Sunday, November 04, 2007

Pdvsa and Oil Socialism

Tina Rosenberg's article, The Perils of Petrocracy, in today's Times Magazine, takes a close look at the petroleum situation in Venezuela and the impact of Hugo Chávez.

Briefly, state control of Pdvsa, the once-private, now state-owned organization controlling (or rather, failing to control) Venezuela's oil development illustrates what might be called a creeping failure. In a lengthy, clear and well-researched article you will find all you need to argue that "oil socialism" is and has always been a failed experiment.

What is oil socialism? I came across the term the first of the year from M. Simon, another blogger. His description is clear and easy to understand. You might want to check out my short post before delving into the article, which elaborates and underscores the failure in detail.

Here are a few snips:

Oil concentrates a country’s wealth in the state, creating a culture where money is made by soliciting politicians and bureaucrats rather than by making things and selling them. Oil states also ask their citizens for little in taxes, and where citizens pay little in taxes, they demand little in accountability. Those in power distribute oil money to stay in power. Thus oil states tend to be highly corrupt.
Venezuela is a typical victim of the oil curse. It has become a rich country of poor people....Chávez has promised to break this curse, to finally use Venezuela’s oil to benefit its people. Oil is everything in Venezuela; it pays for at least half the government’s expenditures and 90 percent of its foreign exchange, according Orlando Ochoa, a prominent economist. Now “zero misery” is one of the government’s slogans, and the vehicle to get there is oil. Chávez’s oil company, Petróleos de Venezuela S.A., or Pdvsa (pronounced peh-deh-VEH-sah — S.A. stands for “sociedad anónima,” or incorporated), is proudly inefficient, proudly political. Chávez has called his revolution “oil socialism.”

“We are doing what the old regimes didn’t do,” Bernardo Álvarez, Venezuela’s ambassador to Washington and a former vice minister of hydrocarbons in the Ministry of Energy, said to me. “We are putting oil into a sustained process of development. Our first priority is a fight against poverty and exclusion.”
Many nationalized oil companies are poorly managed ...Still, it is possible to have a stellar national oil company, efficient in the classic sense, one that can compete favorably with any Western major. ...But perhaps the best-run national oil company that ever existed was in Venezuela. It was Pdvsa.
President Carlos Andrés Pérez nationalized Venezuela’s oil the early 1970s...[ed. not Chavez thirty years later]. Venezuelans demanded that the profits stay at home. The expropriation of Exxon, Shell and Gulf was negotiated and seamless, the lack of acrimony stemming from the fact that the foreign companies’ concessions had been designed from the start to be temporary, and were to expire in 1983. [a former high-level executive of Pdvsa said] “I believe that everybody realized Pdvsa was the goose that laid the golden egg...To keep it healthy you must leave it alone. Every president believed this was sound policy — until Chávez."
If the Pdvsa of the 1990s thought it was Exxon, today’s Pdvsa amounts to the president’s $35 billion petty-cash drawer.
As Pdvsa has been molded to Chávez’s will, it has also become less and less transparent in its dealings. The company used to publish a standard annual report, but after 2004 it stopped filing its annual reports to the U.S. Securities and Exchange Commission. In recent years it has released only a page or two of basic figures, with no breakdowns or auditors’ notes. When Pdvsa does release information, some of it is of questionable credibility. Even the most fundamental operational fact — how much oil Venezuela produces — is subject to debate. In 1997, Venezuela produced 3.3 million barrels per day of crude oil. Today, Pdvsa claims the country produces the same amount, but independent sources, including OPEC, say that figure is too high; OPEC puts Venezuela’s production at 2.4 million barrels a day last year.
Nationalization is often a response to the failure of privatized oil to respond to the people’s needs. Even in the United States, where there is a good chance of getting caught, oil companies have inflated their costs or illegally deducted costs and engaged in other machinations to minimize payouts. For poor countries, the risks of getting a raw deal from private oil companies are much greater. History is littered with contracts that give Big Oil obviously unfair advantages — Shell in Nigeria, Mobil in Kazakhstan and Texaco in Ecuador to name a few. Oil can also be an irresistible seduction to a country’s ruling class. Where democratic institutions — or even merely transparent processes — don’t exist, the lure to corruption is powerful. Oil in Russia, for example, was sold off not for maximum profit to the country but maximum profit to the officials who oversaw privatization. In Equatorial Guinea, ExxonMobil, Amerada Hess, Marathon and others made payments to President Teodoro Obiang or his family for land, security and other services, according to a Senate investigation of money-laundering involving Riggs Bank, where some of those payments ended up.

Nationalization, however, doesn’t cure these ills, and it can deprive a nation of its rightful take of its natural wealth in other ways. One is simply lack of know-how. One reason President Evo Morales of Bolivia pulled back from his threats to radically nationalize the country’s gas industry is that Bolivian officials realize they cannot manage the business themselves. Morales has focused on raising royalties on fields with known reserves, fields where companies essentially are guaranteed a return on investment. The royalty had been at 18 percent. Under pressure from popular protests, the previous government raised the rate to 50 percent, and last year Morales raised it to 82 percent in some cases. While foreign investment in Bolivia’s natural-gas industry has fallen, every analyst I talked to said it was not because of the royalty hike. Morales’s nationalization rhetoric, not royalty rates, made private companies skittish. “There’s a big difference for an investor when there’s a worry about nationalization,” said Amy Myers Jaffe, a fellow at the nonpartisan James A. Baker III Institute for Public Policy, at Rice University in Houston. “There are intangible factors I can’t control, and it’s creating all this political risk.” Roger Tissot of PFC Energy adds: “Companies don’t have a problem paying more rent and taxes. They do have a problem giving up control.”

So perhaps the best strategy for resource-rich countries is to keep the oil private, watch it carefully and tax the hell out of it. Better yet, raise royalties, which are more straightforward and easier to collect. “If your objective is to maximize rent, then the best way is to have companies compete with one another in open bidding for access,” Tissot says. “Angola and Libya have done this very successfully. Libya invited private companies to come back and is squeezing 90 percent of the profits out of them.”
The problem isn’t who owns the resources, it’s what you get from the proceeds,” says David Mares, a professor of political science at the University of California, San Diego, who studies energy in Latin America. “If you waste it in corruption and unsustainable programs, it’s as bad as if you have international corporations dominating, who pay very few taxes.”

Nationalization won’t keep oil from being stolen. Good oversight, accountability and management of the funds will, no matter who owns the oil. “On Jan. 1, 1976, the day of nationalization, Pérez gave his speech with a banner behind him that read ‘El Petróleo Es Nuestro,’ ” Antonio Szabo says. “Guess what? It was nuestro all along

Little footnote here.

I came upon this article very much by accident. I don't get to the Times until later on Sunday, but I check my stats and referrals as soon as I log on. When I saw a Google search for "oil socialism" on the list I checked it out. Sure enough, Hoots' post was among the first five references. Neat, huh?
Also, one factoid that I recall from the article...

Citgo says it gave $80 million in heating oil to poor residents of the South Bronx last winter.

Reflecting on the article, it is clear that a global adjustment is under way concerning the price of oil. I first typed "value of oil" but realized that price and value are not the same. Value is easy to understand, but prices are a lot more complex. As Fallows' piece on Chinese factories illustrates, prices are partly a function of value, but are also subject to other variables such as currency exchange rates, shifting markets and management efficiency (or failure), all of which have little to do with basic value.

What the implications are for Chavez, I can't say. Clearly, he should be on a learning curve but history has shown that tyrants never seem to learn. With limited or no constraints on power, they project themselves ever more deeply into a world of personal fantasy.

No comments: