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152. Memorandum From Robert Hormats of the National Security Council Staff to the President’s Assistant for National Security Affairs (Scowcroft)1

SUBJECT

  • US–Iran Oil Purchase Arrangement

State (Poats) and Defense (ISA) are currently finishing up the paper which I requested of them last week laying out the essential elements, and the pros and cons, of a possible US–Iran oil purchase arrangement. Defense still needs to “clear up” a couple of points with Ellsworth (and may want to touch base with Rumsfeld). It should do so within the next day, after which a State/DOD (Robinson/Ellsworth) paper will be sent to you.2

Following this, it will be necessary to examine the issue in the context of our overall energy strategy (bringing Zarb into the act) and from a foreign policy point of view, particularly its implications vis-à-vis our relations with Saudi Arabia.

There are a number of serious questions which must be addressed at a senior policy level:

—Is the discount contained in the agreement sufficient to warrant the USG getting involved so heavily in the international energy trade? And is the discount sufficient to enable DOD to resell the Iranian oil in the US. (FYI: the spot price for heavy crude is now about $2 lower than it was at the beginning of the year and well below the OPEC price. It may well be that a .50 cent discount on Iranian oil would leave the oil purchased under this deal higher than Iraqi or other spot crude, thus risking the possibility that DOD could not sell all the oil it would be committed to purchase.) Also, who gets the benefit of the discount? If DOD resells to US companies at market prices, what incentive is there for the companies to buy from DOD and not Iran; if the discount is passed to the companies, can it be sold politically here?

—How costly, from a foreign policy point of view, is our acquiescence in the indexation formula? We have resisted indexation of oil and other raw materials in all previous discussions with oil producing and developing countries. Wouldn’t we now be in a significantly weaker position to resist their pressure?

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—Will this arrangement weaken the cartel’s price fixing capabilities by triggering a massive “price undercutting” exercise by other oil exporters, or will it merely antagonize the Saudis (who compete with Iran in the heavy crude export market) by implying favoritism for Iran on top of a number of recent alleged US insults and acts of discrimination against Saudi Arabia. If Saudis preceive that we are making this deal with Iran to weaken the OPEC cartel, might they not simply adjust their oil production downward to offset any possible price weakness resulting from additional Iranian exports; in addition this could be a blow to our political relationship with the Saudis.

When this State/DOD paper arrives, I shall staff it for you. At that point you may want to ask Zarb for his comments (his man Malin is already familiar with the details) and ask Secretary Kissinger for an assessment of the impact on our relations with Saudi Arabia. Following that, I suggest that you, Kissinger, Rumsfeld, and Zarb meet to examine the entire issue and agree on the approach to take with the President.

In the meantime it would, I believe, be highly inadvisable for the President to authorize Kissinger to proceed without having answers to the above questions and others. In addition to the aforementioned substantive considerations, he should know that the purchases by DOD will be made under the Defense Production Act. Appropriations will be required from the Congress. Thus, hearings will have to take place and the entire arrangement will be subject to intense public scrutiny. Our motives and objectives will have to be explained. We may, as a result, be in the embarrassing position vis-à-vis the Shah of having to defend this arrangement on the grounds that it will weaken OPEC, if we actually believe that to be so. Alternatively if we feel we cannot use this argument because it would embarrass the Shah, we may be in the awkward position vis-à-vis the Congress of having to defend a deal with our hands tied. The President should recognize this.

While I recognize that this arrangement might somewhat improve our security of oil supplies (to the extent it increases our dependence on Iran and decreases it on Arab countries) and might also help the Shah out of a foreign exchange bind, I am inclined to proceed cautiously. We should have a very clear idea of what we are getting into before we take additional steps or lead the Iranians on any further.

  1. Source: Ford Library, National Security Adviser, Presidential Country Files for Middle East and South Asia, Box 13, Iran (7). Secret; Eyes Only. Sent for information. Concurred in by Houghton.
  2. See footnote 4, Document 153.