The Wrong Man

“Cuban dictator Fidel Castro is still in the hospital with a serious medical condition. Castro said that a half century of Communist rule seemed like a good idea right up until the point he was rushed to the hospital in a ’55 Oldsmobile.”
—Conan O’Brien

“A message delivered on Cuban Television today said that Fidel Castro’s condition is listed as stable, which in Communist countries means he’ll be dead by Friday.”
—Jay Leno

The headlines (and the jokes) these days are all about Fidel Castro, the appears-to-be-dying Cuban strongman who also ranks as the favorite dictator of Connecticut’s own version of “Senator Forehead,” Chris Dodd.

Back in 2002, Dodd went on a “fact-finding” mission to that country, which is such a land of opportunity, equality and social progression that thousands of Cubans every year risk sharks, starvation, and other ways of dying in order to sail to freedom across the Straits of Florida. Dodd’s “fact-finding” mission apparently gleaned some very interesting “facts” courtesy of the thugs in control, because Dodd later gave a speech on the Senate floor criticizing not the Castro regime; but the “bullying tactics” of the United States government.

(In the interest of full disclosure, I should note that one of those who did escape from Cuba across those shark-infested waters on a raft is now a friend of mine, who found freedom, raised a family and built a successful small business in return. He does not, to put it mildly, like Castro. Nor is he a fan of our Senator Forehead—er, Dodd.)

Nevertheless, while the intense speculation regarding Castro’s fate is interesting and even exhilarating, considering the potential for the freeing of 11 million people from dictatorship, there is, south of our border, a far more ominous development in a far more important country—and that is the destruction of Venezuela’s oil producing capacity under its strongman, Hugo Chavez.

Venezuela, as I have mentioned before, has the biggest oil reserves outside the Middle East. Also, as I have mentioned before, it is the fourth largest oil supplier to the United States.

And it is run by Mr. Chavez, who has publicly declared that in order to counteract an impending U.S. invasion of his country, he is buying Soviet fighter jets:

“Do you all know from what distance the Sukhoi (Su-30MK2) can launch?” Chavez asked at a news conference last month. “Two hundred kilometers — that’s to say, an aircraft carrier that stops in the Caribbean. They (the United States) like to stop aircraft carriers in the Caribbean to invade.”

—from the San Francisco Chronicle.

In other words, he’s a mad-man.

And he’s a mad-man who controls a very large and important oil-producing nation—which Cuba is not.

Consequently, the health of an aging dictator in Havana is of far less import to the United States that the ongoing collapse of the Venezuelan oil company (known as PDVSA), upon which rests the entire social policy of the Chavez government. According to a recent and excellent Wall Street Journal article on the issue:

Since Mr. Chávez took power in 1999, he has become PDVSA’s de facto CEO, steering the oil company into political, economic and philanthropic ventures that have distracted it from its core business of finding and producing more oil. The consequences for PDVSA are stark: Output has fallen to an estimated 1.6 million barrels a day from nearly 3 million barrels in 1998.

That’s a 50% drop in less than 10 years, which works out to almost 8% a year. At that rate, Venezuela will be producing less than a million barrels a day in five years—not enough to export anything to the United States, and certainly not enough to feed Chavez’s hungry entitlements programs.

According to the Journal:

The company [PDVSA] must spend at least 10% of its annual investment budget on social programs worth about $1 billion a year. But that figure doesn’t include other spending by the oil giant on projects such as building roads and the government’s subsidized food program. That kind of economic aid totaled $8 billion last year alone, the company says. Palmaven, the PDVSA unit that oversees social spending, is the company’s fastest-growing division.

How much does that leave the Venezuelan oil company for, oh, finding oil? Not very much:

Such attention to economic development, however, gives the company less time and money to devote to its oil business. It spent just $60 million on exploration in 2004, compared with $174 million in 2001, according to the company’s recently published 2004 financial results.

$60 million worth of oil exploration is, almost quite literally, nothing.

Consider this: Venezuela is producing about 1.6 million barrels a day, and it is spending $60 million on exploration. Meanwhile, Apache Corporation, your basic independent oil and gas company, produced 450,000 barrels a day last year—one-third of Venezuela’s output.

Yet Apache spent $3.4 billion—with a “b”—on exploration and development, or 55-times what Mr. Chavez deems necessary.

As the Journal says:

That’s bad news for Venezuela, where current wells are so old that their output falls at an average rate of 23% a year, forcing the company to drill new wells just to keep production steady.

Yes, that’s bad news for Venezuela, but it’s even worse news for the United States, which relies on Venezuela—think about that for a second—for a healthy chunk of its daily needs.

And with this morning’s news about “British So-Called Petroleum” shutting down the North Slope oil field for repairs to the aging pipeline, Mr. Chavez is the guy we want to see being rushed to the hospital “in a ’55 Oldsmobile.”

Not Fidel Castro.

Jeff Matthews
I Am Not Making This Up

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.