NYT’s Tina Rosenberg Goes to School on Venezuela’s Oil, and Flunks
An interesting dichotomy has developed with respect to Venezuela. With
a highly popular president and a booming economy the place has become,
at least for the moment, downright boring. On the other hand, some in
the international media seem to think that Venezuela’s economy is near
collapse, its president virtually a dictator, its society is facing
social convulsion, and its people can’t find enough food to eat.
Fortunately for Venezuela there really isn’t much more to this dichotomy than some pretty poor reporting. Case in point is “The perils of Petrocracy” in today’s New York Times.
The
first problem with the article is it is a fairly large bait and switch.
It starts off as if it is going to be about the economic problems that
countries with lots of oil run into and whether or not oil is a help or
hindrance for their economic development. That is certainly an
important topic. Yet the article gets side tracked into a discussion of
the current state of the Venezuelan oil industry and never gets back to
the subject of oil and development. But more on that later.
Unfortunately
even though the article is mainly about the Venezuelan oil industry it
doesn’t even prove very informative about that as the author, Tina
Rosenberg, clearly failed to do her homework. She doesn’t bother to
familiarize herself with all the readily available information on the
subject and when she talks to the former overlords of the Venezuelan
oil industry – who just maybe have an axe to grind – she doesn’t even
know enough to ask the right questions or bring up key facts which
might cast doubt on their assertions.
For starters there is this complete misunderstanding of what the dispute over the oil industry is really all about:
In
the 1990s, Venezuela’s state oil company was a sleek machine, an
excellent exploiter of oil, well fed on its own profits. It floated
above society, unmoored from the problems of the average citizen.
Today, oil money feeds and educates poor neighborhoods. The purpose of
the national oil company is not to produce more oil, but to produce
Bolivarian socialism. These are two very different ways to handle a
nation’s oil resource. Can either model show poor countries how to
convert natural resources into sustained wealth? Few questions in
economic policy are more important today.
Here
Ms. Rosenberg has completely confused the issues of what Venezuela
should do to develop economically – i.e., how should it use the oil
revenues that it gets – with the other very hotly debated topic of how
Venezuela should maximize it oil income – i.e. how should Venezuela use
the abundant oil it has in the ground to generate the greatest amount
of income. The dispute over how the state owned oil company, PDVSA,
should be used is NOT between pumping more oil or “producing Bolivarian
socialism” but between pumping more oil just to have a bigger oil
company or pumping less oil to have higher oil prices and hopefully
more revenue for Venezuela.
In other words should PDVSA try to
become as big as Exxon-Mobil, even if it generates less revenue for the
country in the process, or should Venezuela be a good member of the
OPEC cartel and restrict oil output to increase the amount of money
they get for their oil?
That debate, the REAL debate regarding
oil policy, has been going on in Venezuela for 40 years now. Before
Chavez came to office those who just wanted to grow PDVSA had power.
They were notorious OPEC quota busters (Venezuela was producing 700,000
barrels per day over its quota when Chavez came to office). Their quota
busting policies helped push oil prices steadily lower in the 1990s and
in turn sent Venezuela’s economy into a tailspin.
So unaware of
this is Ms. Rosenberg is she never once mentions either OPEC quotas or
the effect that the level of Venezuelan oil production might have on
prices. Prices are presumably set only by outside forces that Venezuela
has no control over at all and so it doesn’t even merit thinking about
or discussing. In this, she accepts, either consciously or
unconsciously, the most fundamental tenet of the anti-Chavez former
managers of Venezuela’ oil – that as Venezuelan production levels have
no impact on prices and prices should therefore be taken as a given,
the only logical policy is to maximize the amount of oil produced. That
many other Venezuelans thought differently, including the ones who made
Venezuela a founding member of OPEC, completely escaped Ms. Rosenberg’s
notice.
Chavez himself of course knew all about those debates
and was a firm believer in working with OPEC to restrict production,
boost prices, and maximize oil revenues, NOT production. Upon coming to
office in 1999 he immediately cut Venezuelan output sharply to conform
with OPEC quotas and in the process almost tripled oil prices and
greatly increased Venezuela’s oil revenues. The old guard PDVSA
management never accepted this and almost immediately set about trying
to overthrow his government.
That Ms. Rosenberg doesn’t even
understand what the heart of the dispute is – should the country
maximize oil production or should it maximize oil revenues and its
corralarly of should it ignore OPEC quotas or follow them religiously –
leads the entire article astray. Moreover, by not appreciating how
contentious this debate has been she doesn’t take sufficient care to
verify peoples assertions on the what Venezuela’s industry is like.
For
example, she clearly swallows the erroneous assertion that Venezuela
was a well run oil producing machine before Chavez and is now much less
efficient hook, line and sinker. She bases this belief not on any
actual analysis but probably on getting most of her information from
the PDVSA management that was fired by Chavez.
In reality, before Chavez PDVSA was highly corrupt and it was that corruption which led them to want to maximize production.
In
the early 1990s when PDVSA embarked on a course of ignoring OPEC
increasing production, profits be damned, it was led by Andres Sosa
Pietri. In his book “Petroleo y Poder” (a book that should be read by
anyone with even a passing interest in the Venezuelan oil industry but
was obviously not read by Ms. Rosenberg) he lays out his beliefs that
PDVSA should be run free of any control by the state, that production
should be maximized, and that Venezuela should leave OPEC.
He
also, in a bout of honesty, notes that his family owned the
Constructora Nacional de Valvulas (the National Valve Fabricator) which
made all the pumps and valves used by PDVSA as it expanded production.
This is a stunning conflict of interest (and it should be noted that
the shareholders of a private corporation would never tolerate such a
clear conflict of interests) and makes it more than obvious why he
would want to maximize production – the country might make less money
but all the new PDVSA investment would, and did, make his family
wealthy.
Later the company was run by Luis Giusti. He believed
in ignoring OPEC and maximizing production just as much as Sosa Pietri
did. He also believed in opening up Venezuelan oil exploitation to
private firms whose long term, favorable contracts would, as Bernard
Mommer (another key observer of the Venezuelan oil industry who Ms.
Rosenberg has apparently never hear of and never read) noted, help
force Venezuela to leave OPEC.
Mr. Giusti was no less
self-serving in his policies than was Sosa Pietri. During his tenure
most of PDVSA’s finance and administrative functions were spun off into
a private for profit company called Intesa which Mr. Giusti had direct
financial interests. Of course, the bigger PDVSA became the more
profits there would be for Intesa and for Mr. Giusti himself. So once
again we see that PDVSA’s policy of hyper growth most likely grew out
of a desire not to help Venezuela but rather to help the top management
of the company enrich itself.
So this morass of insider
dealing and corruption is what we are supposed to believe was a “sleek
machine” and an “excellent exploiter of oil”? The reality is this quota
busting, production maximizing company only made its management wealthy
while the revenues for the country continually shrank.
Ms.
Rosenberg accepts much of the rest of the old PDVSA management’s
propoganda. For example, while noting that Citgo may have been used to
move oil profits out of Venezuela through transfer pricing (for a
discussion of how that worked see Mommer’s article Subervise Oil)
she then gushes that both the Citgo purchase and the opening up of
production of the heavy oils in the Orinoco Belt were “brilliant
business decisions”!
Let’s see how “brilliant” these business
decisions were. First, Citgo was purchased without bothering to
negotiate a double taxation treaty with the U.S.. This was then used as an excuse
for Citgo never to pay any dividends to Venezuela and in fact prior to
Chavez coming to office Citgo never paid any. So Venezuela had a
multi-billion dollar investment which was not giving it any profits. It
is hard for me to see the “brilliance” of that.
Rosenberg then
buys into the spurious argument that Citgo refineries would help assure
a market for Venezuelan oil. She is apparently unaware that many of the
Citgo refineries, and other refineries that Venezuela bought in places
like Germany, have never actually refined any Venezuelan oil.
Worse
still, this betrays a lack of understanding of basic economics. If
Citgo refineries were somehow specially suited to refine Venezuelan
oil, which some of them are, they would be buying Venezuelan oil no
matter who owned them. In fact, Venezuela recently sold off one of its
Citgo refineries in the U.S (one that cost Venezuela $750 million in losses by being forced to sell it under priced oil)
and guess what? – it still buys its oil from Venezuela. Venezuela no
more needs to own Citgo to sell its oil in the United States than Sony
needs to own Best Buy or Circuit City in order to sell its televisions
in the U.S.
The Orinoco Belt oil production, which was ramped up
to 600,000 barrels of oil per day was the other half of this
“brilliant” decision. Yet it only appears brilliant to Rosenberg
because she completely ignores the issue of OPEC quotas. If there were
no quotas and if Venezuelan output had no effect on prices then maybe
having this additional oil revenue would make sense.
However,
Venezuela does have an OPEC quota which limits what it can produce. For
that reason this Orinoco oil, which is expensive to produce and fetches
a lower price on world markets making its profit margin much lower then
other Venezuelan oils, displaces other oil. That is, if Venezuela’s
quota is 3 million barrels and the Orinoco oil is 600,000 then they
have to cut back their other, more profitable production, back to 2.4
million barrels. No normal person would view cutting back on the
production of more profitable oil to make way for LESS profitable oil a
“brilliant business decision”.
Of course, the real brilliance of
the decision from the perspective of people like Sosa Pietri and Giusti
was that turning over oil production to private companies would force
Venezuela out of OPEC as private companies would never agree to cut
their output to stay within quotas. In fact, the co-owner of the Citgo
refinery that Venezuela just sold, Lyondell, sued Venezuela in 2002 for
cutting back its oil allotment due to OPEC quotas!! If Ms. Rosenberg
had bothered to read Sosa-Pietri’s and Giusti’s writings on these
subjects she would have known this. But once again she is so unaware of
what the issues are she is incapable of even asking the right questions
and categorizes as “brilliant” decisions which in fact were disastrous
for Venezuelan.
Rosenberg then veers into talking about how
“PDVSA” is in trouble”. According to Rosenberg one prime example of
“trouble” is “the mystery of the missing drilling rigs”. Venezuelan oil
production is falling, she claims, because Venezuela supposedly does
not have enough drilling rigs to drill for oil and maintain production
which naturally declines as old wells run dry.
To analyze this
mystery we fortunately have at our disposal a chart of oil rig numbers
in Venezuela prepared by one of Rosenberg’s main sources, the
anti-Chavez former PDVSA economist Ramon Espinasa:
The text on this chart says that the current number of rigs is
insufficient to maintain a production level of 3 million barrels of oil
per day. Yet the numbers in the graph itself show that claim to be
false. Looking at it we see that the current number of drilling rigs is
equal to or greater than any time except the period between 1995 and
1998. From 1995 to 1998 Venezuela was very rapidly expanding oil
production (ie not just maintaining production but increasing it by
about 200,000 barrels of daily production every year) to well over
three million barrels per day. Given that Venezuela is not currently
expanding production (because it has to stay within its OPEC quota) it
does not need that number of rigs.
However note that from 1999
to 2002, when the country was simply maintaining production and not
expanding it, the number of rigs was actually somewhat LESS than it is
today. With around 80 rigs Venezuela managed to keep production levels
of around 3 MBPD from 1999 to 2002 so why should that number of rigs
all of the sudden be inadequate? The fact is, comparing the number of
rigs to what Venezuela’s needs are we see that today’s number of rigs
is perfectly adequate to maintain production levels.
Should
Venezuela want to significantly expand production, as its long term
business plan calls for, it would need more rigs, but given OPEC quotas
that is not likely to happen any time soon.
So what we see is
the only thing mysterious here is why Ms. Ronsenberg hasn’t better
informed herself on these issues and even looked closely at the number
presented by her favored sources before giving what is clearly an
erroneous analysis.
Continuing on with her “PDVSA is in trouble”
theme she then quotes one analyst as saying PDVSA production has been
going down for the past couple of years – presumably because of
mismanagement and missing oil rigs! Of course, that Venezuela might
have intentionally reduced its production to meet cuts in its OPEC
quotas over the past two years completely is completely beyond her. Yet
that is precisely what happened. Once again, the fact that she barely
seems to realize that OPEC exists and what Venezuela’s relationship
with it is makes it almost impossible for her to get much of anything
right in this article.
As Ms. Rosenberg clearly wasn’t doing any
independent verification of facts and was relying on the fired PDVSA
managers for most of her information I had to wonder when she was going
to get to the biggest two canards surrounding the Venezuelan oil
industry – that PDVSA is no longer transparent and that its oil
production is much less than what it says it is. I didn’t have to wait
long.
First she starts with “[PDVSA] has become less and less transparent”. She goes on to say:
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.
One thing I’ve always wondered
about this whole transparency discussion is if a company publishes
financial statements and no one bothers to read them does it really do
much for transparency? The reason I pose that question is because, as
will become clear shortly, Ms. Rosenberg obviously did not read any of
PDVSA’s financial statements.
It should be noted that all of
PDVSA’s financial statements, both the ones posted on the SEC web site
and the ones now referenced on PDVSA’s own web-site are audited by an
outside auditing firm which is an affiliate of KPMG. In fact, here is a
copy of one with only “basic figures”:
On page one the AUDITED financial statement clearly points out that
Venezuelan oil production last year was 3.25 million barrels per day.
So it is not just PDVSA “claming” this, its audited financial
statements say that is what it is.
Of course some contrarian may
say – “but production numbers aren’t audited so maybe they are lying
about those”. Yet even if it were true that production numbers weren’t
audited it wouldn’t matter. From the financial statement we see that
Venezuela got approximately $53 billion in revenue from exporting oil
and oil products. Using the knowledge that Venezuelan oil averaged $55
per barrel last year and that there are 365 days in the year we can see
that Venezuela had to be exporting approximately 2,600,000 barrels per
day. Add in the 650,000 that even Rosenberg acknowledges is consumed
domestically and we, very mysteriously, arrive at Venezuela producing
3,250,000 barrels of oil per day.
Will the contrarians now
tell us that the auditors don’t audit the money either? If only Ms.
Rosenberg had read PDVSA’s financial report and done some elementary
arithmetic she could have caught the Venezuelan government telling the
truth.
The reality of the situation is that if you don’t
believe that Venezuela is producing over 3 MBPD of oil then you really
do have a big mystery on your hands, namely where is all the money
coming from?
In fact, if she was on the ball she could have
picked up on this from Mr. Espinasa’s own reports on Venezuela’s oil
industry. You see, he gives numbers showing declining Venezuelan oil
production and that match the numbers Ms. Rosenberg uses:
From that it follows that exports have also declined and are only about
1.6 million barrels per day as Espinasa shows in the next chart.
Of course we have no idea where these numbers come from, they certainly
aren’t coming from any audited financial statements. But that is not
the point as there is a much more fundamental problem with them.
Witness the following chart which is two slides later in the very same
presentation by Espinasa (the entire presentation can be found here):
In this chart Espinasa readily admits that in 2006 Venezuela exported
$60 billion dollars worth of oil (for those of you wonder why it is
higher than the $53 billion on PDVSA’s financial statement it is
because Espinasa’s numbers include the non-PDVSA portion of the Orinoco
Belt production which would not be counted in the PDVSA financial
statements – yet another nuance of the Venezuelan oil industry beyond
Rosenberg’s grasp).
The reason I show this slide is because it
completely blows his earlier slides on production and exports out of
the water. A couple of quick calculations will quickly show anyone
interested that Venezuela had to export far, far more than 1.6 million
barrels and produce far more than 2.4 million barrels to bring in that
much money. It really is just simple arithmetic involving nothing more
sophisticated than multiplication and division.
So never mind
that the Venezuelan numbers are both audited and internally consistent.
The numbers the PDVSA doubters present, and that Rosenberg is
apparently gullible enough to believe, are not only not audited (in
fact I have never once heard how these numbers are come up with) they
aren’t even internally consistent. The production and revenue
numbers people like Espinasa give can’t possibly be right because they
completely contradict each other. Yet Rosenberg is so
unquestioning she can’t be bothered to spend a few minutes on a
calculator and figure out that her primary source is clearly leading
her astray.
The fact that she didn’t read any of the financial statements becomes even more obvious when she says:
Pdvsa
is also taking on debt. The company had very little debt until 2006,
but this year it has borrowed $12.5 billion. While raising cash through
debt offerings can be fiscally sound, and many companies do so, critics
contend that Pdvsa is issuing bonds for the wrong reasons. “Their debts
are low, but they didn’t have any before,” says José Guerra, formerly
chief of the research department of the Central Bank, who left in
disagreement about Chávez’s economic policies. “Other oil countries are
getting rid of debt. And what is the debt going for? Their spending on
exploration is almost nothing. They are taking on debt to have a
party.”
It is true that PDVSA took on
debt earlier this year and the wisdom of that is debatable. But had she
bothered to read any of PDVSA’s financial statements (which can be
found here) she would have found out that PDVSA had at least $7 billion in debt early this decade – hardly “very little”.
In
fact, she really should have known that the whole reason PDVSA had to
file financial statements with the U.S. Security Exchange Commission in
the first place was because they had large amounts of debt held by
bondholders in the U.S. It was only because under Chavez they paid
those debts off that they could stop filing with the SEC after 2004.
I
guess it is too late now but knowing that might have prevented her from
letting the bald faced lie that they didn’t have any debt before go
unchallenged. But repeating other people’s lies is what happens when
you don’t do your homework. (BTW, she also repeats the lie that Ramirez
said that people who don’t support Chavez can’t work at PDVSA – I guess
we can assume she didn’t watch the video of that either even though it
can be easily found on YouTube).
Comically, she goes on to claim
that Venezuela “once” had a savings fund for oil revenues with $6
billion in it that now only hold $700 million. I guess you could be
forgiven if you thought that some previous government saved up money
and Chavez then blew the wad. But in reality the “once” was earlier
this decade after Chavez boosted oil revenues and paid into it – the
fund didn’t exist at all before Chavez and previous governments left
him not a single dollar of saved up oil revenues.
Further, the
money was spent when the PDVSA managers shut down the oil industry and
put the economy in a full blown depression. If you can’t spend the
money in that situation, when can you spend it?
Ms. Rosenberg’s
indolence and failure to dig out facts aside, the Venezuelan oil
industry is doing just fine. Venezuela is producing exactly what it
should be to maximize revenues and the revenues themselves are way up,
confirming that sticking to OPEC quotas is indeed a wise policy. No
one, including Ms. Rosenberg, need cry for PDVSA, it really couldn’t be
better as any one who carefully and honestly looks at the facts will
see.
Unfortunately, her being distracted by the unfounded
allegations about PDVSA sidetracked her from what could have made for a
very interesting article – how exactly should Venezuela’s oil income be
used. She does correctly note that large oil windfalls often dampen
other economic activity – especially manufacturing and exports. Given
that Venezuela clearly is suffering from some of those problems a good
discussion on that topic would have been very welcome.
Unfortunately,
she never returns to that topic. Rather she goes off on a tangent yet
again and discusses whether Venezuela would be better off if oil
extraction were done by private companies that were then heavily taxed.
That is, should Venezuela then let private companies produce the oil
rather than having a state owned like PDVSA do it? Personally, I think
it is a moot point because PDVSA was nationalized well before Chavez
came to office and after a long struggle it is finally now a well run
company. If it is not broken, why fix it?
Also, there are
possible downsides to allowing private companies control production.
First, they aren’t going to do it for free – they are going to want a
profit, probably a big profit. In fact in both the Orinoco belt and in
older oil fields were they were also allowed in the private oil
companies were robbing Venezuela blind. Even if the government is
effective in negotiating a very high level of royalties and taxes the
companies are going to expect to make a decent profit and that stands
in contrast to a state owned model where the government gets all the
profits. So it would only make sense economically to allow in private
companies if the gains in efficiencies would be greater than the
profits that are surrendered to them.
A second, and possibly
bigger obstacle to allowing in private firms, is that they are
generally not going to be receptive to having to reduce output to stay
within OPEC quotas. It is certainly not lost on the Venezuelan
government that they have been sued by private companies precisely for cutting production due to OPEC quota reductions.
Lastly,
switching to a private oil company model does nothing to solve the very
real problems that Ms. Rosenberg noted oil producing countries can
have. An overvalued currency, undermining of local industry, graft, and
all the other problems of the “petro-state” would still exist.
The
reason is those problems have nothing to do with who takes the oil out
of the ground. Rather they result from the government controlling all
the money. In Rosenberg’s model where private companies extract the oil
but the vast majority of the money still goes to the government you
would quite likely have all the same problems.
That Ms.
Rosenberg missed this point shows she really hasn’t thought much of any
of this through clearly. So in fairness to people like Sosa-Pietri and
Giusti, let me at least point out that they do claim to have a
definitive solution to those problems – giving ownership shares of
PDVSA to every Venezuelan citizen so that they receive the oil rents
directly rather than having them pass through a potentially corrupt and
inefficient government.
Despite a promising beginning where Ms
Rosenberg accurately identified some of the pitfalls facing oil
producing countries the article proved to be a major disappointment.
This again goes back to her just not having gotten straight what the
fundamental issues and debates around Venezuelan oil policy have been.
Again,
the biggest dispute has always been what Venezuela should with all the
oil it sits atop – should it intentionally limit how much oil it
produces, in conjunction with OPEC, hoping to maximize revenues by
boosting prices, or should they maximize production and maybe if prices
do well anyways also have high revenues?
In fact, both schemes
have been tried for approximately a decade: the latter for much of the
90s and the former during the entire time Chavez has been in office.
The
production maximization experiment went badly as quota busting led to
steady declines in prices which in turn greatly reduced revenues and
sent the Venezuelan economy into a downward spiral. In contrast, the
strategy of working with OPEC to limit production and defend prices has
proven spectacularly successful with Venezuelan revenues having
increased many times over. As far as I this blogger is concerned that
debate is all but over with the defending prices model having proven
itself to be vastly superior and more profitable. It is hard to see how
any honest person can argue otherwise after the experience of the past
20 years.
The second argument is what should Venezuela do with
the oil monies it gets: should it spend them on imports, should it
invest them, should it give each citizen a check, or should it save up
for a rainy day? This is a very real debate that has yet to be settled.
For example, while I certainly consider their oil policy to be a major
success I think many of their other macro-economic policies are
anything but wise.
Although Rosenberg notes some of the problems
Venezuela faces and how important it is for future generations that
something be done to develop the rest of the economy she abandons this
most important discussion and never returns to it.
We quite
possibly get a hint of why when she says of Venezuela: “It has become a
rich country of poor people”. That is utterly false. For all its oil
Venezuela is still very poor. A couple thousand bucks per person, which
is what Venezuela gets from oil in its best years, doesn’t go very far.
Only if a way can be found to leverage Venezuela’s oil riches
to bring about comprehensive economic development can the country ever
cease to be poor. But Rosenberg fails to discuss at all how this might
be done and her article therefore winds up contributing nothing to
peoples understanding of Venezuela, its oil industry, and the problems
it faces as it struggles to develop.