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ExxonMobil's Exemplary Exit

From | Investors.com

Posted 1/20/2006 | Latin America: The pullout of ExxonMobil Corp. from a project in Venezuela may have marked a turning point not for the oil giant, but as a warning about the deteriorating situation in that country.

Since the company's Dec. 30 exit, the business climate in Venezuela has gone downhill fast. This is cause for concern, because the apparently normal country, awash in malls and gas stations, is starting to sink from general chaos into a more specialized kind known as Cuba.

Bear Stearns warns that the effect of this may spread. "The headline effect of adverse political news may also impair investor sentiment for the region as a whole, even in countries where a trend toward populism is not evident (e.g., Brazil, Colombia), or where the macroeconomic policy framework is not necessarily at risk (e.g., Mexico)." For the U.S., that's getting too close.

Exxon sold its stake in its only operating agreement in the country to its partner, Repsol-YPF, rather than be forced into a joint venture with the state on vague terms or even worse face expropriation.

Some of the vague terms may mean turning a sharply efficient professional oil enterprise into a worker-"owned" collective, with political loyalty determining operational decisions.

For an oil company to dump its stake in scarce acreage is rare. Oil producers rank themselves by acreage and compete fiercely amid dwindling supply. Given the frontiers in which Exxon is used to operating Russia, Angola, Chad, Yemen its decision to leave is a warning that Venezuela is an even higher investment risk.

But in light of a wave of new demands made on other oil companies since they agreed to accept the joint ventures, including arbitrary new back taxes (Shell just got a new $13 million tax bill) and new royalty demands, Exxon didn't close its eyes.

Foreign investment, in fact, is down in Venezuela (see chart) and, more ominously, domestic investment is down even more, particularly since 1998. As bankers at BBO Securities in Caracas put it: "Venezuela has simply become a place where businessmen are looking for deals, but are avoiding investments."

Johns Hopkins economist Steve Hanke points out what any good economist will conclude: "A broken contract amounts to a confiscation of private property."

In the wake of those broken contracts, there's been a mudslide of property rights violations, as well as new price and capital controls. It's not hard to understand why. Property rights violations don't stop at breaking contracts. They repeat into further breaches of contact, and spread to violations of all kinds.

Since Exxon's pullout, Hugo Chavez's loyalists have confiscated about 20 buildings in Caracas, some with their owners still in them. That example has prompted "spontaneous" invasions of other private property that have terrified local owners.

In the latest instance, an unsuccessful attack by ruffians against the Country Club, a rare green spot in central Caracas that isn't particularly exclusive, was triggered by the talk of officials who said they'd like to turn it all into low-income housing to change the voter composition of the area.

Meanwhile, Chavez himself announced that he'll expropriate 1.5 million more hectares of land from Venezuela's battered farmers in addition to the 1.34 million already taken from working farms in the states of Cojedes and Yaracuy.

Some of the farms, mostly in sugar, are owned by foreigners who are not rich investors like Exxon, but poor but industrious immigrants from Spain, Italy, Cuba and Portugal.

Meanwhile, as the tropical jungle slowly reclaims once-vibrant farms, weedy, irregular Jim Jonesian rows of yucca and black beans, planted by squatters on new collectives, are the desolate result.

It hasn't stopped there. Like a madman, Chavez vowed to confiscate the entire coffee, and now corn, industries if they don't continue to sell processed products below production costs.

Price controls and inevitable hoarding stripped grocery shelves of any supply at all. The national guard, on orders from Chavez, was dispatched to coffee warehouses to "take every last kilogram."

It all bears the same hand as the one that tried to confiscate Exxon.



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