Venezuela’s Socialist Utopia is out of Gas

Resource rich Venezuela, which boasts of having some of the largest oil reserves in the world, has now reached an all time low in petroleum production. The exportation of crude oil used to account for 95 percent of Venezuela’s export earnings until the late socialist savior, Hugo Chávez, began to re-distribute the country’s wealth in the form of cash subsidies. Venezuela's former petroleum minister, Rafael Ramirez, recommends importing Algerian oil to shore up their devastated economy in a desperate attempt to thwart bankruptcy.

Venezuela has always had to deal with the problem of extra heavy crude oil from the Orinoco Basin. This region produces a crude oil that is too dense to be transported through pipelines to local ports and then exported abroad. To deal with this problem, the heavy crude oil is usually diluted with super light sweet crude oils. However, this problem is insignificant when compared to the poor management of the state owned oil giant Petróleos de Venezuela Sociedad Anónima (PDVSA).

Venezuela can produce light oils needed to dilute Venezuela’s heavy crude. However, production has been curtailed by a lack of investment, abandoning the exploration of light crude and the nationalization of companies that formerly produced light crude. This is the result of the government-run oil giant that is now being controlled by inexperienced bureaucrats who are obsessed with taking money out of the coffers. It is what some call killing the goose that lays the golden egg.

The Venezuelan government is now asking foreign companies to invest in upgrading facilities that help make heavy crude oil exportable from the Orinoco Basin. No foreign companies want to take that risk because they fear expropriation or minority ownership under Chávez’ socialist rules. Even though oil prices have risen from $9 to $100 per barrel in the last several decades, past president Chávez and current president Maduro have managed to destroy their cash cow.

Nearly half of PDVSA’s employees walked off the job in protest of Chávez, bringing the company’s operations to a halt in 2002. In retaliation, PDVSA fired 18,000 workers and restructured corporate organization solidifying government control of the company. Though some of the 18,000 employees were re-hired, the loss of valuable experienced personnel has never been entirely recovered. This has resulted in a loss of technical capabilities that have driven PDVSA’s production levels to an all time low.¹

Logically, a government would restructure its policy to allow for private investment that would spend heavily in light crude exploration and production and it would stop subsidizing petroleum consumption at absurdly low prices.

However, this government takes no measures. In fact, Juan Fernández, former PDVSA’s executive planning director, has indicated that the government is now forcing motorists to install a chip in their car to monitor the amount of fuel they pump in their cars limiting them to 5.4 gallons per day. Rather than addressing the root cause of the shortages, the same socialist bureaucrats are imposing fuel restrictions to solve the very problems they caused. Such policies, whether applied to food or gas shortages, solve nothing.

There is an old story that circulated in the former Soviet Union that went like this: If the Soviet Union conquered the Sahara, what would happen? Nothing would happen for 50 years, and then there would be a shortage of sand. It seems something similar has happened to Venezuela in 15 short years. Government mismanagement is causing the oil-rich socialist utopia to run out of gas.

Reference:

• 1 http://www.eia.gov/countries/c...