Venezuela's Heavy Oil Didn't Mix Well With Its Socialist Experiment

This article does a fairly deep dive into the Venezuela Oil problem.  Meaty, lengthy and disruptive.

Tackles some prickly subjects that will likely poke people regardless of their political persuasions; everyone seems to be villain in this article.  But it is more akin to intellectual poking and prodding rather than trolling, despite the clickbait title.

The author also provides some clear-headed information about the economic difficulties of Extra Heavy Crude Oil, with its low EROI (Energy Return On Investment).  EROI is a ratio that measures how much energy is used to extract a particular quantity of energy from any resource.  Canadaian Tar Sands, please do take note.

And U.S. Shale Oil producers will hopefully take note of Venezuela's compounding problems of increasing debt combined with moderate oil prices. 

$100 oil is simply not sustainable.  Ignore that at your own risk.

 

Here is a short exerpt from the lengthy musings:

Venezuela’s collapse is a window into how the Oil Age will unravel

The Folly of Endless Growth

Unfortunately, much like his predecessors, Chavez didn’t appreciate the complexities, let alone the biophysical economics, of the oil industry. Rather, he saw it simplistically through the short-term lens of his own ideological socialist experiment.

From 1998 until his death in 2013, Chavez’s application of what he called ‘socialism’ to the oil industry succeeded in reducing poverty from 55 to 34 percent, helped 1.5 million adults become literate, and delivered healthcare to 70 percent of the population with Cuban doctors. All this apparent progress was enabled by oil revenues. But it was an unsustainable pipe-dream.

Instead of investing oil revenues back into production, Chavez spent them away on his social programmes during the heyday of the oil price spikes, with no thought to the industry he was drawing from — and in the mistaken belief that prices would stay high. By the time prices collapsed due to the global shift to difficult oil described earlier — reducing Venezuala’s state revenues (96 percent of which come from oil) — Chavez had no currency reserves to fall back on.

Chavez had thus dramatically compounded the legacy of problems he had been left with. He had mimicked the same mistake made by the West before 2008, pursuing a path of ‘progress’ based on an unsustainable consumption of resources, fuelled by debt, and bound to come crashing down.

So when he ran out of oil money, he did what governments effectively did worldwide after the 2008 financial crash through quantitative easing: he simply printed money.

The immediate impact was to drive up inflation. He simultaneously fixed the exchange rate to dollars, hiked up the minimum wage, while forcing prices of staple goods like bread to stay low. This of course turned businesses selling such staple goods or involved at every chain in their production into unprofitable enterprises, which could no longer afford to pay their own employees due to haemorrhaging income levels. Meanwhile, he slashed subsidies to farmers and other industries, while imposing quotas on them to maintain production. Instead of producing the desired result, many businesses ended up selling their goods on the black market in an attempt to make a profit.

As the economic crisis escalated, and as oil production declined, Chavez pinned his hopes on the potential transformation that could be ushered in by massive state investment in a new type of economy based on nationalised, self or cooperatively managed industries. Those investments, too, had little results. Dr Asa Cusack, an expert on Venezuela at the London School of Economics, points out that “even though the number of cooperatives exploded, in practice they were often as inefficient, corrupt, nepotistic, and exploitative as the private sector that they were supposed to displace.”

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(edited)

Current state of affairs of Venezuelan economy is very pathetic. What has brought the situation to such a low  would be a long drawn out conclusion . However, socialist experiment  is not the only reason for this downfall. China is a classic example of socialist country which has mixed and successfully balanced capitalist mindset into socialist foundation. Venezuelan leadership was lackadaisical in its approach to develop its economy beyond oil. Easy oil and socialist temperament gave easy initial success and command on its 32 million populations with mismanagement, corruptions along with  army sops as  privileges and patronages. But over a long haul that severely weakened the administrative set up and brooded a repressive regime silently but surely. Allowing Army to taste the blood in civil administration is the single most dangerous thing which could happen to any country. In this difficult time, it will be near impossible for any President to come out of the clutches of corrupt army officers without hard bargain. In this set up, under certain socio-economic and political compulsions like the current one, the  President is forced to become  merely a puppet to the army to cling on to power. 

Edited by Sukumar Ray
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13 minutes ago, Sukumar Ray said:

Allowing Army to taste the blood in civil administration is the single most dangerous thing which could happen to any country. In this difficult time, it will be near impossible for any President to come out of the clutches of corrupt army officers without hard bargain. In this set up, under certain socio-economic and political compulsions like the current one, the  President is forced to become  merely a puppet to the army to cling on to power. 

U.S. Offers Sanctions Relief For Army Officers Who Flip On Maduro: Will It Work?

... While the lower ranks of the Venezuelan army attempt to survive on what amounts to $10 a month, the generals remain fiercely loyal as they live large on personal criminal fiefdoms granted by Maduro in the form of "narco-state" perks ranging from drug-running, contracts for hundreds of social housing projects, overseeing ports, money laundering, to fraud  as we detailed recently. This means Guaido's much touted "amnesty offer" will likely do little to encourage what is still a trickle of desertions and defections to become a wave.  ...

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