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Robert Rapier

Robert Rapier

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Can Venezuela Save Its Oil Industry?

The Wall Street Journal reported last week that Venezuela’s oil output in December fell by 11 percent, to 1.62 million barrels per day (BPD). That capped a decline of 29 percent in 2017 and represents an overall decline of 53 percent since the late Hugo Chávez was first elected president in 1998.

To put this in perspective, the proved reserves of the U.S. are 48 billion barrels, versus 301 billion barrels for Venezuela. (I explain here why Venezuela’s reserves are overstated, but without a doubt, they are much larger than those of the U.S.)

Yet U.S. oil production is just short of 10 million BPD — six times Venezuela’s production. And unlike Venezuela, the U.S. has seen its production increase by nearly 60 percent since 1998.

I have covered the ongoing demise of Venezuela’s oil industry for over a decade. I warned back in 2007 that the actions of the late Hugo Chávez would ultimately ruin the country’s oil industry:

So, can Chávez under-invest in the industry while diverting money to his pet causes? He can for a while, but you can see the results. Despite having enormous oil reserves, he and his cronies are running Venezuela’s oil industry right into the ground. His generosity to the poor has only been possible because he had a goose that laid golden eggs because they constantly reinvested money back into the business. Once he kills the goose, where is he going to get the money to continue his programs?

To recap, a significant fraction of the funds Chávez spent on social programs was a result of billions of dollars of Western oil company investments in Venezuela. Once those investments started to pay off, Chávez forced companies to forgo most of the profits — or leave the country and forgo all the profits.

ExxonMobil and ConocoPhillips did the latter, and Venezuela expropriated the assets. A World Bank tribunal ruled against Venezuela in both cases, but neither company has managed to recover any money. Related: The Blockchain Revolution Is Heading To Space

As Venezuela began to fall apart under Chávez’s successor, Nicolás Maduro, I explained in more detail how Venezuela ruined its oil industry.

In a nutshell, the oil industry is incredibly capital intensive. Billion-dollar quarterly earnings are made possible only by multibillion-dollar capital investments. When Chávez started diverting those earnings into social programs, he failed to leave enough on the table for the oil companies to invest back into the business. The result was inevitable.

I don’t mean to suggest that it’s inappropriate to use oil company revenues for social purposes. The U.S. certainly does that with taxes it collects from the oil industry. But Chávez got greedy and ultimately killed the most important source of revenue for Venezuela. His policies toward business are a major reason for the country’s current woes.

The fall of Venezuela’s oil industry reflects a tale of two approaches to the oil industry. In the U.S., we encourage oil companies to reinvest in additional production through various tax deductions. If we employed the windfall profit tax schemes that often become popular when the oil industry is enjoying an up-cycle, then we would take a step toward how Chávez ran Venezuela’s oil industry into the ground.

Venezuela will continue to produce oil for many years, but its importance among the world’s oil producers has fallen drastically. The Permian Basin now produces 1.2 million BPD more than Venezuela — a situation that would have been unimaginable a decade ago.

Saving Venezuela’s oil industry will require major reforms that once again encourage investment in the country. I doubt that’s on the agenda until the current mess resolves itself. Until then, you can stick a fork in Venezuela’s oil industry. It is an oil superpower no more.

By Robert Rapier

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  • Gary Novak on January 25 2018 said:
    Speaking of the late Hugo Chavez, Rapier says, "His policies toward business are a major reason for the country's current woes." And he reminds us that he told us so in 2007. He's right, of course, and the lesson applies to Chavez's American pal, Obama, who also was prepared to kill the goose of business to redistribute the golden eggs in social programs. Despite the attempts of the "swamp" to take out an insurance policy against a reversal of that supposedly inevitable trend toward the expansion of the bureaucratic state, the current administration is cutting taxes, deregulating, and reviving animal spirits. We are seeing the flip side of the Chavez/Obama approach to governance, and a lot of people who were prepared to adjust to the new normal of mediocrity, are beginning to ask themselves, "What was I thinking?"

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