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

219. Memorandum of Conversation¹

Washington, March 6, 1968.

SUBJECT

• Iranian Oil Situation

PARTICIPANTS

• Mr. George Parkhurst—SoCal
• Mr. George Ballou—SoCal
• Mr. George Piercy—Esso
• Mr. L.W. Folmar—Texaco
• Mr. Harvey Cash—Texaco
• Mr. Henry Moses—Mobil
• Mr. John Pendleton—Aramco
• Mr. J.J. Johnston—Aramco
• Mr. S.J. Anderson—Gulf
• Mr. Nestor Ortiz—Gulf
• Mr. Eugene Rostow, Under Secretary of State
• Mr. Lucius D. Battle, Assistant Secretary of State for NEA
• Other Departmental Officers

Mr. Rostow began by reviewing the general situation in the Persian Gulf, in the light of the proposed British withdrawal,² his VOA press conference, and the violent Russian attack on US policy there. Mr. Rostow’s message in his press conference had been a) for the US public, that the US does not have to fill every military vacuum left by a British or French withdrawal, and b) for the Russians, that the US is interested in seeing vacuums filled, and security assured. Our hope is that security can be provided by the cooperation of the states in the area. He believed that much of the current Russian propaganda was in preparation for Kosygin’s forthcoming visit to Iran.

Mr. Rostow noted that the two strong countries in the Persian Gulf are Iran and Saudi Arabia. Both are our friends and we are neutral in any controversy between them. We encourage their close cooperation.

The Shah wants good relations with Saudi Arabia, but there are conflicting claims and sensitivities. With respect to Bahrain, the Shah has no intention of using force, but Iran has a national-minded government and he cannot abandon national claims lightly. In such problems the USG tries to stay out, be neutral and help the cause of peace from the side lines. The USG has no plan for the Gulf, but it does not intend to let the Russians take over.

Mr. Rostow went on to say that we are now in a peculiar situation vis-à-vis Iran, with the Shah unhappy and suspicious that the USG has favored Saudi Arabia over Iran in the Median Line issue.³ The arms issue is also involved with special reference to Iran’s responsibilities in the Gulf after the British departure.

After thorough consideration of why the Shah feels as strongly as he does on the oil issue with the Consortium, Mr. Rostow remarked that while the government did not wish to take responsibility or to become involved in a commercial negotiation, we did have a national interest in successful and harmonious resolution of the oil negotiations, to the mutual satisfaction of the parties. We had important long term political interests in good relations both with Iran and with Saudi Arabia. Mr. Rostow wondered whether what the Shah really wants is the same level of production of oil as Saudi Arabia has. The Shah’s present unsettled mood is probably due to many other factors too. Russia is one, but the Shah knows the Russians are his enemies and wants his arms from the US.

Mr. Rostow commented that if current oil negotiations work out, he was hopeful that agreement on the Median Line could also be reached. He had raised the thought of arbitration, but there are many problems, including conflicting claims for various islands. Mr. Cash said that the Shah’s demands are so far from reality that they could not be met.

Mr. Rostow said that the Shah is also concerned with the internal rules of the Consortium. He believes that some companies are short of oil and would be very glad to take more if the internal rules of the Consortium permitted.⁴

Mr. Parkhurst said the French certainly want more, but they have only made a small investment and he questioned whether it was fair to other members of the Consortium to allow them to take more. Mr. Piercy pointed out that the demand for Middle East oil is limited and more offtake by some companies would reduce sales by others. In response to Mr. Rostow’s reiteration of the possibility that the psychological and political key to the Shah’s problem is equality with Saudi Arabia in production and growth, Mr. Parkhurst said he had never heard of this suggestion before, but, in any case, the companies involved had no cartel and could not arrange matters that way. In the first place, there was no way to divide up the “pie” and secondly, although the companies can explain how (as a result of the Arab-Israeli war and aftermath) Iran’s offtake grew 22% in 1967 as compared to about 8% in Saudi Arabia, they will be hard-pressed this year by the Saudis who will be anxious to catch up. Mr. Cash agreed that whatever the Shah gets, Saudi Arabia will also demand. If the Shah gets cost oil, then Saudi Arabia—and Kuwait—will also demand it.

Mr. Piercy said there had been some confusion in the GOI demands on the Consortium. The GOI demand for $5.9 million over five years apparently covered all GOI oil revenue. However, income from the various joint ventures in the Gulf would mean only about $14 million a year, from a production of 150,000 bpd. The “gap” in 1968 is about 250,000 bpd and this will be worse in future years.

Mr. Rostow voiced his hope that the matter could be resolved. Mr. Cash said that in his opinion the Consortium was heading for a head-on collision with the Shah. Mr. Parkhurst said that the only hope for working out a solution was in confidential discussions and now the Prime Minister has brought charges in the open. Mr. Folmar commented that the Consortium had done the best it could.

Mr. Rostow said that all he could add, from the point of view of the United States, is that Iran is the strongest country in the Gulf, is moving ahead, and is interested in maintaining its momentum. The USG must rely on Iran, not in any way at the expense of Saudi Arabia, but a cooperative relation between Iran and Saudi Arabia was necessarily the keystone of United States plans and hopes for the area.

Mr. Parkhurst commented that although Iran may be number one, Saudi Arabia and Kuwait were the next two in importance. Mr. Rostow agreed and said that only if all worked together could serious problems in the South of the Gulf be forestalled.

Several representatives pointed out foreseeable problems for Middle East oil in the coming year. Mr. Piercy said 1968 was considered a low growth rate year—or “Crunch Year”—with increasing competition with Libya and continued closure of the Suez Canal likely. Mr. Parkhurst mentioned that the sulphur problem was becoming more severe, with more emphasis on quality. African producers had a location advantage, even if the canal were open, and he could see low Persian Gulf growth down the road.

Mr. Rostow then mentioned the stir caused in Germany when it appeared that some foreign buyer, through a Swiss bank, was trying to take over the (German) Gelsenberg Oil Company. Although the offering buyer had not been identified, there had been deep concern that Americans were trying to take over the company, and the Germans showed marked political sensitivity on the subject. This sensitivity to American ownership, even in Germany, pointed out a field in which American companies operating abroad should carefully consider their policy in the long run. Companies should consider bringing in foreign partners and spreading the venture over a wider range of people. The troubles we had had in Mexico and Canada were not unique. It would be prudent to establish as broad a base as possible for American investment abroad.

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 McClelland and Rostow and approved in M on March 14.
2. Due to its continuing fiscal crisis and subsequent budgetary constraints, the United Kingdom had announced its decision to withdraw its military presence from “east of Suez” by 1971.
3. Reference is to an ongoing dispute over division of the waters in the Persian Gulf and the search to determine a “fair” median line. Because Gulf waters are so shallow, there is no differentiation between a Continental Shelf and a seabed, leading to ownership problems over the oil resources of the seabed. The issue was further complicated by the question of sovereignty over the large number of islands in Gulf.
4. See Document 217.