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FÁTIMA REMIRO Minister Ramírez: The entire economic system is impacted by the price of energy, but we don’t see the need to hold an extraordinary OPEC meeting before September” “As everything in life, today’s prosperity will have harmful effects in the future, specially producing countries who solely become beneficiaries of the situation, indifferent to the effect of prices on the global economy” says Luis Pacheco, oil analyst.
Even though it is hard to make predictions regarding oil prices, the price increases of “black gold” seem keeps escalating. This tendency has been persistent for the past seven years. In May, the oil barrel was trading in New York at an average price of US$126 and the Venezuelan barrel was close to US$100 per barrel. But, is this price escalation really justified? Or does the market really fluctuate on the basis of speculation?. During a meeting with several international press agencies, on occasion of the 2nd World Heavy Oil Congress 2008, held in Canada, the Minister of Energy and Oil and president of PDVSA, Rafael Ramírez affirmed that even though the market is well supplied, there are several factors that influence the quick escalation of the commercial value of oil. “Currently, oil prices are impacted by the weakness of the dollar and the US economy, global geopolitical tensions, little refining capacity and financial speculation, among other variables, that are beyond market fundamentals”. The officer added that “there is speculation, purchase of papers and for those reasons, the recent OPEC Conference decided to maintain production. The entire global economic system has been impacted by energy prices, but we don’t see the need of holding an extraordinary OPEC meeting before September”, he insisted. There are no supply problems, it is a matter closely connected to the financial problems of the US economy ", says Ramírez. In his recent visit to Saudi Arabia, the largest exporter in the world, the US President, George W. Bush, renewed his aid request for more oil and asked for support to press OPEC into increasing production that will ultimately lower prices. Another vision. For Luis Pacheco, oil analyst, to explain what is happening in the oil market today “is a high risk situation”, because all predictions about the direction of prices have been wrong. To understand the situation of the oil market, he believes it is useful to understand the forces at play, “because, in spite of what we sometimes hear in Venezuela, economic laws have not been revoked”. Further, according to economic thought, the price increases we have witnessed these past seven years, should have a twofold effect. On the one hand, a lack of demand stimulation, resulting in consumption decrease and on the other hand, a supply increase as a result of larger investments by the producers. “None of the above is happening. The price increase has not resulted in a significant increase of new volumes or in a less demand. And it should be noted, and this is not insignificant, that the demand is being met, that is, the market is not reflecting any real supply problems”. The analyst believes that one of the main reasons is the slow growth of the production capacity of countries with significant reserves, which reflects what the industry calls surface risks. OPEC member countries, with a policy to restrict production to maintain high prices and “with their bags increasingly filled with oil derived funds”, feel that there is little or no urgency to expand their production capacity“. In addition, his fear that the effect of high prices finally has an incidence on demand does not encourage the oil group to invest in new capacity. “We can’t forget that what was once known as the production “mattress” was the result of an unexpected fall of demand which led to a price fall, a situation that still scares OPEC’s hierarchy, prisoners as they are of economies that are highly dependent on tax income”. Factors. The decline of oil fields in non OPEC countries, cost inflation and the shortage of qualified personnel also has a negative influence on the market perception regarding the security of future supply. At the same time, demand keeps expanding. It has been estimated that this year, there will be a consumption of 1,2 million barrels/day, to reach levels in excess of 87 million barrels/day. “Much of this demand continues sustained by the growth in China, India and the Middle East. And even if in most of the developed economies, prices result in less consumption, this will be compensated by the growth of developing countries” says Pacheco. In addition to these increasing factors, there are financial aspects derived from the weakening dollar and the shelter of large capitals in commodities markets: since 2002 the participation in oil futures has shown a 350% increase. In 2008, the weakness of the dollar pushed the recovery of the prices of raw materials, including oil. However, some analysts believe that the value recovery of the US Dollar does not necessarily imply that oil prices will finally yield. Apart from the fall of the dollar, Iraq’s continued instability, strikes in Nigeria, among others, there are examples of factors that affect oil quotations, but they definitely are events that should have already been assumed by the market. There are some experts who believe that they do not justify the price escalation of the past years. The US Energy Information Administration (EIA) has stated that the flow of investments towards the markets of raw materials and geopolitical tensions in a certain number of countries “such as Nigeria, Ira and Venezuela have contributed to the volatility of oil prices”. In this scenario, geopolitical factors not only play a role, they are potentiated by the existing perception of high risk and great uncertainty. “So, the market is an explosive mixture of realities and perceptions that reinforce each other but that can also generate dynamics in the opposite direction”. Pacheco states that “the objective reality is that prices have reached levels that, as of today, the market is willing to pay. To answer the question: Who is responsible for the price increase? One can answer as Lope de Vega did: “Fuenteovejuna, Señor / ¿Quién es Fuenteovejuna? / Todos a una, Señor” .(“Fuenteovejuna, Sir / Who is Fuenteovejuna? / All for one, Sir). And the OPEC? Some experts believe that if oil prices remain over US$ 100, as can be predicted, the existence of the OPEC could be threatened, since the group’s production increase seems to have a very limited influence in the market. With respect to this possibility, Pacheco responds that “one could argue, and in fact some spokespersons of the OPEC have, that price control is out of hand because the market is influenced by factors that are foreign to its scope of influence. Even though this has a significant element of truth, we should not forget that OPEC controls more than 75% of oil reserves and 40% of exports, and as we said before, its reticence/incapacity to increase capacity, has an important effect on price dynamics and on the oil market generally”. Further, OPEC’s position regarding the high prices of the last decade “makes it almost impossible for consumers not to perceive member countries as directly responsible for its increasingly higher energy costs, which will promote political speeches against the organization and the oil industry as a whole”. Nevertheless, the analyst considers that the real danger for OPEC lies in its failure to fully understand that these price dynamics will have long term effects on the industry’s sustainability. “As everything in life, today’s prosperity will have harmful effects in the future, specially producing countries who solely become beneficiaries of the situation, indifferent to the effect of prices on the global economy”. **Petrodollars. Venezuela is living an important oil boom. The 2008 national budget calculates a $35 barrel, against the price of the Venezuelan basket at an average of $100 in May, all of which evidences a $65 excess per each barrel placed in the international market. Luis Pacheco considers that high prices do not only result in higher income for the nation. “As a country with a port economy, the inflationary effect of the energy price increase will be reflected in the cost of imports. Such effect will also show up on the increase of costs to produce our own oil”. But apart from the extraordinary income flowing into the treasury chests, the national government has imposed a “special contribution” to oil companies settled in our country on the sudden profits generated by expensive oil. Contribution or tax? When introducing the new Law of Special Contribution on the Extraordinary Prices of the International Hydrocarbon Market before the National Assembly, Rafael Ramírez, Minister of Energy and Oil, informed that the Venezuelan State is expecting to receive approximately 9 billion US$, an amount that represents 760 million US$ a month and an average of 150 to 200 million US$ a week, to be directly destined to the National Development Fund (Fondo de Desarrollo Nacional (Fonden)). The new law consists of eight articles and intends to recover the extraordinary value of the oil barrel. When this price reaches over US$ 70, the State will recover 91,7% of the excess value and private corporations will recover 8,3%. When the price reaches US$100, the Nation shall receive 96,7% and private corporations will receive the remaining 3,3%. “We believe that collection will be a very efficient mechanism; it will be monthly and in foreign currency. There are no losses in its calculation. All barrels above US$70 generate extraordinary income for the Nation, in abundance” said Ramirez. “The difference between tax and special contribution is that the latter goes directly to Fonden and does not affect income taxes or collection by the Treasury. The mechanism allows the monthly collection of the special contribution and there is no need to wait for the close of the fiscal year” said Minister Ramírez. This modality has been criticized by some experts with respect to the authority of the Government to keep disposing of resources that it assures will be destined to social programs, specially a new mission… Regarding this measure, the chief officer stated that in view of the characteristics of this contributions, this is “an extraordinary and eventual income” that depends on the fluctuation of oil prices and that it is impossible to predict if it will be appropriate next year; therefore, it is beyond the considerations established for taxes. Ángel Rodríguez, president of the Energy and Mines commission for the National Assembly said that the calculation of this contribution is very simple, because there are only three variables to consider: quota, price and volume. “Both the Menpet and the hydrocarbon operators have sufficient knowledge of these three values. Therefore, the multiplication is transparent and leaves no place for doubts to any of the parties”. Unlike other taxes, this contribution will be collected by the Menpet, not by the Seniat. However, the Special Contribution Law does not expressly provide which source will be used to determine the price of the Brent crude oil barrel, to be used as reference to calculate the tax, or the manner in which Menpet is to make its monthly collection. There have also been doubts about the collection of taxes from mixed corporations that substituted operative agreements, because these corporations do not make direct exports of extracted barrels and article 1st of the specific rules specifically provides that the contribution is “payable by those who export or transport liquid hydrocarbons abroad”. Thus, the Ministry of Energy and Oil prepared a resolution that will gather the technical aspects of the tax to facilitate its application after its publication in the Official Gazette. For example, the average accumulated price of the Venezuelan basket between April 1 and April 29 was US$ 99,98, therefore, the Brent average for that period of time should have been around US$ 110 per barrel. This way, in May, oil companies settled in Venezuela will have to pay a 60% quota as provided by the special contribution law in the event the Brent price exceeds US$100 per barrel. Investment incentives. With respect to this new tax, Luis Pacheco, said. “It could be anticipated that in view of the unexpected price increase the state would want a bigger piece of the cake. However, there should always be a balance between the legitimate interests of the resource owners and the remuneration of invested capital, so that investment incentives can be maintained. I believe that, as in all other decisions made by the government in these times with respect to issues of private capital in the oil sector, this one will be accepted, though reluctantly, because of the investments made during the 1990s and early 2000s, during the “Oil Aperture”. Pacheco believes that it is no coincidence that there have not been any significant development projects in the gas, oil, carbon or petrochemical areas in the past 9 years,. “This is unequivocal evidence of how the wrong management decisions, whether for ideological or short term tax purposes, result in the loss of the competitive advantages granted to us by our natural resources as a lever for development”. “It seems incredible that after 70 years of oil, our sophistication in oil issues has regressed to a simplistic equation of tax participation: the more, the better. A sort of a Gomecista vision of the XXI century”.
PRICES OF VENEZUELAN OIL (AVERAGE) JANUARY: 84,53 US$ FEBRUARY: 87,48 US$ MARCH: 96,05 US$ APRIL: 100,14 US$ MAY (105,50) from May 5 to 9 THE AVERAGE OF NATIONAL CRUDE FOR THIS YEAR IS US$ 92,99 PER BARREL, UP TO MAY 9, 2008. Source: MENPET
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