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How Venezuela Ruined its Oil Industry.
Venezuela’s highest-ever oil production occurred in 1998 at 3.5 million barrels per day (BPD). That also happened to be the year that Hugo Chávez was elected president of Venezuela. During the Venezuelan general strike of 2002–2003, Chávez fired 19,000 employees of the state oil company Petróleos de Venezuela, S.A. (PDVSA) and replaced them with employees loyal to his government.
This eliminated a tremendous amount of experience from Venezuela’s oil industry.
In 2007 oil prices were on the rise, and the Chávez government sought more revenue as the investments made by the international oil companies began to pay off. Venezuela demanded changes to the agreements made by the international oil companies that would give PDVSA majority control of the projects. Total, Chevron, Statoil and BP agreed and retained minority interests in their Venezuelan projects. ExxonMobil and ConocoPhillips refused, and as a result, their assets were expropriated. (A World Bank arbitration panel has ruled against Venezuela in both expropriation cases, but the country continues to appeal the decisions).
So there are primarily two related causes that have resulted in the steep decline of Venezuela’s oil production, despite the sharp increase in the country’s proved reserves. The first is the removal of expertise required to develop the country’s heavy oil. This started with the firing of PDVSA employees in 2003 and continued with pushing international expertise out of the country in 2007.
Second, the Chávez government failed to appreciate the level of capital expenditures required to continue developing the country’s oil. This was in no small part due to inexperience among the Chávez loyalists that were now running PDVSA, but it may not have mattered in any case. When oil prices were high, Chávez saw billions of dollars that could be siphoned to fund the country’s social programs, and that’s exactly what he did. But he failed to reinvest adequately in this capital-intensive 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?