22 Sep Subsidized Oil Prices and International Costs
Entering adolescence, my father provided my siblings and me with a monthly allowance to cover the typical expenses of a teenager. Managing this allowance until the end of the month required careful planning and budgeting. When everyday costs increased—like taking a girl to the movies, which wasn’t always trivial—we’d start negotiating for a raise. Equipped with statistics and a touch of charm, such as the classic “Come on, Dad…,” we often succeeded. My father understood that rising expenses justified a bump in income, although the monthly disbursement method remained unchanged for years. To this day, my siblings and I vividly recall the thrill of “living it up” early in the month, followed by the hardship of “barely scraping by” toward the end.
This anecdote, as lighthearted as it may seem, reflects a reality in Bolivia’s hydrocarbons sector, especially concerning production from exclusive oil fields. Domestically, oil prices in Bolivia are heavily subsidized—approximately $25 per barrel at the wellhead. This policy keeps the prices of gasoline, diesel, and liquefied petroleum gas (LPG) significantly below international benchmarks or, as economists put it, their “international opportunity cost.”
What is less commonly known is that capital and operational costs in the sector have surged dramatically in recent years. Why? International oil prices outside Bolivia have soared, driving up production expenses. As my mother likes to say, “One example is enough.” About a decade ago, the daily cost of drilling was around $15,000. Today, that figure easily surpasses $50,000, and here’s why:
* Producing Company: “Oil prices are rising—let’s produce more!”
* Producing Company: “To produce more, we need to drill additional wells. Let’s hire drilling service companies.”
* Drilling Service Company: “Demand for our services is skyrocketing; we need to expand our capacity.”
* Drilling Service Company: “We need more equipment.”
* Equipment Suppliers: “Sure, but additional equipment will cost more steel and other input prices are rising.”
* Drilling Service Company: “We’ll provide the drilling services, but prices must go up to cover our rising costs and soaring demand.”
* Producing Company: “That’s fine; we can afford higher drilling costs because rising oil prices make it viable.”
Unfortunately, this virtuous cycle does not hold in Bolivia. Oil field operators, both domestic and international, grapple with rising costs (Bolivia doesn’t manufacture subsidized drilling equipment) while their revenues remain stagnant due to artificially low domestic prices. This mismatch—subsidized pricing paired with escalating international cost results in razor-thin or nonexistent profit margins. On top of that, Bolivia imposes a 50% royalty based on prices and an additional 10% due to nationalization, creating a dire situation:
Sale Price: $25/Barrel + 50% Royalty + 10% Nationalization = A Very Bad Situation
Currently, Bolivia is squeezing the last “oranges” from a tree planted many years ago. The real challenge lies in planting new trees that will yield the fruits of tomorrow.
S. Mauricio Medinaceli Monrroy
La Paz
September 22, 2012
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