Monday, May. 24, 1976
The Great Iranian Swap
When he went to Tehran last week, Federal Energy Administrator Frank Zarb expected to talk only about oil prices. But then a reporter asked an unforeseen question. Was the Iranian government trying to barter its crude oil for U.S. military hardware? Yes, replied a startled Zarb. The proposal was still in its preliminary stages, he said, "and there's hardly anything to comment on."
But the secret of what could be a multibillion-dollar deal was out. Executives at three major U.S. defense contractors--General Dynamics, Boeing and Northrop--reluctantly confirmed that such a swap is indeed under consideration. TIME has learned that the initial overtures to the companies were made in letters from General Hassan Toufanian, Iran's Vice Minister of War, after the barter proposal had been cleared by the U.S. departments of Defense, State and Treasury. The military equipment that would be bartered includes General Dynamics' F-16 fighters, McDonnell Douglas/Northrop's F-18s and Boeing's electronics-jammed Airborne Warning and Control System (a sort of flying command center).
A barter arrangement makes eminently good sense for the Iranians. Shah Mohammed Reza Pahlavi has ordered $12 billion worth of military equipment from manufacturers in the U.S. and Europe. Despite the nation's vast oil wealth, it is having cash-flow problems. It will post a $2.4 billion budget deficit this year, mainly because world demand for oil remains well below expectations. Bartering would thus allow Iran to employ its excess oil production capacity and use the crude instead of cash to pay for the planes.
Global Glut. But the swap raises significant problems for the American companies. The oil would go not to the defense contractors but to a refiner for processing and sale. The refiner must be willing to 1) accept the crude, and 2) set a firm price for it with the U.S. aircraft manufacturers. Finding such a customer will be difficult; there is a global glut of oil, and even tiny fluctuations in price can cut sharply into refinery profits. But the task is not impossible. Several independent oil companies that have lost access to Canadian oil since Canada cut exports to the U.S. are looking for other assured supplies. They may be further enticed by the billions of barrels of crude involved. General Dynamics alone may take 100,000 bbl. per day of Iranian crude for the next seven years in return for its planes--enough to keep a medium-sized refinery busy.
Officials at oil companies that now deal with Iran have mixed reactions to the barter proposal. Says an executive at Standard Oil of California: "The Iranian government has been pressing the members of the Iranian oil consortium recently to accept more oil. This could take the pressure off us." But another oilman at Standard of Indiana disagrees: "We are now in delicate negotiations with the Iranians. Their crude is overpriced, and we are unwilling to accept their terms. Now along comes the U.S. Government, which says it will [go along with a barter deal]. We are shocked."
If the complications can be worked out--a big if--the swap will provide few surprises for the Iranians. They have been bartering raw materials for industrial products ever since the 1930s. But it would be a whole new way of doing business for the defense contractors. Only McDonnell Douglas has had a similar experience. In 1969 Yugoslavia wanted to buy DC-9s, but did not have enough dollars. So McDonnell Douglas agreed to help by marketing Yugoslavian goods, including hams, in the U.S. For years thereafter, the standing joke in the company's executive dining room was: "Here come the rest of those Yugoslavian hams." Oil, presumably, would be easier to convert to cash.
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