Blood For Oil

Joseph Kennedy II supports blood for oil.

In recent months, my TV has been bombarded with ads from Joe Kennedy promoting his Citizens Energy program, such as the following:

The heating oil distributed by Citizens Energy comes from Venezuela on a subsidized basis (which its been doing since 1979). Since Hugo Chavez took the reins of power in 1998, those donations, and the support of Kennedy’s charity, have had decidedly more political overtones.

“There is a lot of poverty in the U.S. and I don’t believe that reflects the American Way of Life. Many people die of cold in the winter. Many die of heat in the summer,” said Chavez on Sunday during his weekly TV show, explaining why Venezuela was interested in providing discounted heating oil to the U.S. poor.

“We could have an impact on seven to eight million persons,” Chavez added.

Meanwhile, Kennedy demagogues in the face mounting criticism for accepting the subsidized oil from Chavez, as Venezuela continues its decline into full-on dictatorship:

But as the charity run by Joseph P. Kennedy II formally received a third annual donation of heating oil yesterday from Venezuelan-owned Citgo Petroleum Corp., Kennedy was talking the language of dockworkers, not diplomats.

“Our government gets their panties in a knot much more than most Americans do about Hugo Chávez,” said Kennedy, founder of Citizens Energy, seeking to defuse possible criticism about taking $25 million of heating oil from Venezuela’s state-controlled petroleum monopoly. No other oil company Kennedy solicited was willing to make the donation, he said.

“I know there’s a lot of controversy about the fact that this oil ultimately comes from Citgo, from Venezuela and, yes, from Hugo Chávez. I’ll never be in the tank to Hugo Chávez, but I’ll tell you I wish we had a little more leadership in this country that has a concern for the poor and the disenfranchised as we do in other parts of the world,” said Kennedy, a former congressman and grandson of the late ambassador Joseph P. Kennedy, patriarch of the political clan that produced a president, senators, and representatives.

Would that Joe’s concern for the poor extended to those whom Chavez robs to pay for his political intrigue (via Instapundit):

Venezuelan President Hugo Chavez, in an effort to deal with food shortages nationwide, threatened today to expropriate farms and raised the price rice producers are permitted to charge.

[...]

It was at least the fourth time this year that Chavez’s government has threatened to use expropriation to deal with shortages of milk, rice, cooking oil and other price-controlled basic foods.

[...]

The government says the shortages are the result of smuggling of the food out of the country, hoarding by wholesalers who hope to force price increases and growing consumption as poor people get more disposable income.

Farm groups have repeatedly called on the government to remove price controls and criticized previous seizures of land and farm equipment as counterproductive.

How are food shortages and giving away oil connected? Well, by selling Venezuelan oil below cost to Americans, Chavez deprives his own farmers of the subsidies necessary to continue their production. In short, the price for rice, beans, milk, etc. is based partly on the costs of producing and bringing those items to market. If the price set by the state is too low for farmers to recoup their costs, they won’t produce enough food to meet demand (which, of course, rises as the price falls). In order to incentivize farmers to produce enough food to meet demand, they have to be assured of getting paid at least enough to cover their costs (and even this will not be enough). Accordingly, where state-mandated price is too low, farmers must be paid enough of a subsidy to make up the difference between what they could get at market and what they receive under the price-fix scheme. The money to pay that subsidy must come from somewhere, and in Venezuela it comes from oil. Ergo, when Chavez gives oil away, he is literally taking money out of the hands of farmers, who no longer make enough money to continue producing food, and he gives it to relatively better off Americans. The end result: Venezuela starves.

Matar La Gallina De Los Huevos De Oro

The other irony in Venezuela giving away oil to help America’s poor is that Chavez would do more for the downtrodden in both countries if he increased production, thus lowering the price that everyone pays, including the poor. Instead, for quite some time now Chavez has been trying to persuade OPEC to cut production in order to raise oil prices.

When President Hugo Chávez wraps up the meeting of OPEC’s 11 members in Caracas on Thursday [June 1, 2006] with an excursion for delegates to Canaima National Park, the site of the world’s tallest waterfall, it will be another chance to remind energy markets of his influence in helping drive oil prices above $70 a barrel.

[...]

It may seem like a distant memory in today’s context of more belligerent rhetoric, but Venezuela had plans to double its oil production to seven million barrels a day before Chávez was elected president in 1998. He reversed that policy while also persuading OPEC members that output reductions, not ambitious investment programs, were needed to increase oil revenue.

Few of Chávez’s critics within Venezuela argue that high oil prices, whether driven earlier by his push for production discipline within OPEC or by today’s robust demand for oil by China, India and the United States, have not increased Venezuela’s financial clout. Oil export revenue climbed by $4.1 billion in the first quarter from a year earlier, widening Venezuela’s current account surplus by $2.8 billion, to $7.5 billion, according to Barclays Capital.

Traditionally, Venezuela has called for output reductions and then cheated to grab market share, essentially asking everyone else to raise their prices while increasing production to take advantage of the increased price. This is one of the reasons that OPEC (like any cartel) is only moderately successful in regulating the market price for oil. But not many of OPEC’s members are terribly impressed with Chavez, and his calls for output reductions have mostly been ignored.

Furthermore, Venezuela’s oil production has been on the decline regardless of what the rest of OPEC does, since Chavez opted to use the state oil company (PDVSA) as a social welfare piggy bank, rather than treating it as a business. Instead of funneling the enormous profits realized by the oil trade in the past decade, Chavez has let the infrastructure rot, and given away the bounty to anyone he thinks he can buy support from (including Joe Kennedy). The end result? Venezuela’s production has declined from about 3.5 Million barrels/day in 1999 to somewhere around 2.4 Million barrels/day in 2007, a number which does not appear to be increasing anytime soon. Adding to the country’s production troubles, when Chavez picked a fight with foreign oil companies doing business in Venezuela, many stopped investing in infrastructure.

Meanwhile, Venezuela’s joint partners – companies such as ChevronTexaco, Royal Dutch Shell, and British Petroleum – are also perceptibly slowing production here. Last year, Chávez announced that these foreign companies, who had been invited into Venezuela in the 1990s to operate 32 marginal fields, were to have their contracts converted to joint ventures that give PDVSA majority stake and control of the board. With the exception of France’s Total and Italy’s ENI – who subsequently had their fields seized by PDVSA – all the companies accepted the new terms, including a sharp hike in the state’s royalty share.

Oil minister and PDVSA director Rafael Ramirez promised output in these fields would soon rise rapidly. But, in fact, the opposite has happened.

According to industry reports, output has steadily fallen in foreign-operated fields. The largest drop was at Royal Dutch Shell PLC’s (RDSA) Urdaneta field, where output fell to 43,400 barrels per day in March from 46,900 barrels per day in October.

“Governments have the right to want a bigger part of profits,” says Pietro Donatello Pitts, editor of Latin Petroleum. “It’s the same all over the world and the big companies are not surprised. Latin American rates were the best in the world, so this was bound to happen.”

But, while most companies, desperate for oil, won’t pull out, they will slow their rate of investment. “When the rent goes up, you become wary of new investment; it’s logical,” he says.

The way Chávez approached the change, says Ochoa – telling companies they were breaking the law – scared investors. “The anti-imperialist rhetoric that came along with the announcements was the mistake,” he says.

Some companies packed up and left for good:

Then, to complicate matters, Chávez mandated this year that the state own a majority stake in heavy-oil developments. Two major investors, ExxonMobil and ConocoPhillips, walked away, taking critical technology with them. Abandoning its Petrozuata and Hamaca heavy-oil ventures, plus an offshore project, cost Conoco $4.5 billion in impairment charges. The French oil corporation Total signed a deal earlier this month to help fill the void. Still, Venezuela’s output “is declining,” says Rafael Quiroz, an oil economist at Venezuela’s Central University. “If it dips below 2.1 m.b.d. … it could bankrupt the industry.”

To make matters even worse, Exxon-Mobil succeeded in freezing approximately $36 Billion in Venezuelan assets with court victories in the US, the UK and the Netherlands:

Exxon Mobil Corp. said Thursday it has won court orders in three nations freezing at least $36 billion in Venezuelan assets, part of a legal battle that the world’s biggest oil company is waging to recover what it argues is the true value of oilfield assets expropriated last year by Hugo Chavez’s government.

Exxon said a U.K. court granted its affiliate, Mobil Cerro Negro, an order that freezes $12 billion in assets belonging to Petroleos de Venezuela SA, or PDSVA. The order bars PDVSA from selling any worldwide assets with a value up to $12 billion…

Courts in the Netherlands and the Netherlands Antilles also issued orders prohibiting PDSVA from disposing of assets in their jurisdictions worth up to $12 billion, spokeswoman Margaret Ross said in an email.

In addition, a U.S. court in December froze more than $300 million of assets. A court hearing to confirm this order is slated for Feb 13.

Exxon’s victory prompted Chavez to threaten cutting off oil shipments to the US, but its a threat he never follows through on since we are one of the few places that can use Venezuela’s heavy crude. In fact, the US remains Venezuela’s top trading partner for oil.

Double, Double, Oil and Trouble

Chavez’s machinations to wield ever greater power within Venezuela, and increased influence without, are slowly grinding the common man into the ground. Venezuela is a massive welfare state, that increasingly forbids any sort of private initiative, and which is almost entirely funded by its oil revenues. But by funding social welfare programs instead of oil infrastructure, and by chasing out the foreign investment needed to keep the industry going, Chavez is killing the goose that laid the golden eggs. On top of all that, a sizable portion of the oil Venezuela does manage to produce is given away in an attempt to buy international influence. Such giveaways, championed by the likes of Joe Kennedy, take money directly out of the pockets of Venezuelans, and decreases their ability to support themselves. Without those petrodollars, the state does not have enough money to subsidize farmers in order to keep them producing food and selling it at the prices mandated by the government. In short, the oil under Chavez’s control represents the welfare of the nation, and he trades so much of it for his own self-aggrandizement that there is not enough left over to feed his own people.

Said another way, Joe Kennedy supports expending Venezuelan blood so that Americans can enjoy their oil. Is that a problem for anyone?