest and most sudden transfer of wealth in history.

The impact on other countries more dependent on oil imports has been correspondingly greater. In all industrial countries difficulties that had already reached the margin of the ability of governments to manage have threatened to get out of control.

If we have learned nothing from the past year, if we permit our oil consumption to grow without restraint, the vulnerability

-6-

of our economy to external disruptions will be grossly magnified.

We will be even more subject to manipulation of prices at any moment and our economy will be hostage as well to new political decisions to impose embargos or production cuts.

And this vulnerability will increase with every passing year.

Unless strong steps are taken, to reverse the trend, a future embargo would have a devastating impact on American jobs and production.

More than 10% of national employment and output would be restricted as well as subjected to the decisions of countries whose national interest does not inevitably parallel our own. A central element of the price structure of the American economy would be subject to external decisions over which our national policy can have little influence.

Continuing threats of stagnation, recession, and increasing

indebtedness to producers, would impair our political and
economic strength -- affecting not only our freedom of action
in the international area but our prosperity and the availability
of resources for national and social needs.

There could be no clearer demonstration of the link
between the international aspects of this crisis and our domestic
well-being. We already face a fundamental crisis of the
international economic system. As we learned grimly in the

1920's and 30's, profound political consequences inevitably flow
from massive economic dislocations. Economic distress fuels
social conflict and political turmoil; it erodes the confidence of
the people in democratic government and the confidence of
nations in international harmony. It is fertile ground for conflict,
both domestic and international.

-9-

In a sense we in America are fortunate that political decisions brought the energy problem to a head before economic trends had made our vulnerability irreversible. Had we continued to drift, we would have found ourselves eventually swept up by forces much more awesome than those we face today.

As it is, the energy crisis is extremely difficult, but it is still soluble. Of all nations, the United States is most affected by the sudden shift from near self-sufficiency to severe dependence on imported energy. But it is also in the best position to meet the challenge. A major effort now -- of conservation, of technological innovation, of international collaboration -- can shape a different future for us and for the other countries of the world. A demonstration of American resolve now will have a decisive effect in leading other industrial nations to reverse present trends towards dependency. The energy problem is difficult but it is soluble.

-10-

What seems ~~today's~~ a pervasive crisis will then in retrospect

emerge as the beginning of a new period of creativity and cooperation.

One of our highest national priorities must be to reduce our
to supply interruption + price manipulation.
vulnerability. But it is the nature of the problem that no one
the problem
country can solve alone. Jobs, inflation, recession, energy --
in all these areas, national policies can take hold only within a
action.
framework of concerted international measures. Unless we pool
our risks and fortify the international financial system, balance
of payments crises will leave all economies exposed to financial
disruption. Unless all consuming nations act in parallel to reduce
energy consumption through conservation and develop new sources
of supply, the efforts of any one nation will prove futile; the price
structure of oil will not be reformed; and the collective economic
burden will grow. And unless we concert our views and find
consumers
their
the dialogue with the producers will
not prove fruitful.

-13-

programs to cope with new embargoes, and
created new mechanisms ~~for buttressing~~ our
financial institutions against disruptions. This
stage of our common strategy is well on the way
to accomplishment.

-- The second stage is to transform the market conditions for OPEC oil. If we act decisively to reduce our consumption of imported oil and to expand and develop alternative sources, pressure on prices will increase. Measures to achieve this objective are now before the International Energy Agency or national parliaments; We expect to reach important agreements on these measures before the end of March.

-14-

Once the consumer nations have taken these essential steps to reduce their vulnerability, we will move to the third stage of our strategy -- to meet with the producers to discuss an equitable price, market agreement on structure and long-term economic relationship. Assuming the building blocks of consumer solidarity are in place, we hope to engage in a preparatory meeting for a producer-consumer conference before the end of March.

Our actions in all these areas are interrelated. It is not possible to pick and choose; since they are mutually reinforcing, they are essential to each other. No emergency program can avail if each year the collective dependence on OPEC oil

-16-

nation
of embargo each will cut its consumption by the same
percentage, and available oil will be shared. An
embargo against one will become an embargo against all.

last in January,
And in December the major industrial nations
create
decided to establish a $25 billion solidarity fund for
mutual support in financial crises -- less than two months
after it was first proposed by the United States. This
mutual insurance fund will furnish loans and guarantees to
those hardest hit by payments deficits, thus safeguarding the
international economy against shifts, withdrawals or
cutoffs of funds by the producers

The next step should be to accelerate our effort in
the conservation and development of new energy sources.

Action in these areas, taken collectively,
Bold steps, taken in concert, will exert # powerful

-17-

pressure on the inflated price. No cartel is so insulated
from economic conditions that its price structure is
invulnerable to a transformation of the market. Because
reduced in order to keep the price constant, has already shut
down a fourth of its capacity, equalling nine million
barrels a day. As the industrialized nations reduce
their collective consumption, it will become increasingly
difficult for OPEC to allocate the inevitable further
production cuts among its members. Even now, some
OPEC members seeking to maximize income in order
to support their economic development and defense
expenditures are shaving prices to keep up their
revenue. In the face of this new oil exploration, accelerated by the

EJD

-18-

A fourfold-higher price, is constantly uncovering vast new reserves outside of OPEC. The $10 billion in new investment in the U.S. -- on the scale of the Manhattan Project and the moon-landing program -- is certain to produce new breakthroughs sooner or later. Indeed, it is not too soon in this decade of energy shortages to plan for the possibility of energy surpluses in the Eighties.

Thus the strategy we have been pursuing with our partners since the Washington Energy Conference has linked our domestic and international energy policies into a coherent whole. We have made remarkable progress but much remains to be done. The question now is whether the industrialized countries have the will to sustain and reinforce their hopeful initiatives, by a concerted program of conservation and the development of new sources of energy, while protecting our share of the proceeds on our common agenda.

-22-

of our national economic and social policy. And we perpetuate
as well, the excessive international energy prices which are
at the heart of the problem.

When our economy returns to full capacity -- as it is likely
to do later this year -- that figure will rise to 8 or 9 million
barrels a day, and (in the absence of conservation measures)

will continue to grow. Even with new production in Alaska and
the outer continental shelf, this import gap will remain if we
do not reduce consumption significantly and rapidly.

LJ

-24-

If these conservation goals are reached, OPEC will have to
reduce its production further under current economic conditions;
even when full employment returns, OPEC will have surplus capacity.

More cuts will be hard to distribute on top of the existing 9 million

barrel a day. As a result, barrel production outback. Within OPEC pressures to increase production or lower prices will build up as ambitious defense and development programs get under way. By 1977 some oil producers will have a payments deficit; competition between them for the available market will intensify. This OPEC's power to impose an embargo and to use price as a weapon will be greatly diminished.

-25-

consumer -- will not act, neither will anyone else. Just as our
action will have a multiplier effect, so will our inaction stifle
the efforts of others, -- undermining us all to mounting vulnerability.

Instead of reducing our imports by two to four million barrels a
day, we will have increased imports by a similar amount. OPEC's
ability to sustain or raise prices which is now in question, will be
restored. In exchange for a brief respite of a year or two, we
will have increased the industrialized world's vulnerability
to a new and crippling blow from the producers. And when that
new vulnerability is exposed to public view through a new embargo
or further price rises, the American people will be entitled to ask

why their government failed to take the measures it could have
when it should have.

-28-

years, a figure likely to be doubled when private investment in
research is ended.

But if this effort is to succeed, we must act now to
deal with two major areas.

problems - the expense of new energy sources + the varying capacities of the industrialized countries.

First, new energy sources will be relatively expensive.
They will cost considerably more than we paid for energy in

compete with
1973 and can never match the production costs of Middle Eastern
oil. OPEC decides on a substantial reduction.

This disparity in cost poses a dilemma. If we and the
other industrial countries succeed in developing alternate sources
of energy on a large scale, the demand for OPEC oil will fall,
and international prices may be sharply reduced. Inexpensive
imported oil could then jeopardize investment in nuclear and other

-32-

that they will be considerably below the current world oil prices. They must, however, but they must be high enough to encourage the long-range development of energy sources.

These protected prices would in turn be a point of reference for an eventual consumer-producer agreement on an equitable price. To the extent that OPEC's current high prices are caused by fear of precipitate declines later, the consuming countries should be prepared to offer producers an assured price for some time, as long as definite period after this price is substantially lower than the current price, and in return for an assured supply in short, the massive development of alternate sources by the industrial countries will then can meet our need for oil. confront OPEC with the choice of accepting a significant reduction now in return for price stability over a considerable period, or even the risk of a really dramatic break in prices when the program for the development of alternate sources begins to pay

-33-

off in the Eighties.

Second, the United States will propose the creation of a synthetic fuels consortium within IEA.

This would enable countries willing to provide technology and capital to participate in each other's synthetic energy projects.

As an example, the United States is committed to develop a national synthetic fuel capacity of one million barrels a day by 1985; other countries will establish their own programs. These programs should be coordinated, and IEA members should have an opportunity to share in the results by participating in the investment. The proposed consortium agreement would give qualifying participants access to the output of the synthetics program in proportion to their investment.

-35-

Emergency measures, conservation programs and large-scale development of alternative sources will establish a firm foundation of consumer solidarity. What started as a crisis will have been transformed into opportunity; the early near-of-a-year-old panic will have been transformed into hope; vulnerability will have been transformed into strength.

## The Mutual Interests of Consumers and Producers

Consumer solidarity is not an end in itself. In an interdependent world, our hopes for prosperity and stability rest ultimately on a cooperative long-term relationship between consumers and producers.

This has always been our objective, which we announced 24 inches first at the Washington Energy Conference a year ago. Because

-38-

the producers. Today they are unbearable for the consumers;

and threaten the very fabric of the international economic
system on which, in the last analysis, the producers are as
dependent for their well-being as the consumers.

As the consumers approach their preparatory meeting with
the producers, what are the basic principles that should guide
them? The United States will propose the following approach
to its partners in the IEA:

- 40 -

needs can be reconciled, but only through discussion and agreement between consumers and producers.

Third, we must help the producer nations find productive use for their wealth in their own development, thus reducing their dependence on a depleting resource. New industries can be developed, combining the technology of the industrialized world with the energy and capital of the producers, for their own benefit and that of the poorer developing nations. The creation of fertilizer and petrochemical plants is among the more promising possibilities.

Fourth, the oil countries and the developed consuming countries share a responsibility to ease the plight of the poorest developing nations, whose economies have been devastated by OPEC's price increases. The technology of the industrial countries and the capital of the oil producers must be pooled in an international

- 41 -

Fifth, is the need to provide consumers with a
secure source of supply. Another attempt to use oil as
a weapon would gravely threaten the economies of the
industrial nations, and destroy the possibilities of
consumer-producer cooperation. Oil-sharing arrangements
by the consumers ~~would~~ blunt the impact of the ~~crisis~~
at first, but over time an atmosphere of confrontation
would be inevitable. Thus, some understandings on
long-term supplies are essential, ~~if the producer-consumer
dialogue is sincere~~ [illegible]

Finally, a central issue, of course, will be price. [illegible]

It should ~~be possible~~ to agree on prices for the long run

- 42 -

alike. The *near-term* balance of payments crisis of the consumers must be eased; at the same time, the producers are entitled to know that they can count on a reasonable level of income over a period of time.

Such compromise prices would be well below current levels, but well above the historical average.

In sum, consumers and producers are at a crossroads. We have the opportunity to forge new political and institutional relationships, or we can go our separate ways, each paying the price for our inability to take the long view. Mutual interest should bring us closer together; only *narrow-minded*

selfishness can keep us apart. The implications for

the structure of world politics are profound. If we are

- 43 -

States and nations we can shape a new relationship
equal to our opportunity

between consumer and producer, between developed and
developing nations, that will mark the last quarter of the
Twentieth Century as the beginning of the first truly global,
truly cooperative international community.

The United States is ready to begin consultations
with the other major consuming nations on this agenda.
We will be prepared to expand on these proposals, and will
welcome the suggestions of our friends, so that we can
work toward a common, positive and conciliatory program.

- 44 -

The Need for United Action

The United States will soon celebrate the 200th anniversary of our independence. In those two hundred years Americans have gloried in freedom, used the blessings of nature productively, and jealously guarded our right to determine our fate. In the process we have become the most powerful nation on earth and a symbol of hope to those who yearn for progress and value justice.

Yet now we sometimes seem uncertain of our future, disturbed by our past, and confused as to our purpose.

But we must persevere. Either we lead, or no one leads; either we succeed, or the world will pay for our failure.

- 45 -

be met by the cooperative actions of all the industrial democracies. We are well on the way with our partners toward turning a major challenge into bold creation. The meeting later this week of the IEA is the next step in that process.

Our hopes for the future

But this hopeful vista rests heavily on the decisions we take on our own domestic energy program in the days and weeks ahead. Our example -- for good or ill -- will chart the course for more than ourselves alone. If we hesitate or delay, so will our partners. Undoing measures already instituted, without putting an alternative program into place, will have implications transcending the immediate technical debate.

The United States bears responsibility in the world not simply from a sense of altruism or abstract devotion

- 46 -

hardly deserving of apology. We seek it, as well, in
*recognition of the fact that America's jobs and*

cold recognition of the fact that America's jobs and
prosperity -- and our hopes for a better future --

equilibrium of *harmony* and justice. No one step can

Seventh Draft
February 1, 1975

Ladies and gentlemen:

I appreciate this opportunity to speak to you on the
question of the energy challenge:

The subject is timely for two reasons:

-- First, this coming Wednesday, The Governing Board of the International Energy Agency will convene in Paris for its monthly meeting. This organization which grew out of the Washington Energy Conference, at the proposal of the United States, to mobilize and coordinate the efforts of the industrial democracies in energy conservation, new research and development, and the search for new energy sources. This Agency and its work represents one of the success stories of cooperation among the industrialized democracies. In the past year many of the building blocks of a common policy have been put in place. At the

- 3 -

A global solution is therefore imperative. Its necessity
is not the result of sudden, unsuspected events. Rather an
energy crisis has been developing slowly for the better part of
two decades.

In 1950, we were largely self-sufficient in oil. In 1960,
our reliance on foreign oil has grown to 16% of our requirements.
In 1973, it had reached 35%. If those trends are allowed to
continue, we will be dependent on imported energy for 50% of
our needs in the 1980's. The reduction in volume of imports in
the last year while encouraging is due in large part to our
economic recession; in the absence of a comprehensive energy
program, including conservation, these gains will certainly
evaporate as our economy resumes its natural expansion, hope-
fully later this year.

- 4 -

This slowly developing but *structural* energy scarcity was suddenly compounded by an oil embargo against the United States and a 400% price increase that took place in 1973. These actions -- resulting from political and not economic decision -- created an immediate *economic* crisis both in this country and around the world. A mere reduction of 10% of the oil supply to the United States and other industrialized countries lasting less than half a year, cost Americans *outright* half a million jobs and over one precent of national output; added at least five percentage points to price increase in this country in the year of the worst inflation since World War II; set the stage for a serious recession; and expanded the income of the oil producing nations from $______ billion to $110 billion, effecting the greatest sudden transfer of wealth in history.

The impact on other countries even more dependent on oil imports has been correspondingly greater.

- 5 -

If our consumption of foreign oil grows unrestrained and
reached 50%, the vulnerability of our economy to external
disruptions will be grossly magnified. We will be even more
open to the manipulation of prices or production by the cartel.

Our economy will be hostage as well to new political decisions
to impose an embargo. The vulnerability of other industrialized
countries will of course be greater still.

This vulnerability will increase with every passing year. Unless the energetic steps are taken to reverse this trend, a future embargo would have a devastating impact on American jobs and production; more than 10% of national employment and output would be at risk. A central element of the price structure of the American economy would be subject to external decisions over which our national policy would have little influence. The continuing danger of stagnation and recession, and increasing debt to the producers, would impair our political and economic

-7-

Profound political consequences will inevitably flow
from such an economic crisis, as we learned from this
grim truth in the 1920's and 30's. Economic distress
fuels social conflict and political turmoil; it erodes the
confidence of men in democratic government and the
confidence of nations in international harmony. It is
fertile ground for tensions, both domestic and international.

Underlying all these difficulties, and compounding
them, is the crisis of the spirit -- the despair of men and
nations that they have lost control over their destiny.
External and internal forces seem beyond the power of
government and society to manage.

Thus the entire industrialized world faces at the
same time a major crisis of the economy, of the body

-8-

politic and of the moral fiber. It must deal with the technical
problems of energy, but even more importantly it must
regain a sense of controlling its future.

In a sense we are fortunate that political decisions
brought on this crisis before economic trends had made our
vulnerability irreversible. Had we continued to drift we
would have found ourselves gripped in a future crisis much
more awesome than the current one.

As it is the United States -- which faces the greatest
danger in a sudden shift from near self-sufficiency to
severe dependence on imported energy -- is also in the
best position to make possible a solution. A major effort
now -- of conservation, of technological innovation, of
international collaboration -- can shape a different future

-9-

for us and for others. The energy problem is difficult
but it is soluble. What seems today as a pervasive
crisis can in retrospect emerge as the beginning of a
new period of creativity and cooperation.

Reducing vulnerability of the industrial democracies
must be one of our highest national priorities. Jobs,
inflation, recession -- in all these areas, national policy
can take hold only if reinforced by concerted international
measures. Unless we pool risks and fortify the international
financial system, balance of payments crises will drain
resources and leave all economies prone to financial
disruption. Unless all consuming nations act in parallel
to reduce energy dependency through conservation and
new sources of supply, the efforts of any one nation will

-11-

The most powerful argument for action now is that
the failure to act will mean a greater burden and greater
agony a few short years from now. There is no escape.

The producers may find it in their short term interest
to ease the burdens of vulnerability temporarily. But
the price will be increased dependence. Either we tackle
our challenge immediately or we confront it again and
again in increasingly unfavorable circumstances over the
coming years. If it is not dealt with in this Administration,
the same crisis will be faced in the next -- and with even
more anguishing choices.

The President and the Congress, and both parties,
have now taken up their responsibility to act. We must not
flinch from the necessity of decision. For only in the

-12-

solution to the energy crisis is there a reliable long term
solution to the economic crisis. If we vindicate the
confidence that others have in us, we will not only bring
solutions to our immediate difficulties, but will help to
restore the international economy, the strength of all
the major industrial democracies, and the hopes of
mankind for a just and prosperous world.

-13a-

oil will be shared. An embargo against one will be an
embargo against all.

And in December the major industrial nations
created a $25 billion solidarity fund for mutual support
in financial crises -- less than two months after it was
first proposed by the United States. This mutual insurance
fund will furnish loans and guarantees to those hardest
hit by payments deficits. It will thus protect against
shifts, withdrawals or cutoffs of funds by the producers.

members the further production cuts that will be inevitable.

Many of OPEC's members seek to maximize revenues for their economic development. Already some of them are shaving prices to keep up their revenue and market share. New oil exploration around the world, accelerated by the fourfold-higher price, *constantly* is already uncovering vast new reserves outside of OPEC. *Our* $10 billion new investment in the U.S. in technical development -- on the scale of the Manhattan Project and *our* moon-landing *certainly* program -- is *bound* to produce new breakthroughs. *No* cartel is so insulated from economic conditions that its price structure is invulnerable to such a transformation of the market.

Thus the strategy we have been pursuing with our *allies* since the Washington Energy Conference ties together our actions *domestic + international*! *are our partners*, *in all these areas and the actions of all our countries*.

Central to this strategy and this common effort is the necessity to reduce our dependence on imported oil, by conservation and development of alternative sources.

the burden of high energy costs and shift the balance
of market power from producers to consumers in the

immediate future.

In the face of the reduction of consumption this
past year, OPEC has already -- in order to keep the
real price of oil constant -- had to shut down more
than a fourth of its capacity this winter, or nine million
barrels a day. A third of its capacity may have to
be made inactive before the year is out. The lower
that consumption levels go, the harder it will be for
OPEC to allocate among its members the further production
cuts that will be inevitable. Already, individual
OPEC members are shaving prices to keep up their market
share. As the pressure increases, there will be more
and more covert individual deals. OPEC will inevitably
lose its bargaining flexibility; then OPEC prices will

If by that time we have failed to take serious conservation measures, our allies also will have done little. Instead of reducing our imports by two to four million barrels a day, we will have increased imports by a similar amount. In exchange for a brief respite of a year or two, we will have increased OPEC's market power and our vulnerability to a new and crippling blow from the producers. The American people will then be entitled to ask their leaders why we failed now to take the measures in our power to protect ourselves. One embargo -- and one economic crisis -- should be enough to teach us the implications of our dependency.

# THE IMPORTANCE OF NEW SUPPLIES

We cannot permanently reduce our dependence on imported oil by conservation alone. To be successful over the longer term we *must* move quickly into the development of alternative sources of energy, ~~in areas which we control or can rely upon~~ *now*.

Fortunately, the industrialized countries have major energy reserves which have not yet been developed -- North Sea oil, German coal, coal and oil deposits in the U.S. and nuclear power in all countries. Beyond that, ~~We have great potential to create synthetic fuels (shale oil, tar sands, coal gasification and liquefaction). Finally, the effort to develop such advanced energy sources as breeder reactors, fusion and solar energy is already well launched.~~

*This is a draft document. It may contain errors.*

*a sentence about energy efficiency is included.*

*a separate paragraph about scale is included.*

But there are problems involved in developing new energy sources:

First, these new energy sources will be relatively expensive. They will cost more than we paid for energy in 1973 and they will never be competitive in price with Middle Eastern oil.

This disparity in cost poses a dilemma. If we succeed in developing our own energy on a large scale, our demand for OPEC oil will fall, and international oil prices may fall sharply. Inexpensive imported oil could then jeopardize investment in nuclear and other alternative sources; it could

variable levies, or quotas. Each country thus could take-in
tax revenue and balance of payments gains in the event of a break
in the market price for oil.

Another way to reach the same objective would be a
common IEA tariff on oil imports. Such a tariff might
substitute in some countries for existing taxation; it could
be set at moderate levels and phased in gradually as the need arises.

Intensive technical work would be needed to determine
what the protected prices should be. While they will be
undiscoverably
less than the current world oil price, they must be high
enough to enable IEA members to exploit fully new conventional
energy supplies.

These protected prices would in turn be a point of
reference for the producers. The producers cannot expect
consumers indefinitely to pay more for imported oil than
for their own energy. On the other hand, there may be
terms on which consumers would undertake for a time to pay no less.

Second, there are wide disparities among the industrialized
countries in their ability to develop new energy sources.
Some have rich untapped deposits of fossil fuels. Others have
industrial knowhow and advanced technology. Others have
capital. Few have all three.

Each of these elements will be in great demand, over this
decade. There is an eventual advantage in enabling individual countries
to participate in each other's energy development on a business-
like basis.

19 will be in the common interest of the
universities to share in each other's programs.

19. would be most useful in every
country to try to develop all of

25

In an interdependent world, our hopes for economic prosperity and political stability rest ultimately on a cooperative long-term relationship between consumers and producers.

This has always been our objective. It is precisely because we wish a dialogue with the producers to be substantive and constructive that we have insisted that consumers first put their own house in order: -- first, by taking the collective actions I have described so that our mutual support will restore balance to the international economic structure; -- second, by concerting our views on the agenda so that our common purpose will give balance to the consumer-producer dialogue. Only if we adopt a common program (and stick to it) can there be progress with the producers. Otherwise consumer-producer discussions will only find us repeating our own divisions, and tempt some to seek unilateral advantages at the expense of their partners.

26.

On the basis of consumer collaboration, a cooperative
solution with the producers is not only possible but imperative.
There is no rational alternative. The destinies of all countries
are linked in the world economy. The producers seek a better
life for their peoples and a future that is not mortgaged to a
single depleting resource; the industrialized nations seek to
preserve the hard earned economic and social progress of centuries;
the poorer nations seek desperately to resume their march toward
a more hopeful existence.

My producers and consumers, developed and developing -- all
have legitimate claims. The challenge is to reconcile them in
a new equilibrium of interest, to assure mutual benefit over
the long-term future.

We must begin with the recognition that we can neither
return to past conditions nor tolerate current ones. Before
1973, market conditions were unfair to the producers. But
today they are intolerable for the consumers -- and for the
international economic system on which the well-being of the

27

producers depends as well.

Thus it is clear that consumers and producers, working
together, need to shape a new, balanced international structure.

As the consumer nations approach their preparatory meeting,
we must ask: What are the basic principles that should govern
this new equilibrium?

First, we should explore cooperative action
between consumers and producers for *recycling* the huge financial
surpluses now accumulating. The oil producers understand that
the volume of these new assets -- more than they can absorb --
requires new mechanisms for managing them in the monetary system.
At the same time, the industrial nations know that the stability
of the global economic structure requires the constructive parti-
cipation of the producers. New arrangements, bringing them
together, may be needed to manage the world financial system.

Second, we must help the producer nations find productive
use for their wealth in their own *development*, and reduce their
own dependence on a depleting resource. New industries can be

28

developed, marrying the technology of the industrialized
world with the energy and capital of the producers, for their
own benefit and that of the poorer developing nations.

Fertilizer and petrochemicals are two fruitful possibilities.

Third, we need to examine our internal investment policies.

The oil producers need productive outlets for their revenues.

The industrial democracies will want to retain control of
essential sectors of their economies; at the same time that
they will welcome the re-infusion of much of this capital
in the form of new investment. We can reconcile these require-
ments and contribute to global economic growth and prosperity.

Fourth, the oil countries and the developed consuming
countries share a responsibility to ease the stark plight
of the poorest, who are devastated by OPEC's price increases.

There are many ways in which we can pool our strengths to help
industrial countries + the capital
those most seriously affected by the current economic crisis.

Fifth, is the question of reassuring security of supply.

29

Another attempt to use oil as a weapon would gravely threaten the industrialized economies and destroy the possibilities of cooperative solutions for consumers and producers. The oil-sharing agreement of the consumers would blunt its impact at first, but over time a strong response to the producers would be inevitable. Thus some understandings on future supplies are essential.

Finally, a central issue, of course, will be *price*.

It may be possible to identify, and agree upon, prices for the long run which will satisfy the needs of consumers and producers alike. The near-term balance of payments crisis of the consumers must be eased; at the same time the producers are entitled to longer-term stability of income that will not be threatened by the development of alternative supplies. The massive accumulation of surpluses already outstrips the producers' ability to absorb them in imports of goods and services; for the equilibrium of the monetary system, their surpluses must be reduced and eliminated. For the danger of international financial collapse threatens *their* ultimate well-being as well. Compromise

31

The Need for United Action

We Americans are but one year and some months away from marking the 200th anniversary of our independence. In that two hundred years no other people has so gloried in its freedom, used the blessings of a bountiful nature more productively, or more jealously guarded its right to determine its own fate. And in the process we have become the most powerful nation on earth and a symbol of hope to those who yearn for freedom and value justice. It has been a burdensome role -- perhaps never more so than now, when we are uncertain of our future, disturbed by our past, and confused as to our purpose.

And yet, we have no choice but to persevere, for we have no place to turn -- no one to whom we can pass the burden of responsibility that is ours whether we want it or not. Either we lead, or no one leads; either we succeed, or we and the world will pay for our failure.

The energy crisis is an *international* crisis; it is a crisis that can only be met by the cooperative actions of all the industrial democracies. We are well on the way

32

to creating the habit of consultation and the framework
of cooperation necessary to turn a major challenge into
a seized opportunity; the meeting later this week of the
IEA is the next step in that process.

It is no

* exaggeration to say that the prospects for continued cooperation between consumer nations will depend heavily on the decisions we take on our own domestic energy program in the days and weeks ahead. Our example -- for good or ill -- will chart the course for more than ourselves alone.

The United States seeks cooperation with major consuming nations not simply from a sense of altruism or abstract devotion to the common good -- although those are attributes hardly deserving of apology. We seek it,

as well, in cold recognition of the fact that America's
jobs and prosperity -- and our hopes for a better future --
depend upon our ability to fashion a program that will
assure a unified effort with our partners abroad.

Together we have the power to keep control over our
own affairs in our own hands; apart we are nothing more
than hostages to fate.

The effort we are now called upon to make will
require great exertion; it will mean sacrifice; it will
mean change. But what we must do now in order to
secure for this generation the certainty that our
institutions will remain strong and our independence
unfettered is trivial compared to the sacrifices our
children will be called upon to make if we fail them now.

More than two decades ago Dean Acheson stood
before a Senate Committee and said: "In long days and
years which stretch beyond that moment of decision, one
must live with one's self; and the consequences of living
with a decision which one knows has sprung from timidity
and cowardice go to the roots of one's life. It is not

34

It is the glory of our nation that we have never been
a timid or cowardly people; when confronted, we have
always stepped forward with spirit and a will to dare great things.
It is now time to do so again, and in so doing, to reaffirm
to ourselves and to the world that this generation of
Americans has the integrity of
character to carry on the noble experiment that began
two centuries ago.

- 5 -

The impact on other countries much more dependent on oil imports has been correspondingly greater. In all industrial countries economic and political difficulties that had already reached the margin of the ability of governments to manage have threatened to get out of control.

Have we learned anything from the past year? If we permit our oil consumption to grow without restraint, the vulnerability of our economy to external disruptions will be grossly magnified. And this vulnerability will increase with every passing year. Unless strong, corrective steps are taken, a future embargo would have a devastating impact on American jobs and production. More than 10% of national employment and output, as well as a central element of the price structure of the American economy, would be subject to external decisions over which our national

- 11 -

crisis will be faced by the next -- and with even more
anguishing choices.

History has given us a great opportunity disguised as a
crisis. A determined energy policy will not only ease
immediate difficulties, it will help restore the international
economy, the vitality of all the major industrial democracies,
and the hopes of mankind for a just and prosperous world.

## The Strategy of Energy Cooperation

We and our partners in the International Energy Agency
have been, for a year, pursuing strategy in three phases:

-- The first phase is to protect against emergencies.

We must be prepared to deter the use of oil or
petrodollars as political weapons and, if that fails,
we must have put ourselves in the best possible

defensive position.

- 19 -

To be sure, conservation -- by any method -- will have an economic cost. The restructuring which it entails away from production and consumption of energy-intensive goods incurs shortrun *disruptions*. At a time of recession, this must concern us. Yet these costs

-21-

With these prospects in mind, President Ford has
set the goal of saving a million barrels a day of imports
by the end of this year and two million by 1977. That
amounts to the increase in dependence that would occur
as the economy expands again *in the absence of* a
conservation
program.

-23-

But if America -- the least vulnerable and most profligate consumer -- will not act, neither will anyone else. Just as our action will have a multiplier effect, so will our inaction stifle the efforts of others. Instead of reducing our collective imports by ~~two to four million barrels a day, we will have increased them by a similar amount.~~

To four million barrels a day.

OPEC's ability to raise prices, which is now in question, will be restored. In exchange for a brief respite of a year or two, we will have _increased_ the industrialized world's vulnerability to a new and crippling blow from the producers. And when that vulnerability is exposed to public view through a new embargo or further price rises, the American people will be entitled to ask why their leaders failed to take the measures they could have when they should have.

-24-

-27-

-28-

floor price for imports, to be implemented by each
country through methods of its own choosing such as import
tariffs, variable levies, or quotas. Each country would
thus be free to obtain a balance of payments and tax benefits,
without restimulating consumption, if the international price
falls below agreed levels. Alternatively, IEA nations could establish
a common IEA tariff on oil imports. Such a tariff might
substitute in some countries for existing taxation; it could
be set at moderate levels and phased in gradually, as the
need arises.

- 42 -

- 43 -

It is the glory of our nation that we have never been timid
or cowardly when challenged, we have always stepped
forward with spirit and a will to dare great things. It is now
time to do so again, and in so doing to reaffirm to ourselves
and to the world that this generation of Americans has the
integrity of character to carry on the noble experiment that
began two centuries ago.