Saturday, June 07, 2008

Jun 07/08 | On the Delayed Consequences of Wreck Ball Hugo: The High Cost per Barrel of Appeasing Autocracy

PMBComment: In 1998 - when I was in PDVSA's Board - we faced $10/barrel oil and one of the consequences - actually the worst - for our country was the December election of Hugo Chávez. For Russia it was the collapse of their first - chaotic - attempt at market driven economics, and the emergence of a steely KGB Colonel called Vladimir Putin. For the rest of the emerging markets that collapse was a massive drag and all suffered. The developed world saw a slight drop in its exports to the developing world but low prices gave a false sense of confidence and fueled unparalleled growth that became quasi global at the start of the new century.

Yesterday oil prices went up almost $11/barrel in one day. At an all time high close to $140, and maybe on the way to loftier milestones, the burden has shifted disproportionately to the developed world where life styles have all but ignored the delayed impact of the collusion between foreign autocrats and home grown speculators. In a world with questionable political leadership, it will take a massive explosion of popular ire for most to focus on the root causes of this powder keg: excessive consumption, too slow a development of alternative and clean energy sources, too much oil in the hands of undemocratic blackmailers, too cozy and too amoral a relationship between big oil and those oil tyrants and too little understanding by regulators of the intricacies of the markets they are called to regulate.

In 1998, in the midst of the price meltdown, PDVSA attempted to salvage its - well in progress - 10 year plan that would have raised Venezuela's production capacity to 6 million barrel per day by 2005. Upon taking office Hugo Chávez, endowed with an Encyclopedic ignorance, completely scuttled this plan and bowed to pressure from Saudi Arabia to return to the OPEC fold and forget about becoming a responsible supplier of oil to the Western Hemisphere. Price rose rapidly as did the autocratic tendencies of this uncouth Lt. Colonel. Then in 2002, egged on by Fidel Castro's eternal dream of having unfettered access to Venezuela's oil fields and wealth, that same dictator wannabe fired more than 20,000 from PDVSA, including the entire creme of its engineering crop. What has followed has been the most treacherous and treasonous self-destruction of national wealth on record. Venezuela now produces a sickly 2.37 million barrels of oil (compared to the 3.45 million it produced in 1998). Worse yet, local consumption has surged from 460,000 barrels per day to close to 800,000 on the back of the lowest gasoline prices in the world - an incredibly regressive subsidy for a country in which the vast majority of people have remained in poverty - and car-less - throughout the biggest oil boom on record. Due to the poor operational state of its once state-of-the art refineries PDVSA now has to import gasoline and also buy some to meet supply agreements.

In hindsight, Mr. Chávez did not turn out the harmless populist (or buffoon) many had painted him to be. Time and events now playing out around the world demonstrate that the many efforts of millions of Venezuelans: politicians, housewives, students, military officers, PDVSA workers, small shopkeepers, journalists or just plain common folks, to unseat this reckless man where justified and should have meet with more understanding from those "democrats" around the world who are now suffering the consequences of ignoring the true meaning of freedom and the essential tenants of democracy (not to mention the telltale signs that they where on the verge of the ultimate blackmail).

It is hard to imagine what the consequences would have been of PDVSA producing 5.6 million barrels of oil today. Certainly it would have been harder (i.e. impossible) for Russia to take up the slack - it effectively and profitably raised its production by exactly the same amount Venezuela surrendered. And it is almost sure that oil prices would have not reached today's level if those 2 million plus incremental barrels were responsibly supplying the needs of responsible consumers in the Americas. However, the reckless level of consumption in the US and the criminal destruction of PDVSA's industrial might have combined with a cowardly approximation of the world to one of the most fallible of all oil tyrants. Venezuela has suffered immensely as a result, but now is the turn of many others to feel the pain of this new "March of Folly".

Read more of this PMBComment!