Foreign relations of the united states 1969–1976 volume XXXVII energy crisis, 1974–1980 department of state washington
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John M. Dunn Acting Executive Director Council on International Economic Policy Brent Scowcroft Assistant to the President for National Security Affairs 94. Memorandum From the President’s Assistant for National Security Affairs (Scowcroft) to President Ford 1 Washington, February 16, 1976. SUBJECT International Energy Agency Adopts Long Term Energy Cooperation Program On January 30 the International Energy Agency adopted a long term program of cooperation 2 which closely resembles the one pro- posed in Secretary Kissinger’s speech of February 1975. 3 The following are major points in the program: 1 Source: Ford Library, National Security Adviser, Presidential Subject File, Box 4, Energy (10). Secret; Sensitive. A stamped notation on the first page reads: “The President has seen.” Ford initialed the memorandum. 2 In telegram 3089 from USOECD Paris, January 30, Enders reported to Kissinger that the IEA Governing Board at its January 29–30 meeting adopted the Long-Term Cooperation Program. (National Archives, RG 59, Central Foreign Policy Files, P840090–1665) Telegram 3092 from USOECD Paris, January 31, provides a summary of the 2-day meeting. (Ibid.) Telegram 3305 from USOECD Paris, February 3, includes the text of the IEA Secretariat’s conclusions regarding the Governing Board’s discussions. (Ibid., D760040–0978) See also Document 90. For the text of the Long-Term Cooperation Program adopted at the January 29–30 Governing Board meeting, see Scott, The History of
vol. III, pp. 175–204. 3 See footnote 4, Document 39. 365-608/428-S/80010 334 Foreign Relations, 1969–1976, Volume XXXVII —A minimum safeguard price (MSP) of $7 per barrel FOB Persian Gulf (equivalent to $8–$8.50 landed in the US). State believes that authority to implement the MSP is available to the President in the na- tional security provisions of the Trade Expansion Act of 1963. To avoid a potential showdown with Congress, our negotiators stated that the agreement binds the US to the extent that authority is presently avail- able to the Executive to implement such a price. If such authority is not available the Executive is bound to seek necessary authority from the Congress should implementation of the agreement be required (i.e., a drop in the world price below the MSP). —Agreement of participating countries to consider, on a case-by-case basis, off-take guarantees to other IEA members joining us in large scale energy projects in the US. —Agreement to establish an overall R&D strategy for the group, in- cluding technical assistance in helping each country develop its own R&D program, expanded exchanges of R&D information, and joint projects. —Establishment of conservation targets, a monitoring of conserva- tion programs, and an exchange of information on conservation techniques. —Agreement not to impose new restrictions on access of IEA members to energy investment and supplies in other IEA countries (Canada, be- cause of its provincial problem, reserved on this provision). A few aspects of this long term program posed difficulties for indi- vidual IEA member countries. But the widespread conviction that it was important to make progress in the IEA in the face of continuing OPEC domination of oil prices overcame this reluctance. No partici- pant believes that these efforts will substantially weaken OPEC in the immediate future. Consumer cooperation, especially with respect to new investment, technology and reduced consumption, could begin to restore a better balance to the energy market, thereby strengthening consumer position relative to OPEC after four or five years. US leadership in IEA has persuaded countries which were at first reluctant participants to realize that their ultimate interests were in strong consumer cooperation. Compared to the chaos of the immediate post-embargo period, when consumer nations were going their sepa- rate ways and were tempted to deal with OPEC on OPEC’s terms, con- sumer solidarity and confidence have come a long way. We are currently examining possible approaches to the next phase of our international energy policy. A joint NSSM/CIEPSM study is exa- mining measures to ensure a reliable supply of required energy im- ports at reasonable prices over the next five years, with special empha- 365-608/428-S/80010 October 1975–January 1977 335 sis on the possibilities for influencing OPEC pricing and production decisions. 4 It will examine the following: —projections of US energy dependence; —possibilities for diversifying US imports and encouraging pro- duction in countries willing to export more oil; —the character of the OPEC cartel and its likely performance, mo- tivations and objectives; —factors most likely to influence OPEC’s decisions in a way most favorable to us and our allies; —ways to strengthen the IEA; and —near term possibilities for encouraging OPEC restraint. The study will be completed by the end of March. 4 See Document 93. 95. Memorandum of Conversation 1 Washington, March 13, 1976, 10 a.m. PARTICIPANTS The Secretary General Scowcroft Frank Zarb Charles Robinson Paul Barbian, Notetaker SUBJECT Iran Oil Negotiations The Secretary: Frank, how have you been? Zarb: Just fine, Henry. Your speech has really caused a sensation. 2 The Secretary: It has generated a new definition of non- partisanship. 1 Source: National Archives, RG 59, Central Foreign Policy Files, P770092–0067. Se- cret; Sensitive. 2 Kissinger gave a speech before the World Affairs Council in Boston on March 11 defending the Ford administration’s record on foreign policy. He argued that both liberal and conservative critics could together end up “wrecking the nation’s ability to conduct a strong, creative, moderate and prudent foreign policy.” For text of the speech, see De- partment of State Bulletin, April 5, 1976, pp. 425–432. Excerpts were published in The New York Times , March 12, 1976, p. 4. 365-608/428-S/80010 336 Foreign Relations, 1969–1976, Volume XXXVII Zarb: Anyone who can be attacked in one day by both Reagan and Jackson must be all good. The Secretary: They’ve been going around for weeks attacking American foreign policy and accusing us of weakness. And the first time I hit back, they call it unfair. But I’ve got news for them, I’m going to hit them again in Dallas on March 22. 3 Scowcroft: Even Carter hit back. I understand he’s got Brzezinski working for him. That won’t help him very much. Robinson: I understand Carter wants your job. The Secretary: Brzezinski is a total whore. He’s been on every side of every argument. He wrote a book on Peaceful Engagement and now that we are doing most of what he said in the book, he charges us with weakness. Zarb: May I say a few things about oil? The Secretary: Of course. Zarb: We have been talking for the last 6 months about this Iranian oil deal but recently Congress passed a bill of tremendous importance. 4 It gives us a very important international tool. Under this legislation, we are able to buy 1 billion barrels of oil as a government. The one bil- lion barrels of oil will be stored as a reserve. We can begin buying the oil just as fast as we can build storage facilities. The Secretary: You mean one billion barrels of oil per year? Zarb: No, one billion barrels of oil total. Robinson: That’s about 500 thousand barrels per day. The Secretary: For what period of time. Robinson: 500 thousand barrels per day for about 1 year. Zarb: There’s no point worrying about logistics. The point is we have buying power. The Secretary: Who buys the oil? Zarb: I do. The Secretary: Does that mean that DOD is out of it? Anything that excludes DOD, I’m for. Zarb: The main advantage of this new tool is that it allows us to construct a deal whereby members of OPEC can sell cheaper than the market price and can say that they are not selling to the market—rather 3 Kissinger delivered an address on foreign policy to the World Affairs Council in Dallas on March 22. See Department of State Bulletin, April 12, 1976, pp. 457–465. 4 Reference is to the Naval Petroleum Reserves Production Act of 1976 (P.L. 94–258), which President Ford signed on April 5. The act authorized the Secretary of the Interior to establish national petroleum reserves within the United States that would be regulated in a manner consistent with the total energy needs of the country.
365-608/428-S/80010 October 1975–January 1977 337 they are selling for storage. And we can make the commitment that we will store the oil and not let it enter the market for a given period of time. The Secretary: How much is one billion barrels of oil? Robinson: We have been talking to Iran about 500 thousand barrels per day for about a year and that would fill up the 1 billion barrels. Zarb: The one billion barrels is above the current import level. Scowcroft: The deal gives us two possibilities. Either we buy it at a discount and save the money and store it, or, eventually we put the oil on the market and that will also depress the price. Zarb: I don’t think we can break OPEC regardless of what we do with the Shah. The Secretary: Chuck, do you agree with that? Robinson: Well, not entirely. I would have to resist strenuously. The Secretary: I have a great club over Chuck. If he doesn’t agree with me, I will settle the Marcona problem for $5 million. Scowcroft: You can’t do that, I have stock in Marcona. Robinson: Although the amount of 500 thousand barrels a day doesn’t sound like a great deal, you have to remember that that would be new production for the Shah and it would take away from the amount that other suppliers can sell on the market. The Secretary: What I can’t get the economists in this town to un- derstand is that the importance of this deal is political. The political im- pact of 500 thousand barrels from Iran will be very large. I want the Saudis to weep and I want them to be uncertain. Simon keeps saying that the Saudis are willing to auction 2 million barrels. But they always come up with some last minute alibi. We’ve been screwing around with the Iran deal for the past year and quibbling over trivialities. Whether we get a dollar or a dollar 25¢ per barrel discount doesn’t matter. What’s important is the political impact. Chuck, do you disagree with me? Robinson: No. The Secretary: You’ll go far. Zarb: Can’t we get the two deals together? The Secretary: What I’m after is the symbolism of the Shah breaking the OPEC line. Robinson: We could tie the storage program in with two years of . . .
Zarb: We can do it many different ways. All of them will come out the same place. I can structure the cash flow however the Iranians want it. We will have to avoid selling the oil to private companies for resale. We have faced two main objections to the Iranian oil deal from the 365-608/428-S/80010 338 Foreign Relations, 1969–1976, Volume XXXVII outset. Greenspan is opposed to the Government becoming involved in the market system. He sees government involvement in the oil market as a form of communism. The other problem we’re facing is that if we get too small a discount, we’ll have a bad public image. That’s the ben- efit of the storage program. If we buy the oil for storage, we will be able to get a bigger discount from the supplier. Robinson: The deal would force a reappraisal of the OPEC form- ula. A 500 thousand barrel deal doesn’t have to be for five years. It can be phased out and the storage plan phased in. Zarb: Panama City didn’t help any. 5 The companies had armed guards and Lear jets and all of the things that gave the negotiations the worse possible image. The Secretary: Did we know about the Panama City meeting in advance?
Zarb: We knew there was going to be a meeting but I didn’t know where it was going to be. Robinson: The companies were close to a deal with the Saudis be- fore the Panama City. Zarb: They met to work out the terms of surrender. The Secretary: The cowardice and stupidity of US business amazes me. Some man named Hartley jumped me at a leadership meeting in Los Angeles and said that our negotiations with the Soviets for an oil deal 6
Zarb: Our main concern is selling the program to the Congress and the public. The storage legislation gives me all the necessary tools. I’ll have better leverage to buy; because of the lower prices the deal will have a better political image, and because the government is buying oil not for the free market but for storage, the freedom fighters will be put off. If we try to go the other way, with a straight bilateral deal, we won’t be able to bring along Rumsfeld, Greenspan, and the President. Robinson: Can’t we get the bilateral deal first and then phase in yours? Zarb: With this law, I can begin signing contracts for eight years. When I was in Venezuela, I described the deal to the Minister of Petro- leum and he called me back the next day to talk about it further. I didn’t give him any of the details because Chuck and I had agreed not to do that.
5 Representatives of the four U.S. partners in the Arabian American Oil Company, Exxon, Mobil, Texaco, and Standard Oil of California (later re-named Chevron), met with Yamani in Panama City, Florida, March 6–12 to negotiate an agreement on Saudi Arabia’s complete takeover of the company. At the time, the partners had a 40 percent stake in Aramco. (The New York Times, March 13, 1976, p. 45) 6 See footnote 2, Document 86. 365-608/428-S/80010 October 1975–January 1977 339 The Secretary: What would 500 thousand a day for a year do to our reserve position? Robinson: Well, we would have about 800 million barrels. The Secretary: That would not leave much left over for other countries. Zarb: I think we run up against the same problem there. Robinson: I’m very discouraged about our relationship with Greenspan and Defense. We’ve run up against the same problems every time. Scowcroft: If we have a deeper discount, would we be able to get more support? The Secretary: The Wall Street Journal confronts everybody as long it keeps the market free. Scowcroft: If we start as a Iran bilateral deal and then switch to storage as soon as storage is ready. I understand General Dymanics is negotiating with the Iranians right now to swap oil for weapons. The Secretary: Would the oil companies buy that kind of a swap? If we go ahead with it, we’ll wind up with a bunch of barter deals that give Iran exactly what they want. And that will dilute the political im- pact. They can set the price for military equipment at any level so there is no real discount. I don’t care about the economics of the deal. I want the Saudis to be unhappy. I want there to be a visible gap between the price we’re paying for oil and the OPEC price. I want the Shah to break the OPEC line. Scowcroft: Could we auction the oil? Zarb: Yes we could, but I suggest that we start the negotiations where everybody in the government is comfortable: with the storage program. Then move it back towards the bilateral deal. The Secretary: Suppose we get a very good price discount on storage. Then we could sell it to the public as a great achievement. Robinson: If we can get the two together, we can accelerate purchases. The Secretary: (to Zarb) I think it is a very ingenious idea. We can use the storage legislation as a lever to get the other thing. Scowcroft: Do you have a quality problem? Do you have enough storage for a billion barrels of heavy? Zarb: No, we need to have a mix of heavy and light. The Secretary: We could do a seven-year deal. Zarb: I would prefer a seven-year deal. We need to have 150 thou- sand barrels in place by 1978. The Secretary: It’s an ingenious idea. If we can marry the two to- gether, then let’s get off of DOD. They leak everything and I agree with Frank that we cannot move them.
365-608/428-S/80010 340 Foreign Relations, 1969–1976, Volume XXXVII Robinson: But that won’t solve the Shah’s problem. The Secretary: We can use the two-year deal as leverage for the five-year deal. We’ll get some impact on OPEC, if we get a seven-year deal at a discount. Scowcroft: And the storage program allows the Shah to hide be- hind the OPEC line. Robinson: A billion barrels is 500 thousand barrels a day for six years. It’s about 1 year of our crude oil imports. The Secretary: One year is a long time. Zarb: Let Chuck and I go ahead on some of the details. Robinson: Ansary will be here. The Secretary: Yeah, but let’s drop Defense. They’ll write a memo and leak it and that will hurt the Shah. Robinson: DOD hates the Shah. The Secretary: Why? Robinson: Because they think Saudi Arabia is more stable and a better ally over the long term. The Secretary: This deal wouldn’t upset relations with Saudi Arabia. It wouldn’t hit them in the stomach. It wouldn’t be like calling for the internationalization of Jerusalem. When Ansary is here, we’re going to have lunch. I need only 30 minutes with Ansary. Then lunch for the four of us. Then a social dinner. We will have to invite Zahedi to the social dinner. Paul, has DOD been invited to the dinner yet? Barbian: I’ll have to check. The Secretary: Do you know Ansary? Zarb: No. The Secretary: You’re probably too young. Robinson: He wants me to take him (Zarb) to Tehran. The Secretary: He really carries on. I’ve seen him in Zurich and Cannes. Zarb: I’m losing interest in the deal but I sure do want to meet Ansary. The Secretary: Okay. Our plan is to get the deal on storage plus some front end. And we’ll have a general discussion at the dinner with Ansary.
365-608/428-S/80010 October 1975–January 1977 341 96. Memorandum of Conversation 1 Washington, March 29, 1976, 12:50 p.m. SUBJECT U.S.-Iran Oil Agreement (II) PARTICIPANTS Henry A. Kissinger Charles W. Robinson Secretary of State Under Secretary of State for Economic Affairs Hushang Ansary Iranian Minister of Ardeshir Zahedi Finance and Economy Iranian Ambassador Frank G. Zarb Brent Scowcroft Administrator Assistant to the Federal Energy Administration President for National Security Affairs Rutherford M. Poats, E Notetaker Kissinger: We have been thinking about this project of a bilateral oil agreement for a year and a half. I have continued to think that it would be in our interests from the points of view of both immediate and long term strategy. What we have not been able to do is to come up with a workable scheme because to do so we must satisfy everyone here that putting the government into the buying of oil will achieve an advantage for the United States. On your part, you have difficulties as an OPEC member in giving us a financial advantage. I believe we can find a way and that we ought to be able to put together an agreement now.
The question is whether we can find a formula that will have full support within the Administration and can be presented with enthu- siasm on the Hill. At one time we were thinking of working it through Defense pur- chases. We have had to exclude that. If we could do it all with FEA, it would avoid a lot of bureaucratic problems. Frank has an idea. Let him 1 Source: National Archives, RG 59, Records of Henry Kissinger, Lot 91D414, Box 16, Classified External Memoranda of Conversations, March, 1976. Confidential; Nodis. Drafted by Poats. This lunchtime meeting continued a discussion that had begun at noon without Zarb and Scowcroft. The group met again for dinner at 8:30 p.m. with the addi- tion of Atherton and Ellsworth. Between his lunch and dinner meetings, from 4:34 to 5:18 p.m., Ansary met with President Ford in the Oval Office, during which Kissinger briefed the President on their progress regarding a bilateral oil deal. Ford assured Ansary that his “interest” was “for something being done.” The memoranda of conversation of all three of these March 29 meetings are printed in Foreign Relations, 1969–1976, volume XXVII, Iran; Iraq, 1973–1976, Documents 168–170.
365-608/428-S/80010 342 Foreign Relations, 1969–1976, Volume XXXVII present it now and then you can make your counter-proposal—or you can always just accept his proposition. Ansary: I’m always easy. Kissinger: Let me just make this clear: I am for an arrangement. Zarb: In looking at this question, we have to deal with two problems: The U.S. Government is not in the oil business, and to change this would take a strong showing that it was very advantageous to do so.
There is one vehicle now to get around these problems. It is our legislation to establish a Strategic Oil Reserve of one billion barrels with an initial target of 500 million barrels by 1980. 2 FEA is authorized to purchase and store. We can make direct deals with domestic or foreign suppliers of oil. In doing so, we would not change our basic oil distribu- tion system; the oil would not go on the market except in an emergency. We would need to show that we could get very favorable terms in order to buy offshore—a significant discount below world market prices.
Kissinger: Before we get into prices, let me touch on one issue that I know is on the Shah’s mind: Iran wants to increase its sales revenues now, but the Strategic Reserve can’t buy much Iranian oil until 1978. Ansary: Yes, we started these discussions because we wanted to continue to purchase U.S. military and industrial equipment, and by in- creasing our sales to you we could increase your sales to us—the best form of recycling. How can this be accommodated if you can’t start buying oil for the Reserve for a year and a half? Zarb: If we could come to terms on a long-term supply to the Re- serve, we could work out a solution to your cash-flow problem. Ansary: When we talk about financial benefits to the U.S., we must look at just what this means. If you follow the precedents of other gov- ernment agency purchases of oil, it would run through the majors, and they take a profit. We need to find an arrangement that deals with the gap between our sales to the oil companies and our capacity to pro- duce, and to do so in a way that gives the financial benefit to the U.S. Government, rather than the companies. Zarb: We assume that the Consortium companies will gradually increase their take-down from Iran. The Reserve program would be in excess of this. Ansary: How would you assure that there would be no erosion of normal Consortium sales growth in the U.S. market? The Strategic Re- serve does fit this concept, but the other sales? 2 See footnote 4, Document 95. 365-608/428-S/80010 October 1975–January 1977 343 Zarb: The Reserve purchases could over the next two years reach a rate of 300,000 barrels a day using tank farms and other interim storage. We could start the stream of payments to you earlier than the oil deliveries. Ansary: On the basis of a schedule you would set. Zarb: That’s one possibility. Ansary: I see. Then we need to turn to prices and other details. Robinson: Correct me if I am wrong, Frank, but there would be an- other way for FEA to take Iranian oil without storing it, right? Zarb: Yes, Title III of the overall agreement could provide for near-term acquisition by a U.S. Government agency to take it down through the major oil companies. Ansary: That’s what I don’t like. Robinson: On the basis that it would be incremental sales. Ansary: This would put someone in between us, taking a profit. Kissinger: If we buy it for storage, how will we get it? Ansary: Load it on your tankers. The question is the price. Kissinger: You would give us more or less the same profit margin as the Consortium companies get? Ansary: Our idea was to make it more advantageous to you but in a manner that would not put us in an embarrassing situation within OPEC. We could do this by linking prices to changes in your consumer price index. Zarb: If we can agree to a long-term Strategic Reserve scheme, we can then solve the interim problem. Ansary: What are the criteria for purchases for your Reserve? Zarb: We have authority to buy domestic oil or foreign oil. The types must match our refinery requirements and locations. Ansary: Will you have problems if you exclude domestic suppliers? Zarb: Yes. But the primary problem is the argument by some that we should use our government-owned oil. We have a present capacity to provide 160,000 barrels per day from government-owned sources, and this can rise to over 300,000 barrels per day in a year or so. My view is that we would achieve maximum benefits for the U.S. if we bought foreign oil, provided we could get the right prices. Ansary: What quality requirements? Zarb: We are developing a schedule of purchases by amounts and types and locations. Ansary: What proportion of light to heavy? Zarb: We are close to a final decision on this.
365-608/428-S/80010 344 Foreign Relations, 1969–1976, Volume XXXVII Ansary: When will you be ready to ask for an appropriation? Zarb: Friday. 3 Robinson: It will not be tied to Iran. If Congress comes through with the money, we will be ready to make a deal. Zahedi: I understand you have discussed with the Venezuelans and the Saudis buying their oil for the Reserve. Kissinger: That’s why we know the price can be $3 below the market. Ansary: If the Saudis sell it, the money goes into their reserves. If Iran sells it, the money goes back to you for your production and ex- ports of manufactured and agricultural goods. Zarb: That’s why we are trying to put our ideas together on a plan to use Iranian oil. (To Zahedi) Yes, the Venezuelans raised this subject when I was there,
4 and we discussed it in general terms. Ansary: Can you go into details today on what you need to make a decision? I want to be clear that the United States Government will be able to move on this and what steps must be taken. If later we find that it backfires, it would not be good for anyone. Frankly, one reason I have been dragging my feet on stating the terms and conditions Iran would accept is that over and over we have talked and nothing materialized. I don’t want to put our cards on the table and then get no deal. Kissinger: Frank, how soon could we act? I’d rather not complete any arrangement until the Congress has appropriated the money. Zarb: I agree. Ansary: We will abide by your suggestions as to the best route. Kissinger: I am impressed by the possibilities of Frank’s route. He has the legal authority and a program, with appropriations virtually as- sured. As soon as you and Frank and Chuck can work out an agree- ment, assuming the President’s approval, we could implement it im- mediately. We’ve got in this room now, except for the President, all the people needed to put this together. Ansary: Unless I am wrong, the last time I was here the President approved the idea of a government purchase agreement in principle. 5 3 April 2. 4 Zarb was part of a U.S. delegation led by Kissinger that visited Venezuela in mid-February. (Telegram 2056 from Caracas, February 20; National Archives, RG 59, Central Foreign Policy Files, D760066–0257) 5 Ansary was in Washington for the March 3–4, 1975, meeting of the U.S.–Iran Joint Commission. He met with President Ford and Kissinger on March 14. The memorandum of conversation is printed in Foreign Relations, 1969–1976, vol. XXII, Iran; Iraq, 1973–1976, Document 109.
365-608/428-S/80010 October 1975–January 1977 345 Kissinger: The President could order the departments to proceed. But this would lead to a situation in which objections emerged from within the Executive Branch during the Congressional hearings. The result would be to no one’s benefit. My bureaucratic instinct is that the most promising approach is Frank’s. The meeting I had with him a few weeks ago 6 broke the back of the problem. My recommendation is that you put everything on the table, get the main elements agreed, then— about a month before the final appropriation—you and Chuck and Frank get together and work out the final deal. In this way we could in good conscience testify that we did not have a deal with Iran before submitting the appropriation to Congress. Zahedi: How long do you expect the appropriation process to take? Zarb: Probably about 60 days. Kissinger: Is there any serious opposition? Zarb: None that we can see now, but you never can be sure. Zahedi: Perhaps this could be tied in with your visit, Henry. You could see His Imperial Majesty in Tehran and then we could have a meeting of the Joint Commission in Isfahan. 7 Kissinger: Isfahan belongs among the ranks of the most exquisite sights in the world. You will be seeing the President this afternoon and then Frank. I’ll see you again tonight. 6 No record of this meeting has been found. 7 Kissinger visited Tehran August 6–7 and attended a meeting of the U.S.-Iran Joint Commission.
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