Overview class Economics of Oil and Gas PHD Economics and Social Science

Macroeconomics of Rich Mineral Countries, with focus on Petro States part 1 Natural rich endowment societies have their own socio-economics dynamics and institutions born out of their own experience, understanding them through neoclassical macroeconomics models and orthodox national accounting method could become, at times, a futile exercise leading to nowhere and frustration. Therefore, we need different tactics. Indeed our proposal of studying the rent is rooted in the classical tradition of Marx, Smith, Ricardo, and Malthus among others. In the past few years, we have done some descriptive research on this topic, we want now to actualize some data on the Venezuelan case, via some graphics to update past works and illustrate the equation used to calculate extraordinary revenues capture by oil countries in the world market. Not only do mineral rich societies manage strategic mineral resources for the international market, they also -capital surplus countries- own large Sovereign Wealth Fund (SWF) ( see

www.swfinstitute.org) composed of financial and other assets such as corporate bonds, stocks, futures in the commodity markets , real state property, precious metals and so on. These funds are for the most part the result of oil as gas surplus income or if we prefer, rent collected in the international market, as seen in the table kindle provided by SWF Institute. Therefore, they now play an important role in the world market not just suppliers of raw material, but also of lenders of money for stressed economies as the recent financial crises demonstrated. As we know, the gravity center of world geopolitical and geo-economics is changing at a fast rate from the traditional occidental foundations to a multi-polar world , so being knowledgeable about

emerging economies, their inner working, is vital to understand the new world that is coming out in the horizon. Large capital surplus countries will play a significant role in that future.

Sovereign Wealth Fund Rankings Largest Sovereign Wealth Funds by Assets under Management

Country

Fund Name

Assets $Billion

Inception Origin

LinaburgMaduell Transparency Index

UAE Abu Dhabi

Abu Investment Authority Government

Dhabi $627 1976 Oil 3

Norway

Pension Fund Global

$512

1990

Oil

10

Saudi Arabia China

SAMA Holdings

Foreign

$439.1

n/a

Oil NonCommodity NonCommodity

SAFE Investment Company China Investment Corporation Hong Kong

$347.1** 1997

China

$332.4

2007

China

Monetary Authority Investment Portfolio Government of

Hong Kong

$259.3

1993

NonCommodity

Singapore

Singapore Investment Corporation

$247.5

1981

NonCommodity

Kuwait

Kuwait Investment Authority National Social

$202.8

1953

Oil Noncommodity Oil NonCommodity Oil

China

Security Fund National Fund Temasek Holdings Qatar Investment Welfare

$146.5

2000

Russia

$142.5*

2008

Singapore

$133

1974

10

Qatar

Authority Libyan Investment Authority Australian Fund Revenue Regulation Fund Kazakhstan National Fund Korea Investment Corporation Alaska Permanent Fund National Pensions Reserve Fund Brunei Investment Agency Strategic Investment Fund Future

$85

2005

Libya

$70

2006

Oil NonCommodity Oil

Australia

$67.2

2004

Algeria

$56.7

2000

Kazakhstan South Korea US Alaska Ireland

$38

2000

Oil NonCommodity Oil NonCommodity Oil NonCommodity

$37

2005

$37

1976

10

$33

2001

10

Brunei

$30

1983

France

$28

2008

n/a

Malaysia

Khazanah National Oil Fund Social and Stabilization

$25

1993

NonCommodity Oil

Iran

$23

1999

Chile

Economic Stabilization Fund

$21.8

1985

Copper

10

Azerbaijan UAE Dubai

State Oil Fund Investment Corporation Dubai Albertas Heritage Fund International

$21.7

1999

Oil

10

of $19.6

2006

Oil

Canada

$14.4

1976

Oil

UAE Abu Petroleum Dhabi Investment Company US New Mexico New Mexico State Investment Council Mubadala Development Company New Zealand

$14

1984

Oil

n/a

$13.8

1958

NonCommodity

UAE Abu Dhabi

$13.3

2002

Oil

10

New Zealand

Superannuation Fund Mumtalakat Holding Company Sovereign Fund of Brazil

$12.1

2003

NonCommodity

10

Bahrain

$9.1

2006

Oil Noncommodity

Brazil

$8.6

2009

new

Oman

State

General

Reserve Fund Pula Fund Timor-Leste Petroleum Fund Public Investment Fund China-Africa

$8.2

1980

Oil & Gas Diamonds & Minerals Oil & Gas

Botswana

$6.9

1994

East Timor Saudi Arabia

$6.3

2005

$5.3

2008

Oil

China

Development Fund

$5.0

2007

NonCommodity

US Wyoming

Permanent Wyoming Mineral $4.7 Trust Fund and $2.9 2000 Oil 5 1974 Minerals 9

Trinidad & Heritage Tobago

Stabilization Fund Investment

UAE Ras RAK

Al Khaimah Authority Venezuela FEM State Vietnam Investment Corporation Nigeria Excess Account Revenue Kiribati Equalization Reserve Fund Indonesia Mauritania Government Investment Unit Crude Capital

$1.2 $0.8

2005 1998

Oil Oil NonCommodity

3 1

$0.5

2006

$0.5

2004

Oil

$0.4

1956

Phosphates 1

$0.3

2006 2006

Noncommodity Oil & Gas

n/a 1

National Fund for $0.3

Hydrocarbon Reserves UAE Federal Emirates Investment Authority Oman Investment Fund Abu Investment Council Total Oil & Gas Related Total Other TOTAL $2,380.7 $1,730.1 $4,110.8 Dhabi n/a 2007 Oil n/a n/a 2006 Oil n/a n/a 2007 Oil 2

Oman

UAE Abu Dhabi

*This includes the oil stabilization fund of Russia. **This number is best guess estimation ***All figures quoted are from official sources, or, where the institutions concerned do not issue statistics of their assets, from other publicly available sources. Some of these figures are best estimates as market values change day to day. Updated November 2010

Updated November 2010

December 2009

Source: Sovereign Wealth Fund Archives

Venezuela has created some Funds beside the FEM to accumulate large surplus in current account, but they are a black boxes due to our political deinstitutionalize system. We presume that funds like Fonden and Fondo Miranda, besides being used to finance social political legitimizing programs and large infrastructure programs, like the 20.000 km plan railroad network system are being employed to finance a costly foreign policy oriented toward exporting

the revolution. Cuba alone is receiving from Venezuela 14% of her GDP in donations, oil subsidies and cash transfers for non-tradable services. At this point, our interest will shift to calculating oil rent and then examine their longterm performance in Venezuela. We prefer to use a long run approach, since we consider it more accurate to define the role of oil rent in the performing of the economic growth rate. The proposed equation could be used in general for natural rich rentiers capitalist economies or regions: Yet we believe it can be work out to be more precise.

NRS non-oil: Normal rate of surplus non-oil economy OS non oil: Operating surplus non oil economy OS oil: Operating surplus oil economy NRS oil: Normal rate of surplus oil SW non-oil: Salaries and wages non oil economy FCC non oil: Fixed capital consumption non oil economy SW oil: Salaries and Wages oil FCC: Fixed capital consumption oil

NRS non oil

= OS non oil/ (SW non oil + FCC non oil)

NRS oil = (SW oil + FCC oil)* NRS non oil

Thus separating from the operating oil surplus ( excedente de explotacin), the fraction considers a normal profit rate and obtaining as a residual the landowner income (State). This last one is the OIL RENT or extraordinary revenues. Hence, the payment received for the property rights (sometimes called royalty but not necessarily equal to it) on the land and subsoil where oil or others mineral resources are being exploited. That rent logically is pay by the consumers sector of oil importing nations, much less by consumers in oil countries since oil byproducts are subsidized. It is not (the rent) the product of work in the rentiers economy. If we want to see this in a microenvironment, when a vehicle user, in advance capitalist country, fills its gasoline tank, a fraction of that money he or she spends returns to the oil producer nation as a rent. In this sense, the State proprietor in the rich minerals resource country acts like a Feudal landlord. Already the PODE inform of the Venezuelan Ministry of Energy used this equation to calculate the rent contribution to the national economy in 2006. The Central Bank still uses the old methodological approach of petroleum GDP and non-petroleum GDP but in the international

standard national accounting framework. Therefore, from the Central Bank procedures is impossible to obtain the oil rent, but we can get the necessary basic information to calculate it. The World Bank also produces some figure on natural capital depletation and oil rent, but for Venezuela, we think, both are overestimated. This equation could be improved, for example, by changing NRS non-oil for the average profit rate before taxes of largest multinational energy corporations given thus a more precise nature of oil industry performance; deducting this normal profit rate from the operational surplus of oil exploitation under specific property rights conditions mention. This equation could also be used with advantages in different that oil, mineral resources rich countries; adjusting it to the economic sector in question. Using the above equation, we calculated the Venezuelan oil rent and its relation with GDP in the long term as can be seen in the following figures. For that purpose, we used data from the Anuarios Estadsticos, Series Estadsticas de Venezuela de los ltimos Cincuenta Aos, La Economa Venezolana en los ltimos Treinta Aos of the Central Bank, Petrleo y otros Datos Econmicos (Pode) from the Ministry of Energy and Mines. All graphs refer to Venezuela Figure 1
GDP and Oil Rent Per Capita 1936-2009 International dollars 1990
10,500 10,000 9,500 9,000 8,500 8,000 7,500 7,000 6,500

USA dollars

6,000 5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0

1936

1939

1942

1945

1948

1951

1954

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

GDP per capita

Oil Rent per capita

Sources: Central Bank of Venezuela (BCV), Ministry of Energy and Mines and authors calculation

2008

Figure 2
GDP and International Oil Rent growth 1936-2009 Index 1936=100
2000.0 1900.0 1800.0 1700.0 1600.0 1500.0 1400.0 1300.0 1200.0 1100.0 1000.0 900.0 800.0 700.0 600.0 500.0 400.0 300.0 200.0 100.0 0.0

1936

1939

1942

1945

1948

1951

1954

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

Oil Rent Per Capita

GDP per Capita

Sources: Central Bank of Venezuela (BCV), Ministry of Energy and Mines and authors calculation

2008

Figure 3

GDP Standard and GDP minus International Oil Rent 1936-2009 International Dollar 1990
11,000 10,000 9,000 8,000 7,000

USA Dollar

6,000 5,000 4,000 3,000 2,000 1,000 0

1936

1938

1940

1942

1944

1946

1948

1950

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

GDP per capita minus Oil Rent

GDP per capita Standard

Sources: Central Bank of Venezuela (BCV), Ministry of Energy and Mines and authors calculation

2008

Figure 4
Oil Rent Per capita and Population Growth Index Numbers 1936-2009 1936=100

2000 1800 1600 1400 1200 1000 800 600 400 200 0

1936

1938

1940

1942

1944

1946

1948

1950

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Oil Rent Per Capita

Population Growth

Sources: Central Bank of Venezuela (BCV), Ministry of Energy and Mines and authors calculation

2008

Figure 5

GDP per Capita Growth and Population 1936-2009 Index 1936=100

900

800

700

600

500

400

300

200

100

1936

1938

1940

1942

1944

1946

1948

1950

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

population growth

GDP Growth per capita

Sources: Central Bank of Venezuela (BCV), Ministry of Energy and Mines and authors calculation

2008

Figure 6
GDP and International Oil Rent growth 1936-2009 Index 1936=100
2000 1900 1800 1700 1600 1500 1400 1300 1200 1100 1000 900 800 700 600 500 400 300 200 100 0

1936

1938

1940

1942

1944

1946

1948

1950

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Oil Rent Per Capita

GDP per Capita

Sources: Central Bank of Venezuela (BCV), Ministry of Energy and Mines and authors calculation

2008

Figure 7

Oil Rent growth and Oil Prices real terms 1936-1990 Index 1936=100
700

600

500

400

300

200

100

1936

1938

1940

1942

1944

1946

1948

1950

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Oil rent

Oil Prices

Sources: Central Bank of Venezuela (BCV), Ministry of Energy and Mines and authors calculation

2008

Figure 8

GDP Standard and International Rent Per Capita 1936-2009 International Dollar 1990
12,000 3,000

10,000

2,500

8,000

2,000

USA Dollars

6,000

1,500

4,000

1,000

2,000

500

Sources: Central Bank of Venezuela (BCV), Ministry of Energy and Mines and authors calculation

1936 1938 1940 1942 1944 1946 1948 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

GDP Per Capita

Oil Rent per Capita

USA Dollars

Figure 9

International Oil Rent Per Capita 1936-2009 International Dollar 1990

3,000.00

2,500.00

2,000.00

Usa dollars

1,500.00

1,000.00

500.00

0.00

1936

1938

1940

1942

1944

1946

1948

1950

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

International Oil Rent

Sources: Central Bank of Venezuela (BCV), Ministry of Energy and Mines and authors calculation

2008

Figure 10
International Oil Rent as a % of GDP 1936-2009 International Dollar 1990
30

25

20

percent

15

10

1936

1938

1940

1942

1944

1946

1948

1950

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

International Oil Rent

Sources: Central Bank of Venezuela (BCV), Ministry of Energy and Mines and authors calculation

2008

Figure 11
Prices of Venezuelan Oil 1936-2009 CPI Usa dollars 1990
55.00 50.00 45.00 40.00 35.00

US Dollars

30.00 25.00 20.00 15.00 10.00 5.00 0.00

1936

1940

1944

1948

1952

1956

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

2004

Prices of Venezuelan Oil Basket

Sources: Central Bank of Venezuela (BCV), Ministry of Energy and Mines and authors calculation

2008

Figure 12

Average GDP and Oil Rent 1936-2009 International Dollars 1990

10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 Average GDP Average Oil Rent

1936-43 2347.88 109.5

1944-51 3869.75 149.5

1952-59 5865 387.5

1960-67 7307.25 622.62

1968-75 8344.5 907

1976-83 8933.25 1070.88

1984-91 7427.38 705.62

1992-99 7638.63 886.25

2000-09 7531.9 1596.3

Average GDP

Average Oil Rent

Sources: BCV, Ministry of Energy and Mines and authors calculation

Bibliography

Anuarios Estadsticos Ministerio de Fomento, varios aos. Memorias Ministerio de Hacienda, varios aos. De Corso G (1999) The Falling Oil Rent and Venezuelas Economics Decline: A Quantitative Analysis BCV Anuarios Estadsticos hasta el 2006 BCV pagina WEB, y Series Estadsticas de Venezuela de los ltimos Cincuenta Aos BCV. 1971. La Economa Venezolana en los ltimos Treinta y Cinco Aos Caracas. CEPAL-Ministerio de Fomento. 1957. El Desarrollo reciente de la economa venezolana Petrleo y otros Datos Econmicos antiguo Ministerio de Energa y minas varios aos y actual Ministerio del Poder Popular Para la Energa y el Petrleo