"Never again will they rob us — the Exxon Mobil bandits. They are imperial, American bandits, white-collared thieves. They turn governments corrupt, they oust governments. They supported the invasion of Iraq," he said.

Thus reported Reuters.  This episode is the third recent defeat for Chavez.  Previously his attempt to become dictator for life was voted down and more recently members of his own party have begun to voice opposition to him.   His problems all stem from the dismal performance of the Venezuelan economy under his mis-management.

Chavez’ action seems to have contributed significantly to the recent rise in the price of crude by over $5, despite a weakening U.S. economy and lower U.S. gas sales.   Does this act have legs?  

Chavez can rant all he wants but his realistic alternatives are limited.  He could decide to reduce the total volume of Venezuelan oil sales.  That would raise the oil price but not sufficiently to offset the volume, so Venezuelan oil revenues would decline.  

Let’s say he reduced his 2 mb/d sales by 500,000 b/d, probably the minimum amount that would make a significant impact on the price of crude.  That might push the oil price to, say, $110, maybe $20 over recent average prices, a 22% increase.  But Venezuela’s volume would be 25% less, resulting in slightly lower total revenues. 

The expected result would be a slight diminution of Venezuelan oil revenue.  Of course, the example I gave is just a guess.  The actual amount of crude he removed and the impact on the price might be different.  But the tendency will be the same: very little if any net gain in Venezuelan oil revenues.  Moreover, to the extent his actions caused a much higher oil price, Chavez would then gain the enmity of every oil importing country on earth, particularly the poor countries about which he seems to care. 

Moreover, if Chavez goes this route he risks the possibility that Saudi Arabia might make up the difference by increasing its output, thus bringing the price of crude right back down.  In that case, and assuming the numbers I suggested, Venezuela would suffer a 25% decline in oil revenue and the impact of Venezuela’s actions on the U.S. oil imports or the price of crude would be zero. 

Exxon, meanwhile, would not suffer any penalty regardless of the impacts of Chavez’ actions.  In fact, to the extent they caused the price of oil to rise, XOM would likely be a beneficiary.  

What if Chavez simply tries to sell that part of his oil now going to the U.S. into the international markets, perhaps to China?  The reality is that Venezuela depends on its Citgo refinery in Houston to process Venezuela’s heavy crude.  It’s oil would sell for less on the international market, which cannot easily process it.  And ultimately the oil would end up in U.S. markets anyway. 

So in the end,  Chavez is going to lose this fight with Exxon unless the $12 billion U.S. court verdict to freeze Venezuelan assets can be overturned on appeal.   Otherwise, the $12 billion asset freeze will have the effect of forcing Chavez to arbitrate his attempted expropriation (read "stealing") of XOM assets and ultimately to pay Exxon its due. 

I think there will be a lot of pressure on Chavez to chill out.  For one, the Saudis cannot be happy with this development.  They are already under pressure to produce more oil to avoid a global recession.  They do not want to produce more because their fields are fragile; forcing them to suddenly produce more could damage the fields.   The Saudis have seen other countries, like Iran, do that and they do not want to go that route.  The Saudis carry a fairly big stick in the oil world. 

Also, the leaders of all the poor importing countries must be asking him to cool off. Not to mention China, which is an increasingly large customer of Venezuela.  (The Russians must be really chuckling over all this as they quietly watch from the sidelines, hoping the worst will come to the worst.)

Finally, I suspect Chavez’ own party is counseling caution.   As described above, neither of his two possible actions is likely to benefit Venezuela.  His economy is becoming tenuous.   More items are becoming scarce in stores.  Venezuela is running out of time to play savior to the world via international charity and socialism; it is starting to need all the oil revenue it can get just to keep its own economy afloat.  It does not need a feckless vengeance against XOM.

My guess is that Chavez’ only immediate action will be to counter-sue Exxon in a U.S., or more likely, an international court.  He will issue a lot of bluster before the briefs are filed.  And by the time the verdict is reached, he will be off the hook to take any real action. 

Tags: energy investment

This entry was posted on Monday, February 11th, 2008 at 10:04 pm and is filed under Venezuela, oil supply. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.