Foreign relations of the united states 1969–1976 volume XXXVII energy crisis, 1974–1980 department of state washington
Memorandum From Robert Hormats of the National Security
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Memorandum From Robert Hormats of the National Security
Council Staff to Secretary of State Kissinger
Washington, August 13, 1975.
Steps to Prevent or Moderate an Oil Price Increase
There are indications that OPEC will increase oil prices as of Octo-
ber 1 by $1.50–$2 a barrel, but a final decision has not been made. There
are a limited number of possibilities for exercising a restraining influ-
ence, which are reviewed in this paper.
OPEC’s decision will probably depend on five factors:
—The economic strength of the importing countries. OPEC does
not want to cause, or to be perceived as causing, the incipient economic
recovery of the industrialized nations to abort. They recognize that
their economic fate is linked to the recovery. They also recognize that a
price increase in the face of stagnation in the industrialized world
would necessitate additional cutbacks in OPEC oil production, in turn
Source: Ford Library, National Security Adviser, Presidential Subject File, Box 4,
Energy (10). Secret. Sent for action. Brackets are in the original.
April 1975–October 1975 263
pressuring the cartel into the politically difficult process of production
allocation which it has heretofore been able to avoid.
—The perceived possibility of a political and psychological reac-
tion in the developed countries which would provoke retaliation
through an arms embargo, aid cutoffs or even more severe action.
—Fears of individual members that failure to support action could
cause deterioration of bilateral relationships with other producers, pro-
voking attacks from radicals, undermining OPEC solidarity, and de-
priving producers with payments deficits of the opportunity to in-
—The possibility of reaction from non-oil producing developing
countries, who are beginning to display recognition of the magnitude
of the problems which the last price increase has caused them. (OPEC
aid has offset less than one-third of recent increases in the LDC import
—The impact which a price increase could have on the progress
which has been made toward a Middle East settlement, resumption of
the consumer-producer dialogue, and the new initiatives this involves.
If these are the major criteria in OPEC decision making, it be-
hooves the United States—through Presidential or Cabinet-level state-
ments, through the media, and/or by low-key but firm approaches
through diplomatic channels—to make the following points:
—A price increase will have a significant economic impact on the
industrial nations whether still in recession, as most are, or moving
toward recovery. [CEA estimates that the United States would lose
.7–.9 percent of its GNP growth as a direct result of a $1.50–$2 per barrel
price increase; after reflows through trade and investment, the figure
might drop to .5 percent. Unemployment—already very high—would
increase by .2–.3 percent. Tax cuts and monetary stimulus might even-
tually offset the GNP and unemployment losses, but at a significant
cost in terms of inflation. For Western Europe, which is still not in the
recovery stage, the GNP decline would probably be on the order of 2
percent; for Japan, more than 3 percent. Furthermore, in these countries
there is less room than in the US for reflationary fiscal and monetary ac-
tions to moderate this impact, and they will consequently be less able
than the US to offset the lower rate of growth.] A message of this sort,
articulated by competent economists in the US, Europe, and Japan,
might convince OPEC that the market was too weak to sustain large
price increases without significant oil production cutbacks.
—The direct impact on developing countries which do not pro-
duce oil, exacerbated by the lower level of consumption (and imports)
associated with a lower rate of growth in the developed world, would
be to further reduce growth, increase unemployment, and worsen pay-
ments deficits. On top of this would fall the higher prices of industrial-
264 Foreign Relations, 1969–1976, Volume XXXVII
ized country exports associated with increased oil prices and a resur-
gence of inflation. The total balance of payments impact on the LDC’s
would be roughly $1.5 billion; for the MSA’s alone it could be $500 mil-
lion. The loss in GNP growth could be as much as 5 percent. This mes-
sage could be conveyed, in a low-key fashion, to Third World and
—The negative domestic reaction could make it difficult for the
United States (and other industrialized countries) to undertake the
measures we are planning to improve our economic relationships with
the developing world, and with the oil producers in particular. In view
of the fact that (according to Treasury) the purchasing power of a barrel
of oil as of December 1974 was roughly 4½ times what it was in 1955, in
spite of recent inflation caused in part by the last price increase, Amer-
icans will see no justification for a new increase. We might be forced by
Congressional/public pressure to reduce the level or slow down the
pace of our military and economic assistance as well as of activities
such as the Joint Commissions, which are designed to encourage closer
private sector relationships with the developing and oil producing
—Since the breakup of the consumer/producer preparatory con-
ference, the United States has made a major effort to re-establish a basis
for dialogue and cooperation with the developing world, including
particularly the oil exporters. We have undertaken a fundamental re-
view of our overall policy toward the developing countries, which has
produced the new approach articulated in your speeches in Kansas
City and Paris.
We will make additional proposals at the upcoming
Seventh Special Session of the UN. We have made great progress in es-
tablishing the conditions and understandings necessary to achieve mu-
tually beneficial cooperation. But this progress could be reversed by an
OPEC decision to increase the price of oil. Many in the US would raise
questions as to the wisdom of our more forthcoming attitude, arguing
for a far less positive or even hostile posture. This would seriously af-
fect bilateral relationships with key oil producers as well as the multi-
It is essential to convey the above message promptly to key OPEC
and Third World countries, and to encourage other nations, particu-
larly other consumers, to do the same since the process of analysis lead-
ing up to the September 24 OPEC decision has already begun. Modera-
tion becomes increasingly difficult once the momentum for an increase
begins to build. The producers are aware in general of our views on a
price increase but making a firm approach after agreement is reached
See footnote 2, Document 62, and Document 64 and footnote 4 thereto.
April 1975–October 1975 265
to resume the prepcon (along the lines of the attached message to King
Khalid which Bob Oakley and I drafted),
would heighten their aware-
ness. More general communications with other OPEC members and in-
fluential Third World countries might also have an impact.
To put it bluntly, it would be simply incredible for the President to
have to say after a price increase had taken place that he had not com-
municated with key OPEC leaders to make them aware of US opposi-
tion and the possible backlash effect in no uncertain terms, yet that is
the case at present. Moreover, as regards what you and the President
said at the 8:15 a.m. Saturday meeting on the economic problems in Eu-
rope, a substantial price increase will have an adverse psychological, as
well as economic, effect on the consuming countries, demonstrating
their helplessness in the face of the oil producers, even under IEA soli-
darity; it could also, of course, strengthen their efforts to reduce de-
pendence. It would certainly sour US public and Congressional atti-
tudes toward the producing countries, and this could make it more
difficult for us to defend and obtain approval of the economic initia-
tives to the Third World which you have developed. It would also
threaten legislation (e.g., foreign assistance) now pending before the
Congress, and could generate Congressional pressure for retaliatory
action against the producers (e.g., arms embargo, aid cutoff).
That you call a meeting of your key advisers to determine a
strategy for addressing the potential oil price increase or instruct that a
scenario be developed along the above lines to be submitted to you for
approval by Friday, August 15.
Request meeting be set up
Ask Robinson, Enders, Hormats, Sisco, and Oakley to prepare a
Not attached. See footnote 6, Document 79, and Document 80 and footnote 2
Kissinger approved this recommendation. No copy of the scenario has been
266 Foreign Relations, 1969–1976, Volume XXXVII
Memorandum From the President’s Assistant for National
Security Affairs (Kissinger) to President Ford
Washington, August 15, 1975.
Iran Bilateral Oil Deal
We have now reached agreement with Iran on the essential ele-
ments of the bilateral oil deal
(except for the interest moratorium pe-
riod as discussed below), but subject to USG acceptance for which we
will have to determine whether there is some existing authority.
The Shah has now indicated that if we are to proceed this must be
finalized by August 23 (8 days from now), to which is one month ahead
of the OPEC meeting of September 24 to consider the October 1 oil price
increase. The current status of our negotiations with further action re-
quired is discussed below:
1. The only major issue still unresolved is the question of the mora-
torium period; however, I believe that this can be compromised with
some flexibility on our part regarding the higher level of oil deliveries
which Iran desires during an initial period of the contract. We have
agreed to an additional 250,000 b/d (or a total of 750,000 b/d) during
an initial period from September 1, 1975 to February 29, 1976. This
would produce a cumulative average of 500,000 b/d (the contract level)
from an assumed starting date of June 1 which the Shah had requested.
Ansary advised me confidentially that the Shah would like to extend
this initial period of higher deliveries to December 31, 1976. Accord-
ingly, I suggest that we propose an interest moratorium of 120 days if
the initial period of increased deliveries terminates on February 29,
1976, or alternatively 150 days with the extension of this period to De-
cember 31, 1976.
2. With Congress out of session it is clear that our only hope is to
find some existing authority for this deal as we cannot obtain new au-
thority or an appropriation by August 23. From a limited and confiden-
tial review we had concluded that our only hope was through Treas-
ury’s right to issue notes combined with use of its Foreign Exchange
Source: Ford Library, National Security Adviser, Kissinger–Scowcroft West Wing
Office Files, Box 15, Iran (4). Secret; Nodis; Cherokee. Ford initialed at the top of the page.
For an earlier discussion of this issue, see Document 67. A copy of the draft oil
agreed to by Robinson and Ansary on June 30 was transmitted in telegram 6280 from
Tehran, July 1. (National Archives, RG 59, Central Foreign Policy Files, P840178–2008) As
U.S.-Iranian talks continued, Robinson sent further refinements of the agreement to the
Secretary in telegrams Tosec 80325/183102, August 3, and 20866 from Paris, August 13.
April 1975–October 1975 267
Stabilization Fund to cover any financial risk exposure and the Defense
Production Act to cover purchase and sale of oil. Accordingly, on Au-
gust 12 we developed with Iran’s Minister Ansary a set of procedures
which might be implemented on this basis as reflected in the memo-
randum—Elements of Agreement—at Tab A.
This document does not alter the basic terms which were con-
cluded with the Shah and Ansary in Tehran on June 30; however, it
does reflect a new implementing procedure which would be as follows:
a. The U.S. Treasury issues a note on the first of each month for the
value of the contracted oil deliveries for that month on receipt of bearer
contracts from the Government of Iran for immediate oil delivery.
b. The Treasury sells the bearer contracts to U.S. private companies
at auction prices or at cost to a U.S. stockpile or other USG programs.
c. Profits from (1) the difference between the contract price and the
auction price and (2) the interest moratorium, are credited to the For-
eign Exchange Stabilization Fund.
d. The Exchange Stabilization Fund covers any theoretical finan-
cial exposure, thereby avoiding congressional appropriation.
3. This is a highly technical matter which we have not yet dis-
cussed with Treasury lawyers; thus, we have no assurance that it will
prove to be a viable plan. There is a risk that further study will prove
our hopes to be unfounded; however, I believe that we should move
forward promptly with the following steps:
a. Confirm with Ansary that we will make every effort to conclude
this arrangement by the August 23 deadline but point out the possi-
bility that we may not be able to obtain required authority by that date.
At the same time we would propose the compromise on the interest
moratorium period as discussed above.
b. I will talk to Bill Simon and set the stage for an immediate inves-
tigation of the Treasury’s legal authority to make a commitment of this
type. It is critical that Treasury and State lawyers cooperate and try to
make the deal work, which is essential for success.
c. Assuming we are sufficiently encouraged regarding the possi-
bility of concluding this arrangement by the August 23 deadline, we
will send to Tehran by next Tuesday (August 19) State and Treasury
legal representatives for final drafting of the agreement.
d. Even if we determine that the USG has existing authority, we
should consult with certain key Members of Congress prior to commit-
ting to this Agreement.
Dated August 12; attached but not printed.
268 Foreign Relations, 1969–1976, Volume XXXVII
e. If it appears likely that we will conclude this Agreement, we
must consult with key members of IEA to minimize the possibility of
an adverse reaction which might weaken the solidarity of this
Only by moving forward aggressively and in accordance with the
plan outlined above can we hold open the possibility of concluding this
4. Attached at Tab B
are the points which I would make in dis-
cussing the matter with Bill Simon.
Undoubtedly he will raise the fol-
a. This deal appears to “bless” the current OPEC price level.
On the contrary:
—it represents a major crack in the solid OPEC front which could
lead to a break in OPEC prices reflecting market forces (in which case
we would cancel this Agreement).
—it partially protects us from the OPEC price increase on Oc-
b. It includes an element of “indexation” which might be viewed as accep-
tance of this principle.
Our argument is that we are obtaining oil in ex-
change for “Purchase Certificates” for U.S. products. To induce Iran to
make this kind of commitment we must provide them with assurance
of at least partial protection against declining value of the oil in terms of
U.S. product prices. The important point is that this only holds so long
as the formula price is less than the OPEC market price.
c. It could be viewed as a violation of the basic IEA understanding on bi-
lateral oil deals.
If properly explained I believe that IEA members would
see this as a move which could accelerate the return to a pricing system
based on market forces.
this program would represent:
—a first major break in OPEC solidarity,
—a lower price on a portion of our oil imports,
—an effective response to the likely OPEC price increase on Octo-
—a commitment assuring supply of oil to Israel as a replacement
for Abu Rudeis,
At an August 16 meeting in Vail, Colorado, Kissinger told Ford: “On the Iranian
oil, Simon is violently opposed to it. He still expects a price break. No one else in the
world expects the price to drop. Jamieson [of Exxon] thinks the sellers’ market is re-
turning.” (Brackets in the original) Ford stated: “We are going to do it. Simon can like it or
not.” Kissinger replied: “We do need his cooperation.” (Memorandum of conversation;
Ford Library, National Security Adviser, Memoranda of Conversations, Box 14)
April 1975–October 1975 269
—assured petrodollar recycling, supporting Treasury’s interest in
foreign exchange stabilization and the public’s interest in the sale of
U.S. goods and services.
On balance, it clearly serves U.S. interests and we should attempt
to conclude the necessary arrangements recognizing that we may be
frustrated in the end by lack of existing authority and the impossibility
of obtaining new authority by the August 23 deadline.
That you approve proceeding along the above lines to finalize a bi-
lateral oil arrangement with Iran.
Ford approved the recommendation and wrote: “Would want Chuck Robinson to
work with Frank Zarb & Alan Greenspan as he has in past.” Zarb and Greenspan had
sent Ford a memorandum on August 7 in which they asserted: “We both believe that in
the light of an almost certain OPEC increase in October that this transaction can be con-
structive as embargo protection, as well as bringing pressures on the cartel.” (Ibid.,
Kissinger–Scowcroft West Wing Office Files, Box 15, Iran (4))
Telegram From the Department of State to Selected
Washington, August 20, 1975, 0109Z.
196703. OECD Paris pass Lantzke; Brussels pass Davignon.
French Consensus Proposal for Reconvening Prepcon.
Source: National Archives, RG 59, Central Foreign Policy Files, D750287–0508.
Confidential. Drafted and approved by Anne O. Cary (E). Sent to Brasilia, Kinshasa, New
Delhi, Tokyo, Jidda, Oslo, Tehran, Caracas, Bonn, London, Copenhagen, Stockholm,
Dublin, The Hague, Luxembourg, Rome, Madrid, Ankara, Bern, Vienna, Ottawa, and
Wellington, and repeated to USOECD Paris and USEC Brussels.
Davignon responded by urging that the United States “not formally answer the
French aide-me´moire until after the meeting of the IEA Governing Board” on August 25.
He said that he thought IEA members could “be persuaded to support the U.S. position if
they are given an opportunity to discuss it and if they are not presented with a fait accom-
pli.” (Telegram 7407 from Brussels, August 20; ibid., P850081–2027) Enders phoned Da-
vignon and told him that the U.S. response to the aide-me´moire “did not constitute for-
mal USG acceptance of the French consensus proposal” but, rather, indicated U.S.
agreement that the “scenario proposed was an acceptable basis for resuming the dia-
logue.” Enders added that the United States did not intend to accept the consensus pro-
posal formally until four points were “clarified to [U.S.] satisfaction,” as well as “those
which may be raised by the other nine invitees.” (Telegram 198251 to Brussels, August 20;
270 Foreign Relations, 1969–1976, Volume XXXVII
1. Following aide-me´moire delivered by French Charge´ August 18;
same text handed each of 10 Prepcon participants.
We understand in-
vitations to Prepcon will be issued only when 10 have indicated to
French this paper acceptable basis for meeting.
US response follows
2. “It is understood that the questions to be considered in the dia-
logue between industrialized countries and developing countries are
energy, raw materials, and development problems, including all re-
lated financial questions.
3. These questions will be considered on an equal footing. Partici-
pants in the dialogue will, in particular, make every effort to advance
toward constructive solutions in each of these areas.
4. A new preparatory meeting will be held in Paris at the earliest
possible date, and no later than October 15, with the same participants,
at the same level, and under the same rules of procedure (in particular,
with respect to observers) as the preparatory meeting of last April.
5. The title of this meeting will be: ‘Preparatory Meeting for the
Conference Between Industrialized Countries and Developing
6. The preparatory meeting will have the task of:
—Confirming the consensus reached at the April preparatory
meeting on the convening of a limited but representative conference,
the number of its participants, and the manner in which they shall be
—Submitting to the conference between industrialized countries
and developing countries proposals relating to the creation of commis-
sions and their composition (members and observers).
The United States, the European Community, Japan, Saudi Arabia, Iran, Algeria,
Venezuela, Brazil, India, and Zaire.
Sauvagnargues announced on September 15 at the EC Council of Ministers meet-
ing in Brussels that the Government of France had issued invitations to Prepcon II, which
would begin on October 13. (Telegram 23764 from Paris, September 16; National Ar-
chives, RG 59, Central Foreign Policy Files, D750320–0426)
The Department replied in telegram 197496 to Paris, August 20: “The Government
of the United States is pleased to accept the points made in the August 18 aide-me´moire
of the Government of France as the basis upon which it would accept an invitation to
renew the dialogue between consumers and producers.” It then clarified the points upon
which it wanted the U.S. position “to be unambiguous,” including points 2–1, 4–1, 4–9,
and 5–2. (Ford Library, National Security Adviser, Presidential Country Files for Europe
and Canada, Box 4, France—State Department Telegrams from SECSTATE–NODIS (3))
On September 9, Kissinger wrote Sauvagnargues: “I am pleased to learn that discussions
between our respective representatives have resolved remaining differences with regard
to the consensus proposal circulated in your aide-me´moire of August 18.” (Telegram
213668 to Paris; National Archives, RG 59, Central Foreign Policy Files, P850033–1986)
April 1975–October 1975 271
7. Preliminary work for the preparatory meeting should be done in
such a way that consensus may be reached within no more than two to
8. The preparatory meeting will be followed, within a period not to
exceed two months, by the conference between industrialized countries
and developing countries, composed of 27 members, 8 and 19 for each
of the two groups respectively. Each group will choose its repre-
sentatives to the conference within no more than a month after the pre-
9. The Conference Between Industrialized Countries and Devel-
oping Countries will open at the Ministerial level. Like the preparatory
meeting, it should last no more than two to three days.
10. The primary task of the conference will be to reach decisions on
the proposals which shall be submitted by the preparatory meeting for
11. This should lead to the creation of four commissions corre-
sponding to the themes of the dialogue, determination of how they
should be composed, and agreement on how to follow up the work of
12. It would be advisable for these commissions to have no more
than fifteen members. In setting up the membership of each commis-
sion, each of the two groups making up the conference will choose
among its own members those who, by virtue of their particular in-
terests as well as the general significance to be attached to their partici-
pation, seem best suited to be included, so that the proceedings may
take place in an efficient and responsible manner. Each of the commis-
sions will be presided over by two co-chairmen, designated respec-
tively by each of the two groups.
13. The commissions will be made up of high-level experts.
14. The commission on energy will have the task, within the frame-
work of a general survey of world prospects for production and con-
sumption of energy, including hydrocarbons, of facilitating, by appro-
priate ways and means, arrangements which seem desirable between
oil producers and consumers.
15. The commission on raw materials will have the task of facili-
tating, by appropriate ways and means, in the light of the existing situ-
ation, arrangements which seem desirable in the area of raw materials,
including food commodities which are of particular interest to devel-
16. The commission on development will have the task of facili-
tating, by appropriate ways and means in the light of the existing situa-
tion, arrangements which seem desirable in the area of cooperation for
272 Foreign Relations, 1969–1976, Volume XXXVII
17. The commission for financial matters, while respecting areas of
competence of the international institutions (IMF, World Bank), will
study all financial problems related to the work of the three preceding
commissions. It will be made up of a limited number of members from
each of these three commissions.
18. The commissions on raw materials and development will, in
particular, consider the work being done in other appropriate interna-
tional forums and will establish the necessary liaison with them.
19. Joint meetings of commission co-chairmen may be provided for
20. Observers from organizations directly concerned with the
problems under consideration may sit with the commissions and have
the right to speak.
21. The conference will meet again at the Ministerial level within
about twelve months.
22. A meeting or meetings of the conference at the government of-
ficial level could perhaps be held at least six months after the first
meeting of the conference at the Ministerial level.
23. It would be desirable to reach a consensus on these various
points within a fairly short time so that the convening of a new prepara-
tory meeting may be announced as quickly as possible.”
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