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

9057. For the Secretary from the Ambassador. Ref: Tehran 9001 and the Shah’s Press Conference of December 23.2

The consternation caused by the doubling of Persian Gulf crude oil prices provides incentive for the European Community to join urgently with the United States, as per your call earlier this month,3 in a [Page 775] common approach to the energy problem.4 These new prices will hold only for the ninety days after January 1, 1974. Already the Kuwaiti Oil Minister is talking of another increase. The Shah in his press conference of December 23 wants to use this period to establish the price of crude oil in comparison with other sources of energy. Put another way, the time has come for the industrial countries of the world to fashion an approach toward the oil producers and to establish a dialogue between OPEC and the OECD to work out some kind of solution to the present totally unsatisfactory state of affairs. OPEC will meet January 7 to devise its strategy vis-à-vis the OECD. It may well be based on the Shah’s concept. (May I recommend that you read his entire press conference of December 23.)
The Shah’s thinking has changed dramatically during this year. When I first saw him last spring, he was in favor of keeping oil prices down so as not to encourage price rises in the US and Western Europe where he buys most of his imports. The doubling and in some cases tripling of commodity prices in the US this past summer staggered him and faced him with tough problems dealing with inflation in Iran. The October war and resulting oil embargo set the stage for skyrocketing crude prices. Iran could not lag behind. “I cannot get less for my oil than other countries,” said the Shah. Yet he realized that the chaotic price situation must be brought under control. After much thought he developed his concept of trying to relate the price of crude oil to the cost of alternative sources of energy. This idea may be overly simplistic, but it confronts the industrial West and Japan with a challenge the solution to which will engage industry, government and economists across the spectrum.
The developing world will be hardest hit by the latest increase. India’s five-year economic plan will go into the trash barrel. The Shah’s suggestion for helping India help herself seems hardly adequate in the premises. What further price rises will do in these countries is all too clear. In short, it can be said without exaggeration that the non-Communist world is in a fair way to being shaken to its economic foundations. Against this background the United States while joining with the European Community to tackle this problem may also want to [Page 776] give thought to the plight of the developing world and invite its recommendations.
What one does to deal with the OPEC price onslaught is no insignificant question. Until now the approach has been one of pleading, of diplomatic démarches, of appeals to the better self. It is no wonder they have been unavailing. The leaders of these countries know they have the whip hand, remember every denial or indignity of the major oil companies over the years, and are in no mood to have commodity prices float freely in the market while crude oil prices do not. They understand very well too the desire for independence from government control of the majors in the United States and the inability of the USG to do anything except weigh in with words when some decision goes against the majors. Perhaps it is time the USG examined the effectiveness of the majors as negotiators for the American people and their standard of living. In any event, I would like to suggest that finding the answers will require your personal leadership in bringing together the relevant elements of the US economic life to devise an approach to a problem which in the short term at least is the most important economic challenge faced by the industrialized world since World War II.
  1. Source: National Archives, Nixon Presidential Materials, NSC Files, Box 630, Country Files, Middle East, Iran, Vol. V. Secret; Immediate; Cherokee; Nodis.
  2. According to telegram 9001 from Tehran, December 21, the Shah wanted the Persian Gulf members of OPEC, who were to meet in Tehran December 22–23, to do away with the posted price system and fix the price of crude oil in relationship to alternate sources of energy, the equivalent cost of which was between $8 and $14 barrel. (Ibid.) Kissinger recalled that the cost of oil per barrel at the time was $5.12, creating a 387 percent price increase from October. (Years of Upheaval, p. 885) On December 23, Amouzegar announced, on behalf of OAPEC, a new posted price of $11.60 per barrel for Arabian light crude, doubling the price and yielding about $7 per barrel profit for Persian Gulf producing governments. In his press conference the same day, the Shah stated his sympathy for developing nations and said part of Iran’s extra revenue would be invested in both developed and developing nations. (Telegram 9031 from Tehran, December 23; National Archives, RG 59, Central Foreign Policy Files)
  3. See Document 264.
  4. In a meeting with Akins on December 26, Saqqaf, Fahd, and Yamani told him that Saudi Arabia had “strongly opposed” the price increase at the Tehran meeting, but all other OPEC members, led by the Shah, wanted oil prices to be between $10–$14 per barrel. Faisal had “chewed Yamani out” because Faisal thought the higher oil prices “would hurt the world,” and turn “the world against the oil producers for purely economic reasons.” Akins complained that “Tehran was a catastrophe and Kuwait was an insult, given our political actions in the last two months.” (Telegram 5703 from Jidda, December 26; National Archives, Nixon Presidential Materials, NSC Files, Box 630, Country Files, Middle East, Saudi Arabia, Vol. IV) Akins was referring to the OAPEC meeting in Kuwait; see footnote 2, Document 265.