Almost one year after threatening to cut off all Venezuelan oil exports to the U.S., President Hugo Ch’aacute;vez succeeded in his campaign to end presidential term limits in his country Feb. 15.
In the last year, Ch’aacute;vez has threatened an oil embargo on both the U.S. and the European Union. In 2007, he expropriated oil fields owned by western international companies, including ExxonMobil and Conoco-Philips. ‘
Venezuela’s ability to invest in oil extraction has been constrained by the redirection of Petr’oacute;leos de Venezuela’s (the state-owned oil company) revenues toward subsidizing domestic social projects coupled with reduced international oil prices and concessions of low-priced exports to Cuba and Central America.’
With 12 percent of U.S. oil imports coming from Venezuela, Ch’aacute;vez’s latest victory poses concerns that reduced production in Venezuela will lead to higher prices, saod Craig Pirrong, director of Energy Markets for the Global Energy Management Institute at C.T. Bauer College of Business.’
‘Venezuela is sort of a case example of how politics affects energy and how energy affects our way of life and our standard of living,’ Pirrong said. ‘Unfortunately, many of the countries that are very energy intensive, Venezuela, Nigeria, etc., are very politically volatile. And that translates into inefficient production of energy that has a direct impact on everything in our lives, everything that involves energy.
‘In some respects, it is sort of a long chain from cause to effect, but things that happen in Venezuela have a direct impact on what we pay at the gas pump.”
Crude oil prices are down to $45 from a $140 at peak in June. ‘
The Organization of the Petroleum Exporting Countries (OPEC) has announced production cutbacks by 2.2 million barrels per day, effective Jan. 1. ‘
OPEC works on a quota system. In the 1980s, member countries were given quotas to restrain production and maintain high prices. However, there is incentive for countries to produce more than their quotas and earn a greater share of the revenue. Overproduction lowers the effectiveness of the cartel.
‘Venezuela was one of the most notorious cheaters of the cartel. They always produced beyond their quotas and that was good for the U.S., good for consuming countries, that OPEC couldn’t maintain its discipline on prices and production,’ said Tyler Priest, director of Global Studies at Bauer College of Business. ‘Venezuela and the people who ran PDVSA were very cooperative with the wishes of U.S. foreign policy makers to produce more oil and make sure that the prices remained low and stayed low.
‘One of Ch’aacute;vez’s main objectives when he came to power was to restore unity in OPEC and he promised that Venezuela would no longer cheat on its quotas and that it would cut production and raise prices.”
With the steep drop in oil prices, Ch’aacute;vez has again opened the doors of negotiation with western international oil companies.
‘In the last week or two, Ch’aacute;vez has shown some signs of trying to encourage more foreign investment, after kicking out Exxon, in pursuing his Bolivarian Revolution. World oil prices are making him realize that he may need to be more receptive to the internationals and the technology and investment they bring to develop the Orinoco Basin heavy oil reserves,’ Priest said.
Faced with a decline in oil production, higher prices may impede Venezuela’s ability to honor commitments with Cuba and abroad.
‘The biggest supply issue right now is the financial crisis and it is very difficult, if not impossible, for not just private oil companies but for national oil companies to finance big new projects and create big new sources of oil in the future,’ Pirrong said. ‘So, if and when the economies in the U.S., Europe and Asia turn around, demand will rise.’
‘If we have not increased capacity … prices are likely to rise dramatically again. So, the big issue is that the financial crisis is limiting the ability to create new reserves and will make prices more volatile.’
Priest said another concern is that Venezuela is not investing in the U. S. ‘
‘Usually petrodollars are recycled into the U.S. banking system, allowing the U.S. to live for a long time knowing that even though our oil companies don’t control their oil, the revenues often make their way back into our financial and economic system,’ he said.
An energy policy that could end U.S. dependence on foreign oil would have to include drilling offshore and exploration closer to home, Priest said.
‘We need an energy policy and drilling should be part of it, but I don’t agree with drill here, drill now, you know, drill it all up. We need to be selective,’ Priest said.’ ‘I also believe we need an energy policy that promotes a shift away from our extreme dependence on hydrocarbons. We need to purse a mixed strategy and reduce our dependence on foreign suppliers of oil and that means reducing demand, but also finding new sources closer to home.’
Because of the economic crisis in the U.S. and low international oil prices, energy policy has taken precedence in the Obama administration’s agenda. However, supporting energy from renewable sources seems to be the direction the administration is heading, Pirrong said.’
‘ This poses the question of how to shift to a green energy-based policy without drastically affecting workers, manufacturing and service companies that have for years lived off the oil industry.
‘This is a huge problem. I wish policy makers would let the market work more. The energy market has been highly regulated and highly affected by taxes and subsidies,’ he said. ‘My concern would be that in pursuit of this green goal, a lot of money and subsidies will be thrown away in other things and technology that are not economically feasible.
‘Unfortunately, given the way resources are distributed around the world, I think it is unrealistic to think that we will not be a major energy importer, particularly when it comes to petroleum. I think that there is no magic policy that is going to eliminate the problem.’ That said, I think it would be worthwhile encouraging domestic production and development to the extent that it is profitable to do so.’
Pirrong said if green energy makes economic sense, the market would produce those products in an efficient way, but similar energy efforts during the energy crisis in the late 1970s ended up being very expensive. ‘
‘It is sort of gloomy. Actually, one of the founders of OPEC, Juan Perez Alonso, energy minister from Venezuela, said that ‘oil was the devil’s excrement,’ and that’s unfortunately true. His words have been shown true for a long time, and that is not a happy conclusion, but I think it is a realistic one,’ Pirrong said.
