05-04-07
Drunken sailors have a special place in the annals of folklore.
An old Irish shanty, or ship-working song, famously wonders what you can do with one. (Shave his belly with a rusty razor, for instance. Or throw him in the brig with the captain's daughter. The options are endless.)
Ex-presidential candidate Steve Forbes even likes to defend them in his conference speeches. When politicians are accused of spending money like drunken sailors, Forbes notes, it is a gross insult... to sailors. (The sailors are at least defending the country—and spending their own money.)
Our topic this week is a little less light-hearted: drunken dictators.
Recent actions of Hugo Chavez, Venezuela's power-drunk President, show that oil revenues can be more intoxicating than hard whiskey. Just as a fifth of Wild Turkey can severely impair one's judgment, a spigot of cash can make any two-bit dictator feel invincible.
Most recently, il leder maximo jr. has threatened to nationalize Venezuela's banks, as the AP reports:
"Private banks have to give priority to financing the industrial sectors of Venezuela at low cost," Chavez said. "If banks don't agree with this, it's better that they go, that they turn over the banks to me, that we nationalize them and get all the banks to work for the development of the country and not to speculate and produce huge profits."
It was not clear if Chavez was only referring to Venezuelan banks like Mercantil Servicios Financieros CA and others, or if he was aiming the threat at major international banks that do business in the country, such as Banco Santander Central Hispano SA and Citigroup Inc.
In an amusing twist, part of Chavez' rationale for the move was an accusation of "unscrupulous practices" on the part of the banks. How dare they focus on non-revolutionary banalities like shareholder value, risk management, and turning a profit! (Apparently things like blackmail, strong-arm tactics, and outright thievery do not count as unscrupulous in the Chavez dictionary.)
Banks are just the latest target in an ongoing nationalization spree. Chavez has an eye on the country's largest steel producer; the telecommunications and electricity industries are in the process of being swallowed; and, most disturbingly of all, Venezuela's last privately run oil fields have now been seized.
To make a long story short, Chavez recently decided that the state-run oil company, Petroleos de Venezuela SA (PDVSA), did not have a big enough piece of the action in the Orinoco oil sands. So he decided to take over.
The western oil companies, who spent billions of dollars on development, were given a choice by Chavez: lose the majority of your investment, or lose everything. Accept the new terms—in which PDVSA takes full control—or get out.
As far as Macro Musings is concerned, Chavez is not much different than Tony Montana, the memorable gangster played by Al Pacino in Scarface.
Tony Montana: Me, I want what's coming to me.
Manny: Oh, well... what's coming to you?
Tony Montana: The world, Chico, and everything in it.
First you get the money, then you get the power, then you get the [fill in the blank]. This is as true for dictators in oil-rich countries as it is for Miami-based cocaine dealers. Without the money, there is no true power. (Exploiting and terrorizing one's own people is small-time.) Chavez would be nothing, if not for the highly addictive substance he has to sell.
But once you've got the money, you can tell the world where to go. You can buy the love of your people by showering them with petrodollars. You can watch your economy rot from within and laugh it off. You can spend billions exporting your revolution to neighboring countries, even as your own infrastructure falls apart. You can tell the IMF and the World Bank to shove off. Best of all, you can thoroughly abuse your business partners and dictate everything on your own terms. If they show any sign of resistance (as Conoco Phillips dared for example), you can shake your fist and threaten to bury those cockaroaches. Chavez has done all these things.
This turn of events is bad news for the western oil majors, bad news for their shareholders, and bad news for Venezuelans. On a broader level, it is bad news for all of us.
As of this writing, global oil production is in the neighborhood of eighty-three to eighty-four million barrels per day. Global oil consumption is in the same ballpark. With supply and demand roughly matched, there is little slack in the system... and global oil consumption is steadily tracking higher with growth in the developing world. That makes it all the more unsettling when a drunken dictator takes over a large quantity of reserves.
According to the Wall Street Journal, the Chavez fixation on socialism "has turned PDVSA into a poverty-alleviation ministry more than an oil company, and left the company with little focus." Important positions within PDVSA are increasingly filled by political supporters, rather than capable geologists and engineers. Company resources are regularly siphoned off into voter-friendly, welfare-style projects. To top it all off, the blatant abuse of western oil companies has made them less willing to commit money, personnel and technological expertise to Venezuelan projects. The WSJ further notes that Venezuela's total oil output has fallen more than 20%, from 3.1 million to 2.4 million barrels per day, since Chavez came to power in 1999. The drop could have further to go.
Things would not be so bad if Petroleos de Venezuela SA were a special case… an outlier of bad policy and bad resource management. Sadly, it is the opposite. PDVSA is at the vanguard of an ugly trend. Charley Maxwell, a highly respected energy analyst with fifty years (!) of experience, believes that the incompetence of the NOCs (national oil companies) is a serious problem:
About three-quarters of the world's production of oil today is lifted by national oil companies. Companies like Saudi Aramco, Petrobras, the Iran national oil company, the Iraq national oil company, the national companies that operate in Algeria and Libya, produce conservatively 75% of the world supply. Most of them were nationalized in the '70s and early '80s and they have real structural problems today. They bring in a lot of money but most of it goes to support the national Treasuries and the various political constituencies that are in favor in the various countries, whether it's the army or a host of other bureaucratic ministries. In the end, in the political battle for budgetary support the national oil companies tend to be a constituency with little or no political influence. All in all, the national oil companies have been shortchanged and held on a poverty diet for a long time.
As time rolls on, the NOC's fortunes will wax as private players wane. Just as gas tanks have to be refilled from time to time, private oil companies have to replenish their reserves through exploration and development. As new discoveries get harder to find and more expensive to develop, private oil companies will be ever more at the mercy of the NOCs—leaving them exposed to political thugs like Hugo Chavez and Vladimir Putin.
Energy optimists believe the problem can be solved with a little rational negotiation. Just talk nicely to the Hugos and Vladimirs of the world, the optimists say, and everything will work out. Convince these sharp operators that it's in everyone's best interest for them to embrace shareholder capitalism and free market reform.
To which we say, good luck with that.
At the 10th annual Milken Global Conference a week or two ago, Steve Forbes (billionaire magazine publisher, ex-presidential candidate, defender of drunken sailors) and Boone Pickens (billionaire speculator, wildcatter, founder of Mesa Petroleum) took part in an hour-plus debate on energy and peak oil.
Forbes, ever the optimist, expressed hope that things like better monetary policy and expanded property rights could solve the world's energy issues. After a mention of Shell Oil's Sakhalin Island shakedown in Russia, this amusing exchange occurred.
PICKENS: Steve, are you telling me that we're going to get mineral rights in Russia?
FORBES: Hey, whoever would have thought... let's back up for a minute. Thirty years ago, could anyone have imagined the Berlin Wall falling, except for Ronald Reagan? Who would have imagined China being on a capitalist binge? India shucking off socialism? Stranger things have happened. It could happen in Russia.
PICKENS: Getting mineral rights in Russia is stranger than those other events.
Tongue in cheek as it may be, we fear Pickens is right, and that the statement applies to Venezuela too. Once you have the money and the power, why go back to being civil? The world needs what these men (Putin and Chavez) have, and that will not change any time soon. So why should they?
In the debate, Pickens expressed his belief that the demand side of the oil equation would soon outstrip supply, and that sharply higher prices would be the only cure. We essentially agree with this. In the long run, there is only one feasible direction for energy prices: up. This is true for multiple reasons, including a few unrelated to the habits of dictators or the realities of peak oil.
In the short run, though, remember that the United States is still the largest consumer of oil by far, at twenty-one million barrels per day. (China, in comparison, is a little under seven).
If the world is hit by a US-led recession this year—a distinct possibility—we could see oil consumption fall at the margins, which in turn would translate to a temporary fall in the price of crude. We could also see private oil companies get hit by a triple whammy: higher exploration and production costs, fewer finds, and aggressive NOCs renegotiating their existing deals.
None of that is guaranteed, however. And the outlook for drillers and oil service companies is distinctly bright. The world has no choice: more oil must be found, no matter the cost. Drilling must commence. Old oil fields must be reworked. New technology must be implemented. New equipment must be built, contracted, and deployed.
Either way, if we see oil approach $50 again as a result of economic slowdown, fickle energy investors could be tempted to throw out the baby with the bathwater. If they do, bargain prices on energy companies (and oil itself) in the short to medium term will translate to excellent opportunity in the longer term. Global growth may stall for a time, but, barring a catastrophe on par with nuclear war, will not be stopped. The same is true for oil's rise... so we may as well let Chavez have his moment.
