Wednesday, March 28, 2007

Chávez going for broke

Hugo Chávez has a problem. An extremely serious problem: if the price of oil is over $60 a barrel, why is the state owned oil company having so much trouble?

In an attempt to keep up with Chávez's demands for steady cash, PDVSA has found itself handing over more and more cash to the state, and exporting more and more free or "discounted" oil for Chávez to use as a diplomatic tool. What's more, Chávez's recent fetish for nationalization has crippled the amount of foreign investment revenue in PDVSA. This equates even less money available to invest in new fields, new equipment, or more ominously for Venezuela, less money for keeping PDVSA's increasingly expensive current operations running at, much less above, current capacity. As a result, production has dropped dramatically as Chávez's spending has gone up.

As oil fields age, more and more money is required to keep them running smoothly. Without this money, the cost involved in extraction begins to exceed the market price for oil. This would be a problem in any oil operation from Kuwait to Brunei, but this is especially problematic for Venezuelan crude, which is notoriously expensive to process. Unless the state allocates sufficient funds to reinvest in PDVSA, he will be in serious danger of killing the goose that lays the golden egg.

Chávez has treated PDVSA as a private state piggy bank for so long, he's starting to forget that even high demand for oil will not mitigate the economic (and political) mismanagement of PDVSA forever.

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