Oil producers in Venezuela were sucker punched again by Hugo Chavez. The Venezuela National Assembly voted on Tuesday to enact a new windfall profits tax on all Venezuelan producers. The tax is expected to raise $9 billion a year from already struggling producers.
Lawmakers passed the bill only two days after Chavez went to them saying he urgently needed the money. Chavez's popularity has slipped significantly in the past year because many ordinary Venezuelans see little improvement in their lives from all the money Chavez has used to support his social programs.
Inflation from his spending has caused significant inflation. To combat this Chavez put in price controls and that led to food shortages. This angered his supporters and non-supporters alike. Knowing you can buy bread at 50 cents a loaf is great but if there is no bread because the farmers can't sell it that cheap then consumers get even angrier.
The terms of the windfall profits tax are simple. When oil prices are over $70 a barrel the government gets 50% of everything over $70. When oil is over $100 the government gets 60%. Crude hit $115 on Wednesday.
This is $9 billion right off the top for producers including Total (TOT), StatoilHydro (STO), BP (BP) and Chevron (CVX). Chavez already angered all the oil companies when he nationalized the sector in 2007 and forcing everyone to turn over their facilities to the Venezuelan National Oil Company PDVSA. Those that agreed to stay and continue producing were forced to take a smaller stake as operators. Several companies decided to stay in hopes of eventually getting a payback on their billions in investments. Those hopes have been dashed again and I am sure Chavez is not done as long as he can remain in power. He has nationalized banks, phone companies, utilities, the mining sector and many other businesses. Anything he could grab that produced cash to keep him in power.
Exxon and ConocoPhillips elected to leave Venezuela and file claims against the country in international courts. They are probably really happy today they made that decision rather than face death by 1000 cuts as Chavez continues to nickel and dime the sector to death.
All the measures Chavez has put in place since taking power in 1999 have caused production in Venezuela to drop by 35% making his cash flow even lower despite his land grab. If he was removed from office tomorrow and the laws rescinded it would take 5-7 years for private companies to return, rebuild and return production to prior levels. Good job Mr. Chavez! You killed the goose that laid your golden eggs!