Venezuela’s Oil Gambit

Years of threats and bluster over the operations of U.S. and European oil companies in Venezuela turned more serious this month as President Hugo Chavez set a May 1 deadline (NYT) for nationalizing several major foreign petroleum projects. Chavez’s announcement prompted fear from oil executives, but many analysts say the move could be even more disastrous for Venezuela itself.

Chavez says he intends to return control of Venezuela’s oil fields to the Venezuelan government, and their profits to the country’s people. He claims that by prioritizing local markets, Venezuela will be able to guarantee Latin America energy (Bloomberg) for at least the next hundred years. He is also courting a new wave of potential import markets. Most notable among these is China, which Chavez says will soon surpass the United States (MercoPress) as Venezuela’s largest crude oil customer.
Chavez plans to nationalize foreign-operated oil projects under Venezuela’s state-owned oil company, Petroleos de Venezuela (PDVSA). It’s unclear precisely what the effect will be on PDVSA. The company is already stretched thin, given Chavez’s habit of giving ideologically motivated oil handouts to peoples across the North and South American continents. Reports indicate PRVSA pays a considerable competitive price (AP) because of these handouts. Further consolidation under PDVSA’s umbrella could make things even worse for the company. The Economist’s Free Exchange blog predicts unhappy consequences: “The expropriation will almost certainly see a considerable outmigration of talent and capital from the fields, and PDVSA is already underinvesting in its current properties in order to divert money to social spending.”

Council on Foreign Relations