his
and other three texts below contain short summaries on the status of the
nation states that now have, and will in the future, the greatest effect
on oil prices. They have been kept separate from the body of the report The
Future of Fuel Prices because they are essentially political
in nature.
The
situation with Venezuela would, on surface appearances, seem to be
the one big sore spot in our oil future. As of this writing, we got
a real good look at what the future might hold in store when, on
September 20, 2006, the Venezuelan dictator launched a vituperative
verbal attack against George Bush and the U.S. in general at the
United Nations in New York. He demonstrated what a wise man he is
by attacking his number one customer for his country's only product,
oil.
Here are
some basic facts about Venezuela and its oil:
70% of
Venezuela's oil exports go to the U.S.
Oil accounts
for 50% of the Venezuelan economy.
Venezuela
owns CITGO which has five refineries in the U.S. and partnerships
with several U.S. refiners in the Caribbean, which accounts for 4%
of our gasoline supply.
The Venezuelan
national oil company purchased CITGO in 1997, prior to Chavez.
Of the
13 million barrels per day that the U.S. imports, Venezuela supplies
1.5 mbd, or 8.6%.
The nation's
oil production is in decline from a high of 3.1 mbd in '02 to 2.6
mbd in '05.
Half of
the nation's oil production is by foreign operated facilities.
Chavez
has seized foreign assets and oil fields including those of France
and Italy.
Chavez is a
de facto dictator who controls his nation by the use of the army and purging
and manipulating the previously democratic government, and now maintains
only a puppet democracy for appearance purposes.
As with
the mullahs of Iran, Chavez has more interest in promoting his power
on the world stage than he does in running his own country. He's aligned
himself with every thuggish dictator in the world, presenting himself
as a mirror image of Mussolini, replete with the same misplaced megalomania.
But like Mussolini, he is more a danger to himself and Venezuela than
anyone else. Unfortunately, he is unaware of his limitations.
The man's
sufficiently irrational that agencies of the U.S. government agencies,
such as the GAO, have been considering making studies of what to do
should Chavez try to punish the US by withdrawing his oil.
Chavez
has made the same mistake his buddy Mr. Jihad of Iran did: he purged
the oil industry of all politically undesirable workers, amounting
to 40% of total employees, most in management and engineering, thereby
depriving the industry of its most valuable employees. This is attributed
as the primary reason for the decline. Again, like his newfound friend,
Chavez is driving out all foreign companies from a third world nation
that hasn't the expertise of maintaining its industry, yet alone expanding
it.
Chavez
has forced existing contractors to accept new contracts that impose
economically impossible conditions and taxes, apparently as a means
of driving them out.
Based on
the man's behavior it is highly likely that the man is going to force
a showdown with the U.S. Those who think this won't happen base their
beliefs on the argument that any such actions would hurt Venezuela
more than the U.S. This is certainly true but Chavez has demonstrated
that rationality is no check on his behavior.
The GAO
Study estimates that a worse case scenario with Chavez cutting off
all oil to the U.S., plus shutting down his five refineries could result
in a short term increase in oil price of $11 bbl and up to $1.00 gal
of gas. The later figure was based on Katrina figures that are badly
skewed by other factors that were not considered. A more reasonable
estimate would 25-50 cents per gallon. This impact would be rather
short-lived (a period I would estimate to be around three months) and
would rapidly decline as the lost production would soon be replaced
by other sources with a longer term effect more likely 15-20 cents/gal.
Moreover, in the event of Chavez shutting down his refineries, it is
highly probable that our government would seize them under national
security guidelines, so that production would rather quickly resume.
Fortunately, CITGO refineries are all staffed with U.S. workers so
there'd be no problem in that respect, and would further serve as rationale
for seizure.
Working
against Chavez's ambitions is that fact that Venezuela's oil is poor
quality, heavy, sour crude. The U.S. located CITCO refineries are among
a very few world wide capable of handling this oil. Therefore Chavez
won't easily find new markets for his oil. Moreover, a major reason
why U.S. companies buy it is because Venezuela is so close and transportation
costs are much less. Ergo he'd probably have to sell it to China at
a significantly lower cost. Indeed, Chavez has made announcements of
deals with
China and
many others, the problem here being that the man engages in a great
deal of international propaganda.
In summary,
although on the face of things it seems frightening that an irrational
clown like Chavez is in control of five U.S. refineries, that is only
4% of U.S. capacity so he actually do a little damage to our economy,
and only for a very short time. Venezuela's oil production is likely
to decline in any case.
Back
to The Future of
Fuel Prices
Posted
September 27, 2006 |
