Foreign Relations of the United States, 1969–1976, Volume XXXVII, Energy Crisis, 1974–1980

139. Memorandum of Conversation¹

Washington, November 16, 1977, 10:30–11:35 a.m.

SUBJECT

• President’s Meeting with The Shah of Iran, November 16, 1977, 10:30 a.m. to 11:35 a.m., The Cabinet Room

PARTICIPANTS

• The President
• The Vice President
• The Secretary of State
• Ambassador William Sullivan
• Alfred L. Atherton, Jr.
• Zbigniew Brzezinski
• Gary Sick
• Jody Powell
• Hamilton Jordan
• His Imperial Majesty Mohammad Reza Pahlavi Aryamehr, The Shahanshah of Iran
• His Excellency Abbas Ali Khalatbari, Iranian Minister of Foreign Affairs
• His Excellency Ardeshir Zahedi, Iranian Ambassador to the United States

[Omitted here is discussion unrelated to oil.]

The President then turned to the price of oil. He was encouraged by statements by Saudi Arabia and by the statement of the Shah the day before that he would not press for an increase in the price of oil at the upcoming conference in Caracas. The President said he hoped Iran would do whatever was possible to hold down the price of oil. Our country was strong enough to absorb some increase, although we will have a $30–35 billion deficit this year, largely as the result of our purchase of imported oil. He noted that according to our assessment, since 1974 there has been a 20 percent increase in the price of goods going into OPEC whereas there has been a 27 percent increase in the price of oil. This price increase has worked a great hardship on other nations as well. Some of our friends, such as the Germans, French and others, are rather timid on this issue and are unwilling to take a tough stand. They don’t want to antagonize their friends in the oil-producing nations. And the President understood this, since they needed the resources. The President noted that the weakening of the dollar hurts Iran and the other oil-producing countries as well. The President understood that Iran needs the oil revenues but there have been substantial increases since 1973. In our contacts with Saudi Arabia, they have progressed from not proposing an increase to actively opposing an increase at the next OPEC meeting. We are working directly with a number of nations—Tunisia (as heard), Kuwait, and others. Venezuela is the most eager for a price increase. We have absorbed approximately a $30 billion deficit. We are strong enough to do that. But this weakens the structure of the economy and we would like to ask for your help if you can.

The Shah replied that since the last increase a year ago, which was 10 percent, with Saudi Arabia setting its own level of five percent for six months, the average increase has obviously been between five and 10 percent. According to Iran’s figures, world inflation during that period has been rather high. The Shah said that he can notice that the cost of items which he has been buying since 1973 and the present have sometimes gone up as much as five times in price. He was giving these figures simply for the sake of speaking about facts. However, as far as Iran’s policy is concerned he knows that the Western economies are not in such good shape, especially in Europe, and if they were brought under more pressure they might not be able to solve their problem of unemployment. This could in turn affect the situation in France, Italy and other countries. Iran would feel it very badly if something happened in Europe. Therefore, Iran’s attitude was to be silent and, if necessary, to tell them what we think, i.e. “let’s give the Western nations a break,” and even to work for a freeze. But we have to realize that the same problem is going to be in front of us next year and the next year and the next year. The Shah mentioned that he had talked to Dr. Schlesinger on this very issue. Why not form an energy bond which could be sold to some people who don’t know what to do with all of their money? This investment could be repaid with interest, but in the meantime we could use the hundreds of billions of dollars of funds for the development of new energy sources. The only way we can find new sources of energy is to develop an equilibrium between the price of new sources of energy and the price of oil. If the price of oil remains so much cheaper, then people are not going to go for new sources. As far as the effect of lower prices on the oil companies, the Shah said that he didn’t mind. The oil in his country was completely controlled by the government, and he thought that perhaps it would be better if all oil deals were made on a government-to-government basis. But if the oil companies make distribution arrangements in private, it is nevertheless necessary that governments must be certain that they are not the losers in this process. “But we shall really be the people who will have this (a price freeze) in mind in Caracas. The Saudis will probably come along with exactly the same point of view.”

The President noted that if the world knew that a price freeze was based on a long-term arrangement with you, then others might be more interested in going along with such an arrangement and that would be welcomed. It would remove the constant threat which the consumer nations feel in not knowing what to expect next. If we could plan two, four, or even six years ahead on our individual problems it would be helpful. At the present time the business community is unwilling to commit itself to new plant construction because of uncertainty over energy. Part of this is our own problem since we have lacked an energy policy. We hope to take care of that problem in the near future. Of course, we are oil producers as well and in fact produce more oil than Iran. As a result, this gives us greater problems on energy policy than leaders such as Giscard or Schmidt. The President wondered if the Shah had gone beyond simply outlining the program on bonds. Did he have any more specific proposals?

The Shah replied that if the United States is interested (the President indicated yes, we are interested), he will brief Minister of Finance Ansari or Dr. Reza Fallah to come over to the United States and discuss this proposal with the United States.

President Carter said he welcomed this and that we would participate as oil producers.

The Shah noted that if in fact there is going to be a freeze in prices for 1978 there must be something concrete done or something concrete to show for this. At this point he referred to an AP item quoting Qadhafi as criticizing the Shah, saying that the Shah was the tool of the United States and that he only wanted his money to pay for U.S. advisers. He also quoted another item indicating that an Iraqi envoy to Tehran had indicated that they wanted a 23 percent increase in oil prices.

The President responded that he was sure that Iran could control Libya and Iraq.

[Omitted here is discussion unrelated to oil.]

1. Source: Carter Library, National Security Affairs, Brzezinski Material, Subject File, Box 36, Memoranda of Conversation, 11–12/77. Top Secret; Sensitive. The Shah visited Washington November 15–16. This memorandum of conversation and others with the Shah during his visit are scheduled to be printed in full in Foreign Relations, 1977–1980, volume X, Iran: Revolution, January 1977–November 1979.