Battle for U.S. Oil Market Share
March 4, 1999
SUMMARY
Venezuela has announced that it will not attempt
to regain its number one position in the battle
with Saudi Arabia and Mexico for U.S. crude oil
market share. As the struggle for market share
has hindered crude oil producers' collective
attempts to raise oil prices through production
cuts, Venezuela's decision may present an
opportunity for such efforts to achieve greater
success. In a reflection of its potential new
strategy, an increasing emphasis on downstream
operations, Venezuela has announced that it
intends to purchase refineries sold to meet the
regulatory requirements of oil company
mega-mergers. Considering Venezuela's current
economic difficulties, it will no doubt be in the
market for financing as it seeks to increase its
downstream holdings.
ANALYSIS
Speaking Monday at Johns Hopkins University's
School of Advanced International Studies on
March 1, new Venezuelan Oil Minister Ali
Rodriguez announced that Venezuela would not
attempt to regain the U.S. market share it lost to
Saudi Arabia in 1998. "We're not going to be in
competition with Saudi Arabia," said Rodriguez.
Exporting 1.386 million barrels per day (bpd) of
crude oil to the U.S. in 1998, Saudi Arabia
advanced from third place to lead Venezuela, at
1.357 million bpd, and Mexico, at 1.305 million
bpd. "Putting more oil in the U.S. market would
not be in the best interests of Venezuela at this
time, given continued low oil prices," said
Rodriguez. Rodriguez claimed that Venezuela
wants to work with Saudi Arabia, other OPEC
members, and non-OPEC member Mexico, to
establish crude oil production levels that will help
stabilize oil prices.
The price of oil has been relatively unaffected by
the collaborative efforts last year of OPEC and
non-OPEC producers to manipulate production
quotas. Worldwide crude oil prices have been
stuck between $11 and $12 a barrel, the price
to which they fell last year after ten years of
averaging between $17 and $21 a barrel.
Besides questions about OPEC's capacity,
under the best of circumstances, to control
prices through manipulating supply, two specific
factors have been blamed for 1998's failure.
Some countries are continuing to overproduce,
and Iraqi oil exports are not regulated by the
production agreement. Figures released by
OPEC substantiate the claim that Iran continues
to overproduce and that Iraqi oil continues to
flow at increasing rates. Nevertheless, even after
U.S. air-strikes on March 1 and 2 cut Iraqi
crude exports by an estimated 56 percent, the
price of oil actual fell slightly. Other factors than
Iranian non-compliance and Iraqi production
may be at work here.
One major factor that has helped keep oil prices
at historic lows is the struggle for U.S. market
share among Saudi Arabia, Venezuela and
Mexico. The three countries were instrumental in
forging the original production cut scheme,
leadership some argue was specifically intended
to guarantee their positions in the U.S. market.
But while producers' efforts to gain control of
production and prices has been hampered by the
Saudi-Venezuelan- Mexican dispute,
Venezuela's apparent capitulation on the issue
may present an opportunity for such schemes to
work. The next OPEC meeting is scheduled to
take place on March 23 in Vienna, and OPEC
members have already begun calling for further
production cuts, or at least faithful compliance
with existing cutback agreements. Rodriguez'
comments suggest that Venezuela is ready to
remove one major hindrance to the effectiveness
of those efforts.
While production cuts may still be
mathematically and politically doomed,
regardless of Caracas' capitulation, the question
for Venezuela is, "What's next." Venezuela's new
president, Hugo Chavez, has claimed that a
"new energy model" is at the core the core of his
"new macro-project for economic
development." This new model would reportedly
involve promotion of investment in Venezuelan
downstream operations in petrochemical and
natural gas refining. Speaking to reporters
following a speech at the Energy Council in
Washington DC on February 28, Rodriguez
carried the Chavez agenda one step further.
Rodriguez said that Venezuela's state run oil
company, Petroleos de Venezuela (PDVSA),
may be interested in acquiring U.S. refineries
expected to be put on the market by oil
companies in the process of completing mergers.
Rodriguez added that Venezuela's existing
refining capacity would be increased under a $3
billion refinery investment plan. Venezuela
already has six domestic refineries, with a
combined capacity of 1.3 million bpd, as well as
refineries in the U.S. and Europe with an
additional combined capacity of 1.6 million bpd.
Among PDVSA's U.S. holdings is CITGO.
Venezuela's apparent shift in focus to
downstream operations is quite understandable.
Venezuela is hoping to leverage itself against any
further declines in the price of oil. Whereas the
average price of crude oil has dropped by 40
percent, the price of refined petroleum products
has declined only around 10 percent. Even if oil
prices were to recover, other oil exporting
countries would be dependent on Venezuelan
refineries not to preference Venezuelan crude
over their own in the production cycle. Acquiring
additional refineries would place Venezuela in a
much better position relative to Saudi Arabia
and other countries that rely heavily on upstream
operations, the production and export of crude
oil, as their primary means of cash flow. This
policy already has promise. Though Venezuela
was beaten out by Saudi Arabia in crude oil
exports to the U.S. in 1998, Venezuela still
exported more petroleum products, such as
gasoline and jet fuel, to the U.S.
The only caveat to this plan is the fact that
Chavez based his presidential campaign on a
platform that privileges the social welfare of the
Venezuelan population over other goals.
Venezuela must somehow integrate Chavez's
welfare programs with its new hydrocarbon
strategy of increased investment in U.S. and
Venezuelan refineries. Chavez has already
encouraged foreign investment in Venezuela's
downstream operations. As Venezuela shifts the
balance of its hydrocarbon industry from crude
oil exports to refining, both at home and abroad,
it will increasingly be in the market for foreign
financing.
stratfor.com
While I agree with what this writer typically writes and I can corroborate, he is way off base with the statement
Whereas the
average price of crude oil has dropped by 40
percent, the price of refined petroleum products
has declined only around 10 percent.
Of course it depends on your time and price references, but as far as what diesel and gasoline did over the past two years, refined products dropped more than 10%.
eia.doe.gov
Charles |
