Venezuela’s Chávez Tears up Oil Contracts, Bets on Permanently High Prices

Hugo Chávez, the current president of Venezuela, is a typical leftist of the old model – so long as he is making the right noises about capitalism and imperialism, he can run his economy into the ground and thus screw over the little people forever. On the other hand, he doesn’t mind embarrassing the Bush White House at summits, so he isn’t completely awful. His latest move, forcing a more restrictive system on oil companies in his country, looks like more of the same. Yet his critics are on the left, and they’re saying he isn’t Che II but a sell-out. Future oil prices will decide which it is.

Ten years ago, Venezuela opened its oil markets up to outside actors on rather favorable terms to the outsiders. This was perfectly reasonable since crude was selling for under $20 a barrel, and Venezuela’s oil is heavy, sulfurous and geologically tricky to pump out relative to Saudi Arabia and other producers. But things have changed; oil is dearer and Mr. Chávez, a populist firebrand, is now president.

So, the royalties paid to Venezuela are going to rise to 30% from 1%, and taxes on oil companies will rise to 50% from 30%. This means that the government of Venezuela is going to get 82.5% of the profits from the operations of oil companies, mostly foreign, in its territory. If the oil companies don’t like it, they can leave by December 31. This looks like a pretty good deal for the country, and a leftist government awash in oil money can do all sorts of things to help its people (but somehow they never do). And his announcement on TV was all the negotiation offered – what a tough guy!

Of course, this rather draconian move only appears to be a good deal for Venezuela if one is sitting in the Petroleum Club in Dallas on the receiving end. The fact is that most oil companies have been begging oil producing states for deals like this. One critic quoted in the Venezuelan media and in the Economist asked, ““If we have an anti-imperialist discourse here, why are we welcoming the chairman of ChevronTexaco?” It is hard to imagine Riyadh or Kuwait City letting non-locals move this far up the oil production stream.

Moreover, in a global market, there is a huge amount of power that comes from being a minority owner and having the ability to walk away. Right now, at $50-70 a barrel, oil companies want to be everywhere. But if things move back to $40 (granted, that is a big “if”), there are easier places to make money than Venezuela. And then, from whence will the government’s money come?

© Copyright 2005 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.
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