What free market?

Anyone who thinks the oil market is free should read the following Wall Street Journal article very carefully.  Does Venezuela’s national oil company PDVSA, now run by foaming-at-the-mouth dictator Hugo Chavez,  sound like a company run according to free market principles? 

“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.

“The oil company, the world’s third-biggest by most measures, is run along social and political guidelines as much as business tenets. As a result, much of the decision-making involves figuring out new ways to fund Mr. Chávez’s pet projects. One of the latest ventures was paying to televise soccer’s World Cup for free in Bolivia, a Chávez ally.

“Mr. Chávez’s geopolitical considerations, and his anti-American bent, also influence the way the company does business. PDVSA has turned away from traditional partners like U.S. major Exxon Mobil Corp. and is doing much more business with state companies from Iran, China and India. This weekend, during a visit to Tehran by Mr. Chávez, Iran pledged to invest $4 billion in two Venezuelan oil fields. The two nations also unveiled a raft of joint ventures, including a refinery in Indonesia.

“[...] Nowhere has the company’s decay turned up faster than at PDVSA’s massive 1.3 million-barrel-a-day domestic refining network, which suffered more than a dozen plant outages in 2005. In March, two workers died in a blast at the Amuay refinery, the nation’s largest. Last month, another explosion and subsequent fire caused extensive damage at a 190,000-barrel-a-day unit at Amuay, sending spot gasoline prices higher in the U.S. Gulf Coast where Amuay ships much of its production.”

The consequences to the global market are not at all trivial:  “The company’s diminished production has cut world output by more than 1%. That may not sound like a lot, but in a global oil market stretched tight by growing demand, political volatility and hard-to-expand supply, the company’s production shortfall has contributed to the run-up in oil prices during the past few years, and is likely to continue to do so.”

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