Oil Wars

I try to avoid simply posting entire newspaper articles. However, in the run up to the OPEC meeting in Caracas I think its important to give as much background on OPEC and Venezuela's relationship with it as possible. Hence, I found this New York Times article to be worth reproducing:

HOUSTON, May 29 — When President Hugo Chávez of Venezuela wraps up this week's meeting of OPEC's 11 members in Caracas with an excursion for delegates to Canaima National Park, the location of the world's tallest waterfall, it will be another chance to remind energy markets of his influence in helping drive oil prices above $70 a barrel.

Of course, most delegates to the Thursday meeting are expected to nod politely to Venezuela's calls for output cuts that could drive prices even higher, while doing the opposite by reaping all they can from the current bonanza of high prices. The oil minister of the United Arab Emirates rejected talk on Monday of a possible cut in the cartel's output quotas of 28 million barrels a day.

Mohamed Binhttp Dhaen al-Hamli, head of the U.A.E.'s delegation to the Organization of the Petroleum Exporting Countries, told reporters in Abu Dhabi that he did "not expect a change in the production level." Officials from Iran, an ally of Venezuela and OPEC's second-largest producer after Saudi Arabia, recently said they did not expect any output cuts this week.

Still, Mr. Chávez is using the meeting as a platform to celebrate energy policies that irk the United States. The meeting is the organization's first in Caracas since 2000, when Mr. Chávez emerged triumphant from an effort to instill discipline within OPEC after oil had plunged to $8 a barrel in the late 1990's. (Oil prices ended last week at $71.37 a barrel; markets were closed on Monday for a holiday.)

One of Mr. Chávez's goals is to increase OPEC's ranks. Mr. Chávez said last week that Venezuela would back Ecuador if it decided to rejoin OPEC, following Ecuador's decision this month to expel its largest foreign investor, Occidental Petroleum of Los Angeles. Venezuela also offered to refine at subsidized rates oil exported by Ecuador, which was an OPEC member from 1973 to 1992, when it dropped out saying that it could not afford OPEC's membership fees. In another move that could add friction to the competition for oil resources between the United States and China, Sudan said last week that it was considering an invitation from Nigeria to join OPEC. With sanctions preventing American oil companies from investing in Sudan, China has emerged as a key investor in the country, Africa's third-largest oil producer after Nigeria, a longtime OPEC member, and Angola.

These efforts to enlarge OPEC, responsible for about 40 percent of the world's 84 million barrels a day of production, play directly into the ambitions of Mr. Chávez. He has been pushing for more nationalistic energy policies in Venezuela and other countries in South America like Bolivia, which has received generous financial backing from Venezuela.

It was a Venezuelan, after all, who was largely responsible 46 years ago for creating OPEC by modeling the group in part on the Texas Railroad Commission, an entity formed to prevent wild plunges in oil prices in the United States due to overproduction. Juan Pablo Pérez Alfonso, Venezuela's oil minister at the time, persuaded four nations from the Middle East to join OPEC at a meeting in Baghdad in September 1960.

While that meeting set the stage for the nationalization of oil assets in OPEC countries like Venezuela and Saudi Arabia in the 1970's, by the 1990's Venezuela was widely considered a saboteur of OPEC's efforts to raise oil prices by persistently producing above its official quotas and inviting foreign oil companies to help expand output.

It may seem like a distant memory in today's context of more belligerent rhetoric, but Venezuela had plans to double its oil production to seven million barrels a day before Mr. Chávez was elected president in 1998. Mr. Chávez reversed that policy, while also persuading OPEC members that output cuts, not ambitious investment programs, were needed to boost oil revenues.

"The Chávez administration doesn't care about market share," said David Mares, a professor of political science at the University of California at San Diego who closely follows Venezuela's energy industry. "They care about the absolute amount of money coming into the country."

Few of Mr. Chávez's critics within Venezuela argue that high oil prices, whether driven earlier by his push for production discipline within OPEC or by today's robust demand for oil by China, India and the United States, have not increased Venezuela's financial clout. Oil export revenue climbed by $4.1 billion in the first quarter from a year earlier, increasing Venezuela's current account surplus by $2.8 billion to $7.5 billion, according to Barclays Capital.

Venezuela's stagnant oil production, however, points as much to a bounty lost as one gained. Venezuela produces just 2.2 million to 2.5 million barrels of oil a day, according to most analysts. That figure is down considerably from its output peak of about 3.5 million barrels a day, reached before Mr. Chávez purged Petroleos de Venezuela, the national oil company, of middle- and upper-management employees who had shut the company down in an effort to destabilize his presidency.

Meanwhile, OPEC's most pivotal member, Saudi Arabia, has comfortably raised production in recent years, even though much of its excess capacity is not easy to refine. With almost every OPEC member producing flat-out in an effort to meet unprecedented global demand, Venezuela lost an opportunity to earn even more from oil.

"The Saudis took their market share," said Amy Myers Jaffe, associate director of the energy program at Rice University. "They're pumping a million barrels a day more at $70 a barrel, while Venezuela is pumping about a million barrels a day less."

It may be with somewhat token symbolism, then, if Mr. Chávez calls for more cuts in OPEC's output this week. For Mr. Chávez to enhance his influence inside OPEC and to finance his ambitious foreign and domestic policies, analysts estimate that Venezuela needs to carry out plans to double its production to 5 million barrels a day.

It remains to be seen how this increase can be accomplished as Venezuela exerts greater control over international oil companies, which account for as much as half of its oil production. Venezuelan energy officials have signaled in recent days that they would seek up to a 60 percent controlling stake in exploration projects in the Orinoco River basin, one of the world's most promising, though politically complicated, oil reserves.

A few points here merit comment. First, it is good that OPECs ranks may be expanding. The more of the oil market that OPEC controls the more clout it will have. Ecuador's production is small but it will be interesting to see if AMLO wins in Mexico if he can be pursuaded to join OPEC. The other big fish would be Russia. It would seem to be a natural fit as Putin clearly seems to understand that holding oil off the market and boosting prices can be very beneficial. However, I think he is a little too independent to actually joine OPEC. Norway, like Russia, understands the benefit of reducing production and, as we will see in future posts, has co-operated with OPEC by cutting production. But they are also unlikely to join.

However, while OPEC only controls about 40% of actual production they control over 70% of actual reserves because they produce much less oil in relation to what they have than others do. That means as time goes by OPECs power should grow as non-OPEC countries deplete their supplies.

Another important point from the article is that whereas previous Venezuelan governments emphasized production volume what Chavez cares about is how much money is coming into the country. It would seem a no brainer that what matters is profits, not production. Yet I can't tell you how many times I've heard opposition supporters claim that PDVSA and Venezuela are not as good as they used to be because they are producing less oil. This is particulary ironic because PDVSA's previous management always bragged about how they ran the company as a commercial concern. Yet this would be a rather odd commercial enterprise as generally commercial enterprises emphasize profits rather than production volume. So in point of fact PDVSA is now run much more like a commercial enterprise, in that it maximizes profits, than it was previously.

Of course, it seems no article can go by without the standard errors, and this one is no exception. I trust by now most people can easily spot them.
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