The Devil's Excrement

Photo above:Castro and Chavez in business suits in Havana. Is it one of Chavez’ Brioni or a Lanvin? Hard to tell he has over ne hundred of them.

The opening of the office of PDVSA Cuba makes perfect sense. It is clearly one of those management decisions that has been studied and analyzed and the financial models have spoken: We need to open an office in Cuba, it makes perfect sense! Let’s look at the facts:

-Cuba has no oil, it produces no oil, all of the exploration wells that have been drilled in the Guld of Mexico have turned out out dry. Repsol, Petrobras and YPF have even withdrawn from exploration activities in that island, so what better opportunity for a revolution that believes that anything is possible!

-Cuba is the Caribbean island island furthest away from Venezuela, so that from a logistic point of view it makes perfect sense to use the Matanzas storage facilty as a distribution point for all of the Caribbean. That way oil has to travel the furthest in order to send it back to the Caribbean. It is even a better strategic location if you consider that no ship can travel to the US from Matanzas, without touching port in another country first. Thisalso makes perfect sense since the US is Venezuela’s largest export market.

-Venezuela wants to run the Cienfuegos Refinery. Since the CITGO refineries are not profitable and Venezuela has no money to invest in oil facilities in Venezuela, it makes perfect sense to invest in one in Cuba and sell the CITGO ones. Moreover, using the same techniques and experience learned at CITGO will guarantee that the Cienfuegos refinery will never make money so that that facility will be in tune with both the Cuban and Bolivarian revolution.After all, profit is bad, sacrifice is good. The Cienfuegos refinery is of very modern design and was began by the Soviets and abandonded in its first stages of construction when the Soviet Union fell. .

-Banco Industrial de Venezuela. The Government Bank will open an office in Cuba in the PDVSA office to channel the lending to Cuba that the Venezuelan Government wants to funnel to promote more trade with that island. This is very good for Venezuela’s worst run bank, which has been capitalized twice in the last four years and whose main problem is its high expenses. But hey, Venezuelans love subsidies so that this office is in perfect resonance with the country.

-There are other benefits to having an office there. It will make the flow of subsidized and unpaid oil to Cuba more efficient, allowing that country to reexport efficiently that oil which has helped to revalue the Cuban currency while the Venezuelan one has been devalued. That office will keep track of the oil shipped to that island so that there is no record of it in Venezuela and nobody can ever investigate it. Payment by Cuba, if one is ever made, will be directly to that office, guaranteeing that the funds will never reach Venezuela.

All in all, a wonderful step in consolidating the incoherent oil policy of PDVSA and Venezuela of the last two years: It simply makes too much sense!

The President of the National Defense Council, General Lopez Hidalgo has just said
that the military met with the Presidemt of PDVSA and its ready to
“take over” PDVSA where there has been a possible sabotage and a silent
strike. Meanhwile the Minister of Defense says that the Armed Forces
will face the actions of the CIA, saying “we are surrounded by elements
from the CIA” and the Venezuelan Government has “infiltrated” the CIA,
which should be concerned about it. As usual, nothing was proven, no
evidence was given, no details were given as to the sabotage or the
silent strike.

In last night’s post I talked about “experimental economics” in
Venezuela and today the Venezuelan Central Bank launched a new (but
old) experiment by introducing regulations in both savings and lending
rates in Venezuela. Starting next Monday banks will have to pay a
minimum refenced to the so called “absorption” rates of the Central
Bank, which today implies 6.5% on savings accounts and 10% on 30 day
CD’s. Similarly, the lending rate will be referenced to the
“assistance” rate of the Venezuelan Central Bank, which implies that
the maximum lending rate, including credit cards, will be set at 28%.
The new regulations also forbid charging commissions for some services,
requiring minimum balances or asking for any form of collateral on
loans.

When I began this blog, my intention was to talk about the strange economic
system our country has. From subsidized gasoline prices to a belief in
“naive experimental economics” Venezuela is truly a laboratory for
silly economic experiments. Most people sometimes think that economics is a
straightforward science. Nothing further from the truth. There are so many
economic puzzles and paradoxes that whole books are devoted to their study such
as this
one by Krugman or a very recent book called
Freakonomics that looks at everyday economic issues that have no simple
answers. In fact, that is what economists do and spend their life studying.
That is why there are Economic Departments at Universities, attempting to
understand economic behavior.

All of this comes to mind, because in the last week or two I have had many
discussions with friends and colleagues who intuitively support the increased
taxes to the oil projects by the Chavez Government. Mind you, all of them are
anti-Chávez but somehow get a special sort of pleasure in thinking that Venezuela will
get more funds from these companies. The initial reactions are things like:
“:Oil prices are so high that they are making a bundle” or ”
They are selling our oil, why shouldn’t we make more money” or “None
of them are going to leave look at all of the investments they have made”

The problem is that it is very easy to think that way at a time of high oil
prices, but what if they fall? I still remember the nervousness when the oil
opening was done of not knowing whether there would or not be interest in
paying for the rights to exploit these fields. Afterwards it was a huge success,
Venezuela
collected over US$ 2 billion at these auctions. But let us also recall that some
of the fields failed to even generate a single bid. I am sure today they would command
a premium.

One should not forget that these fields are the “marginal” fields,
that is, old fields whose production is marginal and not interesting enough for
PDVSA to invest in at the time, there were other priorities. Thus, those that
bid and won those fields took a risk, a calculated risk that has worked out
quite well due to the high oil prices of today.

But by increasing the tax rate from 32.5% to 50%, the Government is introducing
a number of variables into the system which are in dissonance with the rest of
the world. First of all, the decision was taken unilaterally. Second, the
increase in taxes places some fields into the really marginal area as evidence
by the fact that Japanese company Teikoku has stated that it will not make
money with such high income taxes. 50% is comparable to some countries, but
those that charge that much have low royalties. Venezuela wants to charge a high
income tax rate and royalties of at least 16.5% and typically higher. Venezuela does
not live on a vacuum. Yes, these companies are basically printing money today,
but what if prices drop? What if in the future Venezuela wants to attract new
capital? Will it be competitive?

The same is true of the heavy oil projects ion which PDVSA is a partner. These
projects were conceived with a royalty of 1% to be increased to 16.5% the day
the revenues exceeded the original investment in the projects. Why was this
done? Very simply because the other country in the world that has large heavy
crude reserves, Canada, charges 1% up to the same point. Last fall, the
Venezuelan Government increased it unilaterally to 16.5% before those benchmarks
were reached.

The problem is that Venezuela
would need dozens of these projects to grow. Venezuela needs to grow. It will be
hard now to attract new investments, but imagine if oil prices drop. Who will
come? How will Venezuela
grow under unfavorable conditions compared to other countries?

Most of
those I have argued with are educated and anti-Chavez, after a lengthy
discussion they sort of begin to see the point, but I am not sure they are
convinced. They support the new taxes because intuition tells them it is good
to tax those that are making money. But somehow, they want to tax the golden
goose for Venezuela
that the oil investments represent, rather than taxing others, like banks, that
do live in a vacuum, make a mint and pay little taxes, under the protectionist
eyes of the Government. If we kill the golden goose, what chance will we have
of getting the population out of poverty?

I have
always wondered why Latin American Governments, including ours, always talk
about neoliberals policies that have hurt our countries, when the reality is
that what they call neoliberal is nothing more than a few attempts to improve
economic conditions via macroeconomic adjustments without really getting down
to changing the way these countries really work. But I have always wondered why
most of these Government officials simply ignore Chile, probably the most successful
country economically in the last decade.

I was
reminded of all this by Gerver Torres’
article in Sunday’s El Universal about that country. While the point of his
article was to ask if that was a socialist country, I would like to summarize
its highlights in terms of economic and social achievements.

To begin
with, Chile
has the lowest poverty levels of the region at 20%. Yes, still too high, but
the lowest in the region. Unemployment is 9% and salaries have increased in
real terms by 50% since 1990. Contrasts that with Venezuela’s numbers under Chavez
alone, poverty has increased and salaries have been reduced in real terms.

Chile has on of the highest investment rates
in the region at 23% of GDP and is the one that attracts the highest investment
per capita in the whole region.

Inflation,
that perverse tax on the poor in most of the region including Venezuela, is only 2.2% in Chile. Interest
rates are clearly low, helping the economy grow and the people imprve their
standard of living.

Chile also
has a very good social security system, which not only provides pensions for
its inhabitants, but provides a lot of the funds needed for investment in that
country, without the need for the Government to borrow internationally.

In terms
of economic freedom Chile
occupies today the 11^th. position in the world. This for a country
that had horrible numbers only thirty years ago.

What is
hard to understand is why, with an example like that, our Governments look for
failed policies and ideologies that have repeatedly been tried without any
cases of success anywhere in the world.

Meanwhile,
Chile
simply chugs along, becoming more like a developed country under the
indifferent eyes of the Government and Government officials in the region. Why?

–While the Venezuelan Government continues to say that
CITGO’s refineries in the US
are losing money, Valero Energy will become the largest US
refiner in the US
with
its purchase for US$ 6.9 billion of refiner Premcor., whose stock has
doubled in the last year. According to analysts these transactions are talking
place because refiners are “swimming in cash”. Meanwhile, the Venezuelan
Government dismisses this
report,
in which a former executive says he resigned because it was hard to
“keep track of the company’s cash flow”. Maybe its hard to swim in cash
and keep track of it at the same time.  And in another article, it
is shown how Chavez
has named his cronies to work at CITGO and they have no experience or even a clue
about the business. The problem is that rather than swimming in cash, CITGO appears
to be badly mismanaged at a time that it should be making huge profits. If oil
prices should drop, imagine what would happen! I wonder if this is why they call it “La Revolucion Bonita”. Or is
it because the children of revolutionary oil executives drive $200,000 cars?

–Japanese oil company Teikoku, said that the increase
in taxes for the marginal oil field projects would make it impossible to make a
profit from the fields it runs. The company said it would need to receive incentives
from the Venezuelan Government in order to continue the projects.

–On Chavez’s Sunday’s program Alo President, Chavez
said that among the evidence that the US
is planning an invasion of Venezuela
was the fact that a US
woman was caught photographing a military installation. Chavez also said that “several
other Americans” were caught taking pictures of oil installations. The US
Ambassador in Venezuela
said that to their knowledge no American woman has been detained in Venezuela
in recent months. He did say that a US
woman enlisted in the military lost her purse in Maracay,
where there are military installations. Her purse had a disposable camera. I
guess the invasion will be low tech.

I guess the dislike for the man extends well beyond the Venezuelan borders