Cheap gasoline in Venezuela --but at a cost

Even the Guardian knows that there ain't no such thing as a free lunch and reports it here:

So while oil-importing nations appeal for relief (George Bush called in vain this week on Saudi Arabia to increase its output so as to bear down on prices), major exporters such as Venezuela bask in their immunity from the petroinflationary pain. Venezuela has the seventh-largest oil reserves in the world, and petrol is lavishly subsidised.

"If it gives us nothing else, at least the government lets us have our own petrol this cheap," said Padron, 44, revving her engine. "It may be crazy and have no logic, but I'm not complaining. Nobody is."

That is the problem. The subsidy warps the economy, drains government coffers, rips off the poor, pollutes the air and paralyses cities with traffic jams. Yet it is hugely popular and the government dares not end the insanity.

The phenomenon is common to oil producers such as Burma, Indonesia, Iran and Nigeria: their people feel cheap petrol is a birthright and tend to revolt if the price rises.

The era of $100 barrels has magnified the distortion, because governments are obliged to forfeit windfall revenues to divert ever-greater quantities of oil to domestic markets.

"It is difficult to go from this system to something more rational," said Mark Weisbrot, an economist with the Washington-based Centre for Economic and Policy Research. "People think they know how cheap the oil is, and that it is theirs. It is very deep in the culture."

Venezuela, a major oil producer which introduced the subsidy as a populist measure in the 1940s, is probably the most extreme case of a gas-guzzling dream becoming a policy nightmare.

A lack of rigs and other problems has reduced the output of the state oil company, Petróleos de Venezuela, just as domestic consumption has soared to 780,000 barrels a day. The subsidy costs the government around £4.5bn annually. It also encourages a brisk trade in contraband petrol across the Colombian border, where prices are higher.

A consumer boom has doubled the number of cars on Venezuela's roads, with 500,000 sold last year alone. "None of the advertisements talk about fuel efficiency," said Daniel Guerra, the manager of a Ferrari dealership in Caracas. "People have been spoiled for so long with the subsidy that when it comes time for a reality check they don't understand."

As a result, streets are filled with new SUVs, including Humvees, as well as wheezing 70s-era sedans, aggravating smog and gridlock.

Some economists call the subsidy "Hood Robin", because it steals from the poor and gives to the rich by favouring relatively wealthy car owners above the poor who rely on public transport.

President Hugo Chávez railed against it last year, going so far as to label the inequity "disgusting". He also chided western countries for consuming so much oil and depleting a non-renewable resource. The self-styled revolutionary socialist, however, has not followed through on his promise to raise prices at home.

Oil rig shortage? Sure, those greedy capitalist oil guys are leery of the big V:

Faced with a declining rig fleet in a tight global market for oil services, Venezuela is preparing a fresh licensing round to attract new drilling equipment and renew contracts for those on the ground, industry executives say.

But Petroleos de Venezuela S.A. (PVZ.YY) is increasingly slow about paying its contractors and insists on paying in a local currency that is difficult to convert into dollars, dampening interest in projects with the state oil firm.

PdVSA is still looking to hire a rig for the offshore Mariscal Sucre gas project, where the company first hoped to start drilling in mid-2006. Meantime, foreign operators are neck-deep in a contract overhaul, delaying some work at privately run fields until at least the second half of the year.

Contrary to PdVSA's intentions, industry watchers expect drilling activity to slow down this year, denting the country's production capacity at a time of rising costs at the state firm.

"I don't think you'll see a lot of new capital deployed down there by the operators, nor the service companies," Halliburton (KRY) Chief Financial Officer Christopher Gaut said in a Thursday web cast.

Halliburton provides drilling and waste management services to oil companies in Venezuela. Gaut said currency restrictions are a "constant struggle," and described other Latin American oil producers Brazil, Argentina and Mexico as better markets for growth.

This environment could jeopardize PdVSA's long-term plans to double production by 2012.

"PdVSA is running around trying to make sure rigs don't leave the country," said one industry executive. "We've got a downward trend since July that they are starting to notice."

Venezuela's oil rig fleet peaked at 76 in mid-2006, the highest number in operation since 1998, according to data by Baker Hughes, an oil services firm. Since last July, 13 oil have gone out of service, two last month. Active natural gas rigs also fell to 10 from 12 over the period.
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President Hugo Chavez's socialist policies are partly to blame for declining activity. Last year, PdVSA forced service companies to include good works, such as building schools and clinics in impoverished oil production zones, as requirements for new contracts. The increased costs contributed to a number of null and void bidding rounds last year.

"There are no win-win deals out there," said an executive at a drilling company.

Even more so since there was a threat to "nationalize" rigs operated by outside oil firms:

Venezuela's threats to "nationalize" 18 oil rigs currently operated by outside firms sent a shock wave through the local oil services industry at a time these services are in high demand around the globe.

Executives at drilling firms said foreign rig operators could easily try and move equipment to other markets if the business environment worsens, hurting the country's ability to produce oil.

At the same time, Venezuela may be forced to lean on foreign oil service firms to keep the oil flowing until it follows through on plans to begin assembling rigs in country to help spawn a domestic oil services industry.

That means Venezuela may exempt from its nationalization drive some oil service company activities on which the country depends.

"This is something that took us all by surprise," said an executive at a U.S. firm that has several rigs operating in Venezuela. "Rigs will move to other contracts elsewhere in the world."

The International Energy Agency claims Venezuelan output has fallen to 2.35 million barrels a day, a million barrels a day less than what PdVSA claims it is producing. Ironically, Ramirez's comments come at a time PdVSA is putting together a tender for up to 70 rigs, a plan observers said was not feasible even before Ramirez's rhetoric over the weekend.

"This is obviously impossible. There aren't that many rigs available in the whole world," said another Venezuela-based drilling executive.

Of course, dwindling oil production hasn't slowed Chavez's profligate military spending:

The top U.S. military officer said on Thursday he was concerned by Venezuelan President Hugo Chavez's purchases of military equipment, saying they could harm efforts to build greater stability in Latin America.
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A former head of the U.S. Navy who took on the top U.S. military post October, Mullen mentioned both high-performance planes and submarines as items of particular concern.

"To the degree that those capabilities come into theater, they certainly are of great concern not just to Colombia... but to the region and in fact very much to the United States," he told reporters in Bogota.

Venezuela purchased 24 Sukhoi fighter jets and 100,000 Kalashnikov AK-103 assault rifles from Russia in 2006 and has talked about purchasing submarines, equipment Chavez says is needed to protect Venezuela from any "imperialist" attack.

I bet he sleeps with a night light, too, to keep the "imperialists" away.