Venezuela’s economic gambit

By Tobias Ma

The Venezuelan President, Hugo Chavez, is dead. The former army officer who rose to power following a 1998 election has been lauded as the patriot who freed the marginalized proletariat from the boots of corporations and a corrupt, oligarchical government. He was also condemned as a tyrant who suffered no slights, harassing and sometimes jailing political opponents, or as a bumbler who has left the management of Venezuela’s abundant energy reserves in shambles. How his legacy will effect the future of Venezuelan oil will dictate the Venezuelan economy, as well as foreign economies, particularly here in Alberta. 


The Albertan government’s take on Chavez’s death will be interesting and worth paying attention to when attempting to read the economic winds. Conservatives have generally applauded the end of Chavez’s reign. However, Alberta is positioned for a more polarized reaction because we share Venezuela’s dependence on oil to supply our infrastructure. The value Alberta is getting out of the oil sands is dropping and several recent high-profile disasters, such as the implosion of Suncor’s Voyageur project have companies scrambling to restructure. The exhalation of this “bitumen bubble,” alongside alleged Tory corruption will see Alberta over $2 billion in debt this year. 


Venezuela is in a similar mess. Chavez has been accused by many American media outlets of using the Petróleos de Venezuela S.A., Venezuela’s national energy company, as a piggy bank to fund failing socialist venture policies. Critics have complained that when Chavez nationalized Venezuela’s oil reserves, driving out corporations such as ExxonMobil, he suffocated profits and failed to attract talent in an industry that could have propelled the country to first-world status. Government interference in large revenue industries often causes political mayhem — many Albertans are still bitter about the National Energy Program under Pierre Trudeau. 


Given Chavez’s intensely confrontational approach to American foreign policy — he referred to George W. Bush as a donkey and once called him the devil during a memorable UN address — accusations made regarding his energy policy must be taken with a grain of salt. But the numbers don’t lie — Petróleos de Venezuela is a sinking ship that was left only 11 per cent of its total income to fund operations, compared to 17 and 29 per cent for Mexico and Brazil’s state-owned corporations, respectively. 


Much of the money from Venezuela’s black gold has been siphoned to pay for health care, education and food subsidization programs. These programs have had debatable success and the country is still in substantial debt. Even before Chavez’s body was cold, media speculators were hypothesizing the effect his demise would have on global oil consumption. 


If the new Venezuelan president has a similar ideology and continues imposing severe tariffs on oil exports, the American and Chinese governments will continue to view Alberta with interest. If he is replaced with a capitalist, however, Alberta’s economy might experience deep incursions. Chavez has been sick for several years — maybe foreign financial interests were waiting for him to die. 


In the short term, Venezuela will desire the expertise of Albertan companies if they want to mobilize their unconventional oil sand reserves. Companies like Nexen, Suncor, Husky and ConocoPhilips have been milking oil sands for decades and have valuable experience that Venezuelan engineers will need to take their project off the ground. While this could prove temporarily profitable for Albertans and might even drag us out of a looming recession, we need to remember that heavy crude, which comprises the bulk of our reserves, is expensive to transmute. The price of oil necessary for processing to be worthwhile fluctuates at around $70 a barrel, depending on inflation and technological streamlining. If Venezuela really gets their operation off the ground, their abundance of both unconventional and conventional, easily mineable oil — of which they have the largest supply in the world — could drive prices below the acceptable markers for Albertan production, making it fiscally impossible to extract our own crude. 


The debate over what causes oil prices to rise and fall is both politically charged and difficult to fully grasp given the amorphousness of pricing factors. Even in Alberta, some say that dropping oil prices can be attributed to insufficient pipeline services. Others claim that the solution is to build refineries and stop shipping away our crude, which is often resold to us at an American premium. There are counter arguments to the counter arguments — building refineries is unfeasible because of Alberta’s labour shortage or increased supply to America is driving prices down by glutting the markets with product. China’s peaking growth and America’s renewed interest in its own unconventional energy sources will play important, unpredictable roles during the industry’s future shifts. 


Venezuela’s petroleum industry faces many of the same threats: fickle superpowers, transportation and logistical woes and a saturated buyer’s market. How they handle these problems will affect Alberta perhaps more than anticipated. Chavez’s death suggests a new era for the future of Venezuela’s substantial energy stores, but that future will have to join a larger, more convoluted discussion.