Right now, Hugo Chavez reminds me of that famous quote about US foriegn policy: "You never make simple stupid moves, only complex stupid moves that make the rest of us wonder if we might be missing something." As threatened, Petroleos de Venezuela SA, the Venezuelan state-owned oil company better known as PDVSA (pronounced "PedeVEHsa"), has cut off supplies of oil to ExxonMobil. This is in retaliation for ExxonMobil's legal victory regarding the nationalization of its Venezuelan fields last year, which authorized the company to seize Venezuelan assets abroad.
This move is all kinds of stupid.
1. It's too small--50,000 barrels a day is not going to scare anyone.2. Oil is a fungible commodity, which is why the Arab embargo of America failed so miserably. If Venezuela sells the oil to someone else, there's nothing stopping them from turning around and selling it to the US. Unless Venezuela pulls the crude off the market entirely, this will at best achieve a minor reshuffling of suppliers to American refineries.
3. Venezuela is further poisoning its relations with the only country that is set up to refine its low-quality, extremely sulphurous crude.
4. If Venezuela does pull the oil off the market, the IEA and the US will simply open up their rather lavishly stocked strategic reserves. They can almost certainly dribble out 50,000 barrels a day for longer than Chavez can stay in power with falling oil revenues.
It's probably good political theater at home--but for the first time, Venezuelans are going to have to pay actual cash money for Chavez's anti-US theatrics. It will be interesting to see what their demand curve looks like, now that his tactics have an explicit price.
You may be right there. I think, though, that point 2 kind of undercuts all of the other points. Do you really think no one is going to buy it? Also, you're equating ExxonMobil with the United States, which I think is very problematic.
On a related note, I've been waiting for you to demonstrate intellectual integrity by writing a post that supports a position that isn't in lockstep with your political ideology. Imagine if, for example, there was a move by Chavez or some other foreign leader that was an affront to a global corporation that you actually supported.... Well. I'll keep waiting.
Points 2 and 3 are contradictory.
Dearieme,
Anyone who buys these barrels would have to send them to the U.S. to be reined. But the fact is anyone can buy those barrels. Just saying that X cannot buy them doesn't remove them from the market.
Dearieme, they are contradictory; the point is that there is literally no way that the boycott can win. Either someone buys the oil and ships it to the US (likely outcome) or Venezuela hurts themselves more than they hurt us.
Why put the quote in about simple and complex stupid moves? I don't get it. Are you saying that Hugo Chavez is making a simple stupid move by not selling oil to Exxon, or that he is making a complex stupid move which makes the rest of us wonder if we're missing something?
I don't know if not selling oil to Exxon is stupid or not, but it doesn't seem to me to be particularly complex.
I don't see how the quote fits in with the rest of your post.
Megan's philosophy is often concerned with not violating the dictates of common sense. I am always sorely disappointed when she goes against this (which she does on occasion, but not often).
Who says he has to cut it for more than a couple of days? All he has to do is have some progress in negotiations that he can sell as a victory against the US
"Who says he has to cut it for more than a couple of days? All he has to do is have some progress in negotiations that he can sell as a victory against the US"
You don't think XOM anticipated the cutoff when they successfully got PDVSA's assets frozen?
In the long run, this may actually bring oil prices down. Jingoistic resource nationalism of the sort practiced by Chavez has been a factor behind high oil prices, because the market knows that state oil companies like PDVSA are less able to develop their reserves without foreign investment. If this leads to a cresting in the trend of Chavez-style resource nationalism, it would mean more investment, more exploration, and eventually more supply, leading to lower prices. That will take years though, which is why I am still bullish on oil.
Freddie wrote: On a related note, I've been waiting for you to demonstrate intellectual integrity by writing a post that supports a position that isn't in lockstep with your political ideology. Imagine if, for example, there was a move by Chavez or some other foreign leader that was an affront to a global corporation that you actually supported.... Well. I'll keep waiting.
Interestingly enough, Freddie, the rest of us commentariat have been waiting for you to demonstrate intellectual integrity by writing a post response that supports a position that isn't lockstep with your political ideology.
An honest analysis of the risks and problems associated with moral hazard, bureacratic inefficiency, and financing in a state-run universal healthcare system of the kind you, uh, morally imperatively favor would be a good start, but what the hey -- pick any topic you like. I'll keep waiting.
Children: Points 2 and 3 do not contradict. The fact that Exxon will get the oil some other way does not contradict that Chavez has shown his williness to try to hurt the US and Exxon, ineffective as it may be.
Let's try an analogy. Say theres a bunch of street vendors that all sell mostly the same stuff. But then, one of them decides that he doesn't like tall unmarried female economists. So he says, "I will cut off fried broccoli supply to Megan_McArdle. If she comes to my stand, I'll tell her to go away because I don't serve her type."
In response, a commentator might say:
2) That's a stupid move. Megan_McArdle can just get the fried broccoli from the vendor right next to him, or any of the thousands of others.
3) This will further poison relations with Megan_McArdle, by being so rude to her.
Is that contradictory? Nope.
Try again, kids.
I heard yesterday that Chavez's move was responsible for running up the price of oil. Obviously Chavez benefits from this if he can go on selling his oil to Exxon via some third party.
Chavez lives in a fantasy-land, as exemplified by this tidbit from the linked article:
This is like something out of a Stalinist 5-Year Plan. Nevermind that greenfield refineries take years upon years to plan, build, and get operating. Also the fact that PDVSA is using its money for social welfare instead of capital infrastructure, means that Chavez is either counting on $500/barrel oil soon, or will have to cut the welfare programs he loves so much, or will have to resort to more asset forfeiture and other assorted chicanery to finance such megaprojects.
Venezuelans are flippin' retarded for continuing to put up with this dope.
Dearieme had a point that *I* wanted to make, but as Megan pointed out in her defense, "contradictory" is not the perfect word for it.
In a way they are complementary - rather than being ADDITIVE points like the others, they rather make one COMPLETE point when taken together. They probably should have been points 2(a) and 2(b) :-)
The "rudeness" was not the vital part of point 3, contrary to person.
2. Oil is a fungible commodity, which is why the Arab embargo of America failed so miserably.
The Arab oil embargo did fail, but not miserably. I remember it. It also was a good demonstration of the imperfect nature of the fungibility of oil. The degree to which the embargo can be effective is dependent on how much of the market is supplied by the embargoer and how much is consumed by the target. OPEC, unlike Venezuela, controlled a lot of oil. With the market dominated by the embargoer and target, both sides get hurt, and third parties prosper. In addition, many members of OPEC were flexible in their financial situation. They could keep oil off the market completely. The financial harm to them was equal to that of the target, but less debilitating.
It's surprising that you would post this on the same page as a lamentation about the US automobile industry's problems. It inflicted a bleeding wound on them. They were probably headed for problems anyway, but the embargo sped things up.
The failure was in the goals OPEC set. We were not going to abandon Israel. The fact that we supply Saudi Arabia with such high-tech weaponry is clear evidence that manipulations of the oil supply can be effective - that oil is not completely fungible. We do much of what the Saudis ask us because they are the one supplier most capable of effectively manipulating the market. In turn, the Saudis have a better appreciation of what can and can not be asked.
All that being said, Venezuela is in no position to try anything like this. They don't have the volume or the financial flexibility. At best, it might work as domestic political theater.
I just had a conversation with my husband about this, he's a economic research consultant who focuses on refineries. Some of his thoughts on the matter:
1) The US is not the only place with refineries capable of handling Venzuela's heavy, sour crude. They could ship it off to Rotterdam, for example, to get processed. It would cost more and be a more complicated process than what they're used to, but they could do it.
2) Exxon Mobil probably shot themselves in the foot with this move. Venezuela has already moved many of their assets to safe places, so Exxon won't get what they're seeking. Plus they've probably just scared some developing oil producing countries off from working with them. Oil-producing countries like to be secure in the knowledge that they can tell oil companies to piss off. According to my husband, Exxon should have reacted like Shell did when Russia pulled a similar move. Accept the slap in the face knowing that in the long term it'll keep them in the game.
3) Chavez will not be able to build his own refineries in Nicaragua and Ecuador without it being a joint venture with a company that actually knows what it's doing, like Indian Oil Corporation. Ecuador and Nicaragua have very cheap and low-skilled labor, so they won't be any help. And all of PDVSA'a knowledgeable workforce has left to work for Pemex or Petrobras. Chavez, if he get's this idea beyond the bluster stage, will pay through the nose because he's not the only one trying to increase refining capacity right now.
Sign... The Latin American left needs more Lulas and fewer (or dare I dream, no) Hugo Chavezs. Seriously, he's running his country into the ground in order to score cheap political points. Remember his silly speech at the UN where he all but called Bush the Devil? It may have given him a nice home movie, but it cost his country a seat on the Security Council. Awesome. Nice move, jackass.
For me this isn't some abstract point - most of my family still lives in Argentina, and there is a real fight going on whether a new pro-free trade progressive tradition in the model of Brazil will win out, or the old style anti-trade crap disguised as anti-colonialism will remain.
Christina, the whole point of a court order freezing assets is to prevent them from being moved to safe places. If they'd already been moved, then they couldn't be frozen. Since they've been frozen, they can't be moved.
Doesn't PDVSA own Citgo? Why doesn't Exxon-Mobil just ask U.S. courts to start handing over slices of Citgo worth up to $12 billion, instead of going to Scotland and other faraway places? Surely that would solve the asset-hiding problem. How's Chavez going to move Citgo out of legal range of Exxon-Mobil?
They can almost certainly dribble out 50,000 barrels a day for longer than Chavez can stay in power with falling oil revenues.
I wouldn't bet much on Chavez being driven from power by economic frustration. Hasn't happened to many populist dictators; Mugabe comes to mind. Rulers with substantial popular following and control over the military can usually keep their boots on opponents' necks indefinitely. Venezuela may be different because it's richer and better educated, but it may not.
Second, as you point out, oil is fungible. If Chavez doesn't sell to Exxon, he sells to someone else. He may get a lower price for the oil if it has to be shipped to Rotterdam rather than Louisiana, but Exxon will have to pay a higher price for that oil if it comes through a middleman (and that middleman risks getting cutting off if Venezuela finds out). I'm not sure why one would think that Exxon has deeper pockets and can ride this out more easily than the nation of Venezuela; Russia and China have successfully intimidated Shell and BP.
I think we're overestimating the fungibility of oil here. Petroleum is actually remarkably cheap and heavy - even at $100/bbl, it costs around 30 cents per pound. This is why the US buys a lot of oil from Venezuela, even though it is harder to refine and harder to get out of the ground than the Saudi stuff.
We're not talking diamonds and processors here - this stuff has a significant cost to transport.
Fortunately, Chavez is much less equipped to bear this cost than we are. America buys oil from many places, has enough money to go looking elsewhere, and is wealthy enough to absorb significantly higher oil prices.
In the long run, America is also the most technologically innovative nation (arguably producing more innovation than all other nations combined).
America can come up with substitutes for imported oil faster than Chavez can come up with a replacement for innovative and wealthy first-world customers.
This is the key to the problem.
When faced with high oil costs, Europeans have simply driven less, driven smaller cars, and accepted the social and economic consequences of low mobility.
When faced with merely moderate costs, Americans are now buying hybrids, funding ethanol and biodiesel, developing plug-in hybrids, and so on. Many (perhaps most) of these are stupid ideas, but it's a problem we will solve sooner or later.
Uhm, he'll sell it all to China?
Uhm, he'll sell it all to China?
Selling it to China would be non-trivial for three reasons.
1: Panamax is small. Going around is expensive
2: China is far
3: China doesn't have the world's greatest refining capacity.
Chances are, he'll sell it to Europe. It's closer, doesn't have a landmass in the way, and has better refining capacity.
This just means that he makes less profit and our oil costs a bit more. He's playing economic chicken with a country orders of magnitude larger, and can't win.
There are all kinds of ways to defeat a Western democracy - the KGB and Al Qaeda have done quite well given their comparatively smaller resources. Chavez is not picking one of those ways.
"I'm not sure why one would think that Exxon has deeper pockets and can ride this out more easily than the nation of Venezuela"
Exxon has a value higher than Venezuela's GDP. Exxon has 3 times as much cash on hand as Venezuela in addition Venezuela has debt equal to 27% of its GDP. Exxon's revenues exceed expenditures by tens of billions per year while Venezuela does about $5 billion a year in deficit spending. Venezuela's one advantage is that it is a sovereign entity.
Madam,
I think that EXXON-MOBIL earnings are, already, a political topic at Obama´s campaign.
Sorry but things are not as you wish. My regards to every cons in your beautiful country.
Christina, the whole point of a court order freezing assets is to prevent them from being moved to safe places. If they'd already been moved, then they couldn't be frozen. Since they've been frozen, they can't be moved.
I had the same reaction to what my husband told me, but he said that Venezuela wasn't caught by surprise by the court-order and had already moved a significant amount of money prior to it going into effect.
I'm not a lawyer, but I'm not sure the point of the court order is simply to freeze assets. Venezuela is no North Korea from which it is difficult to get money in case of victory in the underlying arbitration case.
Rather, it seems to me that Exxon's strategy - and victory - is that (1) it obtains an asset freeze order much higher than the amounts in dispute, on the argument "just in case", (2) it then can use that freeze order to influence the abritration, in essence saying, "look, this is the sum in dispute, the London court said so."
If I'm totally wrong, I plead overt bias: Exxon's behavior these past years has been so vile that I find it hard to believe they can be fair or honest, anywhere, anytime.
Correct me if I'm wrong, but selling the oil to a middleman doesn't mean that it has to be shipped anywhere before arriving in the US.
Someone will buy the oil, immediately sell it to Exxon while skimming a bit o' profit.
The entire transaction will cost a couple seconds of processing time and a cent or two per barrel (at most).
Political theater - no more.
Asset freezes can also be used as negotiating leverage later on. They are, after all, a court order and an asset freeze in one jurisdiction can be enforced in another jurisdiction. Not all jurisdictions are willing to enforce these things, but the hold-outs are fewer and fewer as a result of international organizations such as the FATF. Big powerful countries such as Russia and China, of course, can just drag their feet, but the asset freeze remains an obstacle to any future diplomatic negotiations between countries, since nations like to tidy those things up beforehand -- and, as Hans B points out, the freeze puts a number to the dispute that a simple expropriation does not. Exxon Mobil is playing hardball with Venezuela because it can.
Two further points to consider. The option to ship the crude to Rotterdam for refining is a very limited one. If Rotterdam does have a refinery that can process the high-sulfur crude, it probably already has a steady supply from another supplier. Why would the Rotterdam refinery blow off that supplier to accommodate Venezuela? More than likely Venezuela is that supplier. And Venezuela will eat the higher shipping costs.
The other point to consider is what Exxon is saying about the availability of technical expertise and the terms under which it will be made available. To this point a number of governments have decided that they can change deal terms without cost. Exxon is saying that if you want our technical expertise you will always have to pay for it. And one can expect Exxon to make that point in every future deal that gets made. The one thing that the big commercial producers have is a large share of the technical expertise. And one can be assured that few,if any, of the PDVSA folks who left or were thrown out are unemployed. I suspect that the big 5 grabbed as many as they could themselves!