“Bankruptcy is worse than defeat.”
—The Shah, 1977
“Our great diplomacy with the Saudis is what did it.”
—Henry Kissinger, 1977
The looming showdown over oil prices was a harsh reminder that despite the best efforts of the Nixon and Ford administrations to promote fuel efficiency and encourage energy conservation, the American economy was more exposed than ever to the whims of Middle Eastern oil producers. Forty percent of America’s oil needs was now being met by foreign suppliers, which represented a 4 percent increase in crude imports over the past three years. Nixon’s cherished Project Independence had long since been abandoned. “The brave conservation measures of late 1973 and early 1974 have been replaced by a so-what spirit,” reported Time. “Chicago’s Commonwealth Edison Co. has no qualms about urging viewers of its TV commercials to leave house lights on when they are on a trip because ‘a darkened house is an invitation to burglars.’ The small, fuel-saving cars that motorists snapped up in 1974 are now the very models gathering dust in dealer showrooms.” White House officials had another big problem on their hands. Secretary of State Kissinger’s original objective had been to break OPEC without hurting Iran’s economy, which was highly vulnerable to sudden fluctuations in the petroleum market. The collapse of the Zarb-Ansary talks meant there was still no mechanism in place to shield Iran’s primary revenue stream from sudden market turbulence.
President Ford welcomed Ambassador Ardeshir Zahedi of Iran into the Oval Office at 10:00 A.M. on December 7, 1976. Zahedi had been summoned from New York, where he had spent the previous day with Nelson and David Rockefeller. By unhappy coincidence for both the president and the ambassador it was also Pearl Harbor Day. The president was joined by National Security Adviser Brent Scowcroft and chief economic adviser Alan Greenspan. Greenspan’s presence was an indication of the severity of the deepening financial crisis in Europe and on Wall Street. Ford began by offering his warm regards to the Shah and assuring the ambassador of his “great personal regard and affection for him. I hope that in the future years the close relations we have between our two countries will continue.” Ford wasted no time in getting to the heart of the matter: “But I want to talk about an issue which troubles me—the Doha meeting and a possible oil price increase. I have read the Shah’s letter very carefully. I both agree and disagree with it. I agree with him wholeheartedly with his points on conservation . . . . I do disagree with him on the issue of oil price and its relation to industrial prices. These are honest differences between friends.”
Ford talked about “the impact that an increase will have” and told the ambassador that there was no room for compromise because “there is unanimity among my advisers that the world economic health is not good. Any increase in the price of oil would have a serious impact on the world financial structure . . . . I am a strong supporter of the Shah. I think he has done great things for his country and is a strong force for moderation and stability in the Middle East.” This was true. In his second televised debate with Governor Carter the president had defended the Shah when the Democrat stated his opposition to the sale of F-14 fighter jets and warships to Iran “before their delivery was completed to the United States’ armed forces.” Ford had replied by praising Iran as “a good ally.” Now Ford reminded Zahedi that bilateral relations extended to areas other than defense. “But we have to look at it in a broader perspective now and I think an increase would have a serious impact on the world economic structure,” he said.
Zahedi said it was too late. “I don’t want to take your time, but two years ago when prices were going up I talked to Secretary Kissinger and Secretary Simon and would have gone to the area right then and would have helped,” he told Ford, who was presumably startled at this disclosure. “But the past is the past.” He reminded Ford of the Shah’s futile offers to sell to the United States surplus quantities of Iranian oil at a generous discount. The president’s letter to the Shah on the eve of the presidential election had been a mistake. Zahedi upbraided the president: “Had I known of your letter to His Imperial Majesty, I would have urged that it be held earlier or not at all. The timing was not good.” The Shah wanted the president to know that “we do understand the problem, and we have been thinking of only a 10 percent increase . . . . There will be an increase. What would be moderate?”
“The only way we can reassure the world economy is to have no increase.”
“That is not possible.”
“I am telling you the facts,” the president insisted. “Any increase would jeopardize the economy and no increase would be a shot in the arm. The next best would be a delay. Is that possible?”
“Now, it is impossible,” replied Zahedi. He knew, as the Americans should also have known, that Iran’s economy was in trouble again. In October the Shah had grudgingly conceded for the first time that government expenditures exceeded receipts. “Instead of carte blanche expenditure, the government was told to economize in all areas, finish the projects now underway, and leave the rest of the Fifth Plan objectives for the Sixth Plan,” wrote top officials of the Plan and Budget Organization. Prime Minister Amir Hoveyda dutifully launched a high-profile anticorruption campaign and studied ways to eliminate waste. But oil money was the foundation of the economy. Oil money bonded the throne to its stakeholders, the military, middle class, big industry, farmers, and merchants. Even as the government called for economization the popular press kept up a drumbeat of new big spending initiatives that promised better days. The headlines in Tehran’s English-language Kayhan International newspaper in December 1976 told the story: “New Loans for House Purchasing Workers”; “New Plan Will Double Third Party Coverage”; “Nothing Should Be Kept from People—Empress”; “Government Loan Payment to Be Studied”; “Jobs for Returnees”; “Iran Is ‘Shopping Around for Arms’ ”; “Master Plans Under Way for 90 Towns.” For the Shah to be denied his oil money now would be to expose him as an emperor with no clothes.
Ambassador Zahedi disclosed Kissinger’s request from earlier in the year not to raise oil prices until the election was over: “If it were done early in the fall—when Secretary Kissinger and I were joking about it—if you had asked for March, it would have been easy. But Secretary Kissinger said wait until after the election. I know how you spoke up for Iran and the Shah is deeply grateful. I don’t believe any of the OPEC countries would agree to a delay because it would look like they were forced to.”
“That’s why I asked you to come in quietly,” said the president. “I want to have no confrontation, and that is why this meeting is private.”
Greenspan interjected. Zahedi didn’t seem to be getting the point or the president’s sense of urgency. The White House was facing a possible collapse of the banking system. Greenspan took the discussion back to December 1973 and the Shah’s doubling of oil prices in Tehran. “I think it is a fact that the world has not yet adjusted to the earlier increase,” said Greenspan. He explained that the lending flexibility of three years earlier “has vanished,” and “the international financial structure is now stretched thin.” The economies of the industrialized countries were paused because the “huge increase in debts” had shaken the confidence of the markets, government, and business.
President Ford then moved on to the critical situation facing allied governments and economies throughout Southern Europe. “The situation in several countries is very serious. Take Italy. They are having serious economic problems but at the bottom it is political. If the government can’t cope there will be Communists in the government. In France, the situation is potentially serious, with strong Communist forces.” Governments in Portugal and Spain were hanging on by a thread. “Any increase adds to the danger of a financial crisis, to failure in some governments, even to the danger of military crisis.”
Ardeshir Zahedi was unmoved by their appeals. “I think there is no doubt there will be an increase, especially after the steel price increase in this country,” he said. “Many newspapers are now speculating there will be a 7–15 percent increase. We would not accept a big increase. There will be an increase, but we are concerned about the security situation in Europe. We know more than most how important Europe is and the dangers of being isolated. That is why we are giving bilateral help to the Europeans.” Zahedi’s next comment may have given Ford and Greenspan reason for pause: “Unless people get a shock, they won’t realize we have to switch from oil.” What did the ambassador mean? Was the Shah planning a repeat of the catastrophic price increase three years earlier? Zahedi predicted the Shah would settle for a 10 percent price increase. Or maybe 15 percent. Although he did not know what the final outcome would be, Zahedi assured the president, “we would fight anything over 15 percent. Less than 10 percent, I honestly don’t know, but I honestly don’t think so. The Shah said I could promise you he would be moderate and very moderate.”
On December 9, the State Department declared that no oil price increase for 1977 was justified “and any oil price increase could have damaging consequences on the world’s economy.” Also on December 9, Italy repaid a $486 million loan to Britain so that the British government could repay the first installment on its $5.9 billion standing credit. The British met their deadline but Italy was left with less than $2 billion in foreign exchange reserves. The finances of the Western industrialized world were beginning to resemble a giant Ponzi scheme.
During his trip to Mexico City to attend the inauguration of President López Portillo, Henry Kissinger had quietly received an envoy sent by King Juan Carlos of Spain. Manuel del Prado, chairman of the board of Iberia, Spain’s national airline, warned Kissinger that the king was worried about the possibility of right-wing revolt by disaffected army officers. Pro-Franco elements in the army had not reconciled themselves to the new Spain. “Our problem is the Army,” confided del Prado. “It would probably revolt if we legalized the Communist Party.” The king wanted to pave the way for the eventual legalization of the Communist Party while at the same time ruling out immediate Communist participation in a coalition government. In the past few days Communist Party leader Santiago Carrillo Solares, banished from his homeland since the civil war, had illegally slipped into Spain to hold a press conference. Franco loyalists had reacted angrily to what they saw as a dangerous provocation by the left.
Spain inched its way through December. The great crisis for the government and for democracy came on the eleventh day when masked gunmen kidnapped Antonio María de Oriol y Urquijo, president of the Council of State, the fourth most powerful man in the kingdom. Basque terrorists claimed responsibility for the brazen daylight raid in downtown Madrid that struck at the heart of the Spanish state. Agitators on the right used this episode to argue that the government had lost control. Prime Minister Adolfo Suárez was now less confident of winning an overwhelming yes vote in the December 15 referendum. Several days later, riot police battled hundreds of leftist demonstrators in the center of Madrid. The leaders of Spain’s opposition parties received death threats from unidentified fanatics and were placed under armed guard. Spanish police meanwhile mounted a desperate search for the kidnapped Council of State president.
While Spain seethed, Portugal’s fever broke on December 13. Voters gave the country’s minority Socialist Party government “a qualified vote of confidence” and averted a crisis. Democracy in Portugal was safe for now.
The next day, December 14, OPEC oil ministers arrived in Doha. Sheikh Zaki Yamani told reporters that Saudi Arabia favored a six-month price freeze. Even a 5 percent price increase would be a mistake because the economic recovery among Western consumer nations “is not as strong as we hoped it would be.” Simultaneously in Washington, Ambassador Alireza had a 4:51 meeting with President Ford and National Security Adviser Scowcroft. The ambassador handed Ford a letter from King Khalid pledging “to reach a reasonable and acceptable minimum increase” in the price of crude oil. Khalid wrote that he had taken note of President-elect Carter’s pledge to oppose “any legislation against the boycott of Israel, and that he will use leverage on Israel to prevent it from committing any act of aggression against the Arabs in Southern Lebanon. Undoubtedly, this was a good initiative on his part, and we would like to wish him every success during his presidency for the good of his country and the world at large.”
The president expressed his thanks to Ambassador Alireza: “I deeply appreciate the position your country is taking to moderate and hold down prices.”
“Since our last meeting I received a call from Jidda that we hope to keep it a maximum of 10 percent, and are hoping for 6 to 7 percent,” the ambassador explained. “But with the attitude of the oil companies, a 5 percent increase is built in.” When Ford asked if it was possible to postpone the increase until March 1977, Alireza replied that the idea had no support within the cartel.
The attention of the world’s media was focused on the conference hall in Doha’s Gulf Hotel. With the exception of the United Arab Emirates, Yamani’s call for a price freeze was not taken seriously by his eleven colleagues. “We are used to such statements,” sneered the Libyan delegate. “This is a game that he always plays,” the Iraqi minister assured reporters. It was nothing more than a “maneuver” because “all want to raise the price, even Yamani.” Still, Yamani formally presented his proposal for a six-month prize freeze. When he was rebuffed, he led the Saudi delegation in a walkout. Yamani drove to the airport and flew back to Riyadh to consult with Crown Prince Fahd about their next move. While he was away the rest of the cartel, with the exception of the minister from UAE, voted in favor of raising the price of oil in two stages. The first stage, to take effect January 1, would see prices go up 10 percent to $12.70 a barrel. The second stage, to take effect July 1, would raise the price of oil another 5 percent, taking it to $13.30 a barrel. If enforced, OPEC’s first phase 10 percent increase would add $3.5 billion to the U.S. fuel bill for 1977 and 2 cents a gallon to the price of gasoline.
Dozens of journalists awaited Yamani’s return from Saudi Arabia with his instructions. “Any sign of white-robed movement at the far end of the Gulf Hotel’s huge lobby had a gaggle of reporters and an efflorescence of cameramen on their feet in an instant,” reported one eyewitness. Word that Yamani had reached an elevator set off a stampede of reporters, and “so many tried to cram into the lift that it jammed between floors. Muffled banging reached the desperate crowd of wordsmiths waiting below. An Italian reporter shrieked at the guards, ‘Help them, they are dying of suffocation!’ ” The correspondent for Newsweek was mobbed by reporters who mistook him for the oil minister from Ecuador. Hotel management tried to restore order by expelling the journalists from the building for the afternoon. During a security check they discovered a group of American reporters hiding out in the bowling alley. “Late night dramas, rumors, camaraderie, the chance to make up almost anything and call it informed speculation . . . this show had everything,” gushed one reporter. “It even had a good story.”
Back in London, the British government unveiled tough new austerity measures to cut public spending ahead of a meeting of the IMF board to consider Prime Minister Callaghan’s urgent request for an emergency bailout. Cuts of $1.69 billion in 1977 and $2.51 billion for the following year provoked angry scenes in the House of Commons. From the right, the Conservatives led by Margaret Thatcher went on the offensive over the government’s “incompetent management of the economy during three wasted years at Treasury.” The ruling Labour government’s own left wing denounced fiscal austerity as “essentially Tory policies which originated with the bankers. This is a bankers’ strategy.” For his part, U.S. treasury secretary Simon declared himself satisfied with the “excellent” efforts of the Callaghan government to stabilize Great Britain’s finances and impose fiscal discipline.
Yamani returned to Doha after an absence of eight hours. He issued no formal statement and retired to his suite. The tension continued to build. The next morning the oil minister emerged to make the announcement the White House had been waiting for: Saudi Arabia would not abide by the majority decision to raise the price of crude exports by 15 percent in 1977. Saudi Arabia would instead unleash its petropower and attempt the most radical intervention in the market ever by an oil producer. Saudi exports of crude oil would rise in price by 5 percent on January 1 instead of the 10 percent offered by Iran and the price hawks. Saudi Arabia would also try to flood the market by lifting the ceiling on its domestic oil production from 8.5 million barrels a day to 11.8 million. In December 1976, Saudi Arabia and its ally United Arab Emirates were responsible for producing approximately 10 million barrels a day of OPEC’s combined 30 million barrels. Their act of rebellion threatened to dislocate not only the market but also the economies of OPEC member states that were heavily dependent on ensuring that prices stayed high. Yamani’s announcement at Doha offered price relief to consumers even as it threatened to run the hawks from the market and drive their economies to the wall.
The great oil war of 1977 was underway. Yamani was making it clear—to the Shah, to OPEC, and to the world—that the Saudis, the world’s biggest producer and exporter of petroleum, were finally taking charge of their destiny and becoming masters of their own house. “Is it fair for all OPEC to get together to decide the price of Saudi crude?” the oil minister asked reporters. “Is it fair for others to decide against our will?” And with that Yamani stalked out of the Gulf Hotel, not even bothering to attend the closing session.
Iran had the most to lose from a two-tier, flooded oil market. The giant petrostate stood to lose billions of dollars in revenue from oil exports. “Heavy crudes are the focus of the Opec struggle, because Saudi Arabia’s extra production is largely of heavier crude, which also makes up a big share of Iran’s total amount,” reported The Economist. Throttling Iran’s revenue stream meant fewer funds available to lavish on schools, housing, health, forestry, public works, food subsidies, and military equipment. In his usual indomitable style, the Shah had already earmarked or spent billions of dollars that he would now never see. The Americans and the Saudis had finally called his bluff. For diplomatic reasons the Iranian leader dared not publicly attack King Khalid or other members of the Saudi royal family. But Zaki Yamani made for a convenient foil and the Iranian state media swung into action. “The third world and all progressive nations everywhere are angry and detest Yamani for having sold the real interests of his country and of OPEC to imperialism,” declared the editors of Rastakhiz, the newspaper representing Iran’s single political party. Television stations and radio networks derided Yamani as a “puppet,” the “saboteur who knifed OPEC from behind.” “If one has to create a museum of traitors, Zaki Yamani will gain a special rank among those traitors to their own country, nation, king and fellow OPEC members,” declared Ayandegan newspaper. The widely read Kayhan told its readers that Yamani had “triggered an oil war between Saudi Arabia and OPEC” and it accused American oil companies of profiteering from a two-tier market to the tune of $4 billion.
The Economist cleverly described the outcome at Doha as Sheikh Yamani’s “Christmas box” to the outgoing Ford administration, the incoming Carter administration, banks on Wall Street, and cash-strapped Great Britain and Southern Europe. Here was the price relief so desperately sought by Treasury Secretary Simon since the summer of 1974. While it was the case that the world’s fuel bill would still rise by another $10 billion in 1977, it helped enormously that the powerhouse economies of the United States and Japan would be spared the worst of the financial burden. The United States still produced 60 percent of its domestic fuel needs and relied on Saudi Arabia for much of the remainder, while the Saudis supplied Japan with 37.4 percent of its petroleum imports. Member states of the European Community were not quite so fortunate—their collective fuel bill was set to rise by an estimated $4 billion. However, the Europeans would also benefit from something consumers hadn’t seen in quite some time: a buyer’s market. In Great Britain, the government estimated that the consumer price index would go up by only half a percent.
Saudi Arabia’s radical intervention in the market provoked intense speculation about what Saudi leaders wanted or hoped to achieve. Yamani offered three justifications. He explained to West Germany’s Der Spiegel that the Saudis acted to prevent a Communist takeover of Western Europe. “We are extremely worried about the economic situation of the West, worried about the possibility of a new recession, worried about the situation in Britain, Italy, even in France and some other nations,” he said. “And we do not want another regime coming to power in France or Italy.” When Yamani was asked if he was referring to Communists, he answered, “Yes. The situation in Spain is not so healthy either and the same applies to Portugal. If the economic recovery does not take place it will not only have political significance for Saudi Arabia, it will hit Saudi Arabia economically.”
Yamani made it clear that future Saudi cooperation on oil pricing and production would be linked to the future of the Middle East peace process. “We expect the West, especially the United States, to appreciate what we did.” Oil prices and issues of war and peace in the Middle East were now directly connected, a troubling prospect that “has raised all sorts of possibilities for future American diplomacy,” reported The New York Times, even as it “carries with it the possibility of tragic misunderstandings if the anticipated moves by the Carter administration next year fail to produce results.” One month later, Yamani reiterated that “there is a strong link between oil and politics which existed way back in the past and will exist way out into the future.”
There was no doubt that the Saudis also acted with ruthless dispatch because they feared Iran and the predatory intentions of the Shah. A flooded oil market would disrupt the supply of petrodollars the Shah relied on to acquire military equipment and nuclear technology from the West. Oil industry analysts described the Saudi maneuvering as part of “a well-conceived framework that will direct the oil as precisely as possible for maximum impact,” by which they meant it would retard Iran’s ability to spend money freely. Columnists Evans and Novak reported with great confidence that Crown Prince Fahd had acted because he saw the urgent need “to slow down neighboring Iran’s rapid economic and military development.”
Henry Kissinger had feared the day when Saudi Arabia would use its oil power as leverage to influence U.S. foreign policy toward Israel and Iran. Saudi Arabia provided the United States with 25 percent of its imported petroleum and had $40 billion invested in the domestic American economy. This was in stark contrast to Iran, which by December 1976 provided the United States with only 5 percent of its imported oil. The Saudis enjoyed enough clout “to affect US interest rates and the strength of the dollar on foreign exchange markets in the unlikely event they should choose to do so.”
“We are reaching the point where we are more dependent upon them than they are on us,” conceded a U.S. diplomat in the aftermath of Yamani’s oil coup. “No matter what good friends they are, that is an unhealthy position for us.” Yet his was the minority view at a time when U.S. officials were confident they could manage Saudi petropower to the American strategic advantage. Some administration officials and diplomats made no effort to hide their pleasure at seeing the Shah receive his comeuppance.
“Yamani went into the OPEC meeting intending to stick it to Iran,” chortled an American observer in Doha. “We’ll show the Shah who is boss of OPEC, is what he was thinking.” The alliance forged between Treasury Secretary Simon and Sheikh Yamani at Simon’s Virginia estate two and a half years before had borne fruit. Saudi Arabia now replaced Iran in U.S. affections as its closest ally in the Persian Gulf. Articles began appearing in American newspapers lauding the courage of the Saudi royal family in words previously reserved for the Pahlavis of Iran. Yamani was hailed as the “Talleyrand of the Oil World.” “Saudi Arabia Comes of Age” declared the Los Angeles Times. “Saudis’ Influence Is Growing” announced The New York Times. An American with “deep roots” in Saudi Arabia was quoted saying that Saudi Arabia was “the best goddamn base we have ever had.”
Wall Street welcomed the news that the economy had escaped a double-digit increase in the price of oil. The Shah of Iran had taken a bullet for them—next time banks and lenders might not be so lucky. Paul Volcker, president of the Federal Reserve Bank of New York, warned the financial community of the dangers of complacency. Risky lending practices had taken the American banking system and international financial networks to the cliff’s edge. Volcker called for a more cautious approach to banking practices and foreign lending when he urged “closer monitoring of their operations by the Federal Reserve and other regulatory bodies.” He proposed establishing a “financial safety net” to help countries staggered by high fuel costs avoid defaulting on their debt repayments. “Unsustainable tensions are building up,” he said. No one wanted to see another global financial crisis triggered by Wall Street.
President Ford expressed his gratitude and relief in a letter to King Khalid. “While I continue to fear that even a modest increase may lead to unfortunate setbacks among developed and developing economies, your own example of restraint was most commendable and, I am sure, very difficult under the circumstances,” wrote the president. “I regret that most of the other OPEC nations were not motivated by the same shared sense of concern for the health of the world economy upon which we all depend . . . .
President Ford’s national security team cheered two victories on the same day. King Khalid’s decision to break OPEC and stand up to the Shah coincided with a triumphant poll result in Spain. King Juan Carlos’s national referendum to approve free elections and introduce political reforms passed by the overwhelming margin of 94.2 percent in favor. The worst case scenarios envisioned by White House officials had not eventuated. The world economy remained fragile, but the banks held, and the prospect of a catastrophic wave of defaults triggered by another round of high fuel costs receded. Great Britain, Italy, and Portugal earned a precious few months to stabilize their economies. Savoring these triumphs, Gerald Ford publicly attacked the majority vote within OPEC for a 15 percent price increase as “irresponsible and shortsighted” actions by leaders who ignored “the destructive consequences of their action.” His comments were chiefly directed at the Shah, who had led the charge for a higher price. Treasury Secretary Simon insisted that OPEC’s 15 percent increase was unenforceable because the Saudis would simply steal their market share.
There was further good news on January 3 when the IMF approved a $3.9 billion loan to Great Britain on condition that the Callaghan government implement the strict austerity measures announced a month earlier. The “performance clauses” in the IMF contract marked the final humiliation for the once proud island nation that only thirty years before had ruled an empire stretching from Singapore to Aden. Several days later a consortium of ten industrialized nations stepped in for a second time to defend the value of the pound sterling by putting together a $3 billion standby credit.
Henry Kissinger thought he knew who deserved accolades for saving the West in the final hours of the Ford presidency. On the morning of Tuesday, January 4, 1977, the secretary of state and President Ford were in the Oval Office. “We should also get credit for what happened to the OPEC prices,” declared Kissinger. “I have said all along the Saudis were the key. Only they can raise production to make it stick. Our great diplomacy with the Saudis is what did it.” President Ford kept his own counsel and said nothing. Kissinger’s remark suggested that he did not understand what he was taking credit for. The White House had calculated the potential damage to Western economies from a 15 percent price increase. Did U.S. officials undertake a similar risk analysis to measure the impact on the Iranian economy if oil did not rise in price by 15 percent? The surprising answer is yes. The National Security Council did try to assess the possible damage to Iran’s economy. But officials erred when they underestimated the severity of the economic problems in Iran and the financial pressures on the Shah. Working in crisis conditions and apparently in the greatest of secrecy, analysts assumed that Iran’s economy had rebounded from the recessionary conditions of 1975. They did not understand that if the Saudi oil coup was successful then as The Economist noted, “[oil] producers that lie farthest from their markets, and those with the highest proportion of relatively undesirable heavy crude, will be the worst sufferers. Iran—now badly in need of cash—fits both these categories.”
Ambassador Richard Helms had one last piece of business to attend to before he flew home to face prosecution and trial. The SAVAK scandal refused to go away. On Sunday, December 26, Court Minister Alam attended the ambassador’s farewell luncheon and was surprised to see him weep. Helms’s tears may have had something to do with the mess he was leaving behind and the fact that he was flying home, his reputation shredded, to face indictment and possible imprisonment. The following day, in one of his last official acts as U.S. envoy, the ambassador forwarded Kissinger a message from the Shah reassuring the White House that “SAVAK is not authorized to conduct activities counter to U.S. law.” Helms made it clear that he wanted the matter dropped. He warned Kissinger against getting into “an inflammatory, public brouhaha over possibly ill-advised intelligence activity” by the Iranians on American soil. “As you know,” he reminded Kissinger, “we are very beholden here in the intelligence area and therefore correspondingly vulnerable.” He flew out later that day, apparently pessimistic about the Shah’s future for staying in power. “By the time I left Tehran it was becoming clear that Iran was headed for serious trouble,” he wrote in his memoir.
In early January, Embassy Tehran sent Kissinger a message using a special double-encrypted code on its “Roger Channel,” which was indecipherable even to the CIA. The Shah wanted the White House to know that if the Justice Department took action against SAVAK personnel in the United States he “would not be able to overlook the presence of 70 of your people who are carrying out activities contrary to Iranian law,” or of “others whom we do not know about officially.” On the eve of the handover of power to President-elect Jimmy Carter America’s “special relationship” with Iran had devolved into blackmail, intimidation, and threats against U.S. government personnel and CIA operatives.
The scandal over Richard Hallock also resurfaced to cause new complications. On January 2, 1977, The Washington Post published a front-page exposé by Bob Woodward revealing intimate details about the Ibex spy program. Someone had leaked to the Post portions of transcripts of the Shah’s private conversations with Hallock, who as Secretary of Defense Schlesinger’s personal liaison had been entitled to one-on-one meetings with the king at the palace. According to Hallock’s notes, in 1976 the Shah had accused Pentagon officials of involvement in “malfeasance” and “crude deceptions” in the sale of expensive radar technology to Iran. The Shah had railed that “the chicanery of Pentagon officials and their military civilian representatives here was intolerable. Patience was unavoidable until the election, but not necessarily longer than that . . . . [His Majesty’s] disenchantment with American officials, Rumsfeld in particular, was virtually complete.”
Six days after Woodward’s article appeared, General Toufanian fired off an anguished two-page letter to Rumsfeld denying the Shah had made the comments attributed to him and at the same time requesting that “your government determine if the documents mentioned exist, and if so, their origin and present location.” He expressed alarm that “sensitive security information, safeguarded by our two governments,” had been leaked. He reminded Rumsfeld that “it was the U.S. Department of Defense that first introduced Mr. Richard Hallock to the Government of Iran and strongly endorsed his activities and functions in writing to His Imperial Majesty.” Iran had since terminated Hallock’s contract and “we can assume no responsibility for any activity he engaged in which was not specifically authorized by this government during his period of employment.”
Rumsfeld’s crisp letter of response to the general was all of five sentences. He did not deny that the transcripts existed, nor did he offer to help recover or secure them. In fact, Rumsfeld did not mention them at all, nor did he mention Hallock. The secretary of defense merely expressed satisfaction with the state of U.S.-Iran defense relations and delivered what may have been intended as his final insult: “This relationship has been nurtured by the frank and candid exchange of views.”
During the presidential campaign Carter had attacked Simon’s handling of the economy. Democrats argued that Simon’s harsh deflationary policies impeded economic recovery and imposed unnecessary hardships on working families. “I don’t know anybody in the Ford administration that Jimmy detests as much as he does Simon,” confided an insider. Eliot Janeway, a prominent economist and syndicated columnist, and a vociferous critic of the Shah, reached out to Carter’s transition team to set up a meeting between the two men. He wanted to make sure that the new president-elect was personally briefed on the outgoing administration’s problems with the Shah and OPEC. Janeway later wrote that although he did not attend Simon’s briefing with Carter, the outgoing Treasury secretary assured him “President Carter asked me all the right questions.”
On January 1, 1977, Mohammad Reza Shah held a long audience with Court Minister Alam and accused the Saudis of betrayal. “We must give them the thrashing they deserve.” The next day was worse. Alam was greeted with the shattering news that Iran faced financial ruin. “We’re broke,” admitted the Shah. “Everything seems doomed to grind to a standstill, and meanwhile many of the programs we had planned must be postponed.” He expected oil exports to fall by as much as 30 percent. When Alam tried to offer reassurance, the Shah railed against Yamani and the Saudis. “It’s going to be tough,” the Shah admitted. A few days earlier, during an interview with the newspaper Kayhan, the Shah had foolishly lashed out at his own people, blaming them for Iran’s financial crisis and implying they needed to tighten their belts. Iran had become “a paradise of indolence and sloth.” It was time for everyone to roll up their sleeves. “If we do not revise [our policies] we shall not survive,” he said. The King of Kings declared that he would “lead this nation into the great civilization, by force if necessary.” Anyone who disagreed with him should pack their bags: “We shall take them by the tail and throw them out—like mice.”
Iran waited for the Saudi deluge. “The question now is whether Yamani will flood the market with oil,” the Shah grimly conceded in an interview with BusinessWeek. “If he does this, for a little while it may force us to decrease our production. And if this happens it will affect our economic plans, our military plans, our military buildup, and especially our foreign aid program . . . . I am worried somewhat about internal developments. If we do not have the amounts of money we thought we would have, it will slow down a bit. But the economy is overheated, and this will cool a bit.” When Yamani boasted that the Saudis were prepared to boost Saudi oil production by 50 percent, taking it as high as 14 million barrels a day, the Shah went on French television to denounce “an act of aggression.” He told William Schmidt of Newsweek magazine that Yamani was “[Washington’s] colonial appointee to pump all the oil of Saudi Arabia” and bitterly compared the Saudi oil minister to Judas Iscariot. “We shall suffer a great deal if it continues this way,” he said. “But we are not going to give way or give up . . . . And if we are driven out of the market . . . this will affect our whole policy.”
Schmidt asked the Shah what he thought of Yamani’s argument that a 15 percent rise in the price of oil “might weaken some West European countries and make a Communist takeover more likely. What’s your answer to that?”
“I am just laughing,” the Shah snorted.
“You don’t take seriously, the potential of Communist take-overs?”
“That is very possible, but not because of the 5 percent increase of Sheikh Yamani instead of 10.”
“But isn’t there a level at which oil price increases would play havoc with Western economies?” asked Schmidt.
“This is not the real point,” replied the Shah. “It is that your societies are not well run. You have no government and no leadership. I am not talking about America because it is a world of its own. I am talking about the Europeans.”
Iran’s income from petroleum made up 85 percent of foreign exchange receipts. In the run-up to Doha oil companies had rushed to stockpile crude supplies, fearing another big price increase after New Year’s. They were reluctant to take sides in the oil war and were especially wary of antagonizing Iran because the Shah made it clear he would never again do business with customers who canceled their existing purchase orders. For now, the oil companies preferred to deplete their existing inventories and hold back on placing new orders. Companies not already locked into deals with Iran rushed to sign up with the Saudis. The result of the confusion in the market was that in the first nine days of 1977 Iranian oil production plunged 38 percent over the previous month, the equivalent of 2 million barrels a day, as new orders dried up. In just five days the National Iranian Oil Company reported that twenty-five new customers had reduced their Iranian oil purchases from 1.2 million barrels a day to 693,000 barrels a day. Income from oil for the month of January dropped to $460 million from the previous year’s $672 million. By one estimate the country was losing $20 million a day. The price gap between Saudi and Iranian heavy crudes was now 7 percent, more than enough enticement for Iran’s wavering customers to take their business elsewhere. Big drops in Iranian oil production had happened before. The difference this time was that production in January 1977 was lower than even a year earlier when Iran’s output had all but collapsed in the face of falling consumer demand in the West. Other oil producers such as Kuwait also experienced a sharp decline in orders and production. But little Kuwait had not banked its entire fortune on a crash industrialization program of the sort that left Iran permanently slaked for fresh infusions of petrodollars.
Starved of the oil revenues it had long feasted on, Iran’s economy teetered on a precipice. “Iran needs a quick agreement to end Opec’s two-tier oil pricing,” reported The Times of London. “Many Opec members have suffered a substantial loss of oil exports since oil prices rose on January 1. None is feeling the financial effects as acutely as Iran.” Iran’s central bank estimated that total income from oil for the year would fall to $19.5 billion from $22 billion. The Fifth Plan, ending in March 1978, would be short by between $10 billion and $12 billion. On January 11, Iran’s government abruptly tore up its financial estimates, imposed a spending freeze, and canceled a loan intended to help bail out Britain’s shattered economy. Tehran was forced instead to accept a $500 million loan of its own, one hastily cobbled together by a consortium of American and European banks led by David Rockefeller’s Chase Manhattan. Even the armed forces were not spared retrenchment. The start of construction at the massive naval base at Chabahar on the Persian Gulf was postponed. General Dynamics, the manufacturer of the F-16, was asked if it would accept payment in oil for the $3.8 billion worth of aircraft already under order.
The Shah’s inner circle was in a panic. Arriving in London on Friday, January 7, Finance Minister Hushang Ansary confided to Ambassador to the Court of St. James Parviz Radji that “he had forewarned everyone about the untenability of our stance at Doha, and predicts the next six months will be particularly difficult economically in Iran.” Parviz Mina, a director with the National Iranian Oil Company, also flew in to London. “Normally a quiet, reserved and soft-spoken man, I now see him in a state of agitation over the outcome of the recent OPEC meeting in Doha,” the ambassador wrote in his journal. Mina explained to Radji that Iran would bear the brunt of the price collapse. “So all the reduction will be Iran’s,” he said. “And yet the situation is being presented to the Iranian public as a great victory. Goodness knows what will happen when the bills start rolling in for payment.”
Court Minister Alam took to his bed for two weeks with a high temperature. The cancer that would soon kill him was sapping his strength. As he pondered his fate and the future of the Pahlavi dynasty, Alam summoned the nerve to write a letter to the Shah warning him that dangerous days lay ahead for monarchy. “We have squandered every cent we had only to find ourselves checkmated by a single move from Saudi Arabia,” he wrote. “Your Majesty, we are now in dire financial peril and must tighten our belts if we are to survive.” He urged the Shah to restore public confidence in the government and jail corrupt officials.
In late January, at the Shah’s insistence, Alam departed Tehran to receive medical treatment in Paris. He had already been bedridden for three weeks. “We have been thwarted over oil prices and the prospect for our future relations with the USA is bleak indeed,” he wrote from his sickbed. Prime Minister Hoveyda visited him in Paris and confided that there was “an atmosphere of unease” in Iran but he could not put his finger on the cause.
February brought a respite and hope that Iran’s economy might be able to ride out the storm. The Shah let it be known through General Toufanian that he would fight the Saudis. “Bankruptcy is worse than defeat,” he said, and ordered the military to reduce expenditures. However, bitterly cold winter weather in the United States and Western Europe led to a surge in demand for Iran’s heavy-grade fuel oil. In the United States, demand on some days exceeded 20 million barrels. Iran’s position was also helped by high winds that buffeted the Persian Gulf and prevented tankers from taking on oil at Saudi Arabia’s Ras Tanura terminal. Ras Tanura was a marvel of the oil industry and a potent symbol of Saudi petropower. On a single day in early February 1977, “18 ships are taking on oil, and seven more, anchored further offshore, are waiting for clearance to move to berths . . . a tanker is in and out with its load in 45 hours.” If Ras Tanura had a vulnerability it was lack of storage capacity. It could maintain only a four-day stockpile. That meant even minor interruptions to supply led to loading delays. Thanks to the stormy weather conditions that held down the flow of Saudi oil into the system, Iran’s oil production rebounded 30 percent in February over the previous month to reach 5.5 million barrels of oil a day. When North American and European economies revived in the spring, as they were widely expected to, demand for Middle East oil would rise in line with factory orders and industrial activity. “If they [the countries that opted for a 10% increase] can survive the initial drop in output, there should be a strong increase in demand in the second half that may even absorb any future increases in Saudi production,” reported one Western oil company official.
The roller-coaster ride continued when March and April brought the Shah and Iran’s oil industry back down to earth. Saudi Arabia’s drive to open the spigots and ramp up oil production finally took hold, even as warmer spring weather in the United States and Europe led to a sharp fall in oil consumption. Saudi crude exports soared to 9.3 million barrels a day in March, an increase of 540,000 barrels over February, with the country’s total oil production topping out at 9.7 million barrels a day. Iran, rapidly losing its market share, faced a fiscal blowout. The Shah’s Fifth Plan, the symbol of Iran’s “Big Push” and the empire’s engine for growth, was finally rendered “inoperable” and its financial estimates set aside altogether. In April, Iran’s oil production fell 16 percent, a sharp drop of 864,000 barrels a day. “Since oil had been expected to underwrite 78 per cent of the revised Plan, the impact of such fluctuations in international demand was dramatic,” wrote Robert Graham, the correspondent for the Financial Times. “Iran had returned to the unstable conditions of the 1950s when the size of its oil revenue had never been certain.”
The struggle between Saudi Arabia and the rest of the cartel exposed the depth of hostility in the Arab world toward the Saudi royal family and revealed alarming fissures at the heart of the Saudi state. King Khalid was bitterly denounced from Beirut by Yasser Arafat’s Palestine Liberation Organization for selling out OPEC and the Arab world’s oil power to the United States and Israel. Saudi Arabia’s oil industry was centered in its Eastern Province, a region with a large and restless Shi’a population that harbored long-standing grievances against the ruling Saud dynasty. In the spring of 1977 there were reports of unrest among Aramco oil workers unhappy at implementing the directive to flood the market. Saudi oil fields and facilities were also struck by a series of mysterious blazes that knocked out pipelines and processing plants.
These troubling incidents did not pass unremarked in Tehran. On Thursday, May 12, Court Minister Alam was in an audience with the Shah when the phone rang. “Clearly it was to report an enormous fire at an oil field somewhere,” wrote Alam. “I was alarmed and, contrary to my usual discretion, asked HIM for details. ‘Oh, it’s nothing disastrous,’ he replied. ‘It’s in Saudi Arabia. Why else do you suppose I sit here so relaxed.’ ” The fire at the Abqaiq pipeline and pumping station complex run by Aramco knocked out more than half the kingdom’s total oil production. “The sky was black over the Abqaiq oilfield, 40 miles south of the Aramco headquarters here, as the remaining oil in the pipes and overflow dikes was allowed to burn itself off,” reported The Washington Post. One man was killed and thirteen injured in an inferno that took four days to bring under control and cost Saudi Arabia $100 million in lost revenue. The incident also marked a serious if temporary setback in Saudi efforts to flood the market and hold down oil prices. The Western media accepted assurances from Aramco and the Saudi government that the fires were the result of mechanical or human failure. Local reports suggested otherwise, hinting that Shi’a saboteurs had blown up oil facilities in an attempt to panic the royal family and disrupt Saudi oil production. A few weeks later, Saudi authorities broke up a coup attempt by thirteen Saudi air force pilots with plans to bomb the royal palaces, seize power, and declare an “Arabian republic.”
In Iran in the spring of 1977 there were classic signs of structural breakdown and dislocation with shortages of electricity, telephone service, water, gas, and basic foodstuffs. Guests checking into the Intercontinental Hotel in Tehran were supplied with flashlights as a precaution against rolling power blackouts that lasted up to half a day. “Tehran’s streets are so packed with automobiles that the traffic jams entail a serious waste of time,” remarked a visitor to the capital in April. “A few months ago, the country ran out of eggs,” reported Los Angeles Times correspondent Joe Alex Morris. “An emergency call went out, and eggs were flown in from Eastern Europe. Then there were too many eggs.” Morris recounted what happened next: “Desperate, the government asked the American embassy how quickly a powdered egg factory could be set up. Discouraged at the response, it shipped the eggs back to Europe, by air of course, to be made into powdered eggs and shipped back. An expensive way to satisfy a growing public demand for eggs.”
The Iranian government was making progress on at least one front in the battle to restore order to the national economy. Cargo was moving again at Khorramshahr, the port hobbled by shortages of labor and equipment, and which was now open twenty-four hours a day, seven days a week. Temporary jetties were rushed into construction at a cost of $32 million to speed up the unloading and loading of cargo and oil. But was it all too late? “Iran in the past three years has made itself a kind of test case for an extreme hypothesis of development economics—the strategy of the ‘big push,’ which was fashionable in the early days of development studies,” The Times of London reported in early 1977 of the Shah’s belated effort to bring the Iranian economy back under control. “The economy careened towards total chaos, and there were dangerous symptoms of social unrest . . . . Economic growth is certainly desirable, but it should be accompanied by progress toward a more humane and tolerant society. Otherwise the tensions that it generates must sooner or later erupt in violent form and carry away the regime that presided over it.”
The Iranian government revised its budget forecast for 1977 down from $22 billion to $19.5 billion. It anticipated crude exports would drop from 5.4 million barrels a day to 4.6 million barrels of oil a day. “And even though this year’s oil revenues actually may exceed last year’s,” reported The Wall Street Journal, “the total for the five-year development plan ending on March 30, 1978, probably will fall short by $10 billion to $12 billion from the originally forecast $102 billion.” The shortfall would only get worse if demand for oil dropped in the second half of 1977. “The current five-year estimate for petroleum revenues . . . thus underscores one of the flaws of the original development plan: It lacked flexibility to adjust to a lag in money inflows. Moreover, the rapid economic growth has been accompanied by rapid inflation, recently calculated at a 15.5 percent annual rate.” This was no surprise to the Shah’s Plan and Budget Organization, which three years earlier had explicitly warned the palace against locking Iran into a fixed-term spending plan based on oil prices staying high. “The drop in oil exports indicates that the Government is now confronted with fluctuating income from this course,” was how the government minister responsible for the PBO, Abdul Majid Majidi, delicately put it.
That spring Queen Farah visited Paris. For some time Drs. Flandrin, Bernard, and Milliez had wanted to brief the queen on her husband’s condition. They were alarmed by a recent incident in which the Shah’s valet had noticed the Shah’s deliberately mislabeled chlorambucil container was empty and replaced the medication with the harmless drug whose name was written on the label. The mix-up had caused severe health complications, enlarging the Shah’s spleen and affecting his blood count. The French doctors viewed Farah’s cooperation as essential to avoid future medical mishaps. The Shah disagreed and refused their request to meet with his wife. After months of debating the ethics of the issue, Bernard and Flandrin decided to go ahead anyway. Without informing the Shah they arranged through an intermediary to meet the queen in private while she was in Paris. The meeting took place in the greatest of secrecy.
“Fearing a foreseeable deterioration of the disease, we wanted his wife to be informed, so that she could be morally and psychologically prepared for what would inevitably happen one day,” recalled Professor Georges Flandrin. “And so we had a very difficult message to give her, and what is more, it had to be done with absolute secrecy and, if I may be so bold, behind the backs of the patient, his secret service, our families, and our friends, not to mention our enemies and anyone else who would be naturally curious.” Together with Professor Abbas Safavian, Alam’s doctor, they broke the crushing news to the Shah’s wife that they had been secretly treating her husband for cancer for three years.
The Pahlavi court’s excruciating kabuki ritual continued. Queen Farah achieved the tricky task of persuading her husband to allow her to sit in on his next medical checkup with the doctors, though he still knew nothing about her secret briefing in Paris. Relations between husband and wife were such that even now the illness was not discussed openly between them. The doctors used the word “cancer” when they spoke to her but referred to “lymphoma” or “Waldenström’s disease” when they talked to the Shah. The queen did not feel it was her place to raise the subject with him either. She asked the doctors to be frank with him but they held back. She later concluded that her husband most likely understood his fate. She recalled a comment he made to French president Válery Giscard d’Estaing when Giscard called on the royal family at St. Moritz in 1975. “When the French president expressed his surprise at the speed of growth in Iran, my husband confided to him without any explanation, ‘My problem is that I haven’t enough time. I won’t be remaining in power for long. I intend leaving in seven or eight years. I will be over sixty. I would prefer to leave earlier, but my son is still too young. I will wait until he is ready, but I want the essentials to be in place before he takes over. He will have difficulties in the beginning. It’s up to me to bring about the transformation of Iran. I am determined to do it.’ ” The Shah’s doctors also gradually accepted that their patient understood that he was living under a death sentence. “I am only asking you to help me maintain my health for two years, enough time for the Crown Prince to have finished his year in the US and spend another in Tehran,” he told them in the summer of 1977.
On May 12, the same day a fire shut down Saudi Arabia’s Abqaiq pipeline and pumping station complex, Secretary of State Cyrus Vance arrived in Tehran to attend a ministerial meeting of CENTO member states.
Cyrus Vance was the first high-ranking member of the new administration to meet with the Shah. He had a general awareness of the strained relations between the Ford White House and the Iranians but knew no specifics. He wanted to know where things stood. On January 17, 1977, just three days before Jimmy Carter’s inauguration, Vance had taken a helicopter down to Charleston, West Virginia, to attend the swearing-in of Jay Rockefeller, Nelson’s and David’s nephew, as governor of West Virginia. Also in attendance that day was Iranian ambassador Ardeshir Zahedi. When Vance learned of Zahedi’s presence he asked him to join him for the flight back to Washington. The pilot took a detour so the two men could have more time together. Vance arranged for a follow-up meeting at the State Department between the ambassador and an aide. “Everything they asked, I answered,” he said. When Vance asked Zahedi what he thought was the biggest impediment to better relations he said he gave a one-word answer: “Oil. It was oil.”
Yet in order to ask the right questions, Carter’s foreign policy advisers needed to have detailed information at their fingertips. Zahedi said he did not volunteer information on topics such as Iran’s internal political situation because “It was the duty of the host country to show their records [to Carter’s transition team], not for me to show our records to them.” He had in mind the files he believed Henry Kissinger had moved to Nelson Rockefeller’s estate at Pocantico Hills.
President Carter’s ambassador-designate, William Sullivan, was not in Tehran when Secretary Vance arrived there in May. He was in Washington preparing to testify before Congress at his confirmation hearing. During the six-month lag between the departure of Helms and the arrival of Sullivan, Iran’s internal situation had taken a turn for the worse. Not since the early 1950s had the Pahlavi throne been so isolated abroad and vulnerable at home. The Shah had dynamited his long-standing ties to Washington’s conservative Republican political establishment but without building bridges to the Democrats. He had managed to alienate or antagonize the Israelis over the Kurds, Great Britain and the European Community over high oil prices, and the Soviet Union and Arab states over the Ibex electronic eavesdropping project and Iran’s rapid military buildup.
The Shah feared a return to the days of Kennedy and Johnson when arms sales were linked to progress on political and economic reforms. He decided to preempt the new administration in Washington by announcing a raft of measures designed to improve the Pahlavi regime’s image in Western capitals. The Shah knew that Cyrus Vance had served as President Kennedy’s secretary of the army and that Sullivan was a career diplomat who had just spent four years managing another of Nixon’s troublesome gladiators, President Ferdinand Marcos of the Philippines. The Shah gave permission to the International Committee of the Red Cross to visit Iranian jails and meet with detainees to investigate their conditions and treatment. An estimated three hundred to four hundred political prisoners were released back into society. Iranians were encouraged to bring any complaints and grievances they had to the attention of the governing Resurgence Party, which in turn would forward them to the attention of the government. This was how Iran’s one-party state was supposed to work in theory—as a conduit to manage the flow of public expression. It did not work that way. Embittered Iranians overflowed town hall meetings to denounce official corruption and “demand more schools, roads and social benefits and to criticize the Government for not providing them fast enough.” Students, intellectuals, and opposition politicians saw the Shah’s staged opening as a convenient cover for them to call for an end to dictatorship and a return to constitutional rule and parliamentary democracy. The Shah’s government had achieved the stupendous feat of mobilizing its severest critics.
The Shah was perplexed by the high priority Jimmy Carter placed on morality and human rights in foreign policy and national security policy. The new president announced a sweeping review of the way the United States sold military equipment and nuclear technology to its allies. Alam assured him that Washington “will never abandon us,” and opined that Carter’s talk on human rights was a public relations gimmick.
The Shah’s skittishness about American intentions—and his bitterness toward the Saudis—revealed itself in an interview with Newsweek when he indirectly accused Carter of moral hypocrisy and showing favoritism toward the compliant Saudis. “If you Americans are going to be so moral, you must apply a single standard to the whole world,” he complained.
How about Saudi Arabia which, from the lack of American comment, would appear to be a paradise of human rights? If I have a few thousand Communist people in prison so that others can live in a free society, it is magnified and talked about endlessly. But do you ever talk about the hundreds of thousands who were murdered in Cambodia? . . . I cannot believe that the U.S. would be so shortsighted as to cut off arms sales to my country. That would create a widening breach between you and the primary force for stability in this area . . . . If America refuses to sell us arms, if you say that only you and the Russians are entitled to have major armaments, you will be treating us like slaves.
President Carter and his top officials were aware of the Shah’s insecurities and went to great lengths to offer him reassurance. Yet Carter and his foreign policy advisers appeared to have been working in something of an information vacuum. There is no indication that Kissinger briefed his successors on the byzantine deals he had negotiated. There was no paper trail to document the swaps and trades worked out between officials in the White House and Niavaran Palace. Carter and his staff were only now beginning to comprehend the scale of their Persian inheritance. On the question of arms sales, one official used an apt comparison to hint at the scale of the commitments already in the pipeline and that could not be reneged on without provoking a reaction from the Shah: “The problem we’re faced with is how do you turn a 500,000-ton supertanker around?”
“It was quite apparent in Washington that the shah was apprehensive about the new Carter administration,” recalled Gary Sick, the Iran desk officer on the National Security Council. “It was also evident that the United States had no visible strategic alternative to a close relationship with Iran. Policy bridges had been burned years before. Consequently, the Carter administration devoted considerable efforts during its first year to reassure the shah that there was no intent to alter the basic nature of the relationship.”
William Sullivan, a man who did not suffer fools gladly, expressed ambivalence about taking up the post of American ambassador. When he asked the secretary of state why he was being sent to Tehran, Vance replied that the president wanted a professional in the role of ambassador. The Shah would benefit from having someone who could speak frankly with him. Sullivan’s background was ideal because he had “considerable experience in dealing with authoritarian governments and with leaders who were forceful personalities.” Sullivan was not convinced. By his own estimation he was “innocent of any detailed knowledge of Iran . . . . I had never lived in the Islamic world and knew little about its culture or ethos.” He had been holding out for Mexico City. Vance told him that an understanding of Iranian politics, history, and culture was “considered secondary qualifications for this post.” Sullivan needn’t have felt bad. He was inheriting a diplomatic mission whose political counselor, George Lambrakis, “didn’t want to be there,” an economics counselor who had never served in the Middle East, and a new CIA station chief who spoke no Farsi but had presumably picked up a great deal of Japanese during a thirteen-year posting to Tokyo. “The Embassy’s disarray,” recalled a former U.S. diplomat, “made it very easy for the Iranians to play them off against one another.”
In advance of his trip to Iran, Vance received a briefing paper on U.S.-Iran relations from his deputy, Roy Atherton, who had served Kissinger in the same capacity. Atherton’s memo revealed the scale of the American investment in Iran since Nixon’s visit in May 1972. U.S. exports of civilian goods to Iran now averaged $3 billion a year, with $1.5 billion in American capital investment tied up in Iran. Fifty American universities had established links with Iranian counterparts or with the Iranian government. Approximately thirty thousand Iranian students were enrolled at American colleges in the United States, while tens of thousands of American nationals resided in Iran. The irony, as Atherton saw it, was that the very success of the Nixon Doctrine in strengthening Iran had led to a backlash in the United States against Washington’s Persian project. “There is wide concern in this country, reflected in the media, public and Congress, that Iran is needlessly overarmed and that the 30,000 Americans there will produce dangerous frictions in our relationship or would be hostages in the event of a conflict,” Atherton cautioned Vance. “The Shah is broadly viewed as arrogant, imperial and dictatorial, which he is, but this is a caricature which overlooks his extraordinary intelligence, energy and singleminded dedication to his country’s rebirth and modernization. Regardless of their distortions these perceptions now somewhat limit our flexibility in dealing with Iran.” Iran’s single-minded pursuit of high oil prices was “the principal nettle” in U.S.-Iran relations. Atherton advised the secretary of state not to badger the Shah about human rights because it could lead to “serious friction.”
It was the view of the experts at the State Department that although the Shah was not loved or perhaps even particularly liked by his subjects, “the vast bulk of the Iranian people support his policies, at least passively, and there are no serious contenders for power.” Iranian terrorist groups were “small, well armed and disciplined” and received support from Libya and also from Palestinian and European terrorist groups. But the terrorists did not enjoy the support of the Iranian people and “except for the remote possibility of a successful assassination, are not an immediate threat to the Shah.” The Shah’s campaign of self-criticism through the Resurgence Party was a step in the right direction because it encouraged “popular political participation, particularly at the local levels,” thus drawing the lightning away from the Shah. Atherton identified two potential weak spots, of which the first was that the Shah’s “failure so far to develop political institutions could cause instability at the time of transition from his authoritarian rule.” The second weak spot was Iran’s economy, which was beset with shortages of skilled labor, transportation bottlenecks, and was highly vulnerable to sudden fluctuations in the oil market. “A major (and unexpected) reduction in crude oil production and export, however, would be a crippling setback; the economy, for at least two more decades, will be highly-dependent on this one resource,” he wrote. Atherton had identified the major structural weakness in the Pahlavi state: the Shah’s “oily legs.” That made his description of U.S. objectives toward oil prices and OPEC all the more surreal.
At issue is whether Saudi Arabia can bring sufficient pressure on the sales of its Gulf neighbors, particularly Iran, to re-establish the Saudi veto over OPEC price decisions. High world demand and bottlenecks in Saudi Arabia have spared the higher priced producers from feeling any pressure thus far and they are likely to remain in a stronger position for several months before bargaining strength begins to shift in favor of the Saudis toward the end of the year. Our interest in moderating the OPEC price path is served by a continuation of the Saudi policy until they have demonstrated a convincing potential to flood the market to the detriment of the key upper tier producers.
U.S. officials understood that a sudden fall in Iranian oil receipts threatened the Shah’s rule. Yet their decision to support Saudi efforts to flood the market had guaranteed that Iran would see a sharp decline in its petroleum exports, presumably with harmful effects for the Iranian economy. The course of action American officials pursued would help bring about the outcome they feared the most. As late as May 1977, despite mounting evidence to the contrary, the State Department still confidently believed that Iran had been spared “feeling any pressure thus far” in its oil war with Saudi Arabia. It was the Shah, said Atherton, who held the upper hand in the struggle for mastery of the oil market. How much pressure did U.S. officials think Iran could withstand from a two-tier flooded oil market before its economy sustained serious or perhaps even irreversible structural damage? No one knew because no one had thought to ask.
In Tehran, Secretary of State Vance personally offered the Shah Washington’s continued support while gently reminding him that times had changed and that he needed to change with them. Vance did not deliver a human rights lecture to the Shah, nor did he link arms sales to progress on human rights. “No such linkage has been discussed,” Vance said at the conclusion of their two-and-a-half-hour meeting. The new administration wanted to make it clear that concerns over human rights would not stand in the way of close bilateral relations and cooperation on security matters. When Vance did raise the sensitive subject of human rights it was to the CENTO ministerial meeting and he placed it in the context of their own national self-interest rather than high-minded notions of individual morality. “Each country’s growth, prosperity and stability sooner or later depend upon its ability to meet the aspirations of its people for human rights,” he told the gathering. Improving the lives of their people would actually strengthen their legitimacy at home. For his part, the Shah was pleased with how the talks went and reassured by Vance’s knowledge of the Middle East.
A macabre tradition had developed in which red-carpet visits to Iran by U.S. officials were accompanied by grisly acts of terrorism. Sure enough, several hours before the American party landed two gunmen were killed during a pitched two-hour battle in the heart of downtown Tehran, not far from the American embassy compound. Ten days later, U.S. diplomat John Stempel met with Yoram Shani, the first secretary of Israel’s unofficial embassy in the capital, at Xanadu restaurant in Tehran. The Israelis enjoyed close ties with SAVAK and from time to time Shani made low-key trips into the Iranian countryside disguised as an Australian tourist. Several weeks earlier Shani had alerted Stempel to a bloody episode in which SAVAK agents had stormed the wrong house, killing its occupants just as the real terrorists emerged from the building next door. Shani described these casualties as “unnecessary civilian deaths.” In the latest incident, the Iranian government had labeled the gunmen “Islamic Marxists.” But Shani told Stempel that the Israelis did not see it that way. It believed the men to be “fanatical right-wing Moslems.” The two-hour gun battle had occurred outside the offices of the Jewish Immigration Agency in Tehran, and Shani implied that the attackers had at one point fought their way inside the complex before being cut down in a hail of gunfire. Stempel was also told that just two days earlier seven members of the security forces had been killed trying to clear terrorists from two safe houses in the capital.
On Sunday, May 29, Court Minister Alam had an audience at the palace. The Shah made the pointed observation that during a recent tour of South Tehran he had seen thousands of veiled women. This came as an unpleasant surprise to the man who more than any other had granted Iranian women their legal, civil, and political rights. In 1977 37 percent of university-level students were female and half of all applicants to medical schools were women. There were female members of parliament and elected to local councils. Women benefited from equal pay and equal opportunity legislation. Married women were legally entitled to seek a divorce, and single women could obtain an abortion without prior permission from a male family member. The government’s minister of state for women’s affairs, Mahnaz Afkhami, explained to a New York Times reporter that Iranian women were undergoing a “spiritual revival.” She herself had recently visited holy cities in Saudi Arabia and Iraq. “I found it in myself,” she said. “There seems to be a need for religion, as if we have moved too fast in a direction that is not native to us.” It was a revival “against emptiness” but should not be perceived as a backlash against the king’s political and economic reform.
In June, Queen Farah flew to the United States to undertake a series of official engagements in Aspen, Los Angeles, New York, and Washington and, more important, to ingratiate herself with the Carters. The meeting at the White House did not go well. The new president’s effusive Southern charm grated on the queen’s sensitivities. “I had just left Aspen where the talk was about such things as the meaning of development, unified approach, balance between political and economic change, justice and the like,” she later told her husband’s biographer. “The first thing President Carter told me was, ‘You look more beautiful in person than in your pictures.’ I am sure he meant that as a compliment. But I found it insulting.”
Farah’s summer sojourn was troubling for another reason. At every stop the Iranian party was hounded by hundreds and sometimes thousands of jeering demonstrators holding signs that read: “Down with the Shah!,” “No More Arms for the Fascist Shah,” “U.S. Advisers Out of Iran.” During the queen’s speech at a luncheon in Manhattan attended by the governor and city dignitaries a young blond woman suddenly leaped to her feet and shrieked, “That’s a lie!” It was on this trip that she noticed for the first time that young protesters were holding up pictures of a stern-looking bearded cleric. “And so I asked the name of the mullah who was idolized by our young demonstrators and whose defiant look meant nothing to me.” The queen learned that he was Ayatollah Ruhollah Khomeini, the hard-line cleric who had led the 1963 revolt against her husband’s White Revolution reforms. “It struck me as unusual,” she said. “I had always thought of students as young, idealistic, liberal, progressive individuals seeking freedom. Why would a student in America demonstrate for Khomeini and carry his picture as an emblem of his belief?”
Ambassador Ardeshir Zahedi spent 1977 outside Iran, preferring to focus on his official duties rather than deal with the increasingly political atmosphere at court where those closest to the throne intensified their jockeying for position. He heard the murmurings of unrest back home and forwarded the most detailed complaints and warnings to the palace. Zahedi had also become aware of new rumors circulating about the Shah’s health. He took these in his stride. He had spent long enough in the Shah’s company, particularly on the long foreign trips, to suspect that the king had a weak immune system. The Shah frequently caught cold, and on occasion he had experienced reactions to foodstuffs like strawberries and meat. The Shah was famously allergic to Iranian caviar. Early in the Carter administration, Zahedi had been called to attend a meeting with retired Admiral Stansfield Turner, the new director of central intelligence. Turner told Zahedi: “We have actually studied the Shah’s position. And there is nothing wrong with him. The only thing is, he is looking rather tired.” Zahedi told Turner that the Shah took a single Valium capsule before bed to help him sleep. Perhaps the Valium was to blame for the king’s haggard appearance? At Turner’s request Zahedi talked to the Shah and the Shah agreed to stop taking his nightly Valium.
Yet an incident that occurred during the queen’s trip to Aspen made Ambassador Zahedi wonder if something else was going on. He received a request from the palace to send American cancer specialists to Tehran to treat Queen Mother Taj al-Malouk, who had been diagnosed with brain cancer. After the doctors returned from Tehran, Zahedi thanked them by inviting them to dine at the embassy. The mood at the table was lighthearted until one of the doctors casually mentioned an audience he had had with the Shah. “You know, I have heard the Shah,” said the doctor to the ambassador. “He is very intelligent. But I never knew he knows so much about medicine. The questions he was asking, it was as though he was a doctor of cancer.” It suddenly dawned on Zahedi that there might be another patient back at the palace—the real patient. “That moment I was shaking,” he recalled. He immediately telephoned the Shah and demanded to know what was going on. Was His Majesty ill? Had the doctors been sent to Tehran as part of an elaborate ruse? The Shah put Zahedi’s mind at ease. No, he replied, it was nothing serious, only a touch of gout. He even recycled a joke of Alam’s whose moral was that gout sufferers enjoyed longer lives. The Shah’s deception worked. For now, at least, his ambassador’s suspicions were allayed.
In the summer of 1977 Iran’s industrial production slumped 50 percent and inflation was running between 30 and 40 percent. Oil production fell an average of 390,633 barrels a day in June and daily crude exports by 923,594 barrels. The numbers for July were even worse. Iran produced 4,713,767 barrels a day but exported only 4,180,896 barrels a day. What made these figures exceptional was that apart from several days in the spring when Saudi Arabia’s oil production briefly topped 11 million barrels a day, Saudi leaders had still not fully opened the throttle. They were aware of their growing isolation in the Arab world, sensitive to the prospect of more domestic unrest, and no doubt feeling the “extraordinary pressure” being brought to bear on them by Iran. By now enough Saudi crude had been pumped into the system to prevent the Shah’s first-phase 10 percent price hike from taking effect. Spare capacity was returning to the market just as oil from the Alaskan pipeline and the North Sea fields were set to come on line. Saudi Arabia had proven its point. Iran and the other OPEC hardliners “no longer take us for granted,” said Yamani.
The Saudis and the Iranians were both looking for a way out of the Oil War. On June 29, OPEC released a statement in Vienna announcing that the two protagonists had settled their differences. Iran agreed to forgo its second stage 5 percent increase set to take effect on July 1. Saudi Arabia and UAE agreed they would lift the price of their crude exports by 5 percent to bring them into line with the rest of the cartel. OPEC also agreed to freeze prices for all of 1978. The decision by the majority of the cartel not to implement the July 1 price hike saved Western consumers $2 billion. Speaking in Riyadh on the same day, Crown Prince Fahd also assured President Carter that the West need not fear a second oil embargo. “We will not cut the flow of oil to America or to anyone,” he said.
The Shah had no choice but to settle. He was a beaten man and he knew it. Even at this late stage only thirteen of Saudi Aramco’s thirty-five oil fields were in production. “So there is a lot of room for expansion,” noted The Economist. Iran’s waterlogged economy risked being swept away in the deluge. Petroleum Intelligence Weekly described the saturated oil market as “sloppy,” especially in heavy crudes, and observed that “there seems little hope of a rebound in prices before the fourth quarter.” BusinessWeek described the United States and Western Europe as “awash with oil . . . . With storage tanks all over Europe brimful and 40 cargoes of crude oil reportedly floating aboard tankers with nowhere to go, the companies believe market forces now dictate much lower production levels.” There was so much surplus crude in the system that refiners began dumping oil “at less than cost” and Middle East oil producers slashed their prices by 20 cents per barrel. “At present time, there is a glut in the market,” conceded Iran’s Interior Minister Jamshid Amuzegar. Indeed, so much oil had been pumped into the system that the market remained in a slump for the rest of 1977. By December even Saudi Arabia was forced to cut its daily production to 8.3 million barrels, a move that prompted The Wall Street Journal to report that “the Persian Gulf kingdom is singlehandedly trying to dry up the oil glut” it had created earlier in the year.
Industry observers were unanimous that Saudi Arabia had won the war and driven Iran from the market. The Vienna compromise, said BusinessWeek, marked “a clear-cut Saudi victory,” even though in the first few weeks of the battle “it looked as if the Saudis had bitten off more than they could chew.” The fire at Abqaiq and cold winter in Europe and the United States had offered price relief to the Iranians. But these turned out to be temporary aberrations. Saudi Arabia’s oil production was “once again hovering around 10 million bbl a day as the world oil market goes into a seasonal slump.” If Iran had insisted on implementing its threatened 5 percent second-stage price hike on July 1, “the Saudis could indeed have swamped the market and driven prices down.” The Saudis were pleased with the Carter administration’s progress in forging a Middle East peace deal. Besides, high oil prices encouraged energy conservation in the United States, something the Saudis were keen to discourage: “If the West weaned itself from OPEC oil, the Saudis might end up with a lot of oil that nobody wants.”
A thick blanket of brown grime and suffocating heat unfurled itself over Tehran and brought fresh hardships to the people of Iran. Low rainfall and lengthy delays in dam construction placed strains on the electrical grid that led to frequent power outages. “These blackouts have caused widespread inconvenience and, above all, economic losses,” reported the New York Times correspondent. “Government officials must walk up seven and eight stories to their offices. Tourists get caught in elevators. Office workers swelter in 100-degree-plus temperatures without air conditioning.” In London, Ambassador Radji learned from a visitor recently returned from Tehran that “the blackouts have proved a colossal embarrassment to the regime and have provided an outlet for everyone’s pent-up and long-smoldering discontent. The situation has laid indecently bare the Government’s repeated assurances that increased military expenditures would not be at the cost of improvements in people’s living standards.”
From the religious stronghold of Qum, senior Ayatollah Khonsari telephoned Court Minister Alam to inform him that water and power supplies had been cut. Even Alam’s neighborhood was not spared, and he purchased a generator to keep the telephones in his house working. He feared the situation was getting out of hand. “It terrifies me that one day everything will simply cave in around us. Please God that we may be spared this.” Alam described the government’s empty response as “like a scene from some incredible farce.”
The government urged shopkeepers to close their doors at 8:00 P.M. and factory owners to release their workers for early summer holidays. Conditions were especially deplorable in the restive southern suburbs, where “cuts sometimes last 8 to 10 hours a day.” The burden of the dysfunction was falling on the poorest Tehranis. Those who ventured onto the streets of south Tehran in the summer of 1977 were struck by the sullen atmosphere and the large numbers of young men standing around waiting for something to do. Many had come from the countryside to find work or seek a better life for their families. But the economic slowdown halted new building construction and led to high job losses. Former U.S. diplomat Bill Lehfeldt, by now working in the private sector and a frequent visitor to Tehran, scoffed at the efforts of the Iranian government to minimize the problem. “There was more under- and unemployment than you could shake a stick at,” he remembered. “I realize they had to manufacture numbers for things, but if you went down into South Tehran in 1977 on a warm summer’s day, you wondered why the place didn’t blow up earlier. People were flocking to the town from the countryside, from the small villages all over the country, hoping to get in on the gravy train and crammed into impossible living quarters in South Tehran, by and large. And all looking for jobs.”
It was around this time that General Hassan Pakravan and his wife, Fatemeh, took a road trip to Kashan and Natanz. It was Pakravan who had intervened to save Khomeini’s life in 1963. Two years later the Shah had replaced him as head of SAVAK with General Ne’matollah Nasiri, an odious character who showed a great deal more flair for his real estate investments than he did watching the Shah’s back. Since then, Pakravan had served as the Shah’s ambassador to Pakistan and then France before accepting a high post as court adviser. On their way to Kashan the Pakravans drove through south Tehran, a part of the capital they hadn’t seen in many years. “I couldn’t believe my eyes!” Mrs. Pakravan later recounted. “I just couldn’t believe my eyes—the conditions in which people lived! It was incredible! Some of them lived in pens, completely patched up with pieces of nylon on them. The open-air canals were heaped with dirt and garbage. The water was black and smelly. You could not imagine what it was [like]. You cannot visualize it.”
When General Pakravan returned to Tehran he sought an audience with the Shah because, his wife later recalled, he was “terribly worried” by what he had seen. The general described to the king the appalling conditions in south Tehran. “If you’re not going to do something immediately from a human point of view, do it for your own safety, because this is a powder keg. Two million people living like that—your capital city is going to explode and we’ll all be swept away by the explosion.” The next day Pakravan showed photographs of what he had seen to the queen. After that the Shah began to receive Pakravan on a regular basis. These were apparently distressing encounters for both men. One day Pakravan returned home and told his wife, “Whenever I see the Shah I have the sense impression he is like a drowning man who sees me as some safety to which to cling.” Mrs. Pakravan said of those last days of life on the volcano: “It was too late, too late, too late.”
The conditions for a general uprising were in place. In the summer of 1977 a small but growing number of wealthy Iranians and longtime foreign residents quietly put their affairs in order, emptied their bank accounts, and sent family members out of the country on extended “vacations.” James Saghi, a businessman who “saw the writing on the wall,” sold his house at a profit, and moved to California’s Napa Valley. Others who got out early were American passport holders Bill Shashua, Tehran’s Peugeot dealer, who confided to a friend that “everything was going to fall apart,” and Lloyd Bertman, who had lived in Iran since the early 1950s. Bertman shared with a friend his strong personal sense that “there are things that are happening that make me uncomfortable, so I’m going to leave.” These individuals were perceptive and knew Iran well enough to see what was coming.
On Thursday, August 4, the Shah telephoned Court Minister Alam in Paris to ask for his resignation. Two days later, Amir Abbas Hoveyda resigned as prime minister. The Shah appointed Interior Minister Jamshid Amuzegar as Iran’s new prime minister and elevated Hoveyda to Alam’s old post as court minister.
Alam was puzzled by both appointments. Hoveyda’s premiership had ended in failure and Amuzegar had never demonstrated a capacity to lead, let alone inspire. Amuzegar announced sweeping cuts to government spending and imposed harsh austerity measures that led to even higher job losses among poor, unskilled, and semiskilled Iranians. In his first few weeks in office the new prime minister fired 1,700 people from the Finance Ministry and announced his intention to break the back of the Plan and Budget Organization, which he inexplicably blamed for the economic mess. “The PBO had become a super-ministry,” he said in an interview with Joe Alex Morris of the Los Angeles Times. “I’ve asked the PBO to drop all responsibilities for implementation of projects. We’re cutting down other employees and putting them in other ministries where they won’t be sitting around as stumbling blocks.” Morris reminded his readers that three years earlier the PBO had warned “of the dangers of all-out development, and most of its predictions have come true. The report was ignored at the time.” Amuzegar’s course correction was “a gamble, a race against time, with built-in contradictions that are bound to sharpen the conflicts within the society as time goes on.” It was doubtful the new government could meet the rising expectations of Iran’s swollen, sullen urban underclass. Amuzegar’s final words as the interview drew to a close were not reassuring. “Wish me luck,” he said. Luck was in short supply in Iran in the late 1970s. Amuzegar lost his job a year later and eventually fled to exile. Morris, a fifty-one-year-old father of two, took a sniper’s bullet to the heart in Tehran on February 9, 1979, the day the Iranian monarchy was finally overthrown.
The end of empire was at hand. “In the past few months we’ve backed down on oil prices,” wrote Alam in one of his final diary entries. “We’ve surrendered to the Saudis, which means in effect to Carter. Oil prices are to remain frozen until the end of next year . . . . These diaries must come to an end. There is nothing left for me to write now that I’m cut out of my meetings with HIM.”
In early April 1978 Alam wrote a final letter to the Shah. “He suggested that if the crisis were allowed to fester, revolution would be unavoidable,” wrote his biographer. “The situation, he said, was far more serious than the Mossadeq crisis of 1953.” Alam’s death eight days later on April 13 spared him the collapse he fully anticipated. The notebooks he had quietly kept since 1968 were removed from Iran and deposited for safekeeping in Switzerland. Alam instructed his wife not to publish them “until such time as the Pahlavi dynasty no longer ruled Iran.”