133. Memorandum From Robert Hormats and Robert Oakley of the National Security Council Staff to Secretary of State Kissinger1

SUBJECT

  • Iranian Oil Deal

We want to share with you several concerns about proposals for a special oil deal with Iran which we understand Under Secretary Robinson may be discussing with Ansary on June 11.2

Indexation and guaranteed prices are highly inflamatory issues within the US government, with the Congress, and in the domestic and [Page 402]international economic community. While we understand that all the details of the Iran scheme are yet to be worked out, any proposal which would involve a purchase of Iranian oil at a fixed price which would increase in some direct relationship to inflation would (a) be considered a precedent for indexation of oil in general, and of other raw materials, and therefore opposed by those who dislike this concept; (b) be objectionable to those who still (optimistically) believe that the oil price will fall; they will argue that we are locking ourselves into a commitment to purchase oil at fixed or higher prices even though the market will bring the price down; (c) involve committing either the companies (if they are the primary purchasers) or the government (if it is the primary purchaser) to purchase oil at non-market prices; if the world price is above the “indexed” price, the companies would gain the profit, unless of course they paid the difference to the USG; if the world price fell below the indexed price, the government would either have to subsidize the producers directly or subsidize the companies in order to enable them to purchase Iranian oil at the indexed price.

Aside from the fixed price and indexation problems, there are other complications. A long-term commitment to purchase 500,000 bpd (above the roughly 390,000 bpd which the companies presently import from Iran) would require the companies to make purchasing adjustments away from some countries and in favor of Iran. How would the US government get the companies to do this? What would be the reaction of the other countries (e.g., Saudi Arabia, Nigeria, Venezuela)? How would we allocate among competing companies? We could, of course, have a system of bidding for import licenses to import the 500,000 barrels of Iranian oil, but this would be a new dimension in our oil import program; it would require significant (although certainly manageable) modifications.

With respect to the financing, the idea of the companies purchasing medium-term notes, which would bear no interest in the first year and be used to purchase American equipment, sounds attractive. However, Iran already imports several billion dollars worth of goods from the US; it could use the funds in these Treasury notes for purchases which might have been made in any case. Thus, there might be no additional exports accruing to the US as the result of the scheme. In addition, we do not currently have any Treasury notes which do not bear interest, so that a new type of issue would be necessary. Any consideration of issuance of “indexed” notes, useable after the first year, would involve an enormous departure from present US financial practices.

It seems almost certain that some of the several complications discussed above will require new legislation from Congress. This would provide a forum for all varieties of critics, including those who have an [Page 403]axe to grind against the Shah or you for reasons unrelated to the proposed oil deal.

In summary, while we are sympathetic with the objectives of shifting US sourcing to a reliable supplier such as Iran, and of attempting to get a discount through Iranian purchases of notes which would bear no interest for the first year, such a plan runs up against enormous obstacles. Essentially, USG control over the energy industry on such issues as imports is extremely small, and the oil market is highly uncertain, so that a purchase scheme of this sort would be impracticable. The financing side would require major departures.

For 500,000 barrels of oil per day out of our total consumption of roughly 18,000,000 bpd you are, in short, running a major policy and personal risk by advancing this proposal. The profound changes called for in the way the US does business and conducts its financial relations holds virtually no hope that the plan could succeed and will expose you to the worst sort of criticism.

The easiest way to acquire Iranian oil at a discount is simply for the Iranians to use the receipts from oil sales to the US to purchase Treasury notes and forego the interest rate on those notes or put the interest into a special fund or charity under the control of either the USG or a private Iranian-US foundation. This would avoid all of the difficulties noted above.

  1. Source: Ford Library, National Security Adviser, Presidential Country Files for Middle East and South Asia, Box 13, Iran (4). Secret; Nodis. Sent for information. A note on the memorandum indicates that Kissinger saw it.
  2. Robinson reported on the substance of his meeting with Ansary in telegram 15112 from USOECD Paris, June 11. (National Archives, RG 59, Central Foreign Policy Files, P850061–1762)