Exxon vs. Chavez: More Smoke Than Fire
Last year, Hugo Chavez kicked off another term as Venezuela's president by announcing all oil majors in the lucrative Orinoco region would be forced to partner with PDVSA, Chavez's inept national oil company. This was a surprise to no one. The oil majors had already seen most of their Venezuelan holdings nationalized; the Orinoco announcement simply represented the coup de grace in a long series of legalized thefts.
Most companies meekly bowed to Chavez's decree, but Exxon has decided not to roll over so easily. On Feb 7th, it won a court injunction to have US$12 billion of PDVSA's assets - located abroad in the U.S, U.K and Netherlands - frozen. Chavez responded by halting all oil sales to Exxon, and shooting off his customary threat about cutting off oil exports to the U.S.
Sensing a bad situation could be made worse, the U.S. State Department piped up and announced the creation of "special envoys" to deal with countries that use their oil and gas resources for political means. While Exxon had a perfectly valid claim to compensation, Condoleezza's "special envoys" have reinforced the notion that U.S. oil companies are only pawns of U.S. imperialism, and should be dealt with as such.
"Thanks for politicizing an otherwise straightforward legal matter, Condi," I'm sure that's what Exxon executives are saying to each other in long sardonic drawls.
Of course, this sort of saber rattling excites futures markets, and over the last week, WTI crude futures have jumped from $88 to over $95.
ConocoPhillips, which also has Orinoco assets, plans to launch a similar legal battle, so in the short term, we wouldn't be surprised to see oil futures break the $100 barrier again. Still, the overall impact of these spats is often overstated. Chavez threatens to cut off oil exports to the U.S. at least once every year, and he's never followed through on it. By the numbers, Venezuela has been one of America's most steady and reliable suppliers of oil. Chavez funds a huge portion of his antics with oil money, and it would take some serious maneuvering to find another buyer for the 1.2 million barrels per day of heavy oil that PDVSA usually sends to America.
(Exxon, on the other hand, knows that it won't produce from its Orinoco assets. It might get a few billion in compensation, but more importantly, Exxon wants to send a message to other nations looking to claw back its corporate interests. "We will not go easily" is what they're hoping to convey.)
So then, why is it that every time Hugo Chavez opens his mouth, crude oil futures leap to attention and U.S. politicians wet themselves? It's an understandable question, and one that few investors have taken the time to understand.
The short answer would be: What if that blustery demagogue isn't bluffing this time?
The slightly longer answer revolves around the following three essential facts about the U.S. predicament:
- The U.S. produced less oil in 2006 than it did in 1950.
- Venezuelan oil accounts for 10% of total U.S. oil imports.
- Oil imports made up 40% of the U.S. trade deficit last year.
Let's take these one at a time.
U.S. oil production fits a curve that would make M. King Hubbert sigh and nod sagely. He was the first to trace the patterns of Peak Oil, and he saw this chart coming half a century ago.
The red line in this chart shows how - in a remarkably smooth trend - oil production grows, plateaus, and then heads into irreversible decline. You'll notice that the rate of decline matches almost exactly the early rate of growth. For something that is the result of a massive and complex industry composed of hundreds of independent players, it's surprisingly predictable. In 1956, Hubbert forecasted that U.S. oil production would peak in 1966-71, and in 1970 - when rates reached over 9.5 million bpd for the first and final time - he was proven right.
The U.S. now produces less oil than when Hubbert first made those forecasts. The major oil fields of Texas and Alaska are old, and as they age, it becomes increasingly difficult to squeeze out the remainder of their reserves. The bars in the graph above illustrate the change in U.S. oil production from huge growth to steady and continual decline. Since 1986, America has only had one year of growth in oil production rates, proof that the momentum is clearly to the downside. In a few decades, U.S. oil production could be negligible. There are all sorts of new fuel sources - such as ethanol and the oil shales - being held up as the messiahs of energy independence and security. But none of these can be developed fast enough to offset the stunningly rapid decline of U.S. oil production.
I'm sure you've heard plenty about the problems with U.S. oil dependency already. Even Dubya realizes that America is addicted to foreign oil. But what you may not yet have examined is the extent of this addiction, and how it has been intensifying.
Not since the energy crisis of the late 1970s has so much of American GDP been devoted to buying oil from abroad. That's why markets jump every time Chavez opens his mouth. Even a slight reduction in the sources of supply available to the U.S. could cause a major spike in crude prices.
If you zoom in on how this trend has manifested itself in 2007, you see that crude's last run from $60 in January 2007 to over $90 in November 2007 has pushed oil imports as a percentage of GDP even higher. Data for December 2007 on oil import prices has yet to be released, but we know that spot prices kept moving higher, so you can expect this trend is still in full motion.
In 1980, oil imports as a percentage of GDP reached 2.24%. In October 2007, they climbed to over 2% for the first time in 25 years, and by the end of November 2007, they sat at 2.15%. It's very likely that oil imports as a percentage of GDP reached a new record high in either December 2007 or January 2008, although we'll have to wait for the official data to confirm this.
One thing we already know for certain is that the United States had an oil trade deficit of $293.5 billion in 2007, with prices for imported oil averaging $64.27 per barrel. If 2008 continues with oil prices in the range we've seen so far, that average price per barrel, and thus oil imports' share of GDP, will keep increasing, creating a huge strain on the U.S. economy.
As Exxon, the U.S. government and Chavez continue these shots across the bow, there's always the danger that one of them may hit. Brinkmanship is a fine art, and some of the players involved are not - shall we say - artists of diplomacy.
Chris Gilpin is a senior editor of the Casey Energy Speculator (CES), a monthly newsletter dedicated to uncovering deeply undervalued investment opportunities in oil, natural gas, uranium and alternative energy. The CES specializes in the unbiased investigation of small-cap energy companies with the very real potential to offer 100% or better returns over a short time horizon.
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