Oil Wars

Mary Anastasia O’Grady is the Wall Street Journalist Op-Ed writer on Latin America. For much of the past several years this has consisted of haranguing against Venezuela and President Chavez. I feel for Ms. O’Grady.

She has a very difficult job. For example, she had to show that the coup against Chavez on April 11, 2002 wasn’t really a coup. Then she had to pretend the 02/03 “strike” was a smashing success even as it fizzled. Later she had to insist that the opposition would win a recall referendum against President Chavez even when almost all the polls showed they would lose, badly. And when that illusion was smashed by the actual vote she to insist that, all evidence to the contrary, the vote wasn’t real.

All I can say is I hope she is well paid – it’s not easy doing what she has to do. In any event, Ms. O’Grady was out there today trying to earn another paycheck. Lets have a look at how she fared:

Oil Wells Refuse to Obey Chávez Commands

By Mary Anastasia O'Grady | The Wall Street Journal

May 20, 2005 | "We have a little problem," Venezuelan President Hugo Chávez reportedly told Venezuelans on May 3, "and we are fixing it." The "problem" is the drop in output by the Venezuelan state-owned oil company known as PdVSA. The Chávez fixes, thus far, have entailed sending military troops to the oil-rich west of Venezuela to investigate "management errors" and allegations of sabotage, while in Caracas the government is threatening foreign oil companies with contract cancellations and tax hikes.

For most chavistas this may suggest that the whole stink about Venezuela's oil industry's underperformance is about to be resolved. Yet it is likely that the magnitude of the drop in petroleum output is a lot bigger than what Chávez has described. It is equally probable that a military invasion of PdVSA and property confiscations in the private sector won't fix it. Statist economic policies have a sorry productivity record and in this case that record is highly unlikely to be improved.

So here we go with the stories of Venezuela’s oil industries demise again. As was pointed out previously these reports have tended to be greatly exaggerated and, well, completely wrong. But more on this later.

The big trouble is that Chávez has put Venezuela on a centrally planned economic path not much different from the failed experiments of the 20th century. Indeed, last year he declared that Venezuela was preparing for "the great leap," a seeming reference to Maoist China's 1950s agricultural policies that spread famine. Maybe his books about Chairman Mao never mentioned that disaster.

Venezuela – a centrally planned economy?!?!? Maybe I missed something but the great majority of the Venezuelan economy is private – the banks, telecommunication companies, transportation, manufacturing, and on and on. Most everything is private. Heck you can’t walk more than a few blocks in any Venezuelan city without bumping into a McDonalds, Pizza Hut, Subway, Wendy’s … you get the idea. Mao’s China Venezuela is not.

Closer to home, Chávez emulates Fidel Castro, who once commanded that a 10-million-ton sugar harvest spring from the soil. Fidel also promised to clone a prolific wonder-cow called "Ubre Blanca," so that Cuba would promptly rival Switzerland in cheese yields. Almost 50 years into the revolution, Cuba still isn't Switzerland and milk is a luxury. Venezuela is on the same trajectory.

Ah, the old fall back. You can’t paint Chavez as Communist dictator like you want ‘cause he keeps winning democratic elections and presides over a decidedly capitalistic economy. So what to do? Easy. Tell the world that he is friends with Castro and poof, Venezuela must be a second Cuba and anything Castro may be guilty of Chavez must be guilty of too.

Ok that doesn’t make any sense. But give her some credit – at least she’s trying.

Chávez has at least one thing right: Tight control of the country's political agenda requires tight control of the country's economy. In Venezuela, that means controlling PdVSA.

PdVSA was born in 1976. Until the Chávez government came to power in 1999, the company made some effort to be politically nonpartisan. Getting a job at PdVSA required business, engineering or technical know-how, not political connections.

Ok, Ms. O’Grady is right, there are some parts of the Venezuelan economy controlled by the Government – and PDSVA is one of them. So there you go – Chavez must be a Commy!!! Well, not really. See, PDVSA was formed when the Venezuelan government in 1976 nationalized the Exxon and Shell operations in Venezuela (without compensation I might add). This was all done under the government of Carlos Andres Perez, a die-hard capitalist and sworn enemy of Chavez. He also set up the state run industries in Venezuelan Guyana. Funny how O’Grady is good friends with the president who actually put a lot of the Venezuelan economy under state control but views the current president, who hasn’t nationalized a single company, as a dyed in the wool communist.

Was PDVSA well run and non-political? It certainly wasn’t well run. It didn’t figure out how to make unleaded gasoline until 20 years after the rest of the world and in the mid-90s Venezuelan gasoline was actually banned from the U.S. by the Environmental Protection Agency.

Non-political? I guess. Mainly because the people running it weren’t interested in politics; they were interested in money. They just wanted the politicians to stay out of their way so that they could be free to run PDVSA in a way that would make the most money for them. This is an interesting topic that will be the subject of future posts.

That has changed. Not content with just the golden eggs, Chávez wanted the goose. As he began to consolidate his power, he began politicizing both the management and labor arms of the company. That prompted a 66-day strike by employees on Dec. 2, 2002, which brought production levels as low as 150,000 barrels per day (b/d). When the strike ended on Feb. 4, 2003, 18,000 workers were let go, taking the skills and knowledge necessary to run the company with them.

Gee weren’t we just talking about this the other day . The managers of PDVSA got a little upset because Chavez, unlike previous governments, insisted on obeying OPEC quotas and maximizing the amount of money PDVSA generated for Venezuela. The managers of PDVSA didn’t like this and went on a strike to overthrow the government. Chavez did what he had to do, he fired them. Unfortunately though, not before the country lost billions of dollars.

PdVSA has never fully recovered.
Today Chávez claims that production is down by a mere 200,000 b/d for a daily output of 3.1 million barrels. Industry experts dispute this and this month critics grew more vocal.

Ok, this is where she starts getting a little imaginative. Yes, getting straight answers out of oil exporting countries on how much they are producing is difficult. But PDVSA never fully recovered? Well the folks at the U.S. Department of Energy don’t seem to agree. Lets have a look at a graph of Venezuelan oil production published by the U.S. government here:



Now if O’Grady wants to be a nitpicker production IS down a little, maybe a two or three hundred thousand barrels per day. But that isn’t what jumps out at me from the graph. What strikes me is how rapidly and nearly completely production recovered. Considering a good part of your work force walks off the job, damages equipment and computer systems, and throws the country into turmoil getting production back up and running so quickly and completely is nothing short of miraculous.

On May 4, Alberto Ramos, an analyst for Goldman Sachs' Emerging Markets Economic Research, noted that since the strike local and international oil analysts have consistently put PdVSA production some 500,000 to 600,000 b/d below government claims. "Such level of production is also corroborated by production statistics published by OPEC and other international energy agencies."

Venezuela's El Nacional (a daily newspaper) Web site issued a similar report on May 15 -- according to a translation by BBC Monitoring Americas: "An extensive survey of oil industry engineers, geologists, geophysicists and experts indicates that corrective measures have not been taken and the decline in Venezuelan oil production is nearing 1,000,000 b/d. This drop, coupled with a shortfall of associated natural gas, creates an alarming situation with the foreseeable consequence of diminishing crude oil extraction."

In his report, Mr. Ramos also noted that "several oil analysts" attribute the company's inability to return to pre-strike levels of production to "corruption, mismanagement, inadequate investment levels, sloppy maintenance, and lack of qualified technical personnel."

She is a really a dog with a bone on this, but nevertheless completely wrong. Lets look at some statistics, again from the U.S. government . Here are average daily production statistics in thousands for the period before the strike:

Month	Production
January 02	2,630
February 02	2,600
March 02	2,620
April 02	2,530
May 02	2,730
June 02	2,735
July 02	2,735
August 02	2,765
September 02	2,955
October 02	2,980
November 02	2,972

And here are average daily production statistics in thousands for the last 6 months:

Month	Production
September 04	2,540
October 04	2,640
November 04	2,540
December 04	2,640
January 05	2,640
February 05	2,640

And what do we see here? That prior to the strike Venezuela was producting about 2.6 to 2.7 million barrels daily and now it is producing 2.64 million barrels daily. In other words there is virtually no decline at all in Venezuelan oil production!! So in referring to a “million barrel” decline in production Ms. O’Grady is resorting to outright lies. So desperate is she that distortions and twisting the truth is no longer enough – only straight out lies will suffice.

The lack of maintenance, management and qualified personnel can be traced to the strike and the layoffs. It is also possible that disgruntled employees are not toiling as they did when they felt they were measured by their work, not their politics. Yet human capital is but one factor of production. Investment is also scarce and likely to grow scarcer as Chávez puts the squeeze on foreign oil companies.

Since being named president of PdVSA, Chávez ally Rafael Ramirez has been working to expand the company's control of the entire industry. On May 6, the research firm Oxford Analytica reported the government is arm-twisting to force the conversion of 32 foreign company contracts into joint ventures that will give the government 51% ownership. The newsletter also said that the government wants -- as prescribed by Chávez -- to raise income taxes on foreign oil companies to 50% from 34%. On Tuesday, Reuters reported that Venezuelan tax authorities "held a second round of talks with seven foreign oil companies, including units of Chevron and Shell" on the matter. The government has also said it will no longer pay foreign oil firms in dollars.

I know Ms. O’Grady loves sweetheart deals but those days are over. With oil commanding high prices if the foreign companies want Venezuelan oil they are going to have to pay for it. President Chavez runs a serious government that knows how to defend its country’s interests whether people like Ms. O’Grady like it or not. And as for the foreign oil companies, they’ll keep investing in Venezuela. After all, it’s where the oil is.

Added to the drain on human and financial capital, are serious internal problems that this power grab is producing at PdVSA. Oxford Analytica writes that Mr. Ramirez fired 30 "Chavista managers" on corruption grounds soon after he took over his post -- although he did not present proof.

Oxford Analytica said that the move was "interpreted inside the Chavista movement as Ramirez settling old scores with high-ranking executives of the previous PDVSA administration." This has provoked an increase in job insecurity among chavistas who thought their politics gave them security. Analytica says that, "crossed accusations of corruption based on leaked internal documents have increased among different Chavista factions."

Mr. Ramos notes that "aggressive" policies toward the private sector and weak investment in PdVSA "raise serious risks of a further gradual decline in oil production," making Venezuela all the more vulnerable to a drop in world oil prices. It's quite possible that Chávez will have no more luck commanding oil out of the ground than Fidel had getting cows to give more milk. The "great leap" is looking more and more like a great flop.

Seeing as she ran out of even lies to make up she delves into some idle and unsubstantiated gossip. As far as “further” declines in oil production go, I’m not going to lose any sleep over it considering that the declines up to this point she keeps going on about apparently never happened. And I seriously doubt there will be any declines going forward unless Chavez does something completely stupid like hiring the “Oily People” back.

I have never heard Chavez say anything about a “great leap”. But the economy did grow more than 17% last year and is poised for double digit growth again this year. So maybe he just said “the economy is growing by leaps and bounds” and she misunderstood him.
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