Hugo Chavez Gets U.S. Handouts

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  1. Ramapo

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    Aug 29, 2006
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    Sunday, Aug. 20, 2006 3:33 p.m. EDT
    Hugo Chavez Gets U.S. Handouts

    Barely a day goes by without Hugo Chavez hurling an over-the-top insult or threat at the United States yet Chavez, president of oil-rich Venezuela, is collecting hundreds of millions of dollars in subsidies from the United States.

    According to the Washington Times, the U.S. subsidies - a result of what the Times called "an obscure 20-year-old oil pricing formula - are part a supply contract between Venezuela's state-owned Petroleos de Venezuela (PDVSA) and its wholly owned U.S. subsidiary, Citgo Petroleum Corp., which forces Citgo to buy PDVSA's crude for at least $5 a barrel over market prices."

    Explained the Times " The net effect is to reduce Citgo's taxable earnings in the United States and to boost Venezuela's share of oil profits by as much as $1 million a day."

    "At the moment, we have the strange situation where the USA is subsidizing Venezuela to the extent of the tax relief on the excess above-market prices" Oliver Campbell, a former finance coordinator of PDVS told the Times.

    Moreover, the Times reported that James Williams, an Arkansas-based oil analyst with WTRG Economics, has estimated that Citgo has been paying $5 to $8 a barrel over market prices for the past two years, amounting to a de facto U.S. subsidy. He believes that Venezuela could be earning as much as an extra $1 million a day that would otherwise go to the U.S. Treasury.

    Few details are available about the complicated accounting formula. The Times reports that a " rare and superficial description offered in a 2005 Citgo report to the U.S. Securities and Exchange Commission (SEC) says it takes into account a variety of factors, including the market value of refined petroleum products, transportation costs, refining margins and inflation. "

    Because Citgo is no longer a publicly traded stock, it no longer files reports with the SEC. Sources told the Times the formula was designed to help obtain loan financing for the purchase of Citgo, with third-party creditors seeking to ensure the U.S. refinery would not be overcharged in supply contracts. Before oil prices rose in recent years, the formula favored Citgo -- and, by extension, the U.S. Treasury -- as PDVSA was forced to sell at below-market prices.

    That formula was structured in such a way that when prices rise above a certain threshold, the balance shifts in favor of the parent company, creating the situation that exists today with the United States subsidizing PDVSA.

    Moreover, despite paying more for crude, high oil prices have kept Citgo flush with cash. In a May interview with the Venezuelan newspaper El Universal, Citgo's Chief Executive Officer Felix Rodriguez said the U.S. company repatriated to Venezuela a whopping $785 million in 2005.

    This in the face of demands to end tax breaks for Big Oil in the United States as gasoline prices skyrocket and Chavez's repeated threats to cut off oil shipments.

    "The government of the United States should know that if they go over the line, they are not going to have Venezuelan oil," Chavez threatened in February.

    "I have already taken measures regarding this. I'm not going to say what because [U.S. officials] think that I can't take these measures because we would not have any place to send the oil," Chavez added.

    According to a report by the congressional Government Accounting Office (GAO) the U.S. is ill-prepared for a disruption in Venezuelan oil, a development that could cost the U.S. economy $23 billion in losses to its gross domestic product, although Venezuela's economy would also suffer since about 70 percent of the nation's oil exports go to the United States.

    Analysts, however, told the Times the potential impact on Venezuela would shrink as Chavez finds new markets and refining potential outside the United States.

    During the first four months of 2006, the Times reported, Venezuelan oil exports to the U. S. dropped about 6 percent, from 190 million barrels to 178 million barrels of crude and petroleum products during the same period a year earlier, according to the U.S. Energy Department.

    An analyst with the department told the Times it is too soon to say if this represents a trend, because imports routinely fluctuate, making it difficult to determine whether production lags at PVDSA or sales in new markets caused the decline.

    Signs that Chavez is developing new markers include:

    Rises in Venezuela's oil shipments to China. In 2004, Caracas sent a average of 14,000 barrels a day to China, an amount that jumped to 80,000 barrels a day in 2005, according to PDVSA's Web site. In May, PDVSA announced a $1.3 billion plan to buy 18 oil tankers from Chinese shipyards to boost its shipments to Asia.
    "By the end of this year, we should be sending 300,000 barrels a day of oil to China,". Chavez said.

    An expansion of Chavez's energy relationships to Russia and Iran. While both are themselves oil exporters, they have the technology to build new refineries that are needed to process Venezuela's heavy crude. During a state visit to Moscow last month, the Times recalled that Chavez clinched a large arms deal and oil agreements with President Vladimir Putin.
    "In Volgograd, we agreed with the president of Lukoil that by the end of 2006, this Russian company will start to produce oil in Venezuela, in two regions," Chavez said.

    During the same trip Chavez visited Tehran, where Iran's state-owned Petropars oil and gas company said it would invest $4 billion in two Venezuelan oil fields.

    Venezuela also has deals to supply countries such as Cuba and Bolivia with cheap oil, as well as new supply agreements with India, Jamaica, Haiti and Paraguay. Moreover Argentina and Uruguay last month agreed to work jointly on oil projects in Venezuela's Orinoco region, while Chavez continues pushing a number of oil initiatives in the Caribbean.
    And Venezuela, already the world's fifth-largest oil producer, has not yet even begun to develop an oil find in its Orinoco River belt, which promises to give it oil reserves greater than Saudi Arabia's, according to estimates from both U.S. and international agencies.

    "What happens when the weight of global oil shifts from the Middle East to Venezuela?" Jose Cordeiro, a Venezuelan oil specialist, asked recently at an oil forum in Buenos Aires.

    The Times says that U.S. officials are concerned that Chavez will continue to use his nation's oil wealth to reward regimes in proportion to the degree they share his anti-American agenda.

    "So what is it, this [U.S.] government is trying to do? Destabilize its secure [oil] supplier?" Chavez asked rhetorically during his weekly "Hello, President" television and radio show, answering his own question, by saying that Venezuela "has enough allies on this continent to start a 100-year war."

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