134. Memorandum of Conversation1
PARTICIPANTS
- Dr. Henry A. Kissinger, Secretary of State and Assistant to the President for National Security Affairs
- Alan Greenspan, Chairman, Council of Economic Advisers
- Charles W. Robinson, Under Secretary of State for Economic Affairs
- Lt. Gen. Brent Scowcroft, Deputy Assistant to the President for National Security Affairs
SUBJECT
- Bilateral Oil Agreement with Iran
Kissinger: The President wanted me to discuss something we have been discussing with Iran. This is for you only and is highly sensitive.
When I saw the Shah in March, he complained his liftings were falling and he had 500,000 barrels a day excess.2 I said that under specific conditions we might take it off their hands. Chuck [Robinson] has discussed it further with them and they have now gone up to 700,000 barrels a day. They would sell to us for Treasury notes with a forgiveness period. The notes could be redeemed for the purchase of American goods.3
I am interested in this idea because, number one, it breaks the OPEC front because it shifts the surplus.
Greenspan: It would have to be at Saudi expense, and they wouldn’t like it. How long would it be for?
Kissinger: It’s up to us. Second, it would make it harder to raise the prices. Third, it’s insurance against another embargo. Fourth, it puts pressure on the suppliers.
There are two possible schemes. The first one is that we pay the market price for oil. The other is to sell at current prices plus an adjustment tied to the wholesale price index.
Greenspan: That breaks the OPEC price structure.
Kissinger: If they give us a forgiveness feature, one year gives us $1 dollar discount.
Greenspan: If we could keep Iran at full production it puts severe pressure on the Saudis. We would want to insure that Iran would not cut back elsewhere.
Robinson: They could but that obviously is not their scheme. They want to keep their revenue up.
The basic scheme is a barter. If they contract way out for oil, they need the assurance that the price will go up in line with other goods they would buy. By either scheme—the OPEC price, or the current price plus the wholesale price index (so long as it didn’t go above OPEC). We would give them Treasury notes without interest for the first year and that are non-negotiable for the first year. So for the first year we would have $2 billion in our hands.
[Page 405]This will take imagination and a change in how we operate.
Greenspan: So in effect you have $2 billion in escrow. So if they broke the deal or entered an embargo, we have the $2 billion.
Robinson: We get a discount. We will have to establish a specific arrangement, which can go far to break OPEC.
Greenspan: When this gets out . . . the only real issue is price. It would be crucial that the price not escalate beyond the OPEC price.
Robinson: I think I got that, but I haven’t nailed that down yet.
Greenspan: It seems obvious that if you look at 1978 at these prices, the Saudis are the only ones who will not be a net borrower. The others are committing funds at such a rate. The 700,000 barrels by itself won’t do it. But as a symbol . . . The Saudi reaction will be important.
Kissinger: Will the companies give us trouble because the Saudis will be upset?
Greenspan: The idea properly packaged seems very attractive. Let me think about it. An essential ingredient is not to let the price go above the OPEC price. I will think on the negative elements, but I am intrigued.
Robinson: There are two alternatives: a government purchase to be auctioned off, or we could buy it for the Navy reserve and so on.
Greenspan: We can buy it for the stockpile. We are talking about a $1 billion stockpile, but we don’t have the Salt Dome capacity. Maybe you can solve the company problem by having them take the oil.
The notes would have to be non-negotiable. Have you looked at the different interest rates?
Robinson: It is about $1 a barrel at the current interest rates. I am thinking of a five-year maturity with no interest if they don’t use it for equipment.
Kissinger: Another option is to lower the interest rate and have no forgiveness. How will it look to our IEA partners? It really helps them.
Robinson: But we must be careful how we do it.
Greenspan: It will have a devastating impact on OPEC. So you want the maximum apparent price concession.
Robinson: Iran insists that the non-negotiable aspect be covered by a side letter, as well as the price not going above OPEC.
Kissinger: I know we would like the greatest apparent price differential . . . the side letters will look . . . the Saudis will be very upset.
Greenspan: If you then have the same deal with the Saudis, I would not favor it. Because then OPEC becomes Saudi.
Kissinger: That is a separate issue. Let the Saudis worry about that.
Robinson: It would be politically difficult to say we do it with Iran but won’t for the Saudis.
[Page 406]Greenspan: Let me think it through. The critical thing is what happens in 1980, with Iran and with or without the Saudis. We may need a total strategy before we move.4
Kissinger: I think we should pick up what we can and develop a total strategy after Iran is signed up.5
[The meeting ended]
- Source: Ford Library, National Security Adviser, Memoranda of Conversations, Box 12. Secret; Nodis. The meeting was held in the Secretary’s office at the White House. All brackets are in the original.↩
- Kissinger apparently misspoke; he is referring to the meeting with the Shah on May 16. See Document 127.↩
- In a memorandum to Kissinger, June 13, Robinson reported the Shah’s willingness to consider non-negotiable Treasury notes without interest for the first year, as an extra discount off the OPEC official price, but also his insistence that this be kept confidential by handling it in a side letter. (National Archives, RG, 59, Records of Henry Kissinger, 1973–1977, Lot 91D414, Box 15) A memorandum of a longer discussion of the bilateral oil deal among Kissinger, Sisco, Robinson, and Enders, June 14, is in the Library of Congress, Manuscript Division, Kissinger Papers, Box CL–152, Iran, Chronological File, 1 June–31 July 1975.↩
- Scowcroft sent Kissinger a “think piece” by Greenspan on the Iranian oil deal in backchannel message Tohak 10, June 18. (Ibid.) In a discussion with Kissinger, Greenspan, and Robinson on June 23, Zarb warned that the deal could lead to a government purchasing authority, or even a nationalized oil industry. Greenspan added that the Saudis had the production flexibility to preserve the cartel. Kissinger replied that the plan would not break OPEC decisively; it was “just a nibble” to gain leverage with the oil producers. Regardless, Zarb believed that they should proceed with the deal, and Kissinger and Robinson added that, if they did so, the price that the United States paid to Iran could not “ever exceed the OPEC price.” As Kissinger observed later, both the administration and the Shah were reluctant to go through Congress. (National Archives, RG 59, Records of Henry Kissinger, 1973–1977, Lot 91D414, Box 15)↩
- Telegram 148283 to Tehran, June 24, transmitted a message from Kissinger to the Shah asking him to receive Robinson on June 30 to discuss the deal further. (Ibid., Central Foreign Policy Files, P840178–1979) On July 5, Kissinger explained the details of the 5-year deal to Ford, noting: “Zarb and Greenspan are afraid that if DOD buys the oil, it would lead to a government purchasing agency. Greenspan is worried about whether you should give the Saudis the same deal.” He added: “I would give them the same deal for the same amount but ask for a better deal if they want more. I would wait to see if the Saudis came to us. This would end the charges of cuddling the Shah and the money would be spent only in the United States.” (Ford Library, National Security Adviser, Memoranda of Conversations, Box 12)↩