Foreign Relations of the United States, 1964–1968, Volume XXXIV, Energy Diplomacy and Global Issues

214. Memorandum of Conversation¹

Washington, November 1, 1967.

SUBJECT

• Iranian Oil

PARTICIPANTS

• Hushang Ansary, Ambassador of Iran
• Anthony Solomon, Assistant Secretary for Economic Affairs
• Walter McClelland, NEA/IRN
• James Akins, E/FSE

After greetings Mr. Solomon opened by saying our long-standing friendship with Iran made it possible to discuss problems which arise between us in a completely frank manner (the Ambassador concurred) and frankly, the Iranian requests to the U.S. Government both here and in Tehran to insure greatly increased petroleum exports from Iran had caused us considerable difficulty. The Department and the U.S. Government had considerable sympathy for Iran’s aspirations and great admiration for its plans for development but this did not mean we were able to translate this sympathy and admiration into pressures on the American companies in the Consortium to comply with the Iranian wishes.

Mr. Solomon said that there should be no confusion about the relationship between American companies operating abroad and the Department of State. We give advice to companies before they go into a country, if they ask for it; we especially want our views known in cases where the companies ask for U.S. Government assistance. But once a company is in a country it is on its own. There are certainly some disadvantages to this but on balance we believe that they are far outweighed by the advantages in our free system where companies act according to their commercial interests rather than in following instruction from the U.S. Government. The host countries can therefore look on local branches of American firms as good citizens, not as tools of U.S. foreign policy.

It is very important to recognize both the very limited nature of U.S. influence over private firms and the reluctance, or even inability of the US Government to set commercial policies of these firms abroad. Venezuela for example has tried for eight years to get special consideration for its oil exports. While the case is not comparable to the Iranian requests there are some similarities. Venezuela is one of our best friends in the Hemisphere and we have a common problem with Castro but nonetheless, we have consistently refused to permit these important political factors to influence our purely commercial policy toward Venezuelan oil.

If the State Department should try to influence companies to favor Iran or any other country, the reaction from companies operating elsewhere and from Congress would be immediate and hostile. We can tell the American companies in the Consortium of the Iranian approaches to us and we can give them our views on the importance of Iran, as we have done repeatedly, but in spite of our warm friendship for Iran we cannot do more and Iran should not think that these mild interventions will outweigh the companies’ own purely commercial interests.

There are many complex factors which the companies have to consider. The comparative cost of oil in Iran and elsewhere is extremely important. And all of the American companies have interests in other oil producing countries which must be protected. (Incidentally it seems to us that it is in the interest of both Iran and the United States for such moderate Arab nations in the area as Kuwait and Saudi Arabia to be strengthened.)

We are very interested in the Consortium activities and note with pleasure that it has shown its willingness to see that Iran gets its fair share of the Middle East offtake, but given the vagaries of the oil industry, it is impossible to make long term commitments for offtake from Iran for the next five years or even through 1970.

We can also understand why the companies in the Consortium are disturbed by the Iranian desire to revise or even discard the 1966 offtake agreement only ten months after it had been concluded to the apparent satisfaction of all parties. As the Ambassador himself has noted, the continuing Iranian pressure on the Consortium to use all production facilities to their capacity has caused it to be reluctant to enlarge facilities until they are actually needed. This does not seem in the interest of anyone, as surplus capacity in Iran is necessary if Iran is to increase production rapidly during any future oil crisis.

Finally, the Consortium has a vast marketing network which is extremely important to Iran especially during times of a surplus of world oil production. We would hope that the amicable relationship between the Consortium and the Government of Iran which has proven so profitable to Iran will continue uninterrupted.

The Ambassador said the points were well made but he feared that the companies were ignoring other important considerations. Iran believes that its special position warrants special treatment; Iran has a development program which increases the wealth and the stability of Iran and thereby benefits the West and the Western oil companies. Iran is particularly disturbed at the increase in production of certain small Arab countries who are given far more money than they can use and who then give or lend this surplus capital to men like Nasser. The Iranians consider it ironic that the Western oil companies are willing to increase production and therefore royalties and taxes to these small countries which are, quite directly, financing a man who is committed to their destruction and to wiping out all Western influence in the Middle East. Such a policy can only aggravate the instability of the area. Iran believes that there is more than short-term economic profit to be considered and the oil companies should look once again at what Iran is doing with its income and compare it with actions of the small Arab countries.

Mr. Solomon said U.S. has investments abroad valued at about $71 billion. The world-wide investment in oil is of course important but it is only a minority of the total. American companies operating abroad act according to their own economic interests as they see them and none serves as a tool of the U.S. Government. Mr. Solomon then said that the American oil companies have important investments in the small Arab countries the Ambassador referred to and if any of the local rulers thought that the American parent companies were shifting their emphasis from the Arab world to Iran—particularly if they suspected it was at U.S. Government instigation—they would certainly retaliate against the American firms.

We must also be aware of the danger that general, undiscriminating pressure frequently results in a reaction quite the opposite from that which is intended.

The Ambassador concluded by saying that it was clear that the Consortium could not make firm commitments for the next five years; Iran had not asked for this but only for an agreement in principle to increase production. The next development plan, starting in March of 1968, is based on a large income from the exploitation of oil and Iran must have this money. The problems might start even before the new development plan; the Ambassador had just been informed that because the increase in oil earnings was less than expected, Iran would probably have deficit of $110 million this year.

A short discussion of Iran’s economic development followed.

The Ambassador said Iran had a 9.5 percent growth in GNP last year and expected to have 11 percent this year—and all with a price inflation of only 0.5%. Mr. Solomon commented that oil had made all this possible. The Ambassador agreed, said that income from oil now runs about $700 million per year and provides about 70–75% of Iran’s foreign exchange earnings. But this does not mean that more money is not needed.

After leaving Mr. Solomon’s office, Ambassador Ansary commented on Mr. Solomon’s lucid presentation of the U.S. position and said it was important that it be understood in Tehran. While it is possible to explain some things in letters or telegrams some of the more subtle points may be lost. He said he thought he should return to Tehran to explain the U.S. position directly to his government before the Iranian position hardens to the point where retreat might be impossible.

1. Source: National Archives and Records Administration, RG 59, Records of the Department of State, Central Files, 1967–69, PET 6 IRAN. Confidential. Drafted by Akins on November 3.