Thursday, November 09, 2006

Boosting prices and cutting your losses at the same time 

Today we get more details on exactly how sensible Venezuelan oil policy has become under Chavez.

Readers of this blog will be well aware of Chavez taking a leading roll in the late 90's in revitalizing OPEC and its strict adherence to OPEC quotas. Venezuela has reaped huge dividends from those policies.

Recently OPEC has again taken oil off the market in order to stabalize prices and maintain the high levels of income that oil exporters have seen in recent years. So far OPECs cuts seem to be meeting with some success, although additional cuts will probably be needed.

Of course, while price stabalizing cuts are a good thing they aren't cost free. After all you have to reduce production and that cut back on your income and profits to a certain extent (although the whole idea is the increase in prices more than offsets the loss of income from reduced sales.) But in Venezuela's case this turns out not to be so bad, as the following article hints at:

Oil firms teamed up with PdVSA in the 1990s to build integrated oil production and refining operations that produce roughly 500,000 barrels a day. Venezuela recently ordered the Orinoco to cut 138,000 b/d of output to comply with an Organization of Petroleum Exporting Countries' quota reduction.

Amid record oil prices and a domestic policy of resource nationalism, the Hugo Chavez administration has already hiked taxes and royalties on these deals.

As part of the recent OPEC cutbacks Venezuela was required to cut 200,000 in daily oil production. From the above article they are forcing the Orinoco heavy oil associations bear the great majority of the cuts.

Why is this good for Venezuela? Simple. These production associations are mainly owned by foreign oil companies and those companies get the majority of the profits. Further the production costs on this oil are higher than regular oils and the taxes and royalties are lower. The end result is that Venezuela makes a lot less money on the Orinoco crud than it makes on its conventional crudes. So if you are going to cut back doesn't it make sense to cut back on your least profitable product? Absolutely. And that is what the Chavez government has very wisely done.

One can be sure that if the opposition was running the country this would never happen. Never mind that they don't believe in supporting OPEC and would never agree to cutbacks to begin with. You can be sure that if they did make cutbacks the cutbacks would be made from PDVSA's conventional crudes not the foriegn oil companies production. I can hear all the excuses now; "we can't scare away foriegn investment", "we can't break contracts", "we can't alienate our partners", etc.

Fortunately Venezuela has a government that is willing to stand up for Venezuela's true interests. And Venezuelans like it that way. That is why the election of December 3rd is a foregone conclusion.


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