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80. Telegram From the Embassy in Iran to the Department of State1

8163. Subj: Iran and the Price of Oil. Ref: Tehran 7511.2

1. Summary: Visiting Deputy Assistant Secretary Sober met with Iranian representative to OPEC Amouzegar September 25 to exchange views on oil prices, the rationale for higher or lower prices and the impact of such prices on the world economy. Sober emphasized our deep concern over the serious consequences current oil prices may have for the world economy as was reflected in the President’s and Secretary Kissinger’s recent public statements.3 Amouzegar reviewed familiar Iranian arguments justifying current prices. Exchange was spirited but cordial with both sides welcoming the opportunity to review the subject in depth. There was a consensus that the differing points of view needed further examination and discussion in a spirit seeking a solution which reflected cooperation and not confrontation. End Summary.

2. Visiting Deputy Assistant Secretary Sober accompanied by DCM called on Iranian representative to OPEC Jamshid Amouzegar morning of September 25 for an exchange of views on current oil prices and their effect on the world’s economic order. The lively but cordial meeting lasted for an hour and 45 minutes during which both sides reviewed in some depth common as well as differing views on current oil prices, the justification or lack thereof for their present level and the impact they are having on the world’s economy. At the outset Amouzegar expressed dismay and unhappiness at what he termed the President’s and Secretary Kissinger’s “attacks” on oil producers. He suggested the possibility that neither were particularly well informed on the intricacies or ramifications of oil prices as they now stand. In this connec[Page 242]tion he suggested that Walter Levy,4 whom he described as a biased and unreliable commentator, seemed to carry much more weight in USG councils than eminent economists such as Milton Friedman. He cited a recent Manchester Guardian interview with Friedman in which Friedman absolved oil prices and oil producing countries of responsibility for the world’s current economic woes. Why, he asked rhetorically, doesn’t the US listen to qualified economists instead of biased partisans? Warming to the subject Amouzegar reviewed at length Iran’s defense of current oil prices and several times expressed his indignation that oil producers should be made the scapegoat for the world’s economic ills. The main points of Amouzegar’s exposition were as follows:

3. Oil prices were set at $7.50 per barrel in December 1973 as the amount most closely approximating the cost of producing energy from an alternative source. In taking this approach Iran was thinking not only of its own future and future generations of Iranians but also the future of the world. It is well known, he said, that the world’s supply of oil is probably good for not much more than fifty years at present and projected rates of consumption. Iran felt, therefore, that it was imperative that the world be forced to develop alternative sources of energy before it was too late. It must also be forced to conserve this non-renewable asset through a variety of measures including improved efficiency of automobile engines (which Amouzegar claimed Detroit automotive experts told him was a relatively simple design and manufacturing process) and the elimination of wasteful energy consumption such as the 24-hour lighting and temperature control of Manhattan skyscrapers. The search for alternative energy sources would never occur, he said, until there was an economic incentive and as long [garble—as cheap?] oil was available. Pegging oil prices close to the cost of alternative energy provided such an incentive. He went on to claim that he had received a number of messages from United States coal mining concerns and officials of coal mining states urging that Iran not retreat from its position on oil prices since it was now economically feasible to revive this sagging sector of the US economy. High prices also had the virtue of encouraging conservation and the search for higher efficiency in energy uses. In his view, Amouzegar said, the West should be grateful to oil producers for awakening the world to the perils of mindlessly pursuing its wasteful and irresponsible practices of the past.

4. Amouzegar then turned to the question of who was responsible for current oil prices. He said that last December the Shah had determined that $7.50 a barrel, being the lower end of the cost of alternative [Page 243]sources of energy, was the fairest and most equitable price. Iran was not in favor of a higher price but that more recent increases had been brought about by Saudi Arabia and American oil companies through a change in the participation formula from 25–75 to 60–40. This had upped the price of Saudi oil to $9.50 a barrel (sic) and of course all other oil producers automatically adjusted their own oil prices accordingly. It was not Iran but Saudi Arabia that was responsible for this increase and Amouzegar said he could not understand why the West was not able to absorb this simple fact. Just watch, he said, the price of oil will go up to $11.50 a barrel when the Saudis get 100 percent participation from Aramco. In reviewing this matter Amouzegar had harsh words for Sheikh Yamani labeling him “the most two-faced man he had ever known” and “a liar.”

5. Referring to the OPEC meeting in Vienna, Amouzegar said that he had fought a lonely battle with OPEC hawks such as Algeria, Iraq, and Kuwait to hold prices at their present level. He had taken this line on the explicit instructions of the Shah who was as sensitive as anyone to the destructive effects of fanning world inflationary fires. Nevertheless, Iran had gone along with the argument that oil producers were justified in increasing their oil revenues to offset the continued escalation of prices of Western goods by increasing taxes and royalties. Amouzegar claimed this increase could easily be absorbed by oil companies who were now making profits at the rate of about 93 cents a barrel in contrast to a profit of about 45 cents a year ago. It was not the oil producers’ responsibility to control what part of this increase, if any, oil companies passed on to consumers.

6. Amouzegar said that as he saw it, the question of oil prices had three components of concern: First, was the effect higher oil prices may have on the rate of growth of industrial countries. Japan, he said, has enjoyed a rate of growth of about 12 percent for the last ten years. Why should it not be willing to settle for a rate of growth of six percent over the next five years. Given its current per capita base, a growth rate of even six percent would mean $180 per capita. Iran with a per capita base of $500 even growing at a rate of 12 percent would only be increasing per capita by $60. His point he said was simply to suggest that instead of the gap between the poor and richer nations growing, it is in the interest of the world community as a whole that they be moderated even though it is acknowledged that they would probably never converge. In conclusion, he did not find the argument about the negative influence of oil prices on growth rates in the Western world particularly cogent. As to the effect of oil prices on inflation, he cited (as he had done with Congressman Wyatt reftel) an OECD study which purported to demonstrate that higher oil prices had only contributed .04 percent to inflation in the US, 2 percent to inflation in Japan (which was [Page 244]the highest in all Western countries surveyed) and 1.5 percent as an overall average. Since inflation in all of these countries was running somewhere between 12 and 20 percent, oil could hardly be considered the main or even a significant culprit. Furthermore, he said, if Western countries were truly concerned about the inflationary impact of oil prices, they could easily be moderated by reducing government taxes on oil. This seemed contrary to the West’s inclination, however; he cited the recent increase of French taxes on petroleum and discussions in the American press of the desirability of increased USG taxes. Why, he asked rhetorically and with some feeling, should oil producers be asked to lower oil prices while consumer countries increase their take through increased taxes?

8. The third element of the oil price issue concerned balance of payments difficulties. Seizing on Germany as an example of the West’s unfair or uninformed attitude on this aspect of the problem, Amouzegar said that Germany had about $32 billion in reserves before higher oil prices went into effect. Nevertheless, in spite of higher prices, it is expected that it would have about $40 billion in reserves by the end of this year. This is an amount about equal to the reserves all OPEC countries are expected to have at the end of this year. Why should OPEC countries therefore be identified as responsible for balance of payments stresses and strains? Why is it that only the reserves of oil producers are considered destabilizing and not those in the West? For that matter, he said, the balance of payments statements of various Western Finance Ministers were not entirely candid. A great deal of money has already been recycled from oil producers to oil consumers but does not appear in balance of payments ledgers because it is short-term and could conceivably be withdrawn. He acknowledged that this is not an unreasonable accounting procedure but also suggested it was misleading because the money had nowhere else to go. Insofar as Iran was concerned, Amouzegar said that it felt it had already done its share in addressing international balance of payments difficulties. It had given loans to Great Britain and France of over a billion dollars each, it had given loans to some 15 other countries or was providing oil on concessionary terms. It was a net lender to the IBRD and it had given the IMF $700 million. Further, it was spending virtually all of its enhanced income on Western goods (whose prices were rocketing outrageously) to modernize Iran’s economy and improve its people’s meager standard of living.

9. In conclusion Amouzegar said that the only real issue as far as oil prices were concerned was the balance of payments issue. Iran was doing its part but the West would have to convince Arab oil producers to recycle their oil revenues into long-term productive investments. Since they had no place else to put their money, this should not be such [Page 245]a difficult task. They should also be required, he insisted, to be more forthcoming in contributing to international monetary stability through loans or grants to less fortunate countries.

10. Sober responded by urging that Amouzegar avoid drawing conclusions about the President and Secretary Kissinger’s statements from sensational headlines and out of context excerpts appearing in the local and international press. He asked whether Amouzegar had the full text of both speeches. Amouzegar admitted that he did not. Sober said that we thought careful reading of both messages would show quite clearly that we sought cooperation and not confrontation over a problem that concerns us deeply. He went on to note that these concerns are both economic and political because a faltering world economic system would obviously have grave political consequences as well. In our view there is an interlocking responsibility of oil consumers and producers to maintain a stable world economy. Our efforts up to now have been to develop cooperation among consumers, to promote conservation and to develop means to facilitate the wise and constructive investment of huge resources oil-producing countries are now acquiring. These efforts are in no way designed to form a bloc with which to confront oil producers. We recognize that producers have a right to a fair return for their oil but we also believe that current prices are too high and threaten the well-being of all nations including oil producers. Because we believe security of markets and investments for all depends upon a vigorous and healthy world economy, we will continue to try and work for a reasonable level of oil prices and secure oil supply which are responsive to the needs of both consumers and producers.

11. Amouzegar responded that he had difficulty interpreting the President’s and Secretary Kissinger’s remarks as anything other than an attack but said that he was glad to hear that this was not their intention and that the US sought cooperation and not confrontation. He said the one part of President Ford’s speech that he did like was when he spoke of Project Interdependence rather than “Independence.” Iran welcomes this proposal and was eager to become a part of it. In this connection he said the Shah has called repeatedly for a dialogue between consumers and producers and yet so far there has been nothing but silence from the consumers.

12. Sober then pressed on the possibility of rolling back prices to perhaps the $7.50 per barrel level, noting that this was the price that Iran had originally argued was fair and justified. Amouzegar said that it was too late because in the meantime world inflation had further eroded Iran’s purchasing power and also because any country that retreated would face severe political problems and criticism from its own population as well as from the Communist world. He did not [Page 246]think this would be in the Free World’s interest since this is precisely the kind of issue Communists would exploit to the hilt. Nevertheless, Amouzegar went on, if an impartial objective group of qualified experts can demonstrate that the cost of alternative sources of energy is less than current oil prices, then Iran would probably give the most serious consideration to a price roll back.

13. Commenting on the points that Amouzegar made in justifying oil prices, Sober said that while he had seen different figures with respect to inflation and balance of payments questions, he nevertheless would accept that the GOI had some valid points to make. The real question, however, was whether even conceding that current prices might be justified, conceding that they would provide desirable incentives to further the search for alternative sources of energy and conservation and all of the rest, if the net effect was still to create such disorder in the world economy that it collapsed, then what had anyone to gain?

14. Amouzegar expressed skepticism that such dire consequences are imminent or that they may be the consequence of high oil prices. Nevertheless, he said, all of these problems should be thrashed out in a meeting between the producers and the consumers and the sooner the better. Sober agreed.

15. Comment: While the conversation was frank and Amouzegar expressed himself with obvious deep feeling and some heat on occasion, it remained cordial throughout. While he vigorously defended Iran’s position as was expected, he was obviously sincere in urging that a meaningful dialogue begin and even implied that there was give in the Iranian position if a persuasive objective case could be made for lowering oil prices, i.e. as noted in para 12. We think that the exchange was both worthwhile and timely. It should be noted, however, that the Shah is in New Zealand and we have no reading on his reaction to the President’s and Secretary’s recent speeches.

Helms
  1. Source: Ford Library, National Security Adviser, Presidential Country Files for Middle East and South Asia, Box 14, Iran—State Department Telegrams, To SECSTATE–EXDIS (1). Secret; Priority; Exdis. Repeated to Abu Dhabi, Algiers, Beirut, Brussels, Caracas, Dhahran, Jidda, Manama, Kuwait, London, USOECD Paris, Tokyo, Tripoli, and Vienna.
  2. See footnote 2, Document 78.
  3. On September 23, Ford gave a speech before the ninth World Energy Conference in Detroit, Michigan, entitled “A Global Approach to the Energy Problem,” in which he stated that “exorbitant [oil] prices can only distort the world economy, run the risk of a worldwide depression, and threaten the breakdown of world order and world safety.” For the text of speech, see Public Papers: Ford, 1974, pages 175–183. On the same day, Kissinger addressed the UN General Assembly, asserting that “the world cannot sustain even the present level of prices, much less continuing increases.” The text of his speech is in the Department of State Bulletin, October 14, 1974, pp. 498–504.
  4. An oil analyst and consultant to the Department of State.