(PROGRESS) The Perils of Petrocracy
Is Venezuela’s president killing the goose that lays golden eggs?The Perils of Petrocracy
We condense this artice from the New York Times, November 4, 2007, with a factoid from the Edmonton Journal, Nov 7. The main author is a contributing writer for the NYT magazine.
by Tina Rosenberg
Oil deposits are being exhausted in wealthy countries -- the ones that exploited their oil first -- and are being found largely in developing countries. Finding a hole in the ground that spouts money can be one of the worst things to happen to a nation.
Oil exacerbates business as usual. Historically, the state is booty; to win government is to get access to a source of personal enrichment. The elite make money by soliciting politicians and bureaucrats rather than by making things and selling them.
Oil is a powerful lure:
* Even in the US, where there is a good chance of getting caught, oil companies have inflated their costs or illegally deducted costs and engaged in other machinations to minimize payouts.
* In Canada, the oil-rich province of Alberta, according to its own annual report could, since 2004, capture $1 billion more each year without harming the industry; critics say much more (Archie McLean, Edmonton Journal, Nov 7).
* In Russia, the officials who oversaw privatization sold off oil for maximum profit to themselves.
* In poor countries, Big Oil gets contracts with unfair advantages: e.g., Shell in Nigeria, Mobil in Kazakhstan, and Texaco in Ecuador.
With one or two exceptions, oil-dependent countries are poorer, more conflict-ridden and despotic. Between 1965 and 1998, the economies of OPEC members contracted by 1.3% a year. Oil states also ask their citizens for little in taxes. Where citizens pay little in taxes, they demand little in accountability. Those in power distribute oil money to stay in power.
In Venezuela, the disparity between the official exchange rate (2,150 bolívars to the dollar) and the black-market rate (6,200 bolívars at press time) has created a new class known as the Boliburgesía. Bankers, traders, anyone who works in finance or commerce, gets rich manipulating the exchange rates. Inflation is officially at 16% but is most likely higher.
Nationalization of natural resources can bolster a country’s psyche even if the management of those resources is a failure. On average, national oil companies are 65% as efficient as private ones. In 1997, Venezuela produced 3.3 million barrels per day of crude oil. Today, Pdvsa, Venezuela’s oil company, claims to extract the same amount, but independent sources, including OPEC, put Venezuela’s production at 2.4 million barrels a day last year.
When Venezuela’s oil was still in private hands, the government collected 80 cents of every dollar of oil exported. With nationalization the figure dropped, and by the early 1990s, the government was collecting roughly half that amount. Because wells run dry and machinery ages, oil companies everywhere must invest lots of money just to keep production steady, and to grow, they need even more. Without new investment, Pdvsa would lose 25% of its oil production every year.
Venezuelan President Hugo Chávez provides discounted or free oil to Central American and Caribbean countries, sending nearly 100,000 barrels a day to Cuba in exchange for doctors and Cuban expertise on state security. He has given millions in non-oil aid to various Latin American countries, much of it in the form of energy projects. His company Citgo gave $80 million in heating oil to poor residents of the South Bronx last winter. Between its domestic consumption and its use of oil to make friends overseas, Venezuela gives away or subsidizes a third of its production. Most of the rest is sold in the United States.
There is also the problem of contraband: Venezuela’s subsidized gasoline is smuggled out and sold at world-market prices in Colombia and the Caribbean.
Last year, Pdvsa’s payments to the state totaled more than $35 billion, counting taxes, royalties, and direct support for social programs. This is 35% of the company’s gross earnings.
In Bolivia, the royalty had been 18%. After popular protests, the previous government raised the rate to 50%. Last year President Morales raised it to 82% in some cases. While foreign investment in Bolivia’s natural-gas industry has fallen, it was not because of royalty rates. Companies don’t have a problem paying more rent and taxes. They do have a problem giving up control. Morales’s nationalization rhetoric made them skittish.
The problem isn’t who owns the resources, it’s what you get from the proceeds. So keep the oil private, watch it carefully, and tax the hell out of it. Better yet, raise royalties. As a slogan, “Negotiate a Better Royalty Rate!” doesn’t have the ring of “The Oil Is Ours!” But royalties are more straightforward and easier to collect.
Have companies compete with one another in open bidding for access. Angola and Libya have done this very successfully. Libya invited private companies to come back and is squeezing 90% of the profits out of them.
More important than whether to nationalize is to use the money wisely.
Labels: BOLIVIA, OIL, TAXATION, VENEZUELA
posted by MrK @ 8:52 PM
2 Comments:
I think this article has some great suggestion.
Raise royalties (tax on turnover) massively, so that it approaches the oil companies profit margin, which is 60% of turnover in the case of Equinox.
Turnover is much easier to monitor and as a consequence, tax.
And another thing. The mining companies are so dishonest, that the state should just tax turnover, so they can't pull any tricks by underdeclaring profits.
And it's their own fault.
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