Troubled Oil

In 1901, William Knox D'Arcy, an adventurous Englishman who had amassed a fortune in the Australian gold fields, scented a new bonanza. He paid Iran's Shah $20,000 for a 60-year monopoly on oil production in five-sixths of Iran, promised him an additional 16% of the profits. Seven years later, D'Arcy's prospectors brought in a gusher. In 1909, the Anglo-Persian Oil Co. (renamed Anglo-Iranian in 1935) was founded, has been spouting profits ever since. It built the world's largest refinery at Abadan, became a top-ranking crude-oil producer. It also fell more & more into disfavor with the Iranian government. By last week the company's strained relations with Iran formed a major flaw in the defense of the Middle East against Communism; Britain and the U.S. did not see eye to eye on how to correct the defect.

Almost from the start, Anglo-Iranian played an important strategic and political role. In 1914, the British government bought into Anglo-Iranian to assure its navy an oil supply. Today Britain controls 52.55% of the voting stock. With U.S. encouragement, postwar Europe has become increasingly dependent on Middle East oil; it now gets about 70% of its oil from east of Suez, of which about a third is Anglo-Iranian. A friendly relationship between Iran and Anglo-Iranian Oil Co., assuring continued operation, is thus as important to Washington and Paris diplomatic and defense chiefs as it is to Anglo-Iranian's board in London.

Abrupt Hike. For many years, Iran's royalties from Anglo-Iranian made up at least one-sixth to one-fifth of the government's annual revenues. But as the company's prosperity grew, so did Iran's insistence that it get a larger slice of the profits. Late in 1932, the Iranian government tore up the original agreement and forced Anglo-Iranian to hike royalties and hitch them to the size of the stockholders' dividends. In return, it extended the concession to 1993.

In 1948, Sir Stafford Cripps, then Chancellor of the Exchequer, asked British companies to hold down dividends to combat inflation. Since his order would cut sharply into Iran's royalties, Anglo-Iranian, looking for a justified protest from Teheran, quickly offered to revise the 1933 agreement. Razor-sharp Board Chairman Sir William Eraser, a grey, gaunt Scot who runs his own show, journeyed to Teheran, and a compromise was reached in July 1949. It provided for raising Iran's oil revenues sharply. For example, under the new terms, Iran's 1948 royalties would amount to -L-18,700,000, compared to -L-9,200,000 under the old arrangement.

The compromise was certainly a break for Iran. It was also an admission that Anglo-Iranian's old rate had been too low. Majlis (Parliament) members, who had always claimed the foreign company was cheating Iran, reacted violently. The fury of the Majlis' opposition brought forth the new reform government of Premier Ali Razmara, Iran's hardest-working, most honest regime in years. Last week, with defeat inevitable, the Razmara government prudently withdrew the Anglo-Iranian Oil proposal without waiting for a vote.

Washington considered the breakdown of negotiations a serious setback to its hopes that Iran might be made defensible against Russia. Two years ago, a group of U.S. experts, Overseas Consultants, Inc., surveyed Iran's resources and development needs. In 1949, the Majlis set aside all oil revenues to pay for the seven-year development plan drawn up by Overseas Consultants, Inc. (TIME, Oct. 24, 1949). Now, the Iran-Anglo-Iranian deadlock meant no money, no development. Meanwhile, the need for the plan had grown: Iran was reeling from crop failures, business was stagnant, half a million were unemployed.

Dangerous Wrangle. The U.S. had approached the British and reminded them that the prolonged wrangle in Iran could endanger Europe's vital oil supply and open poverty-stricken Iran's door to the Reds. While Washington had no intention of interfering with the British company, the ultimate penalty for failing to reach an understanding with Iran would fall on the U.S. which, in the long run, is responsible for the West's defense.

Last September, while in London, Assistant Secretary of State George McGhee tried to convey U.S. concern to Whitehall. The British politely pointed out to him that they had long experience in dealing with the Iranians, and that was that. An attempt by Secretary of State Dean Acheson to raise the issue with Foreign Secretary Bevin during the latter's recent visit to New York was equally fruitless. The British Foreign Secretary hinted to Acheson that the Iranians could not be so desperate for money, otherwise they would be more anxious to accept the new terms.

Meanwhile, Iran stayed broke and almost defenseless, and U.S. and British diplomats let responsibility fall between them--and the Russians stood ready to pick up the pieces.

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