Sympathy for killing the Golden Goose of oil

April 28, 2005

When I began this blog, my intention was to talk about the strange economic
system our country has. From subsidized gasoline prices to a belief in
“naive experimental economics” Venezuela is truly a laboratory for
silly economic experiments. Most people sometimes think that economics is a
straightforward science. Nothing further from the truth. There are so many
economic puzzles and paradoxes that whole books are devoted to their study such
as this
one by Krugman
or a very recent book called
Freakonomics
that looks at everyday economic issues that have no simple
answers. In fact, that is what economists do and spend their life studying.
That is why there are Economic Departments at Universities, attempting to
understand economic behavior.


All of this comes to mind, because in the last week or two I have had many
discussions with friends and colleagues who intuitively support the increased
taxes to the oil projects by the Chavez Government. Mind you, all of them are
anti-Chávez but somehow get a special sort of pleasure in thinking that Venezuela will
get more funds from these companies. The initial reactions are things like:
“:Oil prices are so high that they are making a bundle” or “
They are selling our oil, why shouldn’t we make more money” or “None
of them are going to leave look at all of the investments they have made”

The problem is that it is very easy to think that way at a time of high oil
prices, but what if they fall? I still remember the nervousness when the oil
opening was done of not knowing whether there would or not be interest in
paying for the rights to exploit these fields. Afterwards it was a huge success,
Venezuela
collected over US$ 2 billion at these auctions. But let us also recall that some
of the fields failed to even generate a single bid. I am sure today they would command
a premium.

One should not forget that these fields are the “marginal” fields,
that is, old fields whose production is marginal and not interesting enough for
PDVSA to invest in at the time, there were other priorities. Thus, those that
bid and won those fields took a risk, a calculated risk that has worked out
quite well due to the high oil prices of today.

But by increasing the tax rate from 32.5% to 50%, the Government is introducing
a number of variables into the system which are in dissonance with the rest of
the world. First of all, the decision was taken unilaterally. Second, the
increase in taxes places some fields into the really marginal area as evidence
by the fact that Japanese company Teikoku has stated that it will not make
money with such high income taxes. 50% is comparable to some countries, but
those that charge that much have low royalties. Venezuela wants to charge a high
income tax rate and royalties of at least 16.5% and typically higher. Venezuela does
not live on a vacuum. Yes, these companies are basically printing money today,
but what if prices drop? What if in the future Venezuela wants to attract new
capital? Will it be competitive?

The same is true of the heavy oil projects ion which PDVSA is a partner. These
projects were conceived with a royalty of 1% to be increased to 16.5% the day
the revenues exceeded the original investment in the projects. Why was this
done? Very simply because the other country in the world that has large heavy
crude reserves, Canada, charges 1% up to the same point. Last fall, the
Venezuelan Government increased it unilaterally to 16.5% before those benchmarks
were reached.

The problem is that Venezuela
would need dozens of these projects to grow. Venezuela needs to grow. It will be
hard now to attract new investments, but imagine if oil prices drop. Who will
come? How will Venezuela
grow under unfavorable conditions compared to other countries?

Most of
those I have argued with are educated and anti-Chavez, after a lengthy
discussion they sort of begin to see the point, but I am not sure they are
convinced. They support the new taxes because intuition tells them it is good
to tax those that are making money. But somehow, they want to tax the golden
goose for Venezuela
that the oil investments represent, rather than taxing others, like banks, that
do live in a vacuum, make a mint and pay little taxes, under the protectionist
eyes of the Government. If we kill the golden goose, what chance will we have
of getting the population out of poverty?

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