Monday, September 08, 2008

Chavez: "Fair" price for oil is just over $100/barrel

"OPEC to Pump at Near Record as Prices Stunt Growth"
"Oil Production Move is a Tug of War" Wall Street Journal
"Russia, Venezuela May Hold Joint Military Maneuvers" CNN
"Venezuela's Oil-Based Economy" The Council on Foreign Relations
PDVSA Official Website

As consumers cheer in the face of declining oil prices, major oil-producing countries like Venezuela have been forced to make a tough decision. Should oil-production remain steady as prices fall, or should production be cut to ensure high prices even in the face of a floundering world economy? Meeting for the first time since March, OPEC's 13 ministers on Tuesday will determine the goal output of each country. Analysts expect production to remain at its present, albeit near all-time high level of production.

As the largest oil-producer in the Western Hemisphere, Venezuela is a major player in OPEC negotiations. Furthermore, Venezuela is highly dependent on its oil revenues, which make up over 75% of export revenues and over half of government revenues.

Venezuela has made no secret of its goal to keep oil prices high. At the time of this blog, crude oil is priced at about 106 USD per barrel. Venezuela's goal is to keep oil at just over 100 USD per barrel, a price which is states as "fair". Iran is the only country thus far to agree with Venezuela on that goal. Other OPEC countries, like Algeria and Kuwait, fear that high oil prices will jeopardize exports as the global economy slows. King Abdullah of Saudi Arabia has also argued that $100 per barrel is too high.

Oil production in Venezuela has been highly nationalized in recent years. Venezuela's state-owned oil company, PetrĂ³leos de Venezuela, or PDVSA, is the world's third-largest oil company. The newly instated company president of PDVSA stated that a key PDVSA goal is to further, below the "great leadership of President Chavez, the beautiful process of constructing Socialism." The company's mandate specifies that it must spend at least 10 percent of its proceeds on social programs.

Venezuela has been using its oil proceeds to finance social programs, agricultural development, military expenditures, and more generally to foster regional independence from the United States over the last few years. Many political analysts speculate that any significant decrease in oil prices will seriously damage Venezuela's new clout and jeopardize President Hugo Chavez's political future.

Of particular concern to the the "West" is Venezuela's use of well over $4 billion oil profits to purchase military equipment from Russia since 2004. Chavez, an ardent critic of the U.S., states that the military build-up is designed to counter any U.S. "imperialist" actions in Latin America or the Caribbean. Chavez also recently announced that Russian naval vessels are scheduled to arrive in Venezuelan ports in late November or December. The Russian Foreign Ministry spokesman said that any joint exercise between Russia and Venezuela would not be directed against any third country. Venezuela has also used its oil proceeds to strengthen economic and diplomatic ties with Iran, Cuba and China. The country has also extended oil at a preferential price to developing Caribbean countries.

1) If oil prices fall below $100 per barrel, what, if anything, can Venezuela do to maintain its current level of social spending?

2) How closely is President Chavez's political legitimacy linked to the success of PDVSA?

3) Does Venezuela have a moral duty to allow oil prices to fall, which in turn would likely soften the global economic decline? Or does Venezuela only owe a duty to its own citizens?

1 comment:

Anonymous said...

As the economy gets colder and the U.S. dollar gets stronger, vital factors for the fluctuations in oil prices, the speculations over continuing the current crude extraction rate are part of today’s OPEC agenda. Due to the position and influence of Venezuela and Iran, it seems like the price for crude will roam somewhere around the $90-100 for a little while. Both argue that production must be cut , as it already has, to maintain a “fair” price for the commodity. Let’s not forget that during the first trimester in ’08 they sought $80 per barrel as a magnificent “fair” amount for their oil, not to mention the oil prices 5 years ago. After the prices skyrocketed and demand increased, people got greedy and comfortable with their income from oil, particularly the two countries in discussion because if oil prices collapsed how were they going to sponsor a nuclear plant or to play a battleship game in the Atlantic with mother Russia?

Evidently, Venezuela is very lucky Russia sent about a 20-member delegation to the OPEC meeting, the biggest delegation in at least 8-10 years, to make its presence felt and to actively lobby the settlement of a $100 per barrel line and to decrease oil production.

Turning back to the question of Chavez link to PDVSA, it is clear that his political legitimacy is linked to PDVSA, as the president of the latter is under accusations for the money seized in Argentina last year that was directed to Cristina Kirchner’ political campaign in Argentina. The accusations turn to Chavez in many palpable ways. However, as many other Presidents in Latin America, Chavez has gone back to his old and well-known expiatory goat: his attempted murder. Classy way of trying to turn people’s heads somewhere else if you ask me, but it is an old trick and blaming it on the “Empire” is little bit more difficult this time.
As for social spending, I do not believe Venezuelans would experience a significant reduction on the government expenditure on public/social programs. The reason for this is that for the Government, no matter how much Venezuela was gaining from oil, social changes are limited to the decision of a radical leftist and almost dictator’s mind. Most of Chavez’ plans become a procedure that ideologically and culturally are not viable, and his obsession with the accumulation of power will lead this suicidal policy.

This Venezuelan case reminds me of a rent-seeking conduct that is getting embedded in the quick and easy accumulation of capital, corruption of government officials and the waste of the most capable human capital that is integrated to a large body of bureaucracy.

Very good questions Amanda!