[Page 516]

170. Memorandum of Conversation1

SUBJECT

  • U.S.–Iran Oil Agreement (III)

PARTICIPANTS

  • Henry A. Kissinger
  • Secretary of State
  • Hushang Ansary
  • Iranian Minister of Finance and Economy
  • Frank G. Zarb
  • Administrator Federal Energy Administration
  • Robert Ellsworth
  • Deputy Secretary of Defense
  • Charles W. Robinson
  • Under Secretary of State for Economic Affairs
  • Ardeshir Zahedi
  • Iranian Ambassador
  • Brent Scowcroft
  • Assistant to the President for National Security Affairs
  • Alfred L. Atherton
  • Assistant Secretary for Near East and South Asian Affairs
  • Rutherford M. Poats, E,
  • Notetaker

Kissinger: Our earlier discussion of an oil arrangement under the Defense Production Act or to supply the Defense Department has been overtaken by events. The authority now is in FEA, and that is the route we are following. However, I believe it would be useful, Bob, if you explained to Hushang the reasons Defense was unwilling or unable to get involved in this.

Ellsworth: (He stated the U.S. Government position that the development of Iran’s capability to serve as a bulwark against Soviet or radical Arab threats to the security of the Persian Gulf area, particularly of oil production and transport, is of great value to the United States as well as Iran. However, he expressed skepticism that Iran could effectively employ new arms systems at the pace that the Shah has projected, due to constraints of skilled manpower, training, port capacity and other factors. Consequently, a slowdown in Iran’s procurement of U.S. arms necessitated by financial constraints might be fortuitous. The Defense Department is not, he said, interested in promoting accelerated sales of arms abroad as a means of supporting the U.S. balance of payments. No bilateral oil agreement that implied any such Defense Department attitude toward arms sales would be acceptable. He also was concerned that a bilateral oil deal might work against the security in[Page 517]terests of our NATO allies, or be so perceived by them. Apart from these considerations DOD had no program of buying crude oil or staff to manage it. However, if the President ordered DOD to carry out an oil purchase-sale program, DOD would organize to do it.)

Ansary: If someone gave you the impression that Iran wanted this deal in order to buy more arms, they were wrong.

Ellsworth: Iranians have told me that. If that is not correct, I am glad to have your authoritative statement of the facts.

Ansary: Our purpose was to increase our oil exports to you by substituting for some of your present sources in supplying the Defense Department, thereby expanding our dollar earnings which could be used to buy your industrial goods, agricultural goods and military goods. We never got down to details on supply of oil to the Defense Department.

Ellsworth: We buy only refined products, no crude.

Ansary: We realized that you would have to pass it on to refineries, and that this required examination of the means—whether it was feasible. So far as Iran was concerned, this was one possible mechanism. But our only interest was to find a U.S. Government agency that we could work with on an oil agreement.

(Reviewed history of bilateral oil agreement idea and added) The idea was that the United States would have increased and reliable access to dependable source of supply. It also would enable the U.S. Government to avoid paying middleman profits to the majors. It also was necessary for Iran, as an OPEC member, to take into account its obligations under the OPEC rules. And, finally, Iran because of its need for your goods, offered a means of recycling which no other oil producer could offer you. The plan called for indexing in the context of His Imperial Majesty’s acknowledgment that the U.S. rate of inflation would be lower than in Europe, so that it should not be necessary for the United States to be subject to oil price increases based on the higher rate of inflation in Europe. We would safeguard you in that at no time would you pay more than the prevailing OPEC price levels.

Ellsworth: The fact that the proposed deal would facilitate U.S. military exports to Iran should not be a dominant consideration, so far as I am concerned.

Ansary: Orderly and reliable supply of oil to the free world is important. But if we don’t have the means to contribute to regional defense we can always crawl back into our shell and defend only our own borders.

Ellsworth: Let me be clear. We want to help Iran do what it wants to do and can do to strengthen its defense capabilities. But the suggestion that had been made that this deal would help the United States be[Page 518]cause it would improve our balance of payments through the expanded sale of military equipment to Iran, that is not our purpose.

Kissinger: Let’s not have a theological debate. Right or wrong, the Shah thinks that Iran needs a certain level and certain types of arms. He thinks he needs a certain level of oil sales to finance this program. If he cuts back on this it would, in some degree, affect the security of Iran and of the United States. He has never said he would buy more arms if we bought more oil.

Ansary: Right.

Zahedi: Taking care of Iran or even the Persian Gulf area is not enough. The security of Iran extends beyond the Gulf. Today the Indian Ocean is of great importance to the United States as well as Iran. We don’t want you to be involved if we can handle it.

Ellsworth (To Ansary): I particularly appreciate your authoritative statement that Iran never had in mind facilitating through an oil deal our sale of arms to Iran.2

  1. Source: Library of Congress, Manuscript Division, Kissinger Papers, Box CL–153, Iran, Chronological Files, 1 January–14 April 1976. Confidential; Nodis. Drafted by Poats.
  2. Robinson reported to Kissinger on his final meeting with Ansary the following morning, during which Ansary professed himself reassured by the President’s support for a bilateral deal but disappointed by his meeting with Ellsworth. The two agreed to meet again when the U.S. position was firmer and the Iranian oil–arms swap and consortium negotiations were concluded. (National Archives, RG 59, Central Foreign Policy Files, P840032–0681) In a wrap-up conversation with Kissinger, March 30, Ford observed: “I think we should ask the Iranians to hold the line on prices this summer. That would mean much more to us than a discount on 200,000 barrels a day.” Kissinger replied, “I think we can get them to do that.” (Ford Library, National Security Adviser, Memoranda of Conversations, Box 18)