Saturday, February 18, 2006

Hugo Chavez - the half trillion dollar man 

The oil policy of Venezuela changed radically with President Chavez coming to power in 1999. Whereas previously Venezuela has been a OPEC quota buster that worked to keep prices down upon Chavez’s coming to power Venezuela became a price hawk insisting on production cutbacks to boost prices. This price hawkishness has been evident recently as evidenced by this article in yesterdays Financial Times:

Venezuela puts pressure on OPEC to cut its output

By Kevin Morrison in London

Venezuela said yesterday the Organization of the Petroleum Exporting Countries should cut its output by up to 1m barrels a day – firing the first salvo well in advance of the next meeting of oil ministers from the cartel in two weeks’ time.

The call from Opec’s fourth biggest producer comes days after the cartel trimmed the demand outlook for this year, and follows a sharp fall in prices this week. The drop was triggered by swelling oil and petroleum product inventories in the US, the world’s biggest consumer.

Rafael Ramirez, Venezuelan energy minister, said that for the level of demand there was overproduction of about 1m barrels a day.

“I think we should cut between 500,000 and 1m,” said Mr. Ramirez, who is one of the most hawkish ministers in Opec.

So in a response to a dip in prices Venezuela takes a aggresively pro-active stance of wanting OPEC to cut back production. That is certainly a very prudent stance and hopefully will allow prices to be kept from falling.

Contrast this to previous Venezuelan governments which were more concerned with doing what the oil consumers, like the United States, wanted than doing what was in the best interest of their own country. In 1990 Iraq invaded Kuwait and due to a US embargoe the oil from both those countries was kept off the market and prices spiked. How did Venezuelan government of Carlos Andres Perez respond? Lets see from a Wall Street Journal articles published on August 20, 1990:

Perez Hints Venezuela, Others Will Lift Oil Output

By Jose De Cordoba

Caracas, Venezuela – President Carlos Andres Perez strongly suggested that Venezuela and other OPEC countries will soon increase production to make up for embargoed Iraqi and Kuwaiti oil.

“OPEC has the obligation to maintain production at the 22.5 million barrels a day level agreed to at the last OPEC conference,” said Mr. Perez during an interview at his ornate office in the presidential palace here.

But Mr. Perez said Venezuela, like Saudi Arabia, wanted if possible to reach agreement with the other members of OPEC, or the Organization of Petroleum Exporting Countries, to “provisionally” increase their production quotas. The higher production would make up a large part of the roughly four million barrels a day of Kuwaiti and Iraqi oil removed from the world market by the United Nations sanctions following Iraq’s invasion of Kuwait.

Mr. Perez said a steep price rise resulting from a failure to replace the lost production would be “disastrous” for the world economy, and especially for the economies of developing countries.

Venezuela, along with Saudi Arabia, has issued a call for an OPEC meeting to consider a production increase.

Mr. Perez, who has been accused at home and in the U.S. of waffling on the issue of raising Venezuelan production, denied that he has been pressured by the U.S. to do so. “The U.S. attitude towards Venezuela’s position has been one of frank gratitude,” Mr. Perez said. Mr. Armas, the energy minister, said that at the beginning of the Gulf Crisis, Venezuela had briefly raised production over its OPEC quota “out of nervousness”.

Clearly, the Carlos Andres Perez administration cared more about helping out the U.S. with low prices than reaping the benefits of high prices for Venezuela. The difference with the Chavez government couldn’t be more stark. And this goes a long ways towards explaining why Chavez is so beloved by Venezuela, he does everything he can to increase the resources available for them, and so detested by the U.S. government, he has cost them a lot of money.

Exactly how much money has the increased in oil prices that started with Chavez’s ascension to power cost the U.S.? This is not difficult to figure out. The U.S. Department of Energy publishes a Monthly Energy Review. Looking at the January 2006 report in Table 1.5 we see the Merchandise Trade Value which gives how much the dollar value of U.S. net oil imports are. In 1998, before Chavez came to power it was $43.7 billion dollars. That is, it cost the spent 43.7 billion dollars to import oil. Lets look at what that number has been in the years since Chavez came to power:

1999 $60 billion

2000 $109 billion

2001 $93 billion

2002 $94 billion

2003 $122 billion

2004 $166 billion

2005 $210 billion

As can be seen the U.S. has been spending ALOT more money to import oil since Chavez came to power. In 2005 it spent five times as much money on oil imports as it did in 1998!!! And what is the cumulative cost – i.e. the cumulative years amounts above the $43 billion amount from 1998 in all the successive years? Doing the calculations in a spreadsheet the number I cam to was a stunning $556 billion dollars. Yes that is right – the U.S. has had to spend more than half a trillion additional dollars to import oil since Chavez came to power. That is a staggering amount. And it will still be a staggering amount even if you don’t attribute all of it to Chavez’s oil policies.

Looking at this it is a little easier to see why the U.S. would very much like to be rid of the Chavez government


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