IRAN'S PRICING SYSTEM FOR OIL, WHAT WOULD AN OPEC-WIDE SINGLE PRICE SYSTEM MEAN?

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001900030148-2
• Release Decision: RIPPUB
• Original Classification: U
• Document Page Count: 4
• Document Creation Date: December 19, 2016
• Document Release Date: August 19, 2005
• Sequence Number: 148
• Publication Date: October 11, 1974
• Content Type: MFR

STAT
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OFFICIAL USE C,.irf
SUBJECT: Iran's Pricing System for Oil, What Would an
OPEC-Wide Single Price System Mean?
The attached information on the Iranian Oil Pricing
System and the Implications of a Single Price for Oil was
prepared for Mr. Charles Naas, Country Director for. Iran,
US Department of State, for inclusion in a briefing book
for Secretary Kissinger.
Attachments:
As stated
Distribution: (S-6544)
Original & 1 - Addressee
1 - D/OER, DD/OER
(11 Oct 74 )
OFFICItAL USE ~14! I.Y
Approved For Release 2005/12/14: CIA-RDP85T00875R001900030148-2
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FOR OF ICIAL USE ONLY
IRAN'S PRICING SYSTEM FOR OIL
Iran's single price for its oil steers from the fact that all oil produced by
the consortium of western international oil companies is owned by the Iraran
government. Under the terms of an agreement signer) in July 1973, the government
sells this oil to the consortium on 20-year contracts. This arrangement is in marked
contrast to that used in most of' the Persian Gulf oil-producing countries where
a certain percentage of the oil produced is owned by the oil companies themselves the so-called equity oil -- and the remainder is owned by the host country --
so-called participation oil. Although Iran sells its oil to the consortium at a single
price, with minor variations for quality, the Persian Gulf states charge one price
for participation oil and levy taxes and royalties that result in another price for
equity oil. The companies in these Arab producing states sell the oil based on
an average of the two prices.
The price Iran charges the consortium is based on the going price for oil
sold by the Persian Gulf producers. With the price paid for Arab oil continuing
to increase, the Shah assures that he gets the same revenue per barrel by
retroactively billing the companies for the difference between the price paid Iran
during the quarter and the price realized by the Arabs during the same quarter.
By having a single price with the retroactive payments, the Shah has the best
of all worlds and the consortium at least knows that the oil it buys will br: no
higher in cost than the average of oil sold by the Arab states. This certainty gives
the companies that make up the consortium an incentive to make any necessary
production cuts by reducing output of participation oil in Arab countries. It also
gives these same companies an incentive to increase output in Iran rather than
in the Arab states.
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 Approved For Release 2005/12/14: CIA-RDP85T00875R001900030148-2
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WHAT WOULD AN OPEC?WIDE SINGLE PRICE SYSTEM MEAN?
An OPEC-wide single price system along the lines suggested by the Shah would.
? Eliminate the posted price,
? Eliminate the equity price,
? Eliminate the participation price,
? Establish a single price for all oil, with variations for quality,
transportation differential, etc., and
? Imply nationalization of the oil companies.
Establishing a single price system would not necessarily mean higher or lower
prices. Since prices are set politically now, they would presumably be politically
set under a single price system. It nonetheless seems likely that the tendency will
be to make this single price higher than the average price is now. Several OPEC
countries, particularly Algeria, Iraq, and Libya will argue for a single price that
would approximate the current posted price. In phis case, oil prices would be
increased on the order of $ 1.00 a barrel.
There are advantages to a single price system for both consumer and producer.
? A single price would eliminate the steady increase in prices that has
occurred as a result of the governments' increasing their ownership share
of the oil companies.
? A single price system would increase transparency - i.e., it would be
much easier to determine profit per barrel the oil companies and
governments were making.
? A single price presumably would eliminate government oil auctions. Prices
received in auctions have been used to claim that prices that companies
paid for equity oil, were too low.
Approved For Release 2005/12/14: CIA-RDP85T00875R001900030148-2