Wednesday, March 31, 2004

Thankfully someone in Venezuela "gets" oil. 

For years the executives leading Venezuela's state oil companny, PDVSA, have been arguing that OPEC is an anochronism and that there is nothing that anyone can do to control oil prices.
Two particular former presidents of PDVSA, Sosa Pietri and Luis Guisti, argued that OPEC was a spent force and that the cartel could do nothing to increase oil prices. They both wanted to ignore OPEC quotas and have PDVSA spend billions of dollars to increase its output of oil. Neither of them cared about how much revenue PDVSA brought in to Venezuela - they were single mindedly focused on increasing production.

Of course, a good deal of this emphasis on increasing oil output was self-serving. More oil output meant more jobs for oil workers and higher salaries for executives like them. More importantly they both had direct financial intersests in increasing oil production. For example, Sosa Pietri owns a company called Constructora Nacional de Valvulas, a company which make valves and pumps for oil pipelines and refineries. Obviously, this company stood to gain from PDVSA expansion. Similiarly, Guisti also had direct financial interests in sub-contractors of PDVSA.

Unfortunately, Sosa Peitri and Guisti were succesfull in convincing succesive Venzeuelan presidents to have PDVSA invest heavily in increasing production. With the green light from Venezuela's political leadership PDVSA spent billions and billions of dollars to drill new oil wells and build pipelines. To get this money, PDVSA not only reduced the amount of money it gave to the Venezuelan treasurery but it also borrowed billions of dollars so that today it is a highly indebted company.

And what did PDVSA and Venezuela get for all these billions of dollars? They busted OPEC quotas and ramped up production to almot 3.5 million barrels per day. This greatly increased output, along with high output from some other oil producing nations, sent oil prices plummeting to $10 per barrel. So after investing tens of billions of dollars PDVSA was actually a less profitable company that it had bee to begin with.

Enter Hugo Chavez. Even if the highly educated and highly paid executives of PDVSA didn't understand how oil markets work Chavez, a former army paratrooper, did. He vowed to cut back on production which he claimed would significantly increase prices and give Venezuela the increased oil revenues it desperately needed. And when Chavez became president and cut back on oil production what happened? The price of oil more than doubles just as he had predicted!

For almost five years now Chavez's oil policy of boosting revenues by respecting OPEC quotas has proven spectacularly successful. The monies coming into Venezuela have substantially increased and are funding Chavez's ambitious social programs.

One would think that having seen this the former PDVSA executives would finally be pursuaded of the error of their ways. But no, like a dog with a bone, they cling to their now discreditted ideas. And so too do many of the oppositions propoganda corp on the Internet.

But aside from the dilletantes and charletans there are people who do understand that Chavez's policy of revitazing OPEC has indeed been successful. To the Wall Street Journal the renewed relavency of OPEC is clear. Even right wing journal such as the National Review cannot deny it. And if OPEC was the complete irrelavancy that some claim why would the US White House spend so much time trying to influence its decisions?

Having the right oil policy is central to Venezuela being able to progress. It is just too important not to get it right. So here is a word to the wise in Venezuela - learn from Chavez and get a clue when it comes to oil.


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