Venezuela is an oil-rich nation. Oil is Venezuela’s biggest export, largest foreign currency earner, and it has the largest proven reserves in the world. It therefore stands to reason that Venezuela would take a prominent place amongst the OPEC nations. However, nearly two decades of corruption and incompetence have rendered Venezuela’s oil industry impotent. OPEC’s June 2019 report on the oil market suggests that Venezuela’s oil production has shrunk to just 741,000 barrels per day, sharply down from the 1.9 million barrels produced in 2017 and tiny when compared to Saudi Arabia’s the 9.7 million barrels per day. This is a stunning collapse in the Venezuelan oil industry, which produced 3.6 million barrels when Chavez came to power in 1998. Today’s production is just 20% of that level and below that achieved in the 1940s.
The speed of the recent collapse obscures its long-term causes. Venezuela’s oil production has not dwindled because of US sanctions (the US continued to buy Venezuelan oil until March 2019), but because decades of underinvestment have eroded its ability to extract and refine oil. Venezuela earned more than $1 trillion in oil revenues during Hugo Chavez’s presidency. If even a little of this money had been reinvested into the oil industry together with some sensible policymaking, then Venezuela could be producing seven times as much oil as it currently does. Instead, for almost two decades Venezuela’s oil wealth has been stolen, misused, or squandered, first by Chavez, then by his successor Nicholas Maduro.
Firstly, members of the regime, especially Chavez’s family and close associates, have enriched themselves through larceny of the highest degree. Chavez’s daughter is worth an estimated $4 billion, his former driver $1 billion, and myriad other former ministers and hangers-on have squirrelled away untold sums in various offshore account and overseas properties. Many are now under investigation by authorities around the world for corruption, and their frivolous spending is being revealed in lurid detail within court documents.
Secondly, Chavez began using oil to increase his political power both domestically and internationally. Venezuela has supplied Cuba with large quantities of oil in return for security and intelligence support essential to the survival of the Chavista regime. Cuba still receives about 55,000 barrels of highly subsidised oil a day, as well as shipments of petrol, despite pervasive petrol shortages in Venezuela that require citizens to queue for days. Chavez similarly provided heavily subsidised oil to neighbouring Caribbean countries through the so-called ‘Petrocaribe’ initiative to buy their political and diplomatic support in international fora such as the UN. Some money was also used to intervene in foreign elections.
Thirdly, oil revenues were squandered through indiscriminate subsidies. Petrol is heavily subsidised in Venezuela, so much is stolen by regime insiders and sold abroad. In keeping with this theme, energy subsidies accounting for some 20 per cent of oil revenues have largely benefitted the better-off. Chavez further wasted money on consumption subsidies to buy domestic political support. These measures had no sustainable effect in reducing poverty and progress was quickly reversed when money ran out.
Lastly, Chavez wasted huge sums on grandiose state-owned industrial projects such as the Iranian-built Cerro Azul cement plant. Many of Chavez’s vanity projects never started production, and those that did failed to meet their expected production output, typically due to incompetent management. Nowhere is this more evident than in the energy sector, which cannot consistently keep the lights on.
Aside from chronic underinvestment, Venezuela’s oil industry has also suffered from a skills shortage. After a general strike in 2002-03, Chavez fired 20,000 employees of the state oil company PDVSA. Unfortunately, those 20,000 employees were mostly engineers, managers, and geologists; Chavez replaced them with unqualified political supporters. For a while the industry was still helped by foreign experts, but in 2007 Chavez nationalised the assets of foreign oil companies and forced them out of the country. This expropriation has of course ended foreign investment in the oil industry, exacerbating the overall lack of investment. Maduro has responded to Venezuela’s oil crisis by doubling down on Chavez’s policies, recently appointing a General to head PDVSA.
Oil industry experts are damning in their verdict; according to Jose Bodas, general secretary of the Oil Workers Federation trade union, “what we are witnessing is a policy of destroying the oil industry”. Reversing decades of destruction will be a difficult and time-consuming task. New laws will be required to permit desperately needed foreign investment and expertise. PDVSA must be cleansed of corrupt and incompetent staff and a culture of professionalism reinstated. High quality specialists will need to return to collapsed Venezuela. The sooner Maduro leaves power, the sooner Venezuela can begin the long process of rebuilding.
More information on the Venezuela Campaign can be found on their website.