Subsidized Prices and International Costs

Subsidized Prices and International Costs

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Thanks to my father, my brothers and I had one of the most successful family policies which I have memory. My father, once you get a certain age gave us an amount of money per month («allowance») that covered the usual costs of a teenage boy or girl. Clearly, it was up to us the allowance «scope» to reach the end of the month and made the money enough for all our expenses. Now, every time I felt an increase in usual costs (invite a girl to the movies was not always trivial) we started the negotiation process to increase this «allowance»; appealing to statistics and some quotes from a «baby son»: «come on dad!»… we reached an increase in our revenues. My dad knew that if costs rose, was reasonable to increase revenue. Until now my brother and sister remember how the allowance taught us how a «vida loca»  of the first week could damage seriously the last week of the month.

Turns out the story I told your before can be apply to the hydrocarbons sector in Bolivia, in particular, the related with the oil production fields. As is widely known, domestic oil prices in Bolivia are subsidized (25 US$/barrel at the wellhead), of course, the mechanism allows low final prices for gasoline, diesel oil and LPG… or as economists likes to talk: » below their international opportunity.»

Well, what is not known is that the capital and operating costs have increased significantly in recent years, the reason? that international oil prices «out of Bolivia» grew so aggressive that originated an increase in the exploitation costs. As my mom says, «como muestra un botón», few years ago (say ten) daily drilling costs ranged from US$ 15,000 per day, today easily this figure stands at US$ 50,000, this is due to following reasoning:

  • Production company: «oil prices are growing… produce more!»
  • Production company: «As we increase our production, we will drill more… get drilling service companies!»
  • Drilling services company, «demand for our services is growing and growing, we must increase our production.»
  • Drilling services company: «get more equipment!»
  • Equipment suppliers: «if you people wants more equipment, you have to pay more… steel costs and others are very high»
  • Drilling services company: «people from the production company, we will perform the drilling service for you, but it will cost more, because an increase in our costs as well as the demand for our services.»
  • Production company: «ok, I can pay higher drilling costs because the oil price allow us that»

This story is very common in the world but not in Bolivia, because the field operators (national and international) in our country face high costs (because Bolivia doesn’t produce rigs that can be subsidized) but their income is «frozen» at US$/Barrel 25. Thus, subsidized prices and international costs (increasing) leave a very low (or zero) profit margin… ah! of course! if we add to this situation that Bolivia charges a royalty of 50% to the wellhead price and 10% more for the so-called nationalization, our oil production situation becomes unsustainable, 25 US$/Barrel oil price + 50 royalties + 10% Nationalization = a very bad situation.

At this time in the hydrocarbons sector in Bolivia, we are squeezing «oranges» of a planted tree many years ago (during the evil neoliberal age)… ok, that’s life; but now the challenge is to plant other trees that will give us the «oranges» for tomorrow.

Mauricio Medinaceli

 La Paz, September 22, 2012

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