Oil Wars

The status of the Venezuelan oil industry and its production levels has been a contentious issue for some time now. And in spite of previous posts which aimed to clarify matters and show that production had NOT declined I believe the highly technical and involved nature of the discussion left many people still sitting in the dark. So I decided I would would produce a graph showing Venezuelan production levels over the past number of years so that people could see in a simple visual format precisely what is going on.

Please note that the information on this graph comes from the International Energy Agency which is the organization that represents oil consuming nations (ie. it is the opposite of OPEC which represents oil exporting nations). So this information is not coming from the Venezuelan government but rather is from independent third party sources. Also note that there are two components to total Venezuelan oil production - standard oil in blue and condensate and Orimulsion in red which are slightly different than standard oil but are still considered oil. Because a lot of the misinformation on Venezuelan production involves counting that those latter types of oil in some cases and leaving them out in others I break them out on the graph.



Two technical notes on the graph: The Orimulsion and Condensate are actual numbers from 2001 to 2005. Prior to 2001 they were not available so I projected the 2001 numbers backwards to the prior years. OPEC quota numbers are from the IEA except for 97 and 98 when they didn't give them and I got them from Alexanders Oil & Gas.

I will add to this post later and show how the graph shows that the opposition has been lying about the true situation of the Venezuelan oil industry and the Venezuelan government has been telling the truth. But for now let me make a couple of observations. First, of late Venezuelan oil production has NOT been declining. Between 2003, 2004 and 2005 it was consistently INCREASING. That is, since the end of the 2002/2003 oil strike production has been on the upswing so opposition assertions that Venezuelan production is declining are flatly false.

Secondly, the main time that Venezuelan oil production was reduced was in 1999 when the Chavez administration intentionally had production cut back to more closely conform to OPEC quotas. As can be seen, in 1997 and 1998 Venezuela was way overproducing its OPEC quota and this played a part in send oil prices down to $8 per barrel. Upon taking office Chavez set a new policy of conforming to OPEC quotas which helped prices immediately recover to over $20 per barrel. Note that overall production in 1999 and 2005 are virtually the same.

I will go into more detail on this later and show how it relates to some of the stuff coming out of the opposition media. Stay tuned.


Ok, now updating this post to show how the graph of Venezuelan oil production blows out of the water some of the more common lies regarding what is happening in the Venezuelan oil industry:

First, we have this little gem from our friendly anti-Chavez blog Publias Pundit:

"That’s been killing oil production to the point of oil shortages in the oil giant. Oil production is down 60% from the pre-Chavez days. Sixty stinking percent! Venezuela is the only OPEC member besides Indonesia that is now producing below quota, what should be a sign to everyohe that Chavez’s rape-and-pillage philosophy toward Venezuela’s oil resources is literally destroying its productive capacity."

No not quite. Production is definitely not down 60%. Ten or fifteen percent maybe and that decrease was made right when Chavez first came to office to get more in line with OPEC quotas. Since then it has been very stable, 2005 production is essentially the same as 1999 production, save for during the oil strike. What’s more, oil production is increasing, not decreasing.

Now, we wouldn’t necessarily expect Publius Pundit to know anything about the Venezuelan oil industry but we would expect people like Luis Giusti who was the President of PDVSA to know something about it. Yet he fares no better. For example:

"Luis Giusti detailed that 'when one takes into account that Venezuelan production instead of being the almost 3.5 million that it was in 1999 is today 2.6 million, then we see that there has been a decline in production of 1.8 million barrels per day....'"

Again referring back to the graph note that in 1999 oil production wasn’t almost 3.5 million barrels – it was about 3.1 million barrels which is about the same as it was last year. So that statement is totally bogus but lets say the guy was just off a year and meant 1998 (incidently here is another board member saying that production was 3.4 million in 1999, so rather than misspeaking they seem to be bullshitting). Ok, in that year, as per the graph, production was almost 3.5 million barrels. But to get that you have to include the condensate and Orimulsion, the red part of the graph. Yet he then goes on to say that current production is only 2.6 million barrels which is true only if you leave out the condensate and Orimulsion (again, the red part of the graph).

This is one of the most common tricks the opposition uses when trying to show that there has been a decline in production – count ALL oil types (blue and red in the graph) when referring to oil production when they were running the shop but leave out some of those oil types (the part in red) when giving current numbers. Thoroughly dishonest but they do it all the time.
[BTW, it should also be mentioned his saying a decline from 3.5 million to 2.6 million is a decline of 1.8 million shows arithmetic is not his strong point]

Of course, many many similar examples could be found. Hopefully what people will take away from this is Venezuelan oil production has a) remained fairly constant over Chavez’s term b) is not declining at the present time, rather it is increasing and c) the opposition assertions of dramatic declines are made by giving completely false numbers and switching within the comparisons what they count or don’t count as oil.

And just one final point, while the opposition has clearly been lying about Venezuelan oil production the government has been telling the truth. For example here is a quote from a Wall Street Article where rabid anti-Chavez columnist Maria Anastasia O’Grady scoffs at Chavez saying Venezuelan production is 3.1 million barrels:

"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."

As it turns out, as can be seen from the graph Venezuela was producing 3.1 million barrels in 2005. As I’ve said before, I love it when they catch Chavez telling the truth !!!!

|

Last week I posted on the new extraction tax that Venezuela is imposing on oil companies. However, at the time I was confused and thought this was an across the board tax that applied to all oil operations. Apparently it is meant to only apply to the oil companies operating in the heavy oil projects of the Faja del Orinoco.

Yesterday in Vheadline Oliver Campbell, a former PDVSA finance director, published an excellent analysis of the new tax and how it would effect the profits of the oil companies in those projects. I highly recommend that everyone take some time and read it. But this is the bottom line. These projects were making profit of about $10 per barrel when oil prices were at the more "normal" level of $25 per barrel from 99 to 2002. And given that prices were even lower when these projects were initiated and were generating losses the oil companies were probably quite happy with the $10 per barrel profit these projects were getting.

Fast foward to the last couple of years and oil has gone through the roof. So these companies started making much higher profits - in fact even after the government increased taxes and royalties last year these projects were still making $20 per barrel profit. And remember, that isn't reveneue - that is pure profit.

Now once this new extraction tax is put into place Mr. Campbell caclulates that the profits will be back down to $10 per barrel. Certainly that is a very reasonable rate of return - after all several years ago the companies were more than happy with it. So all this new tax structure has done is make sure that the windfall profits from the recent run-up in oil prices go to Venezuela and not to companies like Exxon-Mobil. Given that Exxon-Mobil had profits of $36 billion last year I'm not going to lose to much sleep over this.
|

One of the main assertions in the international propaganda efforts against Chavez is that despite his professed love for the poor poverty is actually up under Chavez. Of course, that lie was already rebutted on this blog here, here, and here.

Today we get yet more evidence of the decline in poverty under Chavez in an article published in today's El Universal. Along with the article they published a nice little graph showing the evolution of the poverty statistics since 1998:



Just to remind people of where these numbers are coming from poverty is measured solely based on monetary income that households receive (ie, in-kind benefits like free medical care from Barrio Adentro are not included) in relation to the monies needed to purchase basic necessities. If you don't earn enough to by all your basic food, clothing, shelter, and transportation necessities you are considered poor. If you can't afford even the basic food items you are considered to be in extreme poverty. Note that on the graph the top line is inclusive of those in extreme poverty, i.e. it is the TOTAL number of poor in Venezuela.

Clearly poverty has fluctuated significantly during Chavez's term. For the first several years it trended down. Then, with the sharp economic contraction of 2002 and 2003, brought about in large part by the opposition led oil strike, it shot up to levels even higher than in 1998. But with the strong economic recovery since 2003 it has again declined. The overall poverty rate at the end of 2005 of 37% is down more than 5 percentage points from the 43.9% rate that Chavez inherited and extreme poverty is down to 15% from the 17.1% that he inherited (curiously extreme poverty had been even lower but shot up in the second half of last year). This sharp decline in poverty is in line with the dramatic rise in income of the poorest segments of Venezuelan society which we saw documented here.

So the facts are very clear. Chavez has successfully reduced poverty (and remember this doesn't count all of the effects of the social programs many of which are in-kind and not counted in these numbers). The opposition can lie all they want but Chavez set out to help the poor and has successfully done just that.
|

Today in Ultimas Noticias they had interviews with two of the new members of Venezuela's electoral council, the C.N.E. While they didn't go into great detail on issues they did seem reasonable. They are willing to consider not using the fingerprint reading machines the opposition has objected to, they recognized that a segment of Venezuelan society doesn't trust the electoral authorities and they want to re-establish that trust, and they are open to discussing all of these issues with the opposition.

So far so good. But then there was one statement, made by Janeth Hernandez, that struck me as quite dumb. In response to a question on what percentage of the paper ballots generated by the computerized voting system should be counted she said it can't be 100% because to do that would be to return to manual voting. Huh?!?!? That doesn't make much sense.

Let me back up for a moment. Venezuela uses touch screen computers for their voting and after each vote the computer prints out a little receipt telling you who you voted for. You confirm that the information is correct and deposit the receipt in a box. At the end of the day the receipts can be counted up to check that the numbers the computer is giving is correct. That is how the computerized system is audited.

During the Presidential Recall Referendum they audited a random sample of 1% of the boxes and found that they matched the computerized results. On the basis of that audit the Carter Center and O.A.S. declared the election results accurate. However, some segments of the opposition have continued to insist there was fraud and have demanded that in future elections all the paper receipts be counted. As a concession to this demand in last years National Assembly election they counted 47% of all the receipts (one box selected randomly at each voting site).

Still, this has not been enough for the opposition who continue to want ALL the receipts counted. Now, Ms. Hernandez's response is that to do that would be unacceptable because that would be to revert to a manual system. That is not at all true. The votes would still be transmitted electronically and tabulated by computers so you would still get one of the main benefits of automated voting - rapid results. Further, by using computers which print out receipts there would be virtually no spoiled ballots. So you still get that virtue of computerized voting.

Counting the receipts clearly still leaves you with a computerized voting system. All it means is that you are now auditing every single vote rather than just a sample. In the end it makes no difference. If you audit a random sample properly you can be certain the results were accurate. Similarly if you count every last receipt you will also be certain the vote was accurate. If a bunch of opposition poll monitors want to stand around all night counting little pieces of paper to confirm that they really did get their butts kicked let them do it.

Make no mistake, the opposition will still complain there was fraud. They will still complain the elections were not free or not fair or whatever. Losing with grace and dignity is not something the opposition knows how to do. In fact, even with the elections still six months away some opposition bloggers are already hard at work with their pre-emptive excuse making. There is nothing the C.N.E. can do to change that - that's a given.

However, there is something even more important - and that is perception. The more transparent you make the voting process the more difficult it is for the opposition to come up with complaints and the more absurd the complaints they do come up with become. How will opposition complaints about the receipts being treated with a special chemical that after an hour convert Petkoff votes into Chavez votes play in the press (and if you don't think they'll use that excuse you don't know the opposition very well)? Not well at all would be my guess. Just as the opposition's complaints about the finger-print reading machines boomeranged on them when the government agreed not to use those machines and the opposition then proceeded to boycott the elections anyways.

The C.N.E. needs to make these elections as transparent as possible. Yes, international observers have consistently verifed the integrity of the vote in Venezuela. But getting beyond that it is important to make the process as credible as possible for all Venezuelans. Further, nothing makes the opposition look quite so silly as calling their bluff and giving them what they want. In this case that will simply cause them to wind up standing naked before the whole world revealed for what they are, nothing more than a small, if vociferous, minority of Venezuelans. If nothing else, Chavez supporters need only think of it in the same terms as Oscar Wilde would:

"One should always play fairly when one has the winning cards."

|

This is a good one from the New York Times:

Six nations with poor human rights records were among those elected to the new Human Rights Council on Tuesday, although notorious violators that had belonged to the predecessor Human Rights Commission did not succeed in winning places in the new group.

China, Cuba, Pakistan, Russia, Saudi Arabia and Azerbaijan, countries cited by human rights groups as not deserving membership, were among the 47 nations elected to the council. But in a move hailed by the same groups, both Iran and Venezuela failed to attract the needed votes.

Kenneth Roth, the executive director of Human Rights Watch, said: "The good news is that we did better than expected in the voting because Iran and Venezuela both lost. Venezuela's losing shows that bluster and anti-Americanism isn't enough to get elected."

So let me get this straight, China, Cuba, Pakistan, Russia, Saudi Arabia and Azerbaijan get elected to a human rights council (try not to get hurt laughing) and Venezuela doesn't - and the head of Human Rights Watch thinks this is good?!?!? Out of the group that made it only one country has anything aproximating free elections (quick trivia question - when was the last time China, Cuba or Saudi Arabia had free elctions?). In Saudi Arabia you offend the wrong people and you get beheaded. In Cuba you offend the wrong people and you get shot. In China make the mistake of getting pregnant one too many times and you get an obligatory visit to the nearest abortion clinc.

In Venezuela you can vote for whomever you want, say whatever you want, openly criticize the government, travel freely, and have as many kids as you want yet somehow our esteemed friends at the Times, and maybe Human Rights Watch too, think they are a "notorious violator" of human rights. What this really shows is it isn't your human rights records that counts - if that were the case Venezuela would be one of the first to make this council. Rather, its who likes you, and even more importantly, who doesn't like you. Whats more, if this typifies the views of Human Rights Watch I guess we know what their reports and opinion must be worth - not much.

I'm sure the Venezuelan government is a little miffed at not having been chosen. After all if they bothered to put themselves foward for this they must have wanted it. But hopefully they'll get over it quickly. After all, considering who DID get selected for this council it's a badge of honor NOT to have been selected.
|

Despite all the whining as we have seen previously the price of oil and gasoline is still not all that high by historical standards. Even in inflation adjusted dollars it is below its all time high and when compared to purchasing power it is significantly lower than in years gone by. What’s more, a good many people in the U.S. pay more for a gallon of bottled water than they do for a gallon of gasoline. Which makes me sometimes wonder if the leadership in Venezuela might do to bottle water and sell it. Forget the Faja del Orinoco - the real money is in bottling and selling the Orinoco itself.

Be that as it may there has always been another way to discern that gasoline prices aren't really all that high. Just watch the behavior of people as they use gasoline and see if they do to economize their use of it.

The easiest way to do this is to observe how fast people are driving. Simply driving slower saves a lot of gasoline as this chart shows:



So are people buying themselves an extra 25% in fuel efficiency by slowing down from 75 M.P.H. to 65 M.P.H. (which is, incidentally, generally the speed limit)? All I can do is give my own observations. Five years ago when gasoline was cheap I would set the cruise control on my car at 65 M.P.H.. During long 5 and 6 hour highway trips other cars would be whizzing by at least 10 or 20 M.P.H. faster. Often times I would not pass another car along the entire route.

And now that gasoline is over $3 per gallon? Most other cars still blow by me 10 or 20 M.P.H. and I still don't pass anyone else. Another words, given a chance to easily knock 75 cents off the price off a gallon of gasoline virtually no one takes the offer. I guess they all still think gasoline is inexpensive, or at least cheaper than their time.

My anecdotal observations have been corroborated by the few brave (foolhardy?) politicians who proposed rolling back the speed limit to 55 M.P.H. No sooner than the proposer of that idea makes it public than he/she is inundated with hate mail and it is tabled. So for those of you living in the good old U.S.A. here is how you will be able to know when gas really is starting to get expensive - when these things start sprouting up along highways:


|

I'm sure all Oil Wars readers are well aware that every poll in the land shows Chavez with a commanding lead in the run up to the December presidential elections. So doing yet another post on poll numbers could be considered beating a dead horse. But I think it is worth making an exception in this case for one reason. There are in particular two very anti-Chavez and pro-opposition polling firms which consistently seem to show the LEAST favorable results for Chavez - Keller and Hinterlaces. The other day we saw that Keller had Chavez comfortably in the lead. Today we'll look at what Hinterlaces found in its March 2006 poll (hat tip to Vheadline).

Here are the numbers in response to the question "Who would you vote for in this year’s presidential election?

Hugo Chávez 38%

Julio Andrés Borges (PJ) 9%

Manuel Rosales 7%

Teodoro Petkoff 5%

Roberto Smith 1%

Undecided / Would not vote 40%

Certainly this isn't a good showing for the opposition. Even totalling everyone besides Chavez you come up with 38% supporting him against 22% supporting opposition candidates. If the undecided voters wind up voting in the same proportion Chavez would win with 63% of the vote (versus the 58% to 59% he has gotten in all his previous elections).

If this result holds, and with a booming economy, huge social programs, and numerous public works about to come on line it should, there is little doubt Chavez will win. And on a side note it looks like Mr. Teodoro "I can't pay my bills" Petkoff will lose any opposition primary as he is way behind Julio Borges.

So lest there be any doubt, even the most die hard opposition polling firms show Chavez winning easily. About the only question remaining is will the opposition be adult enough to accept their defeat or will they resort to their "fraud" or "we're not playing" routines. Given their continueing inability to mature I suspect the latter.
|

On the bottom of page 2 in todays edition of Ultimas Noticias there was a little blurb that would have been very easy to overlook yet somehow caught my eye. It turns out that in a round about way it was about the upcoming presidential election.

The article itself was about 20,000 former and current university employees who are demanding that they get back pay and benefits that they are owed from the period 1994 to 1997. Three unions, Sintraucv, Fenasoesv, and Fenasinpres, are insisting that the 2.4 million dollars be paid now that the National Assembly has finally allocated it.

Doesn't sound like a big deal does it. In and of itself it's not. But it is part of a much larger problem. When Chavez took office in 1999 he inherited over $6 BILLION DOLLARS in back wages that were unpaid by the previous government. So this 2.4 million is just one remaining vestige of that enormous debt that the Chavez administration has had to spend the past 7 years paying down.

And who could have been so irresponsible as to not pay so many government workers their wages and benefits? Here's a hint; he has a very non-Venezuelan last name, a moustache, and his own newspaper. If you still haven't figure it out here is another hint; he is running for president.

By now you have certainly deduced that it is Teodoro Petkoff, the Planning Minister under Caldera, that I am talking about. Now that he is running for president over the next months I'm sure a great many people are going to review his extensive government record - first as a congressperson and later as a Minister. Needless to say this sad record of just not making good on government obligations and paying civil servants their salaries is not going to help him get out of the single digit support level he seems to be stuck in.

Just as importantly I hope someone else in his household is responsible for paying the bills. One would hate to think of him being responsible for that and then having his electricity, cable TV, telephone and other services cut off for non-payment.
|

Today Chavez announced that Venezuela is considering levying a new tax on oil companies called an "extraction" tax. This new tax would be 33% and at the same time it was announced that the existing income tax on oil companies would go from 34% to 50%.

No details were given on how this tax would work. Calling it an "extraction" tax almost makse it souns like its a royalty - ie a set fee on every barrel of oil extracted from the ground. But a tax per se is generally very different. For example a the current income tax is charged on the profits that the oil companies earn.

Given that it is unclear if this tax is more like a royalty or like an income tax because details haven't been given I'll take a minute to discuss why Venezuela would do much better to focus on getting royalties right and not worrying about taxes.

When it comes to collecting oil revenues royalties are vastly superior to taxes. The main reason is they are much easier to collect. A royalty is a fixed dollar amount or percentage of each barrel of oil extracted so calculating what it should be is much easier. If the royalty is $40 per barrel all you have to do is know how many barrels were extracted which can be easily done with meters on the well heads and then multiply that by $40 and you have the exact amount due the government.

Compare that to collecting an income tax on the oil companies. To collect that one has to know how much profit the company made and that is no easy matter. A company can easily hide profits through inflating expenses, using shell companies, or simply keeping its finances as complex and opaque as possible. So to collect taxes it takes teams of accountants and even with them there is no guarentee that the full amount of taxes owed will be collected.

For these reasons governments like Venezuela's interested in maximizing oil revenues should prioritize royalties and de-emphasize taxes. Hence, I had mixed reactions to this new tax. If they wanted to increase their take and make sure the oil companies weren't getting a windfall profit at their expense they should increase the royalties charged. Not only would it increase revenues but it would make the process of collecting those revenues much more transparent. And increasing revenues and transparency is a win-win proposition for all Venezuelans
|