Kissinger Lays Out His "Floor Plan"

As U.S. energy policy has evolved lately, a number of Administration planners have concluded that the high world oil prices not only pose severe economic problems but also point the way to their solution. The argument: high or relatively high prices can be used to discourage consumption and, more important, to encourage investment in development of new energy sources.

Last week, in a speech before the National Press Club in Washington, Secretary of State Henry Kissinger made the strongest affirmation yet of that philosophy. The Secretary coupled a call for a "substantial" reduction in the price of oil with an argument that there is a minimum level below which the price should not be allowed to sink. He asked all the major consuming nations to join the U.S. in establishing a "common floor" for the price, to be maintained through import tariffs or other means.

Kissinger's floor plan was submitted to the Paris-based International Energy Agency last week by Assistant Secretary Thomas Enders. IEA officials were noncommittal. Neither Kissinger nor Enders has said publicly where the floor might be. The level most often mentioned in Washington is $7 or $8 per bbl. That is far above the $2.65 import price that prevailed before the Arab oil embargo of October 1973, but it is also $3 to $4 below the $10.80 per bbl. basic price currently dictated by the 13-member Organization of Petroleum Exporting Countries.

The core of Kissinger's argument for a minimum price was that it was necessary to "bring about adequate investment in the development of conventional, nuclear and fossil energy sources." He urged the consuming nations to join the U.S. in a consortium that over the next ten years would invest $500 billion in developing nuclear power, synthetic fuels and other energy alternatives. At the same time, he made a carrot-and-stick offer to the OPEC countries. The oil producers, said the Secretary, 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."

In sum, Kissinger's basic strategy for dealing with the oil cartel is 1) to threaten the OPEC countries with a break in prices in the future as the consuming countries gain greater energy independence, and 2) to hold out to the producers the promise of stable income over the long term if they agree to cooperate with the needs of the consumers now.

Unclear Returns. Yet Kissinger's proposal was greeted skeptically by oil users and producers and its chances for broad acceptance seem uncertain at best. In Western Europe and Japan, which are far more dependent on OPEC oil than is the U.S., critics argue that the floor plan is mainly aimed at getting the rest of the industrial world to safeguard a big U.S. investment in costlier sources of energy. The critics fear that they would be locked into a long-term commitment to high-cost energy that would offer unclear returns far off in the future. Japan's Foreign Minister Kiichi Miyazawa said that he considered the floor plan "beyond the bounds of reason" for his country. The producing countries were cool too. OPEC leaders believe that only continued high prices will serve their dual purpose of building up purchasing power and preventing the rapid depletion of oil sources.

There is considerable doubt in and out of Washington about just how effective a floor price would be in promoting energy development, particularly in the U.S. Atlantic Richfield Co. and three other firms recently suspended a big oil-shale project in Colorado after cost estimates for a 50,000 bbl.-per-day plant jumped from $450 million to $800 million. A price of $7 for oil, concluded the Federal Energy Administration in its Project Independence Blueprint last fall, could boost consumption back to wasteful levels while providing only a slight stimulus to production, thus actually increasing U.S. dependence on foreign oil.

The long-term impact of Kissinger's floor on OPEC is equally uncertain. There are no signs that the cartel will break up soon. Its members have proved that they have the cohesiveness to cut oil production at sharply varying rates in order to maintain the $10.80 price. Over the past year, the OPEC nations as a whole reduced output by 21%. Some countries have cut back even more: Iraq by 27%, Kuwait by 39%, Libya by 72%. They may well reduce production further instead of competing among each other and slashing prices. The producers feel that they ultimately gain more by pumping less at the current high price than by pumping more at lower prices.

Sealed Bids. One vocal critic of the Kissinger floor plan, Economist Arthur Okun, argues that the consuming nations can best cope with OPEC by bargaining with them individually. If the consuming nations were to insist on, say, taking sealed bids for their oil-import needs, Okun says, some OPEC nations would be sure to start breaking the price line sooner or later. In any case, Okun worries, if the consuming countries try to deal with the producers as a bloc they might just "solidify the position of OPEC as a bargaining agent for its member nations."

Other critics, including some within the Administration, have misgivings about the oil-conservation effort that would complement the floorplan strategy. Kissinger is a champion of the Administration's declared goal of reducing imports by 1 million bbl. per day this year. Many economists and politicians wonder if the cost of achieving such a reduction might be too much at a time of high inflation and increasing unemployment. But Kissinger argues persuasively that the price of less dramatic action could be higher. As he said in his speech last week: "Unless the industrial nations demonstrate the political will to act effectively in all areas, the producers will be further tempted to take advantage of our vulnerability."

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