Another Castro, With Oil?

Roger Cohen’s column in yesterday’s New York Times called attention to Venezuela’s impending constitutional referendum, which is expected to cement Hugo Chavez’s aspirations as President-for-Life, giving him effective control of the few levers of government that he had not yet consolidated. The following is excerpted from a posting I wrote in August 2006, examining some of the implications for Venezuela and the US:

As Fidel Castro fades from view and Venezuelan President Chavez accretes ever more power to himself, the speculation about Sr. Chavez’s ability to assume the mantle of Castro's revolutionary leadership grows. That would be worrying enough, geopolitically, if Venezuela weren't also our fourth largest oil supplier. Oil is the only thing that makes Chavez's "Bolivarian Revolution" economically feasible, though it's worth recalling that Chavez's own actions had previously put Venezuela's future oil revenues into a death spiral, by breaking the 3-month strike of the national oil company, PdVSA, and firing 18,000 managers and workers. By a quirk of fate or good luck, this was just about when oil began its long march to $75/barrel, with the US invasion of Iraq. So even though Venezuela's oil production has never entirely recovered from the strike, its oil revenue has risen dramatically.

According to the Oxford Institute for Energy Studies, Venezuela's oil export revenues in 2000 were $27 billion, but their net from that was only about $11.3 billion, after accounting for tax and royalty rates that were intended to make the country's challenging oil reserves more attractive to international investors. At current (2006) prices, gross revenue on today's lower volumes should be roughly $50 billion, but their net take has probably tripled, after factoring in the recent changes in terms. That's quite a track record, but where does it go from here? While oil may yet hit $100, that won't necessarily add another $25/barrel to the price of the heavy oil Venezuela specializes in. We are into diminishing returns, here. Venezuela has only a few more levers to pull on oil revenues:

• Completing the recent partial nationalizations. However, if companies like Chevron actually do know more about running these complex facilities than PdVSA's downsized staff, production would fall again.


• Expanding production via more international investment, presumably with a different group of companies, since the political risk models of the folks who've already been semi-nationalized must be flashing all sorts of warnings. Unfortunately, those same companies are the ones that best understand the intricacies of Venezuela's Orinoco Belt geology and the necessary upgrading technology. There's also a significant time lag involved in bringing new upgraders on-line.


• Cutting off oil exports to the US. They'd have to hope that the resulting rise in world oil prices would more than offset the much higher freight costs to Venezuela's alternate markets in Asia or Europe, and that this could be done without triggering a direct response from us. This looks like a fool's bet.

So, unless the adherents of the Peak Oil theory are correct and global production will never again outpace demand growth, Mr. Chavez could just be looking at the high-water mark of his oil revenues, at the same time that he has committed himself to foreign activities and transactions that will tie up an increasing share of them, on top of an ambitious domestic social agenda. There's no better antidote to good luck than hubris, and an extra $20 billion or so of oil money only goes so far in a region with an aggregate GDP of $2-4 trillion.