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Venezuela will not profit from an oil thirsty world

By Aleksander Boyd

London 11 August 2004 – The latest report by the International Energy Agency (IEA) and press releases by the OPEC point clearly at a surge in demand that was not properly foreseen and assessed. China surpassed Japan as the second largest oil consumer and, according to figures, oil consumption is likely to remain at the present levels only to decrease marginally in 2005. The UK has, for the first time in its history, become a net importer of oil, ergo its hegemony as an energy exporter suggest that one more OECD country shall fulfil its energy requirements by shopping at the oil market. Whilst OECD countries’ demand growth is estimated at less than 1% in 2005, China’s expansion is set to augment on a year-on-year basis by 8.1% and equally the Middle East will increase its demand by 4.7%.

Given the late volatility of prices, Saudi Oil Minister Ali al-Nuaimi said today “the kingdom is well prepared to meet all the requirements of the international oil companies if they need additional volumes, relying on its surplus production capacity of more than 1.3 million barrels daily, which could be used immediately if required.”

How did this volatility come about?

A combination of factors according to the IEA namely the tightness of the market, incapacity of producing countries to raise production significantly in the short term, lack of infrastructure and uncertainties. Venezuela is the fifth largest oil producer of the planet and the fourth largest oil supplier to the ever demanding US market. However the energy policies of Hugo Chavez, if one could refer to his clumsiness as such, have left the country ill equipped to profit from this new era in energy consumption. Sitting atop of the largest reserves of crude oil outside the Middle East with the added geo-strategic benefit of being located a stone-throw away from the world’s largest consumer will have any right minded person gleefully salivating with the new realities of the market. However Venezuela will not profit from any of it. Let me explain why. Following the strike and the massive dismissal of 18.000 employees, PDVSA lost for good the workforce and know-how to keep production levels, let alone augment it as OPEC and IEA figures corroborate.

Saudi oil is light in composition, mother Earth was also magnanimous in the area --in terms of geological formation-- therefore is much cheaper to extract and refine a barrel of oil in Saudi Arabia than in Venezuela, where complicated refining processes and well maintenance increase costs. Nevertheless executives from the former blame-for-everything PDVSA had the vision of constructing and acquiring a network of refineries inland and abroad which could guarantee the placement of the end product in the market. Enter Hugo Chavez; out with the ‘technocrats’ who converted PDVSA in one of the finest oil conglomerates in with a bunch of useless ‘Bolivarian’ party members who can not tell the difference between gasoline and diesel. The obvious consequences are; the diminished output, present figures stand at 1.6 MBD; inexistence of exploration strategies and activities; disappearance of the R & D department; rapid deterioration of facilities due to sheer ignorance and lack of maintenance; damage to the value of the company; international lawsuits owing to disregard of legal obligations; investor’s apprehension caused by the failure of filling financial reports with the SEC for the second consecutive year; in sum the work of 25 years has been destroyed in two.

The House of Saudi, through its spokesperson, has tranquilised the market with the announcement of an increase in production, which is meant to stand at approximately 9.3 MBD. Ironically, Chavez’ fans maintain that present oil prices are the result of a shrewdly devised strategy in Caracas, reality however is much starker than that for Venezuela lacks the capacity in terms of production to convert the increasing demand into needed hard currency. The OPEC decided recently to increase quotas, and guess what, Venezuela can not meet them. Angola seems to be capitalising, so is Brazil and other non-OPEC nations.

PDVSA, the social NGO

Effectively Petroleos de Venezuela has become the petty cash for Chavez’ revolution. Social programmes, with the accompanying rampant corruption owing to the reckless and unaccountable expenditure, have escalated a great deal of steps in the priority ladder of the administration which from a humanitarian perspective is absolutely correct. However from a strategic viewpoint such irresponsible spending spree can only create a momentary and surreal image of the government among the dispossessed, who have placed great hopes in the ability of Chavez to rescue them from misery. From a financial viewpoint said ‘misiones’ are unsustainable for it is a known fact that sooner rather than later the aforementioned problems affecting PDVSA will impact the government’s income. Realistically speaking oil prices are not coming down in the foreseeable future, what will come down surely though is Venezuela’s oil production.

Once the international reserves are wasted or stolen and the current income halved in dollar terms, how will Chavez finance his ‘misiones’? A quick look at the cession of the Plataforma Deltana to foreign oil conglomerates can be hinted as a sneak preview of his future plans. Ergo since PDVSA is incapable of financing exploration and opening the bigot joint ventures will provide. Should these be insufficient, Chavez most probably will invent a new tale about CITGO being a CIA front and sell it, just as he did away with the participation of PDVSA in German refineries. Sovereignty, strategic forecasting, international clout in energy markets… Who cares about any of that? The revolution and only the revolution is what matters to him. “Si tenemos que ir descalzos, si tenemos que dejar de comer, si tenemos que dormir en el piso… nada de eso importa si afianzamos la revolución,” Hugo Chavez’ dictum.

One can imagine that oil people the world over must be intrigued by this man’s irrational actions. Russians, Mexicans, Brazilians and Norwegians are already laughing their heads off; Big Oil is just waiting for the kill and fellow OPEC members are wishing he stays in power so that they could take away Venezuela’s share. Time has proved that the dismissed technocrats had an exceedingly better project and mission for it is unconceivable that Chavez will turn PDVSA into an energy powerhouse.

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