You can’t put optimal oil policy on a bumper sticker

…well, not a sensible bumper sticker, anyway.

Oil policy in a context like Venezuela’s is irreducibly complex. You could say you want to maximize the cash flow to the public purse, but it only takes a moment’s reflection to realize that’s a non-answer, because the question becomes – when?

The policy that will maximize the tax take next year – invest nothing, hand every penny to the treasury – will be a disaster two years from now, when underinvestment causes wells to run dry en masse.

But the other extreme – invest everything, pay nothing out now – is fiscally untenable and politically impossible.

What we are faced with is a good, old-fashioned intertemporal optimization problem. What we need to find is a solution that spreads oil rents equitably over time. But what “equitably” means in this context isn’t at all straightforward. It hinges crucially on how well you think people will live in the future.

If the economy grows sustainably over the next 20 years, Venezuelans a generation from now will be far wealthier than they are today. In that case, equity demands that we front-load the bulk of the take, because the current generation needs the money more than its children will.

But if the economy continues to languish into the 2030s, then equity demands that we invest relatively more and spend relatively less, because the next generation’s going to be just as hard up as the current one.

The detail, of course, is that we don’t have any idea if the next generation is going to be richer or poorer than we are, so uncertainty floods any attempt to really give a definite answer to the question.

And notice that we haven’t even gotten to the whole vexed issue of market power: whether Venezuela might cause the global oil market to tank by ramping up production too far too fast. We haven’t stopped to ponder the unknowable mystery of what demand for crude oil is likely to be over the next 20 years. And we’re not touching with a 10-foot-pole such wildcards as whether physicists might finally crack Cold Fusion, putting everyone into electric cars and rendering the whole issue moot.

In fact, there’s a virtually endless line of other questions, each one surrounded by the kind of deep uncertainty that reduces us to mere speculation.

Let’s be clear: in the medium run – say, the next five years – nobody seriously disputes Venezuela needs to invest in much expanded production capacity. Not even PDVSA.

Whether it’s actually possible to raise the financing needed to achieve it given current institutional constraints is up in the air, but that the goal is desirable is one of the few points of consensus left in the polity. On the margin, Venezuela is a price taker, so ramping up production to take advantage of high oil prices is a slam-dunk.

Beyond that, though, we’re into wild guessing game territory.

Leopoldo López’s stated goal of turning Venezuela into the world’s top oil-producing country would require more than quadrupling our production to the neighbourhood of 11 million barrels a day. That would amount to a 10% increase in global oil production.

It’s simply impossible to overstate the sheer titanium-testicled ambition of the call. It’s for statements like this that the word “hubris” was invented for.

Whether Venezuela can ever find the international credibility and domestic institutional arrangements it would take to attract the gargantuan levels of investments required to make that happen is doubtful. Whether there’s even enough capital in the world economy willing to go into oil extraction to make it happen is questionable. Whether the massive deferral of consumption involved makes sense is an open question. Whether the Venezuelan economy would have a prayer of overcoming the titanic case of Dutch Disease this would bring on is unsure. And whether we may not find ourselves devoting a decade worth of dislocation to finance enormous investment just in time to be overtaken by new technologies is up for grabs too.

Raising production capacity gradually in tune with the oil market? By all means.

Pharaonic decade-long vanity projects? Me bajo en la parada, por favor…

76 thoughts on “You can’t put optimal oil policy on a bumper sticker

  1. I would totally paste one of those on my bumper… who’s game for getting these done?

  2. You ask good questions but again are failing to ask the questions on how to get off oil dependency – not just oil price fluctuations – and that is part of the investment issue. Obviously we cannot go into Paleolithic “import substitution” attempts of the seventies, specially with the lack of accountability and transparency Venezuela has. Still, we need more than a line in a programme stating “invest in petrochemistry because that’s what we are good at (sic, good who?)”

    Venezuelans’ reluctance to talk about this is amazing and that even for a lot of foreigners right and left who are into the energy business and follow Venezuela’s news.

    You really think by solving the oil optimisation problem we are solving all the rest or the rest will solve for itself?

    OT but perhaps not so OT: I just read a book about economy of the XVIII century…it seems 2/3 of the costs for the Spanish administration in the Provincia de Venezuela was being provided by Mexico and Peru for over a century until after the mid XVIII century. Basically Venezuelan’s state apparatus even then were living off something else.

    Only in the late Bourbon period did things start to change dramatically;..and after the independence Venezuela was again poorer than most comparable countries.

    Petrodollars will deliver less and less by the day. Norway did not become rich by striking oil, unlike what the myth said. It was actually just a little bit pooer than Sweden that is what it would be today, in the worst case scenario.
    Mexico carried out the transformation, even if not optimally.
    We are obsessed with oil and investment is seen only in terms of “education/health” or “investing for the wells to keep delivering”.
    The most people get at is “let’s have an Über-Pequiven”

  3. Fascinating post Quico. One of your very best IMO! I never saw the oil industry this way before. I’m making a note to myself to check out “intertemporal optimization” in Wikipedia as soon as I get a chance. This whole issue of “biggest oil producer in the world” is exactly why I’m so disappointed by our political opposition. Just when we need brilliance, we get “batequebradismos” like that.

  4. Im more interested in making our economy in just more than oil, because if a) we cant be sure how oil demand is going to be in the next 20 years and b) we cant be sure how much is going to be worth and c) we cant anticipate “the unexpected”, the best way to be prepared for a worst case scenario if that doesnt happen, to be wealthier is diversifying our economy.

    What about a Venezuela able to feed itself? A Venezuela in which the minerals industry works, not necessarily like a charm, but good enough, a Venezuela with tourist hotspots instead of killspots and certainly a Venezuela in which oil and it’s sub-products play the big buck role in our economy but not at the “damedamedame” level in which we are now, and not that just by increasing production, also by cutting expense! Carritos por puesto leaking gas out of their tanks? -> Sayonara, 1e-05 USD/KWh? -> No freaking way.

  5. I share some of yours concerns about equitable share between generations.

    Even if physicists domesticates micro-black hole in 2150 and providing “free” energy to the world, petroleum will remain useful for agriculture and petrochemistry. In the long term, it is probably that humanity will consider as a foolish to burn petroleum as we do.

    Other point: Venezuela will be (is) affected by global warming. Even if it is difficult to estimate economically those damages, it will be very high cost. Increasing our oil production is spit in the sky. If we take in consideration those environmental costs (how much money will be require to construct dykes to protect Maracaibo, Barcelona, Puerto Cabelle, La Guaira? To move several million people?), a more rationnal strategy is to reduce production and seek higher prices. It would be our indirect help to the technological shift, that in fine, will be useful for us too.

    As side effect, lower rent income (so, lower imports) would be good incitation for industrial development, if we can manage a smooth transition.

  6. PDVSA es te Todos! there is your bumper stiker!…

    True, strategy is one thing, spinning another. One needs to go with the ohter though.

    I liked the post I read the other day (CC?) about incrementalism in good public policies. Trying new ideas, keeping those that work better that the incumbent, iterating and moving ahead.

    The quid here must be to understand that the present status quo is antipatriotico, and totally inconveniente. Whatever LL, MCM, HCR, others propose, and get to potentially execute, would be better that the saqueo form Los Piratas del Caribe.

    However, it is all pipe dreams and wihisful thinking until its your time at the coroto.

    Primero montate, y luego propones.

    I know you are going to say, well montarse sin propuesta!, that is not the case. Its good that plans are drafted, and strategies are advanced. But this is realpolitik as it gets! if you still asume electoral ways, instead of preseting the hard fact strategies, LL should have presented the SPIN, the populistic vote grabber!!! Is he thinking to win “elections” with our endorsement in CC, Devils, etc.?

    IMO, the real benefit of growing production is an increase of related services, and work for many if done right. Not dadivas and schemes of La NeGRA etc. this takes education, technical schools, R&D, privatization of the energy industry, promotion to small and medium bussiness, tax incentives, bank loans, and a long etc. … not a 10 yr. goal definetelly.

    However, quoting you guys, its La NEGRA on STEROIDS, what will win the day.
    ….That is assuming again you think votes are counted and elections are fair ;)

    Side Note:
    Venezuela has lost its competitiveness. Period.
    …there is no infrastructure as described above. There is no trust, and there is no human capital. The only apparent advantage is geological and that is not going anywhere (*)

    Big Oil knows this and in due time it will come back and exprore/ produce in our fields
    regardless of who is in power. Ask the guys doing business in Ecuatorial Guinea, Lybia, AS, etc.

    (*) badly managed fields however, are being damaged.

  7. “Pharaonic decade-long vanity projects”

    Those are at least marginally better than the pharaonic, incredibly short-sighted vanity projects as highlighted in the previous post. Oil policy revolving around birthday presents?

    Seriously, I think the four-fold idea is nuts, but wouldn’t be opposed to seeking to double production. But if you’re serious about getting to 11 MBPD, you have to get there somehow, and I think you can only get to 4X by gradually building credibility – one of your doubts near the end, Quico. I think the private sector would buy in more easily if you talked about doubling, rather than quadrupling, production. Of course, it works just fine if you have those conversations in private, where you tell them the other part is for public consumption. Plus, aiming for double gives you time and flexibility to adjust as needed, as you analyze the impact of what you are already doing.

    • I agree with all of this. And I think it takes debate in the right direction. Because the key question here is how you mobilize the resources for *any* capacity expansion.

      We’ve seen how it goes with the PDVSA-must-own-50%+-of-any-project approach: you can’t borrow enough at reasonable enough rates, you can’t sign up serious partners with serious money to put in, it just doesn’t work. The outcome when you do this is what Setty’s been chronicling…ambitions scaled down and put off year after year after year, PDVSA debt and yields skyrocketing unsustainably, and stagnant production.

      When you think incrementally, you realize that it’s really about the INSTITUTIONS able to mobilize the resources. “Democratizing PDVSA” is nice and all.

      How does it translate into “I’ll chip in $250,000,000,000.00 to develop the faja”, exactly?

    • ps: is this font easier to read on Mozilla/Windows XP?

      ops: What kind of masochist nut insists on still using Windows XP?!

  8. Nice little jump from here:

    “In fact, there’s a virtually endless line of other questions, each one surrounded by the kind of deep uncertainty that reduces us to mere speculation.”

    to here:

    “Let’s be clear: in the medium run – say, the next five years – nobody seriously disputes Venezuela needs to invest in much expanded production capacity.”

    So the all the variables are too complex and unknowable so we have no choice but to… do what YOU want done. Nice logic there.

    Anyways, there are plenty of people, including the Venezuelan government, who think Venezuela should stick to supporting OPEC and not producing more than their quota system allows for.

    They’ve essentially been doing that for the past 12 years and with pretty good results. When Chavez came to office the total government take from the oil industry was less than $10 billion per year. Presently it average around $50 billion per year.

    So what is the compelling reason anyone would want to change oil policy? Other than people with direct ties to the oil industry through PDVSA or contractor jobs and who would therefore benefit directly from increased oil production I can’t think of any.

    The opposition line, which seems to consist of the notion of the past 12 years of high oil revenues are all a fluke, unrelated to Venezuelan oil policy, seem silly: China is growing fast? China was growing fast before 1999 too, and the U.S., which has been practically stagnant since 2001 had a huge boom in the 1990s. The “Asian Crisis” tanked oil prices before? But the world financial meltdown and recession in 2008/2009 was orders of magnitude bigger and yet even at their nadir oil prices in 2008 were almost 4 times higher than they were in 1998.

    Clearly Venezuelan oil policy, for whatever reason, is working. It is bringing in more money than any remotely competent government should need to effectively manage the country and promote its development.

    Campaigning in Venezuela saying you are going to fix its oil policies is like campaigning in Japan or Denmark on an anti-crime platform.

    Any new Venezuelan government would have three major crisis to deal with that should more than occupy its time:

    1) putting in place macroeconomic policies that allow for the country to grow and diversify away from oil
    2) vastly improving the educational system without which the country can never progress
    3) overhauling the policing and criminal justice system to deal with the flat out crisis of crime.

    Quite frankly, when I see people talk about changing oil policies I see behind them old PDVSA employees who want their high paying jobs and perks back and oil company contractors who simply want all the new business increased production would bring. I think they still make up a significant section of the leadership of the “opposition” and that is why this even comes up.

    • You still swear because of that report from the US government that the main cause for oil price increase was OPEC…sort of like “if even Chávez’s foe says it fo an intenal report, it must be true”
      Fact is a lot of specialists have been damned wrong when it comes to oil price development, including the International Energy Agency, if you care to check out their forecasts over and over again (specially in 1998, 99)
      And Juan does the other thing: stagnation before that ” was the Asian crisis, period”…even if the stagnation preceded it.

      But then there is this:

      http://en.wikipedia.org/wiki/File:Oil_consumption_per_day_by_region_from_1980_to_2006.svg

      and something that is a taboo in the Americas. P.O.

      • Kepler, there is no reason to make any judgement as to what is causing the high oil revenues. The point is they are high, have been high for quite a while, and there is no reason to think that is about to change. In short, there doesn’t appear to be any problem with the Venezuelan oil industry.

        Contrast that with:

        capital flight – obvious problem
        stagnant manufacturing – obvious problem
        out of control crime – obvious problem
        deficient educational system – obvious problem
        deficient infrastructure – obvious problem

        Simply for reasons of pragmatism why not focus on those problems I just listed which are certainly huge and can keep the government busy for years? That is, leave the oil industry as it is and focus on those problems. If after two or three years there does arise some problem with the oil industry then you can focus on it. For anyone focused on pragmatic problem solving that would seem to be the best option. Especially given that even if you thought the oil industry in Venezuela was currently sub-optimal there is no way to know (as per Quico’s statements above) if your changes will make things better or worse. So under the idea of “first, do no harm” just leave it alone.

    • In general, I agree with this comment.
      There is no need to quadruplicate production or even duplicate it. Investment should go to maintain enough sustainable production capacity to maintain OPEC quotas.
      Any increment in Venezuela’s quota should be done within the OPEC agreement and without breaking the organization.

      Plus there is a lot that needs to be fixed in PDVSA to bring it back to previous high standards of professionalism that it enjoyed pre-Chavez.
      – Reinstating meritocracy
      – Depolitization
      – Shedding off non oil business units (Pudreval)
      – Reconstructing the network of contractors
      – Rebuilding a research and development infrastructure (INTEVEP).
      – Cancelling non profitable refineries (Cuba)
      – Getting rid of external intrusion from: Cuba, Iran, China
      – Recuperating part of the human capital lost
      – Rebuilding a professional sales team (non corrupt)
      – Reducing accidents and spills in refineries, oil ducts.

      Also reducing oil give aways: Cuba, petro caribe, China, etc.

    • ow, look at the copper, soja, gold, iron, you_name_it prices and you may agree that the oil prices of the last 7 or 8 years are probably not due to the venezoelean OPEC policiy.

      1) putting in place macroeconomic policies that allow for the country to grow and diversify away from oil

      allow the country to grow in equity

      2) vastly improving the educational system without which the country can never progress

      especially the public schools for the kids with lower income parents

      3) overhauling the policing and criminal justice system to deal with the flat out crisis of crime.

      Good, though very obvious points that are valid for the region as a whole.
      Regarding the points 1 and 2 Chile has archieved far more. …and hundreds of thousands are protesting, because they consider they are doing it in a way that doesn’t take enough emphasis on social justice. A more rationale left wing Government may have managed to provide a more social equitable alternative. Chavismo did not and will never deliver.

  9. Meanwhile, in El Imperio…

    http://www.washingtonpost.com/blogs/ezra-klein/post/will-the-new-fuel-economy-rules-actually-work/2011/07/28/gIQArYkBhI_blog.html#pagebreak

    Relevant quote:

    “the regulations could reduce U.S. oil consumption by nearly 2.2 million barrels per day by 2025—roughly equal to all of our current daily imports from Saudi Arabia, Venezuela, and Kuwait.”

    See, I think the CIA is trying to push for tougher fuel standards under the guise of environmentalist hippies, to ultimately destroy the venezuelan economy! Ambientalistas capitalistas: no pasarán!

    Seriously though, are people in the opposition even factoring decrease in US oil consumption over the next decade? You could try to sell it elsewhere, but that would mean more investment in refineries since Venezuelan oil needs so much refining.

    Leopoldo should instead propose as a goal exporting 11 million barrels total of all combined non-oil exports in areas where Venezuelans had high expertise in the past: cocoa, coffee and breast implants.

    • Regarding “high expertise in coffee”…
      Venez imports coffee to meet nat’l demand
      http://gain.fas.usda.gov/Recent%20GAIN%20Publications/Venezuelan%20coffee%20imports%20have%20increased%20in%202010_Caracas_Venezuela_9-22-2010.pdf ,
      two years after Chávez promised to increase green bean pricing. Back when and perhaps still, what coffee is grown in Vzla, gets exported to Colombia whose coffee infrastructure is better developed and can give better pricing on the green beans than does the Vzlan coffee regulatory board.

      That leaves chocolate and breast implants.
      Now, I think a booming business could be made of combining these two “commodities”. After all, if the Imperio sells Hershey’s kisses, why can’t Savoy export chocolate breasts?

      • Syd, you ARE a genius.

        As for what Ow said on focusing on those other things: that’s good for me, although I think a transparent project for R&D support would do marvels…if transparency is enforced.

        • nah, no geniosity, just a little entrepreneurship. that’s all. as for R&D and transparency, maybe Osmel Sousa can be put in charge of that for the chocolate project under discussion. Otherwise, I’ll leave the esoteric concepts to others.

  10. If LL had said “we will gradually increase production according to the demand and the financial capacity of the state” we would not be talking about this. FT says it all the time: dog bites man…nobody cares, man bites dog…here we are talking about how stupid quadrupling production in ten years sounds. I think it is smart to get people talking about the subject of present and future investment planning for our oil industry. It is a sign of the times: in a world flooded with multimedia news and scandals you need to be strident to be heard at all.

  11. López’s proposal is to double production in 6 years, under a vision that in the long run, we should be the World’s production leader. Longer term, The idea would be to negociate a due share of the 43MM bpd deficit expected in 2030 between demand and current oil fields production. Another idea would be to have “tough diplomacy” for reshaping the relative quotas among OPEC countries so that we don’t have to reduce our production as sharply if a limit of production is to be set.

    There are many things that in the long term we can do to aim to lead the oil market, but quadrupling production in ten years is not one López is proposing. I wonder where Quico got that from.

    The proposal that has been presented until now has only emphasized on the oil industry. In use of oil revenues, the objective is to prioritize poverty reduction, social security capitalization and public investments conceived as means for increasing productivity and competitiveness in the economy and creating millions of productive jobs, all in an intertemporaly stable fashion.

    • Poverty reduction, social security capitalization…

      More concretely?

      Sustainable jobs…how?

      What can and should the state do with those petrodollars in this field?

      What does it mean to increase productivity in a country that produces nothing and where most people don’t have an idea about what is to compare one’s productivity to that of the competition somewhere else?

  12. The mixed messages gets more and more confusing. On the one hand we must get rid of the petro-state model by getting the government’s grubby hands out of the oil, but on the other hand we’ll do that for when “we” don’t control the oil. That is, we don’t want the grubby hands of others deciding what to do with the oil, but *our* hands? Our hands is ok.

    As to all those very interesting questions, they really should be answered by those in the industry. The key is, politicians and citizens should not be the ones answering those questions. Get the government out of the oil industry! What government should be doing is simply getting all citizens to benefit from the Venezuelan oil, without it being a part of the industry. Again, oil gets extracted by private industry, government charges for each drop of it based on free, globally competitive market prices and stays out of the rest of the business.

    As to expansion money, well, if you privatize and let companies invest as *they* see fit to invest according to a market to which *they* are deeply sensitive, *they* will put up the money. Just show them that their investments are protected.

    As to getting the citizens politically on board, it’s simple:

    *** Ten tu plata! ***

    *** Sin condiciones. ***

    As to all other government spenditures, well, guess how high taxation revenues will be if all the oil money is going to all citizens…

  13. Macroeconomic Stability: According to venamcham members, the most important deterrent of private investments (Even more than lacking rule of law).

    Poverty Reduction: A given share of the stabilized revenues transferred as Conditional and Targeted Cash Transfers to the poor.

    Social Security Capitalization: A given share of the stabilized revenues transferred to individualized social security accounts.

    Competitiveness: Public investments conceived for diminishing costs to private enterprises without subsidizing inputs. Lots to do on road, energy and public services infrastructure.

    Productivity: Social investment as means of improving capacities –> Health and Education policy.

    Lot’s to do and lot’s to do it with for one to be too pessimistic.

    • It’s an odd discussion to have with no numbers attached to it: if you’re diverting most of your cash-flow to new investment to achieve a big expansion in capacity, how are you going to fund cash transfers?

      Maybe there’s a good answer to that. Really, there may be. But until you show me the numbers, you’re talking a heck of a lot of straw.

      • It’s a discussion that we should not be having unless you work for an oil company. The same way the government should stay out of aluminum company decisions, and coal, and gold, except to charge for the amounts of natural resources mined, it should stay out of decisions pertaining how much to invest in R&D. Let the competing oil companies decide that! Why do you insist that that should be part of a political/economic platform? The government’s responsibility is not to the oil industry, but to its citizens. Bringing us back to the regressiveness of spending oil money: if you spend the money it is tantamount to a tax of equal amount (not percentage) to each citizen, including the poorest.

        How do you justify forcing people in critical poverty to be taxed for R&D investment in the oil industry?!

        But let me buy your argument: let’s suppose we do need to decide how to achieve a big expansion AND fund cash transfers. That’s doable like this:

        All revenue from oil sales goes directly to the citizens, they spend it, it gets taxed from those who made the sales, and the government uses it for the big expansion. Can we estimate the numbers? Sure. Revenues are easily calculated from barrels x price, while taxation can be estimated from percentages of past tax revenue weighted by consumer products.

      • We gringos translate talking “puro paja” to “talking bullshit,” not talking straw. We don’t “talk straw” in English although it is interesting that the bull has to ingest one to create the other.

  14. Great article and discussion, but guys, one complaint about the new blog format: Can you move the comments button to the bottom? It’s frustrating to read an entry, then have to scroll back to the top to see the comments. Or maybe I’m missing something? Hasta la vista.

  15. What we can be sure about though is that if status-quo reigns with respect to how oil revenues are centralized then 11 m bpd with Leopoldo guarantees something much worse than the 2.5mbpd with hugo… that’s just the way oil goes!

  16. JAJA Quico, that ” intertemporal optimization” citation cracked me up. Were you joking or was it a serious attempt at snobbing us?

    Saying it is a “good old-fashioned” intertemporal optimization, on top of that!

    Next time please explicitt the Kuhn-Tucker conditions, otherwise we won’t be able to get what you are talking about.

    LOL

    • He had me at “irreducibly complex”. Not complex, mind you, but irreducibly so.
      Huh?
      I stopped reading at “intertemporal optimization” and went directly to the comments, which I enjoyed for their simpe creativity.

  17. Why do I find intertemporal optimization so irreducibly complex? Well, it’s because I don’t have a freakin’ clue what it is.

  18. to hell with it, i couldn’t even read the comments. Please change back, its horrible.
    I feel that i’m going to be visiting CC less frequently

  19. Well said, Francisco. The oil sector is going to be a mess for years to come. I would only add, and I’m always cautious about contradicting your wisdom, that the question of oil production and revenues still isn’t the central one. Venezuela has had plenty of oil revenues in the past and has plenty right now, what it doesn’t have is a coherent way to spend them. Even if we assume Leopoldo can quadruple oil output, it won’t mean anything if the same adecos and ex-adecos turned chavistas are still running the government for the same way they’ve been doing for the last 50 years. Venezuelans still fundamentally believe in the idea of wealth redistribution as a mechanism for development, even though it’s one that’s been demonstrated not to work anywhere. This always struck me as the foundation of Rosales’ Mi Negra campaign — to convince people that he was going to do even more wealth redistribution than Chavez. It’s not just chavismo that believes this stuff.

    And of course everyone yells and screams about sembrando el petroleo and insists they are the true followers of Uslar Pietri and Juan Pablo Perez Alfonso. But who’s actually going to make an entire generation of Venezuelans give up all their petro-republic perks, from free gas to cheap cadivi dollars, to build functioning hospitals and schools for the next generation? Who is actually going to administer billions of dollars in oil revenues without stealing them or inflating them away into bolivares de hielo as Uslar used to say? Until that changes I don’t see Venezuela being a different place, even Leopoldo manages to 30 oil companies to pump heavy crude out of La Faja. Feel free to flame me for missing the plot on this, of course, just my two cents.

  20. Oil policy, in Venezuela, means the minutiae of oil production, strategies of exploration and commercialization, even vis a vis world prices.

    Not guidelines for a desired end, nor regulations, nor law, because there are not diverse actors in the oil business, just one, a nationalized enterprise.

    That said… let me get it out of my chest for sanity’s sake… Now.

    WHO SAID THAT THE MINUTIAE OF OIL PRODUCTION BELONG IN POLITICAL CAMPAIGNING OR CAN BE DECIDED BY POLITICIANS RATHER THAN BY OIL PRODUCERS, ANY MORE THAN THE MINUTIAE OF AGRICULTURAL PRODUCTION CAN BE DECIDED BY POLITICIANS RATHER THAN FARMERS?

    EVEN WORSE, WHO CAN IMAGINE MAKING SOMETHING SO COMPLEX INTO BUMPER STICKER SLOGANS?

    Sorry for the caps.

    What should be decided by politics is what to do with tax revenue and how to maximize the bang for our buck, present and future.

    Now the real outrageous bit for everyone: I expect, and rather hope for PDVSA to fold in the near future and Venezuela to leave OPEC. Thus bringing some sanity to the situation, actually ending the petrostate, be it damned forever and ever.

    • “and Venezuela to leave OPEC”

      I would agree with that, if oil consuming countries agreed then not to tax the consumption of gasoline, by which for instance the European taxmen are capturing more of the market value of a barrel of oil than what any OPEC member is doing.

      Just let us suppose Europe had oil and we taxed gasoline in Venezuela and used the taxes to subsidize for instance coal… anyone thinks Europe would not say anything about that?

      • I didn’t mean to stress that OPEC thing, but…

        Leaving OPEC did not mean that oil production should go up because Venezuela would leave OPEC to duplicate oil production because it’s a good thing to do because… it’s good. Or some other tautological argument.

        Only that political motivations should give way to economic considerations.

        If oil consuming countries tax oil, and hence are responsible for high gasoline prices in Europe, it’s because, barring environmental concerns, of what OPEC and the oil producing countries have become or rather have almost always been.

        Unstable, dangerous both in the traditional military sense, and dangerous in an more than one way related to economics, not only because they can damage the West, but because there’s this humongous quantities of money concentrated in (or controlled by) a few hands that view the funds as political weapons. And then… they are even sources of Islamic fundamentalism (The Saudi connection with Wahhabism/Salafism and fanatical, Al-Qaeda inspiring imams in Europe is not lost on anyone, which is infinitely closer to home for most Europeans than anything the Shiite Iranians could manage to do).

        Besides, high oil prices themselves fuel such research that would substitute oil for other less dangerous sources.

        But I am not saying this because I am a fanatic of low oil prices. The OPEC is a cartel mostly of countries with nationalized (read centralized in a few dozen hands) oil industries. And the greatest empowerment tool for very well-known dictators and absolute monarchs who then enjoy the modern form of hydraulic despotism, only they are much richer than any poor despot who only controlled water. In fact, it must be a testament to the democratic strain in modern Venezuelans that Hugo Chavez did not happen before to Venezuela. Since 1976 the stage was all set.

        • OPEC is an economic consideration…. if you were a shareholder of an oil company and a consultant came to a shareholders-meeting and suggested to break up OPEC you would throw him out!

          Do you protest that some countries impose their patents on us so that we have to pay fortunes for their renewable inventions… if you do, then you have the right to oppose OPEC, if you don’t then you do not have that right….

          • I see patents as a different matter, so sticking with OPEC, I would not kick a consultant out if his basis for proposing leaving OPEC were that Venezuela has a competitive advantage over most other oil and gas producers by its mere proximity to the world’s greatest guzzler. That’s just for starters.

            Secondly, that’s a private industry matter. Why should a government be a member of an organization of oil producers? Especially to cap the amount of oil it sells at a free, competitive market price to the private industries that extract and distribute it and its derivatives? Government, get out of the oil industry; just administer the sale of the frickin crude!

          • I am not a fan of patents, for they are government enforced monopolies. I am dead set against patents that “protect” more than a single device or a very specific functioning principle on an actual device (perfectly described and named, diagrams, and only THAT). And of course I am dead set against renewing patents under any pretense, they should expire and end.

            But let’s not be naive, OPEC is a cartel, and at times it’s a politically motivated one. It’s in theory empowering producing countries. In reality it empowers despots.It concentrates power, together with nationalized oil industries, in a few hands. Most of those nationalized oil industries have one (or more than one but related, at times family) shareholder with complete control over oil production and a country that produces little else, by extension.

            Venezuela has political motivations, urgent too, to de-“nationalize” the oil industry and leave OPEC. Venezuela as a nation, not the Venezuelan President or his Party (note I am not referring to Chavez or PSUV specifically), who enjoy almost unlimited economic power as a result.

      • “if oil consuming countries agreed then not to tax the consumption of gasoline”

        Why would that matter? Let them tax their gasoline consumption all they want. That should make no difference in the process of deciding the pricing and production of crude oil within a context of a free, competitive market.

          • Let’s be clear, I’m talking about the price of the oil to the extractor. Venezuela could simply post its crude oil up for bids. Oil companies that wish to extract get to bid against each other to get to extract. That would be a free, competitive market. Whether those companies have to compete against other companies that are getting subsidies from other nations should not be Venezuela’s government’s problem, because it should only be in the business of selling the crude to those who extract it. So the example you give, is not a counter to my argument.

            • @extorres “Let them tax their gasoline consumption all they want. That should make no difference in the process of deciding the pricing and production of crude oil within a context of a free, competitive market.”

              What are you talking about? Free competitive market? What would gasoline consumption in Europe be without gasoline taxes… what would legal consumption of European cheeses in other countries be if we applied consumption tax on European cheeses? You want to see some free competitive market? Then let PDVSA place a gasoline station on a tanker in the middle of the Mediterranean and you would see some freed up demand.

            • Per Kurowski,

              An oiler comes to Venezuela and wishes to drill for oil. The government asks how much will be extracted over what period of time. Using a pricing formula, the government provides a price. As demand goes up, and time remaining on the reserves goes down, price goes up. As demand goes down, and time remaining on the reserves goes up, price goes down. All oilers interested are treated equally as far as procedure, though pricing may differ depending on their chosen amounts and time-frames, as well as changes in the global oil market from day to day. If oilers wish to go someplace else because of better deals, then the demand for Venezuelan oil will go down, so the price will go down. If they wish to buy the Venezuelan oil because geographically they have reduced transportation costs, then the demand goes up, so the price will go up.

              The oilers are free to compete between themselves in bidding higher for Venezuela’s oil, while Venezuela is free to compete in oil pricing against all other oil nations. This is what I mean by “should make no difference in the process of deciding the pricing and production of crude oil within a context of a free, competitive market.”

              As for Europe’s gasoline taxation, I believe that using taxation tools for market regulation is bad practice. If consumption is what they want to regulate, they should use direct policies, not indirect market interventions.

  21. Thank you, Quico, for bringing back the tried and true. The previous template was somewhat pretty, but the bells and whistles ended up being impractical, I think, and it reduced the “campo” for your posts.

    • I think you should have stuck to your guns and kept the new design. Look at Twitter and Facebook, you think they are going to bring back the old formats just because some old farts with a need for eye-checks start whinning about the change? In any case, keep trying new formats and don’t be bullied by the readership from la tercera edad…

      • Well, Twitter and Facebook have the resources to keep iterating their designs until they display well in EVERY browser: I don’t!

        • I understand that you don’t have the resources of huge private companies. My point is that FB and Twitter tend to stick to their design decisions – I was not talking about the functionality of the site, but was praising your fresher take to displaying your content. In any case I hope that you continue thinking about new ways of presenting your content, especially when trying to engage a younger readership. Your blog already serves as a place for sharing ideas for a future and better Venezuela and the more people, young and old, participating in the blog the better. Keep up the good work!

        • Look into softwares that simulate the look of any web design on each browser and their different versions. There are also services that are even more thorough.

      • LuisDavia,

        First of all it shows your incredible lack of maturity to refer to the readers in this way.Lack maturity= mistaken ideas.

        Secondly a large percentage of the population of ALL ages suffer from Irlen syndrome which manifests itself in difficulties reading on a white background.This particular layout expands the white, and produces and slight glare.

        • You are too kind to a punk, FP. And if I may suggest, never mind the Irlen, but consider the more universal presbyopia, from which there is no escape, as of the age 40. Luis Davila won’t know what hit him when he reaches this age, say in another two decades.

      • Hay junior! Why don’t you just stay on crónicasdecaracas.net? It’s a lovefest for kids’ eyes. As for your delusions of youth, know that it’ll come to an end soon enough.

  22. I’ve been trying to pinpoint the inconsistency in criticizing LL and others for their lack of plan details regarding the oil industry, and here it is:

    We seem to have no debate when it comes to criticizing chavismo’s plan to control all pricing within the market, but we don’t seem to realize that it is the same level of craziness to plan to control all the spending of the oil money, AND direct the whole rescue and development plan of the whole Venezuelan oil industry (not only one of the potentially largest and most complex, but also possibly one of the ones currently in most trouble).

    It’s crazy for any of us to think we should be trying.

  23. I’ve just gone through all the posts for the last week (I’ve been away). This is what I would like to say:

    Oil revenues have certain attributes:
    1. Oil revenues represent “easy money”. Easy money tends to be spent frivolously. Professional athletes who made millions quickly end up broke.
    2. Oil production requires huge investments that suck away capital from not-so-easy money. Why invest money in anything else than oil?
    3. Oil producing wells go dry. After spending all that capital, it ends up being a short-term thrill, and “whoops! I forgot to save some of the money to drill the next well!”.
    4. Each new well costs more to drill and produces less oil (or some of that heavy stuff).
    5. They keep exploring and finding more reserves! It seems like the money is already in the bank! ( just got to get it out of the ground).
    6. Venezuela is rich. Who needs to work hard?
    7. All we need to do is borrow money from china to drill more wells, and will pay china back with oil!
    8. This is easy!

  24. Simply raising taxes winds up simply raising prices.
    Raising prices simply makes importing more attractive.
    Low price imports need foreign exchange.
    Price controls might keep prices more in line with imports, but with limited foreign exchange, what’s the point?
    Lower prices reduce profits, and profits are needed to modernize and expand production. But if profit margins cannot be increased, what is the incentive to expand and modernize?
    If there is simultaneously lack of foreign exchange that reduces imports and lack of in incentive to expand and modernize, there will be decreased supply. When there is too much demand for too little supply, there will be increased speculation.
    When there is increased speculation there will be increased demand for prison space.
    When there is more demand for prison space than there is prison space, there is no incentive to prosecute speculators.
    When there is no prosecution of speculators, everybody becomes a speculator, and fewer goods plus rising inflation will cause panic.

    I haven’t read the specifics of the fair costs and price act, but I suspect that it will only make things much worse.

    • I don’t see many people supporting the raising of taxes. I like to mention revenue from taxes going up, but not because of taxes being raised, but because the market would be doing so well that taxable base would be huge. Given my proposal taxes could be lowered considerably (don’t get me started on how they can be eliminated altogether) and still have a greater tax revenue than today.

      Your mention of inflation only skims the surface. For a country that imports almost all its finished goods, increasing the price of oil is shooting itself in the foot. All that higher oil prices achieves is higher prices of goods. So the huge revenue from oil, if not translated to higher finished goods production, will translate to even higher prices for imports in the long run. This is the main reason for pointing out the reactivation of the consumer market with an unconditional cash transfer. An UCT would directly translate the oil money into finished product demand, which would inject Nitrous into incentives for producing finished goods and services.

  25. Well, Chavez outdoes LL as he asks OPEC to gradually increase Venezuela’s quotas, as he would like to produce 8 to 9 million barrels of oil by 2031.

    I wonder if someone will come along and say 15 million by 2050 now.

  26. Mr. OW and Mr. Humboldt are on the right track, in my opinion. The current oil policy isn’t that bad — the 60% of each project for PDVSA is a financing hassle, but that’s because PDVSA finances aren’t being professionally run and bonds are used as a substitute for currency exchange. Oil is so valuable that people will find a way to get at it as long as there is any profit margin at all. There is oil investment in Saudi Arabia, Cuba and Alaska, all of which have onerous terms for private companies. So what’s such a drag about Venezuela? You have done a very good job of documenting all the other, less obvious problems in Venezuela’s political culture, and I think they are more important.

    The things that get in the way of the oil industry in Venezuela are the same issues that get in the way of everything else — exchange & customs controls, the gasoline subsidy, lack of respect for schedules, impunity for both violent and white-collar crime, lack of respect for expertise, politicization of everything, and perverse incentives that reward those who do least and punish those who work hard. You don’t need to come up with some fancy new oil policy. You just need to start paying the bills on time, demanding hard work from employees, laying the groundwork for an end to the gasoline subsidy (which may be 5% of GDP, much bigger than any other government program), etc. The number of barrels produced, and the exact contract terms with private partners, and other real “oil policy” items are sort of beside the point.

    • I agree with all that. Now, if you want to avoid massive riots and a possible coup, you need to start a programme on awareness about petrol subsidies for a year, kind of compulsory stuff at school, in newspapers, etc…and then implement it. People need to be educated about that. Venezuelans are completely insane about the issue, nuts, round the bend, locos. Petrol increase comes close to losing a child in Venezuela.
      It’s sick.

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