Events in Venezuela

I have seen a number of interesting stories on Venezuela this week. First was:

The Chávez Spiral

With petroleum prices down around $71 a barrel from a high of $147 the Venezuelan government is struggling to make up for the revenue shortfall to save programs that placate the poor by providing cheap food, fuel and other government giveaways.

Making matters worse, the once mighty Venezuelan petroleum industry has been laid low by politicization, corruption and mismanagement; rather than producing 3.3 million barrels per day, industry analysts believe the production is closer to 2.3 million. Instead of maximizing profits by producing its quota, Venezuela’s state-run oil fields are either underperforming or have collapsed altogether.

I have warned numerous times about the risks Chavez was taking by siphoning off oil revenues to fund other programs. If you are going to do that, you must do is to make sure you aren’t siphoning off too much, as the oil industry is capital intensive. If you pull out too much, then you kill the goose laying the golden eggs. Norway has a very successful model for how the oil industry can be used to benefit society as a whole. One thing they didn’t do was siphon off all of the oil companies’ revenues.

But because reelection is coming up, don’t expect Chavez to shift course:

Venezuela’s Devaluation a Boon for PDVSA in Short Term

Venezuela’s currency devaluation should give state oil company PdVSA an immediate and much-needed boost to its budget. But President Hugo Chavez is likely to procure a large part of that windfall for social spending ahead of this year’s congressional elections.

Then there was the story about Chavez searching for scapegoats when his decisions start to have consequences:

Chavez sacks energy minister after rolling blackouts

Venezuela President Hugo Chavez has indefinitely suspended rolling blackouts in capital city Caracas just a day after they began, and sacked his electricity minister.

Chavez said that the minister was responsible for mistakes in the way the rationing plan was applied.

Mr Chavez’s announcements were a significant strategic shift in his attempts to prevent a widespread power collapse in the coming months through rolling blackouts of up to four hours a day across the country.

But no worries. He believes that after stealing the assets of oil companies, he can invite them back in and they will come running:

Venezuela Expects $8.3 Billion Field Investment, Universal Says

Jan. 15 (Bloomberg) — Petroleos de Venezuela SA, Venezuela’s state oil company, said it expects bids today totaling $8.3 billion to develop the Mariscal Sucre offshore natural-gas project, daily El Universal reported.

The company known as PDVSA seeks partners to take stakes of as much as 40 percent in the project, Eulogio del Pino, vice president for exploration and production, told the Caracas-based newspaper.

PDVSA and the Energy Ministry asked companies including Russia’s OAO Gazprom, Norway’s Statoil ASA and Japan’s Mitsubishi Corp. to participate in the bidding, del Pino said.

I don’t know. I will be surprised if these companies trust Chavez enough to put serious money down on any of these projects. As he has shown before, if the profits start to look good, he will change the terms. Who wants to take risk only to let Chavez reap the reward? On the other hand, these aren’t the same companies Chavez cheated the first time around, so maybe they will be a little more trusting. But if so and they lose their investment, shareholders shouldn’t be the least bit surprised.

5 thoughts on “Events in Venezuela”

  1. Chavez is a lunatic, and I hope the Venezuelan people choose new leadership soon.

    Chavez joins Iraq, Iran, Libya, and Mexico as nations with enormous potential to boost oil production. We could be talking 20 mbd among the five, maybe more. The question is, will they?

    OPEC faces a conundrum: If they do not provide a reliable and cheap source of energy, the world will move on. Yet, flummoxing the reliable supply of oil are the large number of thug states who control the world's oil. (Of course, many would define Saudi Arabia as a baboon-like thug state, and given that they finance terrorism and do not let women vote, maybe that is a fair description.)

    In any event, in business school I don't think they teach that one should offer customers unreliable and expensive supplies. Yet that is what OPEC is doing–and after every price spike, demand is permanently crimped.

    I think we are seeing the Oil Era end, and with a whimper.

  2. Wow! I know Eulogio del Pino from PDVSA in the 1990s. I did not know that he survived the political sackings in the past. He is a very bright and talented geophysicist and manager. He is a great asset to PDVSA, and I hope they appreciate him.

  3. But even if Chavez got ousted, what do you do about all of the PDVSA human resources that got fired and now live & work in diaspora all over the world in various other oil centers in the world? You can't issue orders to recall them. They are free human beings. Some will come back, some won't. I know PDVSA people in Denver now. You can't get people to move from Denver to Houston, I don't think they'd move from Denver back to Maracaibo.

  4. Corporations may well invest, simply because of the richness of the resource in Venezuela. Big companies can sometimes be as naive as individuals in believing that 'Things will be different this time.'

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