
How Bad Off Is Oil-Rich Venezuela? It’s Buying U.S. Oil - adventured
http://www.nytimes.com/2016/09/21/world/americas/venezuela-oil-economy.html
======
jimmywanger
Currency controls and price controls and government nationalization have
destroyed Venezuela.

Currency controls: there's a 1:10 exchange rate, dollars to bolivars, for
essential imports, like food, medicine, etc. The black market exchange rate is
about 1:1010.

To get the good rate, you need connections. But hey, it's a pain in the ass to
actually contact suppliers and get goods through customs, and you're capped at
what price you can sell goods at, so what you do is actually exchange 10
bolivars for a dollar, and turn around and exchange that dollar for 1000
bolivars on the black market. You keep doing that until either you have way
too much money or you lose the preferred exchange rate.

Price controls: No country is an island these days. No matter what good it is,
you need external imports. For instance, if you're making beer, you might need
to import hops or barley (true story, look up Polar in Venezuela).

With the currency controls, you can't get hard foreign currency to pay your
suppliers. And they sure as heck aren't going to accept your debased currency
as payment. So your factories sit idle, because you just can't get supplies
for production, and then the government nationalizes your factory because
you're "sabotaging production".

Government nationalization: The goal of the government is ideological purity.
If you're not producing goods for sale at artifically low prices (sometimes
the sale price is below the cost of production), the government swoops in,
calls you an enemy of the revolution, and replaces all the skilled people who
are ideologically impure, such as managers, with party hacks who have no idea
what they're doing. That's why Venezuela oil production is in the toilet.

The Nordic version of "socialism" simply involves taxing the rich and giving
subsidies to the poor. They don't try to dictate prices or control means of
production or fiddle with the exchange rate. The authoritarian socialism
Venezuela is using right now has failed in every instance it has been tried.

~~~
jimmywanger
Funny thing is that socialism tends to reject religion, but price controls
originated in Christian thought.

[https://en.wikipedia.org/wiki/Just_price](https://en.wikipedia.org/wiki/Just_price)

What a lot of people don't realize is that prices aren't inherently good or
bad in and of themselves, they just _are_. If somebody else is willing to pay
20k for a diamond, that's the price of a diamond.

No amount of legislation or argument will drive down the price of a diamond to
what it "should" be.

See
[http://www.wsj.com/articles/SB100014240527023034600045791921...](http://www.wsj.com/articles/SB10001424052702303460004579192100178248012).
The prices of electronics dropped in price after a governmental mandate. Guess
what? After the store inventories were depleted, they never got any more TVs
to sell.

~~~
cvwright
> What a lot of people don't realize is that prices aren't inherently good or
> bad in and of themselves, they just are. If somebody else is willing to pay
> 20k for a diamond, that's the price of a diamond.

Arguably, even the early Christian thinkers like Acquinas agree with you on
this.
[http://www.thepublicdiscourse.com/2015/08/15435/](http://www.thepublicdiscourse.com/2015/08/15435/)

~~~
jimmywanger
In theory, yes. But look at this following quote from the article:

> but was simply the current market price, with this important reservation: in
> cases of collusion or emergency, the public authorities retained the right
> to interfere and to impose a fair price.

In socialist governments, they see the free market as always "colluding" to
cheat the working man. That's why they set unrealistically low prices for
basic goods, like bread, and rail against producers for "colluding" because
hey, most price costs about the same amount, so it has to be a coordinated
effort while people are going hungry.

------
cobbzilla
Curious American asking any Venezuelans out there: how does this situation get
any better? What do you look to for hope? I'm not familiar with the Venezuelan
media perspective (any non-state-affiliated stations left?), but from here, it
seems like there is no serious effort to change course; on the contrary Maduro
seems to be driving ahead with the notion that, somehow, more of the poison
will cure the patient.

When does the change in direction come? What brings it on? Will Maduro step
down? Will his successor do any better? Or will his successor be even more
dictatorial? It's all very worrisome, my heart goes out to those who live
under such incompetent rule.

~~~
bpolania
First step is to reduce public spending and fight corruption, just very basic
steps will bring significant improvement.

Then, welcome foreign and local investment: privatize most of the industries
that were nationalized and are now idle, and fix labor laws a little, this
also include liberalization of currency, enforce property laws so private
companies feel safe investing in the long term.

When can this happen? As of today no sooner than 2019 when the next
presidential elections will take place. Unless a coup is on the table but I
don't see that happening.

~~~
jimmywanger
I doubt it will happen in 2019, and this is why.

Maduro has painted himself into a corner. He has very nakedly announced that
he will do everything in his power to remain in power, even if it means
crapping all over the constitution, and stripping the legislative branch of
all its power.

He'll figure something out in 2019. He has all the guns, and he know that if
he falls out of power, he'll be strung up on the nearest lamppost like
Mussolini. He's doubling down because he really has nowhere else to go. Once
you realize that, that he has to do everything he's doing to cement the
military to his side, it all makes perfect sense.

------
matt_wulfeck
Venezuela is a failed state at this point. I'm more than happy to personally
take them as an example of why spending big on social programs doesn't produce
long-lasting social benefits. I understand many people will find a point of
disagreement here.

This is especially true when corruption is rife. In countries with high
corruption, it seems the very best thing to do is to limit as much as possible
how much money flows from the top, which is another way of saying limit
federal government spending.

~~~
joshred
Yeah, but what about the other states that spend on social programs and ended
up successful?

This is like throwing out a carton of eggs because one of them broke.

~~~
adventured
How many nations fall into that category?

There are only roughly 28 nations on earth with a GDP per capita over $20,000
for example.

I happen to find what the six or so best managed welfare states in Europe have
accomplished, to be impressive. However, for every Sweden in Europe, there are
two Bulgarias. Or there's France, which has seen economic stagnation for
nearly a generation. Most of the well-managed welfare states have seen zero or
near-zero economic growth for nearly a decade at this point, while their debt
has exploded vastly higher as they try to fake-maintain their present standard
of living by stealing from the future.

~~~
varjag
Look this is pointless argument. Same way we could argue that small
government, sovereign citizen, libertarian meritocracy leads to Somalia.

There is a continuum of social systems that can work, and whether it works
mainly depends on confounding factors. History, culture fit, geography,
neighbours. E.g. Sweden's been an empire most of its history; Bulgaria has
been a colony. Check their performance in historical cohort perhaps? Sweden vs
Turkey and Bulgaria vs Tajikistan?

Chavez' Venezuela system is well beyond the "habitable range" of governance.
To present it as some condemnation of West European welfare states is
ridiculous.

------
conistonwater
> _Early this year, the United States began shipping more than 50,000 barrels
> a day of the light crude that Venezuela needs to prepare its own oil for
> export_

What does this mean? How does this work? Why do you need oil to make oil?

~~~
tptacek
This is addressed in the article: the oil industry in Venezuela is in
disarray, so the country can't rely on its own supply. They have enormous
reserves, but they can't reliably draw from it or refine it.

~~~
jondubois
They should just lease out licenses to allow foreign companies to draw the oil
themselves and use the proceeds to fix their own oil infrastructure.

They have so many options to chose from to fix their economy. It seems like
they don't have the will to fix anything. I wouldn't be surprised if there is
some sort of corruption going on.

The leaders of the country seem to be intentionally draining the money out of
the country (and personally profiting from this).

~~~
douche
Somehow I don't imagine Royal Dutch Shell will be _that_ eager to dive in
again, unless they've got some very strong assurances that the next government
isn't going to just pull the rug out from under them again...

~~~
jondubois
It seems like a change of leadership would be necessary to restore trust. When
you consider this, the corruption actually makes sense.

The country's leaders probably know that it's just a matter of time before
they are removed from power and are trying to make use that time they have
left to enrich themselves personally.

~~~
jessaustin
This seems like it could explain all corruption everywhere? After all, "it's
just a matter of time" for everyone.

------
kilroy123
What I don't understand is, how the hell are the leaders still in power? Why
aren't people taking drastic action against this failed government?

If people are literally not eating food, that's typically when there's a
revolution. If I couldn't eat everyday and feed my family, I'd be out in the
streets. Why not? You have nothing to lose at that point.

~~~
DefaultUserHN
>Why aren't people taking drastic action against this failed government?

They don't have the 2nd Amendment.

~~~
bpolania
Venezuela doesn't have a 2nd amendment, but the lack of guns is certainly not
the reason, if anything is the excess of guns in the street, what people in
America don't understand is that the government will always be better armed
than the population, Syria is a good example.

What keeps totalitarian governments is will to power, how much os the
government willing to risk against the population. Owning a gun is not the
same as being willing to die.

------
tim333
You wonder how long Maduro will hang in there. With him gone they could return
to somewhat sane economic policies.

~~~
adventured
I keep wondering if Venezuela won't end up somewhat copying Argentina and
politically moving away from the numerous failed policies of the Chavez era.

~~~
iKenshu
As Venezuelan I hope no.

I think everything that can happen with the opposition can't be worse.

------
alphydan
How Bad Off Is Oil-Rich USA? It’s Buying oil from all over the world!

in 2015, the USA imported 9,400,000 barrels every day from 82 countries
(Mostly from Canada, Saudi Arabia and ... surprise, surprise from Venezuela).

Now the NYT thinks that Venezuela importing 50,000 barrels of light crude (to
dilute their heavy crude) is news? They forgot to mention that last year the
US imported 830,000 barrels from Venezuela (the third largest supplier to the
US). If you read the actual import/export numbers [0], you will understand
that it's just a political submarine article. The reason Venezuelan oil
production is declining is a pretty complex phenomenon (driven mostly by
Geology and exacerbated by mismanagement, brain drain, corruption, etc).

[0]
[http://www.eia.gov/tools/faqs/faq.cfm?id=727&t=6](http://www.eia.gov/tools/faqs/faq.cfm?id=727&t=6)

~~~
abysmallyideal
The US is hot on the plan to burn all of the world's fossil fuels and natural
gasses before anyone else does. Some old strategy from ww2.

Edit: my android autocorrect is altering my posts

~~~
alphydan
I'm afraid there is no such plan. US production has been declining since the
70s in spite of all attempts to keep it going. Only with the >$100/barrel
prices from the last few years did fracking become viable and production
recover (Tight oil's growth in the US is not expected to last very long
though).

------
k_sh
> Oil accounts for half of the Venezuelan government’s revenues

...Who thought that was a good idea?

~~~
Analemma_
Nobody, but the Resource Curse seems to be one of those iron laws that happens
inexorably even if people are aware of it (cf. principal-agent problems
pushing prices upward), unless very determined action is taken to avoid it
(like Norway), and that kind of action wasn't going to happen under Chavez.

~~~
ars
> unless very determined action is taken to avoid it (like Norway)

Norway is not immune. It's the current popular thing to say, but Norway will
fall victim to it just like everyone else does.

Look at some charts on their exports: 60%+ is energy. Look at their industry:
Basically non-existent, except energy. Look at where young people are making
their living: Energy.

If (when?) the oil runs out (or people stop buying it) their economy will
implode - the fund they setup will not last long enough (they have enough for
about 10-20 years). No one is developing skills in any other fields, it will
take a generation or more to transition, and in the meantime everyone depends
on charity (i.e. the fund) - and that's toxic to any economy because people
become used to it.

So what you wrote about "Iron Law" is correct _without_ the qualifier you
added for Norway.

~~~
milcron
Still, they're certainly doing better than many other oil-rich nations.

~~~
ars
That's true, but it's not exactly a high bar.

They gets lots of credit for being aware of the problem, but less credit for
thinking they are doing better than they actually are.

It's too bad oil will be worth less eventually - otherwise they could just
force themself to leave it in the ground, but the way things are going they
had best convert it to cash as soon as possible.

It makes me wonder if it's economically long-term better for them to pretend
not to have oil and develop their economy, vs. selling the oil.

Long term, which will give them more total cash?

------
dredmorbius
There are some crucial points missing from and/or obscured in this story. Yes,
Venezuelay has run some massive social benefit programmes, including
subsidising many standard goods, mosts especially fuel and food (both of
which, on reflection are fuels), for years. _So has virtually every other oil
state._

The situation in Venezuela devolves in large part, though not entirely
exclusively, from:

1\. The globally depressed petroleum market. After massive price spikes in the
late 2000s, increased extraction, mostly from very highly-financed
unconventional wells, and an ongoing global economic recession, have caused
oil prices to fall.

2\. The highly-financed well operators, much as Venezuela, have the problem of
high fixed costs, mostly debts, which must be serviced in order to avoid
bankruptcy. This creates a perverse incentive to _increase_ supply as price
_falls_. Since these operators have high _marginal_ costs, their profits are
also lower to start with.

3\. Venezuela's oil reserves, among the largest in the world, have _always_
been less desireable than West Texas or Persian Gulf oil, both of which are
"light sweet crude" \-- comprised largely of smaller hydrocarbons, and low in
contaminants, especially sulfer. Saudi crude flows like syrup, Venezuelan more
like molassas on a cold day. Venezuela previously had more light and medium
crude oil, but production of these has fallen by 37% since 2004 (Reuters,
below).

4\. Much of recent US domestic oil supply has been of NGL (natural gas
liquids) and condensate -- _very_ light fractions of hydrocarbons, some of
which are only very barely not gaseous at normal temperatures. (This is also,
incidentally, why oil train wrecks and fires have been so volatile -- the
lighter fractions of oil are exceptionally volatile and burn explosively.)
_Much of this supply is not suitable for use in transport fuels._ You cannot
produce petrol, kerosene/jet fuel, or diesel from them, and the US has been
(quietly) looking for ways to export this _anyway_. See this _Wall Street
Journal_ article from June, 2014:

[http://blogs.wsj.com/corporate-
intelligence/2014/06/25/what-...](http://blogs.wsj.com/corporate-
intelligence/2014/06/25/what-is-condensate-introducing-americas-new-oil-
export/)

Oil industry critics have argued that counting condensate/NGL in US crude oil
extraction statistics isn't defensible.

[http://oilprice.com/Energy/Energy-General/The-Condensate-
Con...](http://oilprice.com/Energy/Energy-General/The-Condensate-Con-How-Real-
Is-The-Oil-Glut.html)

Exports of condensate began only in 2014 following regulatory rule changes:

[http://fuelfix.com/blog/2014/06/24/feds-open-door-to-
condens...](http://fuelfix.com/blog/2014/06/24/feds-open-door-to-condensate-
exports/)

5\. Venezuela is using the US imports as dilutants for its heavy oil. I
suggested this in an earlier reply, and confirmed the fact in a Reuters
artice:

 _Each barrel extracted from the Orinoco belt needs some kind of diluent to be
transported and exported. Naphtha is typically used to transport crude to the
upgraders, but when these facilities are not fully working or are under
maintenance lighter crudes are needed to formulate blends for exports._

[http://www.reuters.com/article/us-oil-venezuela-imports-
fact...](http://www.reuters.com/article/us-oil-venezuela-imports-factbox-
idUSKBN0IG17Q20141027)

Venezuela previously imported distillates from Nigeria in the 1990s.

6\. As the _NY Times_ article _does_ manage to mention, Venezuela faces large
debt and financing obligations to multiple creditors, including China, and
several US firms, including Halliburton.

As with several previous Venezuela stories on HN, there's been a swarm of
comments attacking the Venezuelan government and political systems. At best,
those criticisms tell only a part of the story, and quite possibly a minor
part.

~~~
bpolania
Some of your point are consequences not causes. For example: the reason
Venezuela is using the US imports as dilutants for its heavy oil is because
bad management of the industry, it wasn't always like that, you can say the
same about the debt, Venezuela is not screwed because of the debt, it has debt
because it's screwed.

------
marcoperaza
The wonders of socialism.

~~~
nnq
Sincere question: HOW? I mean, even if we assume a socialist economy is
terribly inefficient, like operating at 50% of the efficiency a capitalist
one, it still should be enough for sustaining a resource-rich country.

WTF they are doing _so_ wrong?! Are they under intense internal or external
sabotage? Corruption is so bad?

I mean, this is not some mid-African country with >50% of the population
illiterate, bunch of horrible tropical diseases, plus children running around
with guns and AIDS...

A country like Venezuela should "kind of work" _even with corruption and
inefficient socialism!_ What the heck is going on there?

~~~
metaphorm
> A country like Venezuela should "kind of work" even with corruption and
> inefficient socialism! What the heck is going on there?

its not just a little corruption. it's absolutely stunning batshit off the
charts rampant corruption.

~~~
MrZongle2
"Well, let's say this Twinkie represents the normal amount of corruption in a
socialist country. Based on this latest report, it would be a Twinkie thirty-
five feet long, weighing approximately six hundred pounds."

------
binarray2000
Why can't they just ask other more friendly countries (Russia, Norway, maybe
China) for the expertise in exchange for oil? Should be an easy solution, or
am I missing something in my oversimplification?

(And, please, don't blame it on communism/socialism; people have interests and
I believe so do people in Venezuela - including those working in the
government.)

~~~
civilian
I'm gonna blame it on communism.

It's not that they don't know how to produce oil. It's that the oil company
has been so heavily mismanaged and used for political purposes that it has
become extremely inefficient.

[http://www.economist.com/news/americas/21607824-venezuelas-l...](http://www.economist.com/news/americas/21607824-venezuelas-
loss-thousands-oil-workers-has-been-other-countries-gain-brain-haemorrhage)

 _> IN 2003 Venezuela’s then president, Hugo Chávez, fired more than 18,000
employees, almost half the workforce, of the state-run oil corporation,
Petróleos de Venezuela (PDVSA). Their offence was to have taken part in a
strike (pictured) called in protest at the politicisation of the company.
Their punishment was to be barred from jobs not only in PDVSA itself but also
in any company doing business with the oil firm. The axe fell heavily on
managers and technicians: around 80% of the staff at Intevep, PDVSA’s research
arm, are thought to have joined the strike. At the stroke of a pen, Venezuela
lost its oil intelligentsia._

Obviously, this wouldn't have happened in a free market. But even other state-
run oil companies haven't made this kind of blunder.

~~~
binarray2000
What you (plus the quote from The Economist) describe is like shooting
yourself in the foot. Still, ideology aside, why would Chavez do such a thing?
Was he an intellectual moron? No. He knew that without oil exports his people
would be hungry, and hungry people mean bloody revolution.

Also, quoting from The Economist is one sided considering their position
regarding Venezuela during and after Chavez.

You see, media is biased and I don't want to trust them, no matter how
"respectable" they are. (eg. NYT in the eve of 2003 Iraq invasion)

I'd like to hear from people who live there (or from less biased reporters)
about causes for this situation in which an oil rich country must import oil
from its major adversary, in which the whole society dissolves.

EDIT: User nnq asks the same questions as I do.

~~~
AnimalMuppet
You don't trust The Economist to be unbiased. Fine. But I know of no sources
that assert either that the event in question (the firing of the oil workers)
didn't happen, or that it didn't destroy Venezuela's oil production. So in the
absence of _any_ contrary evidence, I think The Economist's account of that
specific event is to be trusted.

Why would Chavez do such a thing? I suspect (OK, guess) that when you have a
theory that you are so committed to that anything that doesn't conform is
regarded as enemy propaganda, it becomes amazingly easy to do really stupid
things. (Note that this does not depend on what the theory is; _any_ theory,
disconnected from any counter-evidence, is prone to this.)

