[Page 497]

166. Memorandum of Conversation1

PARTICIPANTS

  • The Secretary
  • General Scowcroft
  • Frank Zarb
  • Charles Robinson
  • Paul Barbian, Notetaker

SUBJECT

  • Iran Oil Negotiations

The Secretary: Frank, how have you been?

Zarb: Just fine, Henry. Your speech has really caused a sensation.2

The Secretary: It has generated a new definition of non-partisanship.

Zarb: Anyone who can be attacked in one day by both Reagan and Jackson must be all good.

The Secretary: They’ve been going around for weeks attacking American foreign policy and accusing us of weakness. And the first time I hit back, they call it unfair. But I’ve got news for them, I’m going to hit them again in Dallas on March 22.3

Scowcroft: Even Carter hit back. I understand he’s got Brzezinski working for him. That won’t help him very much.

Robinson: I understand Carter wants your job.

The Secretary: Brzezinski is a total whore. He’s been on every side of every argument. He wrote a book on Peaceful Engagement and now that we are doing most of what he said in the book, he charges us with weakness.

Zarb: May I say a few things about oil?

The Secretary: Of course.

Zarb: We have been talking for the last 6 months about this Iranian oil deal but recently Congress passed a bill of tremendous importance.4

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It gives us a very important international tool. Under this legislation, we are able to buy 1 billion barrels of oil as a government. The one billion barrels of oil will be stored as a reserve. We can begin buying the oil just as fast as we can build storage facilities.

The Secretary: You mean one billion barrels of oil per year?

Zarb: No, one billion barrels of oil total.

Robinson: That’s about 500 thousand barrels per day.

The Secretary: For what period of time.

Robinson: 500 thousand barrels per day for about 1 year.

Zarb: There’s no point worrying about logistics. The point is we have buying power.

The Secretary: Who buys the oil?

Zarb: I do.

The Secretary: Does that mean that DOD is out of it? Anything that excludes DOD, I’m for.

Zarb: The main advantage of this new tool is that it allows us to construct a deal whereby members of OPEC can sell cheaper than the market price and can say that they are not selling to the market—rather they are selling for storage. And we can make the commitment that we will store the oil and not let it enter the market for a given period of time.

The Secretary: How much is one billion barrels of oil?

Robinson: We have been talking to Iran about 500 thousand barrels per day for about a year and that would fill up the 1 billion barrels.

Zarb: The one billion barrels is above the current import level.

Scowcroft: The deal gives us two possibilities. Either we buy it at a discount and save the money and store it; or, eventually we put the oil on the market and that will also depress the price.

Zarb: I don’t think we can break OPEC regardless of what we do with the Shah.

The Secretary: Chuck, do you agree with that?

Robinson: Well, not entirely. I would have to resist strenuously.

The Secretary: I have a great club over Chuck. If he doesn’t agree with me, I will settle the Marcona problem for $5 million.

Scowcroft: You can’t do that, I have stock in Marcona.

Robinson: Although the amount of 500 thousand barrels a day doesn’t sound like a great deal, you have to remember that that would be new production for the Shah and it would take away from the amount that other suppliers can sell on the market.

The Secretary: What I can’t get the economists in this town to understand is that the importance of this deal is political. The political im[Page 499]pact of 500 thousand barrels from Iran will be very large. I want the Saudis to weep and I want them to be uncertain. Simon keeps saying that the Saudis are willing to auction 2 million barrels. But they always come up with some last minute alibi. We’ve been screwing around with the Iran deal for the past year and quibbling over trivialities. Whether we get a dollar or a dollar 25¢ per barrel discount doesn’t matter. What’s important is the political impact. Chuck, do you disagree with me?

Robinson: No.

The Secretary: You’ll go far.

Zarb: Can’t we get the two deals together?

The Secretary: What I’m after is the symbolism of the Shah breaking the OPEC line.

Robinson: We could tie the storage program in with two years of . . .

Zarb: We can do it many different ways. All of them will come out the same place. I can structure the cash flow however the Iranians want it. We will have to avoid selling the oil to private companies for resale. We have faced two main objections to the Iranian oil deal from the outset. Greenspan is opposed to the Government becoming involved in the market system. He sees government involvement in the oil market as a form of communism. The other problem we’re facing is that if we get too small a discount, we’ll have a bad public image. That’s the benefit of the storage program. If we buy the oil for storage, we will be able to get a bigger discount from the supplier.

Robinson: The deal would force a reappraisal of the OPEC formula. A 500 thousand barrel deal doesn’t have to be for five years. It can be phased out and the storage plan phased in.

Zarb: Panama City didn’t help any.5 The companies had armed guards and Lear jets and all of the things that gave the negotiations the worse possible image.

The Secretary: Did we know about the Panama City meeting in advance?

Zarb: We knew there was going to be a meeting but I didn’t know where it was going to be.

Robinson: The companies were close to a deal with the Saudis before the Panama City.

Zarb: They met to work out the terms of surrender.

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The Secretary: The cowardice and stupidity of US business amazes me. Some man named Hartley jumped me at a leadership meeting in Los Angeles and said that our negotiations with the Soviets for an oil deal is a communistic plot to destroy American oil companies.

Zarb: Our main concern is selling the program to the Congress and the public. The storage legislation gives me all the necessary tools. I’ll have better leverage to buy; because of the lower prices the deal will have a better political image, and because the government is buying oil not for the free market but for storage, the freedom fighters will be put off. If we try to go the other way, with a straight bilateral deal, we won’t be able to bring along Rumsfeld, Greenspan, and the President.

Robinson: Can’t we get the bilateral deal first and then phase in yours?

Zarb: With this law, I can begin signing contracts for eight years. When I was in Venezuela, I described the deal to the Minister of Petroleum and he called me back the next day to talk about it further. I didn’t give him any of the details because Chuck and I had agreed not to do that.

The Secretary: What would 500 thousand a day for a year do to our reserve position?

Robinson: Well, we would have about 800 million barrels.

The Secretary: That would not leave much left over for other countries.

Zarb: I think we run up against the same problem there.

Robinson: I’m very discouraged about our relationship with Greenspan and Defense. We’ve run up against the same problems every time.

Scowcroft: If we have a deeper discount, would we be able to get more support?

The Secretary: The Wall Street Journal confronts everybody as long it keeps the market free.

Scowcroft: If we start as a Iran bilateral deal and then switch to storage as soon as storage is ready. I understand General Dynamics is negotiating with the Iranians right now to swap oil for weapons.

The Secretary: Would the oil companies buy that kind of a swap? If we go ahead with it, we’ll wind up with a bunch of barter deals that give Iran exactly what they want. And that will dilute the political impact. They can set the price for military equipment at any level so there is no real discount. I don’t care about the economics of the deal. I want the Saudis to be unhappy. I want there to be a visible gap between the price we’re paying for oil and the OPEC price. I want the Shah to break the OPEC line.

Scowcroft: Could we auction the oil?

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Zarb: Yes we could, but I suggest that we start the negotiations where everybody in the government is comfortable; with the storage program. Then move it back towards the bilateral deal.

The Secretary: Suppose we get a very good price discount on storage. Then we could sell it to the public as a great achievement.

Robinson: If we can get the two together, we can accelerate purchases.

The Secretary: (to Zarb) I think it is a very ingenious idea. We can use the storage legislation as a lever to get the other thing.

Scowcroft: Do you have a quality problem? Do you have enough storage for a billion barrels of heavy?

Zarb: No, we need to have a mix of heavy and light.

The Secretary: We could do a seven-year deal.

Zarb: I would prefer a seven-year deal. We need to have 150 thousand barrels in place by 1978.

The Secretary: It’s an ingenious idea. If we can marry the two together, then let’s get off of DOD. They leak everything and I agree with Frank that we cannot move them.

Robinson: But that won’t solve the Shah’s problem.

The Secretary: We can use the two-year deal as leverage for the five-year deal. We’ll get some impact on OPEC, if we get a seven-year deal at a discount.

Scowcroft: And the storage program allows the Shah to hide behind the OPEC line.

Robinson: A billion barrels is 500 thousand barrels a day for six years. It’s about 1 year of our crude oil imports.

The Secretary: One year is a long time.

Zarb: Let Chuck and I go ahead on some of the details.

Robinson: Ansary will be here.6

The Secretary: Yeah, but let’s drop Defense. They’ll write a memo and leak it and that will hurt the Shah.

Robinson: DOD hates the Shah.

The Secretary: Why?

Robinson: Because they think Saudi Arabia is more stable and a better ally over the long term.

The Secretary: This deal wouldn’t upset relations with Saudi Arabia. It wouldn’t hit them in the stomach. It wouldn’t be like calling for the internationalization of Jerusalem.

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When Ansary is here, we’re going to have lunch. I need only 30 minutes with Ansary. Then lunch for the four of us. Then a social dinner. We will have to invite Zahedi to the social dinner.

Paul, has DOD been invited to the dinner yet?

Barbian: I’ll have to check.

The Secretary: Do you know Ansary?

Zarb: No.

The Secretary: You’re probably too young.

Robinson: He wants me to take him (Zarb) to Tehran.

The Secretary: He really carries on. I’ve seen him in Zurich and Cannes.

Zarb: I’m losing interest in the deal but I sure do want to meet Ansary.

The Secretary: Okay. Our plan is to get the deal on storage plus some front end. And we’ll have a general discussion at the dinner with Ansary.

  1. Source: National Archives, RG 59, Central Foreign Policy Files, P770092–0067. Secret; Sensitive.
  2. Kissinger gave a speech before the World Affairs Council in Boston on March 11 defending the Ford administration’s record on foreign policy.
  3. Kissinger delivered another speech on foreign policy to the World Affairs Council in Dallas on March 22.
  4. Reference is to the Naval Petroleum Reserves Production Act of 1976 (P.L. 94–258), which President Ford signed on April 5. The act authorized the Secretary of the Interior to establish national petroleum reserves within the United States that would be regulated in a manner consistent with the total energy needs of the country.
  5. Four major oil companies, Mobil, Exxon, Standard of California, and Texaco, met with Saudi Petroleum Minister Yamani in Panama City, Florida, March 7–12, to negotiate an agreement for the complete Saudi takeover of Aramco.
  6. Ansary was to visit Washington March 29–30.