Disaster looms in Venezuela

Every time I read a headline about crude oil prices, I think about Venezuela.

Venezuela’s Communist strong man, Hugo Chavez, has been living large during the past few years, thanks to the skyrocketing price of crude oil. Oil accounts for 90% of Venezuela’s export revenue, and more than half of the government’s annual operating expenditure.

Chavez is a clever politician though, and when he is not busy taking over private industry, silencing his nation’s broadcast media, or nationalizing an ever-growing segment of his nation’s economy, he expends a great deal of effort redistributing a handsome portion of his booty back to the people of his country. An example: after he placed his minions in direct control of Venezuela’s state-run oil company, PDVSA, he converted part of its corporate office space into a luxury university that currently provides 5,000 students with a completely free education; the university’s expenses are paid by money taken directly from PDVSA’s revenues. Needless to say, Chavez is very popular with the poor people of Venezuela.

But Hugo Chavez has a big problem — his government is very good at confiscating wealth from the private sector, but it has been rather inept at growing his nation’s economy or creating sustainable sources of income apart from crude oil. And like most authoritarian regimes, his government is infested with cronyism and incompetence. Concerning the deteriorating state of PDVSA, I blogged over a year and a half ago:

Chavez replaced experienced engineers, directors, and managers with cronies who know little about oil production or the business of oil trading. The result has been a marked increase in the number of spills, fires, and other accidents which have turned Venezuelan oil into a very unreliable commodity.

As PubliusPundit and other bloggers have noted, Venezuela’s oil output has been steadily declining. He has tried to downplay this trend by aggressively pursuing partnerships with Iran and China, perhaps in an effort to form a rival cartel to challenge the dominance of OPEC. But his problems have not gone unnoticed.

In October, the BBC quoted an overly-confident Hugo Chavez stating, “a price range of US$70 to US$90 a barrel will give us more than enough room.” And Jose Manuel Puente, from the Public Policy Centre in Caracas, told the BBC, “There is no chance of an economic collapse this year,” because average oil prices for 2008 have been strong. But what about 2009? At the close of the market today, January crude oil futures stood at $36.22 per barrel, only about half of what Chavez himself claims to need in order to sustain his economy.

Over two years ago, in response to Chavez’s takeover of PDVSA, He Who Needs No Linkage had this to say:

The only thing saving Chavez from himself is steadily rising oil prices; if they reverse, it’s a good bet that the Venezuelan government will fall, doing serious damage to the resurgent left-wing populist strain of Latin American politics. I’m told that PDVSA used to be known as the only state-run oil company that was competitive with the majors in terms of expertise and efficiency; now it is rapidly descending past other state-run firms in terms of competence. Since Venezuela’s oil is unusually heavy, sulfurous, and difficult to extract, that decline will be a disaster for Venezuela’s poor, who may be enjoying those marble elevators without electricity to run them if oil falls back towards $25 a barrel. This is not some grim gloating of a classically liberal economics writer at having been proven right. If PDVSA screws up the Venezuelan oil supply, consumers around the world will suffer, the poorest worst–and the poorest Venezuelans worst of all.

All of this is even more troubling in light of Hugo Chavez’s newly strengthened ties to Russia. The Russians have loaned Venezuela a large amount of money that is reportedly being used to buy weapons and to establish a nuclear energy program.

Chavez is famous for his flamboyant speeches accusing the United States of plotting to destroy him and undermine his success as a people’s revolutionary. If Chavez really believes that the US is behind an international conspiracy to lower oil prices, and thus poses a serious existential threat to both himself and his government, then he may respond in a very irrational — and potentially deadly — manner, under the impression that he must do what ever is necessary in order to save himself and protect his nation. With Russia, China, and Iran poised to be entangled in such an act, we should all be very concerned.

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