Countering the Oil Cartel

"The problem is grave, but it is soluble."

The problem: the energy crisis. The speaker: Henry Kissinger, in a major policy address at the University of Chicago last week. The Secretary of State has long recognized that the economic and political dislocations rocking the globe show all the signs of events that in many times past have led to bloody conflict. Convinced that economic sanity can be restored through concerted efforts by the industrial powers--the U.S., Western Europe, Japan and Canada--he spent months pondering policy options. He and his staff went through ten drafts of the speech. The result was a passionate, sometimes eloquent statement. At its heart was a five-point program of international cooperation that Kissinger hopes will help avert massive financial and political disruptions by eventually driving down the price of oil. The industrial nations, he argued, must band together in what amounts to a countercartel and jointly conserve, develop and share their own energy sources.

Kissinger detailed the seriousness of the matter. The industrial nations' payments deficit of $40 billion this year is the largest in history; the developing nations' deficit of $20 billion is primarily caused by oil prices; financial institutions have been badly strained by the "abrupt and artificially sustained" price rise. "If current economic trends continue," Kissinger warned, "we face further and mounting worldwide shortages, unemployment, poverty and hunger . . . Democratic societies could become vulnerable to extremist pressures from right or left to a degree not experienced since the'20s and'30s."

For the crisis to ease, said Kissinger, oil prices must come down. While the oil producers might choose to lower prices some time in the future, he added, "it would be foolhardy to count on it or passively wait for it." Instead Kissinger called for:

CONSERVATION. By cutting demand, the major consumers of oil can force the members of the Organization of Petroleum Exporting Countries into production cuts that some of them, at least, will eventually find intolerable. Needing greater revenues, these oil countries would buck the cartel, increase output--and lower prices. The U.S., said Kissinger, intends to reduce oil imports from about 7 million bbl.-- per day now to 6 million bbl. by the end of 1975--and to only 1 million bbl. by 1985.

But belt tightening can be useless if it is not exercised internationally. Kissinger proposed that "by the end of 1975 the industrialized countries reduce their consumption of oil by 3 million bbl. a day over what it would be otherwise." Over the next ten years, he suggested, the industrialized consumers should reduce energy imports from the present one-third of their total energy use to only one-fifth.

NEW SUPPLIES. The U.S. and its energy allies, Kissinger contended, should launch joint research and development projects in such areas as coal technology, solar energy and nuclear power. They should also create a "common fund to finance or guarantee investment in promising energy projects."

FINANCIAL INNOVATIONS. The oil producers will seek to invest their new billions in the industrialized nations, said Kissinger, but this money will not necessarily flow back to the countries that have the worst balance of payments problems. Many banks face a flood of short-term deposits that they cannot safely reinvest or relend on a long-term basis. The danger is that the oil producers might quickly pull their funds out of the bank. To ensure against this, Kissinger proposed that the industrialized nations join in creating "a common loan and guarantee facility" capable of handling the staggering sum of $25 billion. This international institution would recycle the oil money in order to "help assure the stability of the entire financial system."

Participating nations would set up a fund from which government-to-government loans would be made. Such loans--all at the prevailing commercial interest rates--would help rectify balance of payments deficits that might result from excessive oil bills or from shifts by oil-nation investors of their money from one country to another. Kissinger hopes that the oil producers will be moved to deposit money in the fund.

AID TO DEVELOPING NATIONS. These countries are naturally the hardest hit, since high energy costs make it much harder for them to buy enough fertilizer and food. Kissinger suggested that the International Monetary Fund set up a special trust fund from which poor nations could borrow at affordable interest rates. "A major responsibility" for bailing out these nations, he said, rests with "those oil producers whose actions aggravated the problems of the developing countries."

CAUTIOUS DIALOGUE WITH THE OIL PRODUCERS. With the groundwork laid by putting into effect all the foregoing proposals, "the conditions for a constructive dialogue with producers will have been created." Then--and only then--can the major consumers and OPEC members sit down with any hope of reaching an accord on price.

The Western nations are already taking some fitful steps toward forming a common front. This week the U.S., Canada, Japan, Turkey and twelve European countries will formally create the International Energy Agency. Member nations aim to share resources in the event of another oil embargo, and set up joint conservation and energy development programs.

Pledging that the U.S. would do its fair share of conserving and cooperating, the Secretary proudly cited Project Independence, an effort "dwarfing our moon-landing program and the Manhattan Project." With its intention of investing hundreds of billions of dollars in an effort to develop new energy-sources conservation techniques, he said dramatically, the U.S. demonstrates that it "will never permit itself to be held hostage--politically or economically."

Two days before Kissinger spoke, the long-awaited report on Project Independence, prepared by the Federal Energy Administration, was made public. The report lays out supply and demand choices from which Government policymakers might choose. The study is cautious about the potential of alternative energy sources. But it argues that by exploiting both these sources and domestic oil reserves and by adopting a strenuous, mandatory conservation program, the nation can cut its total annual growth in energy use from the 4% to 5% rate of recent years to as low as 2% by 1985. Among the conservation options: federal standards for energy use in cars and buildings, expansion of public transport and an enforced shift from oil-to coal-based electricity.

Secretary of the Interior Rogers Morton, chairman of President Ford's Energy Resources Council, told reporters last week that the FEA report bolstered the arguments--which he and a small group of experts are preparing for the President's consideration--that an increased federal gasoline tax should be a part of the nation's energy policy. But Ford declared during a swing through the Southwest: "I don't know how many tunes I have to say we are not considering an additional gas tax." A spokesman for Morton quickly announced that the Secretary would not "push" the idea any longer, since Ford was so "adamant."

A gasoline-tax increase is apparently dead for the time being. But last week other proposals were being seriously considered in Washington. Among them was an automobile efficiency tax to be paid by the manufacturer. It would be designed to make gas-thirsty models uncompetitive with similar-size cars that are more economical. This would force Detroit to place a premium on fuel economy. Another proposal was for a surcharge on heavy consumption of natural gas, aimed primarily at discouraging its use in industrial boilers. At the same time the price of natural gas would be decontrolled. A windfall-profits tax on gas producers would accompany this measure.

The final policy decisions should be ready in time for the President's State of the Union message in late January. Any package that lands on Ford's desk will be closely coordinated with the Administration's domestic policies and Secretary Kissinger's international initiatives. The result could at long last prove to be the coherent energy program that the U.S. so desperately needs.

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