Double Jeopardy In Iran

Now the orders are drying up like the oil

From the start, Iran's turmoil has threatened real double-trouble for the U.S. and the world's other industrial nations. Until as recently as last December, the country was both a major source of oil--second in importance only to Saudi Arabia--and a businessman's bonanza, with a powerful appetite for arms, machinery, factories, cars, computers and countless other products from the West and Japan. Last week the extent of the double jeopardy became startlingly clear.

First came an announcement by the U.S. Defense Department that upwards of $7 billion in military sales contracts with Iran had been canceled by mutual agreement as a result of the continuing strife in the country and spreading Iranian hostility to U.S. weapons sales. The disclosure, which affects some of the nation's largest defense suppliers, including General Dynamics, McDonnell Douglas, Boeing, Litton Industries and Textron's Bell Helicopter division, was shock enough. But even as businessmen wondered if additional deals were about to collapse, Energy Secretary James Schlesinger brought up an even gloomier subject: the increasing chances for an outright oil shortage. He warned of the looming squeeze in some of the scariest terms yet used by any Administration official. He told a Senate committee that the six-week-old Iranian oil shutoff could turn out to be "prospectively more serious" than the five-month Arab oil embargo of 1973-74 because it could last much longer.

Together, the developments pitched Wall Street into a funk, pushed the dollar into another slide on the money markets, after more than two months of relative stability, and sent gold leaping to a record $254 an ounce in Europe.

So sharp were the financial reverberations set off by Schlesinger's rather overwrought vision of a coming energy crunch that the Administration felt obliged to send forth Treasury Secretary W. Michael Blumenthal in the dollar's defense. Before a Senate committee, he cited Schlesinger's remarks about oil and said that this was "clearly the type of thing that causes people to run for gold." (Aides later maintained that Blumenthal had not been commenting on what Schlesinger had said, but on the Iranian situation itself.) Blumenthal forcefully reiterated that the Administration remains committed to maintaining stable market conditions for the dollar. Currency traders took this as a sign that the U.S. was prepared to intervene massively in the money markets to prevent a dollar rout, and the slide stopped, though the greenback still closed out the week lower than it began it. In fact, the Schlesinger-Blumenthal performance accomplished little except to underscore the trouble that the Administration is having in saying or doing anything effective to deal with the Iranian oil problem.

Schlesinger's aides, seeking to fend off criticism that their boss had overplayed the perils posed by the Iranian oil shutoff, quickly sought to explain that the Secretary was trying to promote "prudence, not panic." Indeed, the Iranian situation is already having a significant adverse effect on oil supplies. Since late December, lost Iranian production has been causing a worldwide petroleum shortfall of approximately 2.5 million bbl. a day. That is almost exactly the same amount that was lost during the 1973 Arab embargo, and oil companies are being forced to dip ever deeper into their inventories to make up for it. Last week Texaco, Shell and British Petroleum announced delivery cutbacks to their worldwide customers because of the supply pinch. In the U.S., current stockpiles amount to a 70-day supply for crude. Said Schlesinger to the Senate committee: "As we reach 60 days, one should get quite nervous."

President Carter, for all his apparent concern about not exaggerating, the gravity of the situation, took some symbolic steps intended to raise public awareness of the need to conserve oil. He issued a directive to all federal agency chiefs, suggesting that they lower the heat in federal buildings, restrict the use of Government vehicles, and suspend "energy-intensive research activities," though

Department of Energy officials confessed bewilderment at what such activities could be. At DOE, staffers hurried to put the finishing touches on a program of mandatory conservation measures that the Administration will send to Congress for approval later this month. The program is to begin in the spring if voluntary energy savings do not reduce consumption. Among the elements: weekend closings for gas stations, and Government-ordered lowering of thermostats of public buildings. Gasoline rationing remains a last resort.

In fact, the troubles in Iran would be bad enough even if the country's oilfields were pumping as hard as ever. The reason is the collapsing Iranian market for Western goods and technology, which was illustrated by last week's cancellation of military sales contracts. Until recently, Iran was one of the nation's most important Third World markets, with imports from the U.S. jumping from just $769 million in 1973 to nearly $3.7 billion last year.

At the least, the sales cutback will now make it more difficult--if not impossible --for the Administration to meet its already doubtful goal of chopping as much as $8 billion off the U.S.'s record 1978 trade deficit of $28.5 billion in the year ahead. A continuing deficit of that magnitude means yet more dollars pouring out of the U.S., and that in turn is bound to lead to further wild gyrations in currency values during 1979. Warns Alan Greenspan, former economic adviser to President Ford: "The non-oil consequences of the turmoil in Iran are likely to be even more unexpected and difficult to reverse than are the oil-related problems."

Fortunately, most defense suppliers will be able to absorb at least the immediate impact of the cutback. As is the case with nearly all U.S. military exports, the Defense Department protects manufacturers by routinely requiring buyers to deposit enough money in a Government-administered trust account to cover a company's start-up costs under a contract. The money, which in the case of Iran totals $500 million, is held in escrow until work is completed and all the equipment has been delivered and paid for. At the same time, the contracts themselves also normally require buyers to make regular progress payments as work continues.

In combination, the arrangements as-,ure that no defense supplier will suffer out-of-pocket losses as a result of the Ira nian cutbacks. On the other hand, the potential loss of Iran as a market for U.S. arms sales means that weapons makers will have to look elsewhere for business, and that raises the prospect of some potentially explosive competition for customers in the 1980s.

Companies with non-defense-related activities in Iran are threatened with the loss of business more immediately. Since 1973, the U.S. has sold Iran upwards of $11 billion in civilian goods, everything from 15,000 pregnant Wisconsin milch cows for the Iranian dairy industry to a complete telephone switching system by General Telephone and Electronics. Billions more in long-term contracts, covering such things as housing and highway construction and port development, remain still to be fulfilled by large corporations, including Ford and AT&T. Few if any civilian contracts have been canceled so far, and businessmen hope that socially useful projects like housing, hospitals and schools will survive no matter who winds up in power. Even so, many companies do not seem to know what to do. Says a Commerce Department staffer in Washington: "We have hundreds of companies that are very worried about this. They keep phoning up and asking, 'How do we collect? What are we supposed to do?'" Complains an official for Levitt Industries, a New York builder that has contracted to build $220 million in low-income housing for Iranian government workers: "Our whole project is in a state of limbo. All we have is a lot of signed papers."

European and Japanese companies are also feeling the squeeze. In fact, because the economies of Western Europe are smaller, slower growing and more export oriented than that of the U.S., a number of countries could be quite hard hit. West Germany's economy is only half as large as the U.S.'s, but the country's exports to Iran last year reached nearly $3.4 billion, or almost as much as the U.S. figure.

Now imperiled are deals for the future delivery of almost $15 billion worth of West German nuclear reactors, six submarines costing $545 million, and several smaller projects. In Britain, Chrysler U.K. Ltd. last week laid off 1,500 workers at its Coventry and Birmingham plants because of chaos in Iran's ports. The disruptions have prevented the company from shipping auto-assembly kits under a long-term contract that was signed in 1970 with an Iranian company and is worth some $200 million annually to the ailing automaker.

One thing no one wants to contemplate is the possibility that ideological or economic pressures might force whatever government finally emerges in Iran to try to back out of its international loan obligations.

Though oil exports last year brought the Shah's government some $22 billion, the cost of pell-mell modernization was high; when the Shah left, Iran owed $7.2 billion to foreign lenders, including an estimated $2.2 billion to U.S. banks. Bankers point out that any attempt by Tehran to renege on those commitments would make the country an international financial pariah.

But failure to find some sort of compromise could also trigger a global banking panic, and that is something that would hurt Iran's creditors as much as Iran itself. Reports that Abol-Hassan Banisadr -- said to be a leading candidate for Finance Minister in the regime that Ayatullah Khomeini wants to establish -- plans to write off an undisclosed portion of Iran's foreign debt if cho sen for the post, were hardly reassuring. Said a Citibank vice president bravely: "Whatever comes out of this will be a sensible decision. Someone will be there with a level head to deal with the debt situation." If so, he had better turn up soon.

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