COMMODITIES: Venezuela Terms New Agreed Oil Cutback a Success

By Estrella Gutiérrez Reprint | | Print |

Estrella Gutierrez

CARACAS, Mar 16 1999 (IPS) - Without production having been cut yet by a single barrel, oil prices have already risen around 20 percent due to the announcement of a new cutback, Venezuelan Energy Minister Ali Rodriguez remarked Tuesday.

The energy minister of Venezuela, the world’s second top exporter of oil, said prices would have fallen by up to four dollars below Tuesday’s spot prices if the situation on the market had remained unchanged.

At a news briefing, Rodriguez refused “to confirm or deny” any precise figure as to the voluntary supply cuts agreed last Friday in the Hague.

He stressed that a commitment had been made to release no details until the Mar 23 special conference of the 11 members of the Organisation of Petroleum Exporting Countries (OPEC) in Vienna.

Venezuela was one of the five oil-producing countries that participated in the ministerial meeting in the Hague, along with fellow OPEC members Saudi Arabia, Algeria and Iran, and independent producer Mexico.

Reports out of London indicated that as of next month, OPEC should reduce supply by 1,718 million barrels per day (bpd). Non- OPEC producers would account for the rest of the total cutback of 2,004 million bpd.

From March to July 1998, OPEC agreed on a total cutback of 2.6 million bpd, while independent producers agreed to cut another 600,000 bpd.

But the organisation only lived up to 75 percent of that commitment. In February, collective production stood above 28 million bpd, according to independent sources, while the upper limit as of July was set at 26.054 million bpd.

Deputy Minister of Energy Alvaro Silva said “two million barrels a day should be withdrawn from the market.” He added that an immediate rise was seen on the speculative market, while on the market of real transactions the effect would be felt more clearly as the enormous stockpiles that had built up were reduced.

Silva said that while a general understanding on the amount to be withdrawn had been reached, the details of each OPEC member’s quota would be finetuned in Vienna.

The deputy minister pointed out that the agreement reached in the Hague demonstrated to all actors in the oil business that producing countries were determined “to balance the market, and to do so through an understanding, and in no case by means of a price war.”

The spot price of Venezuela’s export cocktail stood above 10.60 dollars Tuesday, three dollars up from its February price.

“If the situation on the market had remained unchanged, particularly this quarter, oil prices would have plunged even below seven dollars,” commented Minister Rodriguez.

He pointed out that Venezuela refined 1.3 million bpd of the approximately 2.8 million bpd it currently produced.

“That would mean the real price of crude would have dropped below six dollars, a level that would have forced a large number of wells to close because they would no longer have covered costs – which would have put us in an even more critical situation than at present,” Rodriguez maintained.

He added that the situation of producers in the United States, where 45,000 workers had to be dismissed, was even more desperate.

Rodriguez admitted that in Venezuela, the social impact of the agreed reduction of 535,000 bpd had been extremely tough, but he ensured that without the new cut, the situation would get even worse.

Venezuela’s representatives went to the Hague determined not to cut one single 159-litre barrel more, due to the tens of thousands of dismissals directly or indirectly caused by the slump in oil activity since last July.

The situation has worsened since February, when the new government of Hugo Chavez decided to stop complying with Venezuela’s cutback quota, which it was still 125,000 bpd short of meeting.

“Without vigorous actions like those being taken, prices would have fallen sharply, and in the case of Venezuela, no less than one-third of the wells would have had to close, which is expensive,” said Rodriguez.

Private oil traders operating here described the agreement as “good business” Tuesday, saying Venezuela would obtain more benefits by shoring up prices than by defending volumes.

The reports out of London say Venezuela will reportedly be asked to cover only four percent of the new overall cutback, some 125,000 bpd, due to the social impact of the measure and the fact that last time, Venezuela undertook the largest relative cut – 15 percent of the total.

But sources close to the government said Venezuela’s cut would be even smaller, and that it had been asked to comply with a total cutback of 585,000 bpd with respect to a year ago, when it was extracting 2.37 million bpd.

President Chavez said Venezuela had “committed itself to expanding the cutback somewhat, but not much due to the internal situation.” The country is aware, however, that it is indispensable to shore up prices because “if the barrel plunges any further, we won’t know what to do.”

Oil covers 40 percent of the government’s budget and accounts for more than 70 percent of foreign exchange earnings in Venezuela, where revenues crashed seven billion dollars in 1998, plunging the country into recession and driving unemployment up even further.

It is calculated that for every dollar that Venezuela’s export barrel falls, the country loses one billion dollars. The new government took office in the midst of the worst financial outlook “of the century,” according to Central Bank director Domingo Maza.