Wednesday, April 04, 2007

Gasoline Prices: Prepare for a Pain in the Wallet

Between the Iran Crisis and the impending nationalization (take over) of oil fields in Venezuela, world consumers should prepare for a deep pain the wallet.

Once recognized as a world leader among state-owned companies, PDVSA today is a troubled entity struggling to cope with responsibilities that far exceed merely pumping oil. Ch?vez taps the state-owned giant to finance an array of social programs at home and to cement his regional influence through subsidized oil exports to allies such as Cuba and Bolivia.[snip]

If an overtaxed PDVSA stumbles, the United States could feel the reverberations. In January, Venezuela, a leading member of the Organization of Petroleum Exporting Countries (OPEC), was the USA's fifth-largest source of imported oil, shipping 955,000 barrels of crude each day. That figure is 23% below the level of one year ago, reflecting the aging of Venezuela's oil fields and its compliance with OPEC production quotas.[anip]

Today, employment exceeds pre-strike levels, and Venezuela claims to be producing 3.3 million barrels of oil per day. But the International Energy Agency in Paris puts current production at 2.43 million barrels, and analysts say PDVSA continues to suffer the lingering effects of the political battles that consumed it in recent years.[snip]

Just to maintain current production, PDVSA must invest $3 billion annually in its aging fields, EIA says. But Ch?vez has drained PDVSA's coffers to fund generous health, education, literacy and food programs, leaving insufficient funds for its core operations.

The oil company's obligations to the poor appear to be mushrooming. PDVSA last week disclosed that it spent $13.3 billion last year on social programs, almost twice as much as in 2005 and more than it invests in its oil operations.

Incredibly, at a time of sky-high oil prices, the company's net income last year fell 26% to $4.8 billion on $101 billion in revenue, according to unaudited financial results published in Caracas. That's less profitable than other state-owned oil producers such as Norway's Statoil, which last year was twice as profitable as PDVSA in terms of net income as a percentage of revenue.[snip]

In addition, Venezuela is over stating it's current production. Venezuela says it is producing 3.3 million/bbl when the EIA puts it at 2.43 million (and falling if needed investment in the infrastructure is not made). Second, PDVSA is claiming that it will boost oil production to 5.8 mil/bbls per day by the end of 2008. Most experts say these projections "lack credibility". Third, Venezuela is claiming that it's exploration will boost it's "reserves" to 316 bil/bbls, replacing Saudi Arabia as number 1 in the world.

The real tell is here:

The new Orinoco contract terms, however, will raise the break-even price of the four projects from about $18 per barrel to $35, Sira says. And that change, coupled with the political risk associated with operating amid an uncharted socialist revolution, means the private oil companies are unlikely to make the additional investments Venezuela needs.

With the rise in price and the lack of investment that will most likely result in a decline in production, world oil prices will continue to rise and world consumers will feel a deep pain in their wallet. Particularly, consumers in the United States.

Publius Pundit notes that other Latin American nations are boosting their sales to the US: Brazil and Colombia. Publius says look for a possible re-alignment of security. This shift has been coming for awhile since the introduction of CAFTA that President Bush signed into law in 2005. Hugo Chavez has opposed CAFTA for several reasons. He opposes US "interference" in Central America. He may believe that Central America should become its own "sphere of influence" and support each other. He's made several attempts to bring other nations into his "sphere" including Bolivia and Argentine. He may also believe that trade agreements with other Central American countries, especially those with energy resources, will undercut Venezuela's trading power.

The key to continuing economic success in the US is a stable energy resource. Stable energy resources come from diversified investment and imports. The question is whether this diversification and improved production in these nations can offset the problems Venezuela, Iran and the continuing ME crisis are causing.

Your pain may vary.

***Heh. Even the Ayatollah of Iran knows that it's Economic Warfare among other things:

Ayatollah Khamenei called “psychological warfare, economic war, and countering the scientific development of Iranian people” the three main approaches of the enemies.[snip]

Pointing to the enemies’ “economic war” against the country, he said they want to put the people in a difficult economic situation but with the announcement of the Article 44 of the Constitution and a serious effort by government to implement the privatization plan a new opportunity has been opened for economic recovery in the country.

Pointing to economic threats against Iran for its nuclear program, he said, “the Iranian nation has developed and gained access to nuclear energy through such sanctions and therefore don’t scare this nation of sanctions.”

You think?

Everybody thinks.

(h/t Pajamas Media)

Apparently, the United States will attack Iran at 4 AM on April 6 (Good Friday). I don't believe it, but it is some interesting propaganda.

No comments: