Venezuela's oil wealth fueled Hugo Chavez's socialist programs at home and policies abroad, but the world's largest petroleum reserves were never enough to deliver prosperity in his 14-year rule.
One of Chavez's final acts, ordered last month from his hospital bed, was to cut the price of the national currency by a third—the seventh devaluation of his presidency—in an attempt to narrow a staggering deficit with a hike in the cost of living for Venezuelans. He died yesterday at the age of 58, leaving behind a nation struggling with shortages of housing, food, goods, and electricity, along with high inflation and rampant crime.
In the economic isolation that Chavez imposed, development of the nation's vast oil reserves languished, most outside observers agree. Venezuela's oil production has declined 25 percent since 2001. Crude exports to Venezuela's long-time chief customer, the United States, have fallen roughly to the level seen before Chavez took office. Indeed, after a deadly explosion last year in its main refinery, Venezuela was forced to rely on gasoline imports from the United States to keep its economy moving. (See related: "Venezuelan Refinery Under Scrutiny After Deadly Blaze.")
Now, in addition to electing a new leader, Venezuela must choose a path for managing its immense resources—either staying the course that Chavez plotted in support of his "Bolivarian revolution," or attempting to forge a future that better realizes the value of its natural treasure.
Large, Sticky Oil Stores
Because oil accounts for 95 percent of Venezuela's export earnings and nearly half of its federal budget revenue, Venezuela is deeply dependent upon a factor largely outside its control—the global price of oil. Chavez took office in 1999 amid economic turmoil in Venezuela caused by a precipitous fall in the price per barrel during the Asian economic crisis. As oil prices climbed steadily over the next decade, the new flow of revenue bolstered Chavez's regime.
"Oil prices are what made Hugo Chavez possible," said Daniel Yergin, a leading energy industry consultant, in an email from Houston, where he is hosting one of the industry's biggest conferences, IHS Ceraweek, which was abuzz with the news out of Caracas. "The collapse of oil prices [from 1997 to 1998] and the resulting discontent in Venezuela gave him the opening to become president, just seven years after he was sent to jail for leading a coup," said Yergin, author of two histories of the oil industry. "And it was rising oil prices since 2000 that gave him the financial resources to consolidate power, court public opinion and try to turn his Bolivarian revolution into a global campaign for 'twenty-first century socialism.'"
Meanwhile, advances in technology had made it possible to extract heavy oil mixed in sandstone, like the vast reserves in Venezuela's Orinoco belt, in the basin of one of the longest rivers in South America. In 2010, in a review of Venezuela's stores based on the current state of technology, the U.S. Geological Survey concluded that, based on the state of technology at the time, Orinoco held the largest accumulation of oil it had ever assessed. One widely followed global review of resources, BP's, put Venezuela ahead of Saudi Arabia as the nation with the largest stores of oil. Others said Venezuela was in a close second place.
But much like the tar sands of Alberta, Canada, the heavy oil of the Orinoco belt requires specialized production and refining processes. Canada's tar sands oil production has skyrocketed over the past decade thanks to application of the new technologies, but Venezuela's heavy oil development has stagnated. The state-run oil company, Petroleos de Venezuela (PdVSA), had made an effort to attract foreign investment and the technical expertise of the large multinational oil companies before Chavez took office, but those efforts were halted. In 2002, nearly half of PdVSA's employees walked off the job in protest against Chavez's management of the company's operations; Chavez responded by firing 18,000 and consolidating control.
In 2006 and 2007, Chavez fully nationalized oil exploration and production, forcibly seizing assets of Exxon Mobil, France's Total and Italy's Eni. Last year, Venezuela said it paid Exxon $250 million to settle Exxon's legal claims over the seizure; the company originally had sought to freeze $12 billion in PdVSA assets as compensation.
Isolation and Declining Oil Production
Expelling the foreign oil companies served Chavez's leftist aims, but deprived Venezuela of the expertise to tap its unique geology and the ability to earn far more oil revenue. "In a way it showed just how ideological Chavez was," says David Jhirad, professor and director of the energy resources and environment program at Johns Hopkins University's School of International Studies, who served during President Bill Clinton's administration as the U.S. Department of Energy's deputy assistant secretary for international energy policy. "The state still could have gotten a lot of those revenues through taxing the companies and through partnerships. Venezuela could have achieved far more for the goals of social justice with an approach that was much more pragmatic and smart."
While oil production declined, Venezuela's take on each barrel also declined due to Chavez's policies at home and abroad. Venezuelans paid the lowest prices in the world for gasoline—from 6 cents to 12 cents per gallon in recent years—and even Chavez threatened in recent years that the high subsidies for fuel would have to be rolled back, blaming citizens for energy waste. (See related gallery and map: "Eleven Nations With Large Fossil Fuel Subsidies" and "Fossil-Fuel Burden on State Coffers.")
Under Chavez's "Petrocaribe" initiative, Venezuela provided a sizable amount of its crude oil and gasoline to regional allies at below-market prices and with favorable financing terms. About 400,000 barrels per day, nearly a quarter of the nation's exports, went to Cuba, where Chavez spent much of his final months in ultimately futile treatment for cancer. (See related story: "Cuba's Oil Quest to Continue, Despite Deepwater Disappointment.") The favorable exports rankled many in Venezuela and were taken up by opposition leader Henrique Capriles in last year's election.
Capriles, a centrist and governor of Miranda state, is expected to make another bid at the presidency in the elections that should be held within the next 30 days under Venezuela's constitution. But Chavez's hand-picked successor, former bus driver turned loyal lieutenant Nicolas Maduro, has signaled his devotion to continue Chavez's path. "Our people will never again see the bourgeoisie plundering this country," he has said. "Better to be dead than traitors to the people and to Chavez!"
Jhirad says it remains to be seen whether Venezuela "can take all this ideological baggage of Chavez and kind of bury it" in an effort to rebuild its economy. Yergin notes that post-Chavez Venezuela now stands greatly weakened by spending, capital flight, and shortages. "Without his charisma and force of character, it is not all clear how his successors will maintain the system he created," he said.
This story is part of a special series that explores energy issues. For more, visit The Great Energy Challenge.