There's another aspect to the current row in Venezuela between the government and foreign oil companies like Chevron
Here's a refresher. The Venezuelan government has launched a multi-arm strategy to reap greater benefits from its oil assets at the expense of foreign partners. Royalty rates have already gone from 1% to 16.6%, and the government is now engaging in retroactive taxation to pull even more money out of the coffers of foreign oil companies.
Petroleos de Venezuela (PDVSA), the state oil company of Venezuela and the owner of CITGO, has announced a policy of paying less than market value for oil deliveries. It is also paying for some of this oil in Venezuelan bolivars instead of U.S. dollars, and it has held up new drilling licenses. Through it all, the government is attempting to strong-arm foreign oil companies into replacing existing legal contracts with new agreements that will give preferential status (and majority control) to Venezuela.
Assuming that this all works out as planned, Venezuela could then funnel subsidized oil into CITGO refineries and sell the resulting gasoline in America at the same price as ExxonMobil
Given that the United States has denounced government subsidies for Airbus, it'll be interesting to see what, if anything, comes out of Washington on this matter. On one hand, you have a foreign government shaking down American companies and possibly using the benefits to gain a competitive edge in the U.S. gasoline market. But on the other hand, the Bush administration clearly does not want to further antagonize a major nearby oil exporter. What's more, if PDVSA/CITGO uses its resources to lower the price of gasoline, who wants to be seen as coming out against cheaper gasoline for consumers?
It's a complex issue, and it's one that will not be resolved quickly, if at all. While I wouldn't suggest that it's a major priority for the U.S. government to play the role of recess monitor and protect the profits of American companies' overseas business ventures, the whole deal smells bad. What's more, if it ends up harming domestic refiners, it could end up being a problem for all of us someday.
Maintain an air of refinement with these other Foolish takes:
- Is PetroKazakhstan Cheap Enough?
- Sunoco's Air of Refinement
- Total Return
- Valero Comes Closer to the Edge
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
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