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Opinion and Analysis: Oil and Gas

Myth Busting – How Much Money Does Venezuela Really Get From Oil?

It is a very frequent assertion by the Venezuelan opposition and a significant number of casual observers that Venezuela has received spectacular amounts of oil revenues under the Chavez administration (see here for an example). Generally these assertions are the lead up to the statement “how can Venezuela still have any problems or unmet needs when it is swimming in petrodollars. With all the money they have the country should be rich”. So goes the argument.

But how much money does Venezuela really get from oil? Lets take a look at the numbers. Let me start out by saying how NOT to try to answer this question. You most definitely cannot simply take how much oil Venezuela produces, multiply it by the oil prices that you read in the newspaper and think you then know how much money the Venezuelan government gets from oil. Just to show how far off that is I will actually do the calculation. The average price in 2001 was $20.18 and assuming a daily production of 3.3 million barrels you get a daily amount of $66.5 million per day. Multiplying that by 365 days gives an annual income of 24.3 billion dollars. So the Venezuelan government had $24 billion of oil money to spend in 2001? No, not quite. The actual government income from oil was $11.5 billion. A pretty big difference.

Before going into why actual income is so much less than what one might think let me first give what the actual Venezuelan government oil income has been and where I am getting these figures. Here are the actual revenue numbers (note: these numbers are a slight underestimate which will be explained later):

1997 $13.657 billion
1998 $ 4.343 billion
Chavez takes office
1999 $ 8.347 billion
2000 $17.950 billion
2001 $11.519 billion
2002 $8.487 billion
2003 $10.510 billion

These numbers have been compiled from PDVSA’s audited financial statement by former PDVSA finance manager named Oliver Campbell and can be found here and here. The reader who is accustomed to hearing that the Chavez administration has had hundreds of billions of dollars at its disposal will probably be surprised by these numbers. While not insignificant, the total amount from 1999 through 2003 was a little over $56 billion or about $11 billion per year, these are certainly not huge sums of money for a country of 25 million people. Out of this money and general tax revenues a vast government bureaucracy has to be maintained, hospitals run, children educated, roads paved, social programs financed, etc, etc. When that is taken account of clearly the sums listed above just are not going to go that far. Just to illustrate, on the best year, 2000, per capita oil income would have come to $718 for every man, woman and child in Venezuela. And in less stellar years such as 1999 and 2002 it would have been around $350 per person – not even a dollar a day.

Now lets turn to why actual government revenue from oil is so much less than one might think. The first thing that needs to be taken account of is price. People following the news might hear a number quoted for oil and assume that is what Venezuela gets paid for its oil. They would be wrong. There are many different types of oil and they command different prices based on their quality and the ease with which they can be refined. The most commonly quoted prices are Brent and WTI (West Texas Intermediate). But these are high quality types of oil that command about $10 per barrel more than the lower quality oil that Venezuela sells. In fact looking back at this listing of prices we can see that last week Brent and WTI sold for $62 and $64 respectively while Venezuelan oil sold for $52.47. So the simple equation is just knock ten dollars off what you read in the paper and you’ll get what Venezuelan oil is selling for.

Yet there are even bigger factors than price that need to be taken account of to understand why the Venezuelan government doesn’t get a huge oil windfall. First, out of an average daily production of 3.2 million barrels not all of it is sold at international prices or even controlled by the Venezuelan government. For example, approximately 400,000 barrels of daily production are used for internal consumption – i.e. they are used to make everything from gasoline to cooking gas that is then sold at sharply reduced prices inside Venezuela. Considering the cost in producing, refining, and transporting those products Venezuela is actually losing money on that part of its production.

Then there is the 600,000 barrels of synthetic oil produced by foreign oil companies in Venezuela. Up until late 2004 Venezuela was only charging 1% royalties on this oil and charged reduced taxes on it so that its income from this part of Venezuela’s daily production was very minimal. On top of that there was the 500,000 barrels of daily production carried out by the infamous foreign partnerships. These companies had extremely inflated production costs of more than $18 per barrel and the major part of any remaining profits accrued to the foreign companies so that again Venezuela received very little income from this oil [as a side note PDVSA’s previous management which gave these companies sweat heart deals often guaranteed them a certain profit level so that in more than a few cases Venezuela not only didn’t get any money from the oil these companies were producing it actually had to PAY THEM money so they got their guaranteed profit.]

So we see that if Venezuela is producing 3.3 million barrels daily it has been getting either no, or very minimal, revenue from 1.5 million barrels. That is Venezuela is only really making money on a little more than half of its oil production!! This may seem stunning, and it is, but it is also very true and a very overlooked fact. And it is this fact that largely accounts for why the actual government oil revenues are so much less than one might think.

Yet even for oil fully controlled by Venezuela it needs to be noted that it costs money to get oil out of the ground. The operational expenses of actually pumping and transporting the oil come to about $4 per barrel. Additionally, the oil fields are rapidly depleted so billions of dollars more have to be spent annually to locate and drill for new oil. Taking all of these factors into account it shouldn’t be difficult to understand why the Chavez government was only averaging $11.5 in oil revenues over its first five years rather than the 30 or so billion that the opposition would like one to believe.

In this discussion of oil revenues I have only gone up to 2003. The reason being that is the last year for which complete financial statements have been filed which allow us to know exactly how much oil revenue Venezuela has had. However, it would be interesting to have at least an estimate of what Venezuela has earned in the last two years and I think we can make an educated guess. First lets look at prices. Up until 2003 Venezuelan oil was selling in the mid 20s per barrel or less. Then in 2004 it had an average price of $32.61 and in 2005 it had a price of $41.39 (I think I have seen somewhat higher figures for 2004 elsewhere but for consistencies sake I will continue with the PetroleumWorld figures). These certainly are a significant jump in price.

To see how they may affect revenues lets take a look at how price and revenue were related in a prior year. In 2001 (I keep choosing 2001 for my comparisons because there were not strike related production disruptions that year) the price of oil was $20.18 per barrel and government revenues from oil were $11.5 billion. Now, to make an estimate of how much the government take would be in 2004 let me assume that the price differential between the $32.61 per barrel in 2004 and $20.18 per barrel in 2001, which is $12.43 per barrel, is complete profit that goes to the Venezuelan government. That is probably a reasonable assumption because most of the costs of oil production would be fixed costs so that all incremental revenue could go to the government. Then taking account of the fact that Venezuela is only really getting this revenue on 1.8 million barrels of production, not the 3.3 million of barrels for the reasons previously enumerated, we can calculate the additional revenue:

It would be 1.8 million barrels x $12.43 per barrel x 365 days = $8.2 billion.

Adding that to the 11.5 billion which the government earned in 2001 and which I am taking as the base figure for this estimate gives Venezuelan government oil income of just shy of $20 billion for 2004. This is something of an underestimate because in reality the government did get more money from the extra heavy crudes and its operating partnerships as it did things like raise the royalties and taxes charged to them. Still it is likely to be fairly accurate and not off by more than a couple billion dollars.

Doing the exact same calculation for 2005 gives additional revenue of almost $14 billion which means total estimated government revenue of $25.5 billion. Again this may be low but I think it is a reasonable approximation.

Now, if we add these estimated number for 2004 and 2005 to the $56 billion earned through 2003 by the government we see that total oil revenues for the Chavez administration have been $101.5 billion dollars for an average annual oil income over 7 years of $14.5 billion. On a per capita basis this is $580 per person per year – less than two dollars per person per day!!! This should clearly dispel the notion that Venezuela is awash in petro-dollars. What is more, that Venezuela has, with such limited resources, managed to create a rapidly growing economy, significantly reduce poverty, cure social ills such as illiteracy, undertaken needed infrastructure projects and even provide aid to other countries shows how well indeed the Chavez administration has utilized Venezuela’s resources.