Friday, February 23, 2007


It's kind of funny but I hadn't even realized that the final Venezuelan GDP for last year hadn't come out yet. Yet today the poor doomsayers in the Venezuelan opposition got smacked upside the head by them.

Here goes what is by now the very boring routine for Oil Wars regulars:

In the fourth quarter of 2006 Venezuelan GDP grew at an astounding 11.3%. And with that the final growth rate for 2006 was 10.3%. As Austin Powers (a big Chavez fan) would say - YEAH BABY. I love hitting double digits. It sounds so much better than a measely 9 point something percent.

As usual, the private sector leads the way. Private sector GDP grew 14% while the lagging public sector grew only 2.3%.

The non-petroleum sector grew 13.1% while the petroleum sector shrank by 3.7% (OPEC cuts and Orinoco maintanence).

Manufacturing was up 12.4% (damn, those lazy Venezuelans aren't just all living off of oil - they actually are making increasing numbers of things!), commerce was up 22.7%, construction was up 30.5%, communications up 20.9% while government services were up only 3.6%.

So the private and productive sectors of the economy are skyrocketing. Sure wouldn't guess that based on the opposition propoganda.

Any bad news? A little. Non-oil exports fell by 8.5%. That is what a way overvalued currency will do to you. Sooner or later they'll have to devalue the Bolivar and that will take care of that problem.

Anways, sorry for putting everyone to sleep with more boring "Venezuela is booming under Chavez" news.


Thursday, February 22, 2007

The opposition eats its own 

Via BoRev.net I found out about this simply stunning turn of events:


Award to ex-candidate irks Miami's expatriatesAn American political group will give former Venezuelan presidential candidate Manuel Rosales an award in Miami Beach today, and that displeases many of his former local supporters.

Former Venezuelan presidential candidate Manuel Rosales, who once united that country's conflicted opposition, will accept an award today in Miami Beach from a U.S. political organization that hails him as a ``champion of democracy.''

Miami-area Venezuelans who once supported him in his campaign to oust leftist President Hugo Chávez will be far less warm.

''Sincerely, I don't believe he deserves [the award], because he should have fought harder than he did,'' said Nelly Zabala, head of the local campaign team for Rosales' party, Un Nuevo Tiempo. ``Rosales should have answered to his people.''

In the months leading up to the Dec. 3 presidential election, Rosales became the great hope of the long-fractured opposition when the parties put aside their differences to back him as the unity candidate. Despite drawing large, enthusiastic crowds, on Election Day he received less than 40 percent of the votes -- a result that he accepted immediately, despite what many of his supporters maintain were clear signs of fraud.

His quick concession drew fire from the Venezuelan opposition. Nonetheless, his willingness to concede is precisely why the American Association of Political Consultants is giving Rosales the award, said the organization's president, Wayne Johnson.

''Here's a case where someone lost an election in a very volatile situation and who made a commitment to stick with the democratic process,'' Johnson said. ``Rather than only going around and honoring people who win elections, we believe the promotion of the democratic system depends not only on the winners but on the losers.''

Rosales did not respond to repeated requests for comment.

This year's ''Champion of Democracy'' prize, which Rosales will receive at the association's sold-out awards banquet tonight at the Eden Roc Resort in Miami Beach, marks the second time the organization so honors a politician. The previous winner in that category was Ukrainian President Viktor Yushchenko, who fought back against a fraud-plagued 2004 election to eventually win a run-off election against a candidate backed by Russia.

The award to Rosales offends many local Venezuelans, who insist that he should have denounced what they view as irregularities in the voting process -- including cases of local expatriates who tried to vote at the Orange Bowl, but couldn't because their registration location had been changed.

''He betrayed us,'' said Patricia Andrade of the Venezuela Awareness Foundation. ``He was the last hope to remove Chávez democratically, and he killed that opportunity. He sold us out to Chávez.''

The Organization of American States' electoral observers who watched over the balloting in Venezuela said that it was generally trouble-free and that minor problems would not have affected the outcome.

Rosales had planned to meet with the local opposition community, but his representatives canceled the meeting on Friday, citing scheduling conflicts. His proponents-turned-critics say he opted out of the meeting because he didn't want to face expatriates' criticism.

''It's unbelievable to me that he won't come show his face to us, the people who worked for him,'' said Maylin Silva, of All for Venezuela. ``The least he could do is thank us for what we did for him and listen to our concerns.''

All for Venezuela joined with other groups, such as the Venezuela Awareness Foundation, We Are All Venezuela and Independent Venezuelan-American Citizens, to campaign for Rosales, and to organize hundreds of volunteers to work at the local polls on Election Day.

The discontent with Rosales extends through the opposition in Venezuela, said political analyst Oscar Schemel, of the Venezuelan election polling and public opinion firm Hinterlaces.

''People viewed him as a tool to remove Chávez, but he never achieved his own political identity,'' Schemel said. ``The opposition is now feeling resigned, uncertain and pessimistic because they don't perceive any leadership in the opposition to Chávez. They are unhappy with Rosales right now.''

This is truly amazing. Is Rosales the first person to ever lose an election? What was he supposed to do - hold a gun to people's heads so they would vote for him?

All things considered he probably did as well against Chavez as anyone could have. Incumbants coming off of three years of economic boom and sharply higher standards of living simply don't lose - "it's the economy stupid". And why do people like Borges and Petkoff so readily stepped aside? Everyone knew being the opposition candidate would be a thanless task.

So at the end, Rosales couldn't walk on water and lost to Chavez as any mortal would have. And for this "crime" he is not pilloried amongst the opposition. The indecency and disrespectfullness of this is breathtaking.

I know there are many decent people amongst the Venezuelan opposition. But it is also very apparent there is a great collection of very juvenile behavior amongst its middle aged supporters too.

And by the way, Rosales should be proud of this award. He did a great thing last December 4th by being adult enough to accept results once it was clear they were accurate and by getting his supporters to do the same. I may not agree with his politics but that does make him a patriot in my eyes. And even though I thought his attempt to out populist Chavez in his campaign was a mistake this sad spectacle shows that in reality much of the opposition was underserving of someone of his caliber.


Tuesday, February 20, 2007

It takes one to know one 

Last week I poked fun at a opposition supporter for just making up numbers when trying to show how Venezuelan suppliers are losing money selling meat at prices controlled by the government. Fortunately Ultimas Noticias took the trouble to come up with actual numbers:

This diagram follows the meat prices through the process. The cattle are sold to the slaughterhouse at about 3,990 bolivars per kilo. The slaughterhouse then turns around and sells the meat at 7,880 bolivars per kilo. But as only half the mass of the cattle is usable the slaughterhouse is actually selling for barely more than it paid for it; 1,970,000 bolivares for the meat from one cow versus the 1,915,200 bolivares the slaughterhouse paid for it to begin with. That certainly isn’t much to cover their expenses and profit.

Now this price of 7,880 bolivares per kilo is exactly what the meat markets and grocery stores are supposed to pay for it according to the government. Yet there is a wholesaler between the slaughterhouse and the retail stores that tacks on another 5% bumping the price up to 8,274 bolivares. Right there the price controls have been broken as the retailers only get meat if they overpay for it.

That then leads to retailers to overcharge. There are strict controls on the final price to the consumer as is seen in this (rather threatening) advertisement by the government:

The meat is broken into three classifications with prime meet having a controlled price of 11,722 bolivares, diced or ground meet selling for 9,400 bolivares and the lowest quality meet going for 6,210 bolivares per kilogram.

The problem is that the retailers complain they can’t make a profit unless they sell it for 15,000 or 16,000 bolivares. They say that they have to sell at those prices to cover the cost of buying the meat at 8,200 per kilo. To sell at the regulated prices they would have to be able to get it for 6,200 per kilogram. Because they say they can’t sell it at the regulated prices they don’t sell at all – hence the empty meat displays.

However, the industry federation for the beef industry, Asofrigo, claims there is plenty of beef, that they are selling it in the market at the regulated price, and that they are slaughtering 5,000 to 6,000 cattle per day.

Who is telling the truth? Is there a genuine shortage created by price controls? Could be. Or is there hoarding by people who don’t like seeing their profits constricted and are intentionally creating shortages as a way to pressure the government to back off its controlled prices? If so it wouldn’t be the first time, and the government finding warehouses full of other supposedly scarce items does make one wonder. But the price numbers given in this analysis simply aren’t precise enough for us to know. Moreover, this price information comes from people involved in producing and marketing meat and who therefore have every incentive to manipulate the information they provide.

In reality what this does show is what the government is up against trying to regulate prices in a market economy – it is very difficult and requires the government to be able to gather and evaluate all sorts of information very quickly and efficiently. That isn’t something that governments are known for being able to do.

Further, as has been pointed out very nicely by others price controls create problems and distortions of their own. The reality is, they are not an effective means for the government to control the economy or give subsidies to needy sections of the population. They create distortions, are impossible to administer, and they aid everyone without regard to income, which surely shouldn’t be the governments intention in the first place. The rich can afford to pay top Bolivar for their meat!

I have noted this recurring problem with the Chavez government. They often adopt what may be appropriate measures to deal with a crisis – exchange controls, price controls, prohibitions against laying off employees, etc. – but then leave them in effect long after the crisis has passed. Most all these measures were adopted during the crisis brought about by the opposition strike of 02/03 and may have been appropriate at that time but we are now four years removed from that event and these measures still remain in effect in spite of the fact that the economy is booming.

Do workers really need to be protected against layoff when the economy is expanding and hundreds of thousands of new jobs are being created annually? Do prices need to be controlled when the purchasing power of Venezuelans is skyrocketing? If these emergency measures can’t be lifted now when the economy is about as far away from an emergency as it will ever get when will they ever be lifted?

Now, it may be pointed out that entire sections of the Venezuelan economy are dysfunctional, being controlled by oligopolies and there is no free competition to protect consumers from being gouged. It is possible that is true. But then the appropriate response isn’t for the government to take on mission impossible - effectively setting prices throughout the economy.

A better and more effective solution would be to speed up land reform, create more new farms and farming co-operatives, provide more capital to these new farmers and then let them produce the new food that Venezuela needs and that will bring prices down.

The Venezuelan economy, in spite of what one would believe from listening to the opposition, is very much a market economy. Market economies are very efficient under certain circumstances but among other deficiencies they don’t always create desirable outcomes. But a clever government rather than dealing with this by attempting to dictate to the market what to do, trying to heard cats in effect, will use the market to its advantage by creating the market conditions it wants.

So if the Venezuelan government wants to make sure food in Venezuela is less expensive there is a pretty much 100% guaranteed way to do that – make sure there is lots of food being made by lots of different producers. If the oligopolies of a few entrenched producers try to get in the way just wipe them out the good old capitalist way – through competition. For a thinking government, sometimes socialism will be the solution. But sometimes the solution is simply for there to be more capitalism. This is one of those situations.

Now, people may be wondering where the title of this post came from. I really appreciate irony and the world is full of it – the Venezuelan government being no exception. It certainly hasn’t escaped my attention that the same government that in effect makes its living off of high oil prices brought about by hoarding (see the previous post on OPEC) is so quick to cry foul when some meat producers may be hoarding their goods to get higher prices. In this case it appears what is good for the goose isn’t so good for the gander!

Anyways I guess it should come as no surprise why the government is so good at sniffing out hoarders – it takes one to know one!


Sunday, February 18, 2007

OPEC for Dummies 

Seeing as the subject of OPEC keeps coming up and most of my posting regarding it was towards the beginning of this blog maybe it is time for refresher. This especially true given that some want to cling to the notion that things other than OPEC – China, the weather, SUVs, etc – are what are driving oil prices.

Fortunately, I don’t have to write much of this myself. The Joint Economic Committee of the U.S. Congress was nice enough to do it for me:

Quite frankly, the executive summary on this page pretty much tells you everything you need to know. Oil is in fact a plentiful resource and costs about $5 to produce. The reason it sells for so much more is the “artificial scarcity” created by OPEC.

However, reading through the paper you can find a wealth of important data that debunks many misconceptions. For example, it debunks the notion that prices are high because the world is running short of oil. From the bottom of page 2:

One approach to measuring whether the supply of oil is keeping up with demand is to track the size of the world’s in-ground oil inventory and compare it to the rate of production. In 1980 known oil reserves stood at 645 billion barrels; today they stand at 1.278 trillion barrels. This means that enough new oil was developed to replace all the oil produced in 25 years and nearly double the reserves. In 1980, the rate of production was 64 million barrels per day (b/d). The known reserves would have lasted for 28 years at that rate, if no new oil had been developed. Much was said at the time about the world running out of oil, because the price was at an all-time high. But, in 2004 the rate of production was 83 million b/d and at that rate today’s reserves would last more than 40 years.

Yet despite oil supplies becoming even MORE abundant prices have gone up. As this document makes clear, it is OPEC keeping huge quantities of oil that would readily produced under normal market forces off the market and boosts prices. As is shown on page 9, OPEC reaps huge dividends by doing this:

Indeed, OPEC has collected enormous monopoly rents since 1973.
In 2003, The Economist cited a study that estimated the wealth transfer from American consumers to oil producers at more than $1 trillion since the 1973 embargo, because the oil price has been held above the competitive level.27

According to the EIA, OPEC collected $193 billion in net oil export revenues in 2002, $243 billion in 2003, $338 billion in 2004, and will collect an estimated $430 billion in 2005; that represents a 123 percent increase in just three years on a 17 percent increase in OPEC’s averagerate of oil production.28 Stable or not, high oil prices are hugely profitable for OPEC and they are kept high only by collusion.

"Kept high only by collusion" - can't be much more clear than that - there is no doubt that OPEC is effective. A big part of the reason that it works so well is that it doesn’t just include the countries with most of the worlds oil reserves but he countries with LOW COST oil. Look at this chart it provides in the cost of production for different countries:

All the low cost producers are OPEC members – Iraq, Iran, Saudi Arabia, Kuwait, Venezuela, and Nigeria. The U.S. and Canada by contrast are very high cost producers. By being low cost producers these countries can even manage to restrict investment and production in higher cost non-OPEC countries. From page 10:

Non-OPEC producers will respond to a rising oil priceby keeping older wells operating longer and by drilling new ones. But upfrontinvestment in new production is essentially irreversible. Since investors know that OPEC can movethe price up as well as down but do not know what its plan is, they are more hesitant to invest than they would be if the market were not subject to manipulation.

That is, OPEC not only boost prices by keeping supplies off the world market by also by scaring off investment that knows OPEC can also collapse prices thereby making their investments unprofitable.

Finally, the article points out that the seeming impact of other events, wars, political instability, hurricanes, terrorism, etc. only seemingly boost prices because OPEC keeps supplies so tight to begin with. From page 15:

Other explanations for high oil prices. An inadequate supply side response to increasing demand magnifies the price impact of any disturbance that lessens, even minimally, the amount of oil available for purchase. In the short-run, input substitution typically is a very limited option, which makes oil buyers willing to bid the crude oil price up disproportionately to try to meet their requirements (demand is highly inelastic).

This raises concerns over events that normally would not move the price of oil on the world market, such as accidents or labor strikes somewhere in the oil supply chain. Supply disruptions of larger magnitude also are usually compensated for in short order in an unfettered market. Natural disasters, terrorist attacks or production problems in a major oil producing country certainly can have an effect on the price of oil but it does not last very long. Supply shocks occurred prior to the oil embargo of 1973 as well, but they were absorbed so quickly that annualized price data shows virtually no variation (see the nominal price line in Figure 7). It is useful to recall the complaint by Mr. Ali I. al-Naimi that Saudi Arabia—the largest oil producer in the world—cannot hold up the market price of oil by itself, which strongly suggests that no other country can either, whatever the particular circumstances. The reason for high oil prices is the ongoing, collective restriction of the oil supply by the cartel members, not isolated events.

Stated another way, without OPEC sharply restricting oil production these other events – from Hurricanes to coups – would have next to no impact. And as the article pointed out, before OPEC they indeed had next to no impact. Just look at the graph:

Prior to the mid 1960’s when OPEC was formed prices were nice and flat with barely a ripple. It should also be noted they were pretty constant at $10 in current terms. Since the formation of OPEC as can be clearly seen that fluctuate quite dramatically and are generally well above $10 per barrel.

To sum up, what we have is a cartel, OPEC, which artificially restricts production in order to boost prices. Without OPEC there would be an unfettered market in which production would keep ramping up until prices were only marginally above the cost of production – say $10 a barrel which probably not coincidentally is about what they were in the decades before OPECs creation. It is the enforced and artificial scarcity brought about by OPEC that puts today’s prices where they are. Isolated events can cause temporary peaks and troughs but without OPEC they wouldn’t exist – and indeed they didn’t prior to OPEC.

The end result is by supporting OPEC Venezuela gets to sell its oil for $50 as opposed to $10. Sounds like a good deal to me and a smart policy on Chavez’s part to make sure that OPEC remains strong and its quotas are respected. Quota busters like Giusti, Sosa-Pietri, and Toro-Hardy can go elsewhere. Venezuela is a lot better off without them.


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