66. Telegram From the Department of State to the Embassy in Iran1

152797. Subject: Oil Prices.

1. We believe that it is timely to renew dialogue with Iran on oil price issue and that the GOI decision to apply the two percent royalty increase provides an opportunity to do so.2 We do not feel, however, that entering into debate on rationale Iran and other OPEC members use to justify price rise would be profitable. We are convinced that high cost of oil is responsible for considerably more than the one percent of the inflation rate which OPEC has averred; 2–3 percent is probably more accurate and thus represents significant portion of total inflation rate. Also, comparing rates of price increases of oil and selected commodities is statistically fallacious. More pertinent would be a comparison of complex price indices of total imports versus exports of oil producers. However, we recognize that at this time emphasis on such matters, in which each side has its set of statistics, would bog down dialogue. Therefore, we wish to turn discussion to broader economic and political consequences threatening economy of world and especially of West with whose prosperity and security Iran’s fortunes so closely tied.

2. You are requested, therefore, to seek opportunity to discuss with appropriate senior official the oil-related economic problems now facing the industrialized world. If you talk with Amouzegar you could note our appreciation for his frank comments on Quito meeting.3 The OECD forecasts following B/P deficits in 1974: France $6.5 billion, Italy $7.5 billion, Japan $7.5 billion, UK $11 billion, and predicts similar though smaller deficit rate in the first half of 1975. These deficits are largely a function of 1973 oil price rises. In most OECD countries growth rates in 1974 have dropped sharply with the OECD average growth rate in 1974 forecast at only 0.5 percent. In several cases 1974 growth rate likely to be zero or negative. Improvement is forecast for 1975 but growth rates will still be lower than normal. Again, oil prices, as well as uncertainties about oil supply, have been major contributors to this change in pattern.

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3. A major effect of the large 1973 oil price rises has been and will continue to be a draining of capital resources from the industrialized countries of the non-Communist world and into the accounts of oil producers. Capital has thus been diverted from traditional investment channels; control over funds now resides in hands that in the main do not have the resources to use them fully. Some producers such as Iran are being helpful in recycling their oil incomes into the world economy, but vast amounts of capital formerly available for investment and growth throughout the world remain unavailable.

4. In some ways more worrisome than the economic problems growing out of oil price increases are the related political problems. Italy is a case in point, where economic problems pose the strongest danger to democratic government in some twenty years with all it could imply for NATO and the Common Market. The shock of the oil price rises and the attendant balance of payments deficit have been major contributors to the political deterioration in Italy.

5. We do not desire to enter into debate with Iran over the rights or wrongs of the oil price rises or over need for adjustments in world economic patterns to take better account of the needs of developing countries—whether oil producers or not. Fact remains, however, that world economy is interdependent. The Shah has himself referred to that interdependence and specifically to the vital importance to Iran of a stable Western Europe and to the inseparability of European regional security from that of Iran’s own part of the world. We are sure that Iran understands that neither it nor its friends could profit from sustained economic or political weakening of Western countries—nor, for that matter, of the less developed countries.

6. We believe that ways must be found for the Western and world economies to recover from the blow of the 1973–4 price rises. We do not wish to argue that oil prices should not have risen at all in face of increases in prices of various other goods and commodities in international trade. However, enormous increase of oil prices in short time span based in large part in artificial market conditions connected with Arab oil embargo has created severe disequilibrium. Time is needed to make the fundamental adjustments necessary to deal with increased oil price levels. We believe that major oil producers have a responsibility to ensure adequate supplies for consumer requirements, at prices which bear reasonable relationship to economic market value and which at same time provide reasonable return to producers. The alternative can be disaster, which eventually could engulf both producers and consumers.

7. This is a matter which compels most careful attention by both Iran and United States. The increasing breadth and profoundness of our common interests and our collaboration, and especially warm rela[Page 212]tions between our countries, provide the framework for our frank consideration of this subject.

8. The US respects the motivation and intentions of the Iranian Govt. in the matter of oil pricing policy. We understand various of the factors which have entered into Iran’s formulation of policy on this subject. We are also well aware of GOI’s proposals and actions to help alleviate financial burden on some less-developed consumers through concessional funding. We remain, however, deeply concerned over the cumulative burden of price hikes over the past year and over the latest indication—through Iran’s decision to implement the two percent royalty tax increase approved in Quito—that the burden is being increased rather than lightened.

9. We would welcome GOI comment and opportunity to discuss these matters in greater detail, in spirit of close friendship which marks our relations.

10. Ambassador Helms has been informed of above and he will draw upon this telegram as appropriate in his conversations with GOI after his return to Tehran.

  1. Source: National Archives, Nixon Presidential Materials, NSC Files, Box 603, Country Files—Middle East, Iran, Vol. VI, January 1974–. Confidential; Exdis. Drafted by Morton, Naas, and Sober; cleared by Robert P. Gallagher (EUR/WE) and Katz (EB/ORF); and approved by Sisco.
  2. At OPEC’s most recent meeting in Quito, Ecuador, June 15–17, members voted for a 2 percent increase in royalties.
  3. Reported in telegram 5509 from Tehran, July 5. (National Archives, RG 59, Central Foreign Policy Files, D740178–0563) Amouzegar was Iran’s representative at the OPEC meeting.