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

92. Memorandum From the Administrator of the Federal Energy Administration (Zarb) to President Ford¹

Washington, January 13, 1976.

SUBJECT

• U.S. Government Oil Purchase Agreement

Proposal

The USG has the opportunity to negotiate with Iran an agreement for the purchase of 500 MB/D of crude oil for a period of five years, at prices below OPEC levels and with price adjustments tied to changes in the U.S. wholesale price index. The State Department proposes to negotiate for a firm discount of at least 50 cents per barrel with further savings anticipated on periodic price adjustments. Defense and FEA believe a firm discount of at least $1.00 per barrel is necessary to minimize the risk of short-term loss by the USG in reselling the oil. Iran’s interest in the agreement reflects anticipated financing difficulties in meeting its development and military needs and the low level of demand for Iranian crude in the currently depressed market.

Mechanics

The USG would purchase the oil directly from Iran and resell it to U.S. companies for delivery to the U.S. The Technical Purchasing Authority (TPA) provision of the Energy Policy and Conservation Act (EPCA) would provide enabling legislation, although the required appropriations legislation would be enacted only after the Congress had the chance to review the proposal. (A more detailed paper developing the mechanics of the proposal is attached.)²

Advantages and Disadvantages of Proposal

The principal advantages of the proposal identified by the interested agencies are essentially international and political.

• The relationship between the U.S. and Iran would be strengthened, and a possible severe cutback in Iranian purchases of U.S. military equipment and industrial goods could be averted.

• A measure of instability would be introduced into the international oil market by Iran’s violation of OPEC agreements, and the doubling of Iran’s share of the U.S. market at the expense of other OPEC countries. These factors could weaken the OPEC cartel’s ability to unilaterally establish prices and production levels.

• The U.S. would switch about 8 percent of its oil imports to a cheaper and a politically more secure (i.e., non-Arab) source. An estimated annual savings of $180 million—assuming an average $1.00 per barrel discount—versus a total import oil bill of over $28 billion would result.

The principal disadvantages of the proposal identified by Defense, CEA and FEA focus on the energy and economic aspects and the domestic political implications.

• Involving the USG in the business of buying and selling oil would encourage those proponents of greater governmental involvement in the oil industry generally and of nationalization of imports more specifically.

• The amount of savings to be gained is not significant and the benefits to consumers would not be identifiable.

• The 500 MB/D lifted from Iran would displace some liftings from Saudi Arabia, which probably would threaten the US/Saudi relationship.

• The size of the discount would not significantly undermine OPEC’s strength, and the indexation feature would represent an unfortunate precedent, not only with respect to Iran, but also with respect to other oil producers and raw materials exporters in general.

• The market and revenue pressures on Iran that have caused Iran to seek a bilateral agreement with the U.S. represent precisely the OPEC vulnerability to market forces that consuming countries are trying to encourage.

• The nature of the advantages preclude their being discussed publicly with Congress, either because of the political sensitivity of the issue or because the economic advantage would not be deemed to be significant.

Consideration of a Possible Alternative

If it is decided not to pursue the proposal currently under consideration, the possibility of entering into a sizable oil purchase agreement to fill the strategic reserves mandated by the EPCA may warrant consideration. Since the USG, under such an arrangement could commit the oil to reserves and therefore obviate any market impact, a potential supplier might consider a deep enough discount, providing sufficient economic benefit, to override domestic political considerations. Such a proposal could be evaluated in the context of the Early Storage Program and the Strategic Storage Program presently being developed in the Federal Energy Administration.

Conclusion

State discounts some of the disadvantages outlined above, but joins Defense, CEA and FEA in concluding that a decision to proceed with the proposal should be deferred for further evaluation of the likely responses of the oil market and of the Congress.³

1. Source: Ford Library, National Security Adviser, NSC Middle East and South Asian Affairs Staff: Convenience Files, Box 7, Iran—Oil. Secret.
2. “Mechanics of Oil Purchase Agreement” is attached but not printed.
3. After reading Zarb’s memorandum, Scowcroft sent a memorandum to White House Staff Secretary James E. Connor, January 17, in which he wrote: “I fully support the objectives of the proposed arrangement with Iran. However, while it may not be possible to conclude the arrangement immediately, I recommend that we press ahead as a matter of the highest priority to resolve the issues which we now find troublesome.” (Ford Library, National Security Adviser, NSC Middle East and South Asian Affairs Staff: Convenience Files, Box 7, Iran—Oil)