In the wake of our surgical raid on Caracas, it is not at all clear that the United States has any control over what happens next in Venezuela. It seems that we have very little actual influence over the Marxist regime that remains in power. Yet the Trump administration and much of the commentary class are talking like we own the place. One of their ideas is that America will soon be able to tap Venezuela’s vast oil reserves, which have been largely off-limits to U.S. firms since 2007.
Say, for the sake of argument, that we do control what happens to Venezuelan oil. There are two ways for American companies to regain access. The first option would be a return to a pre-2007 status quo, where developers go to Venezuela on their own initiative, investing their own private capital in extraction permitted — but not managed — by the country’s government. If a company like ExxonMobil or ConocoPhillips wanted to drill in Venezuela, it would be its responsibility to organize, finance, and operate the project. This is how oil companies operate in the United States, even when they lease land or require permission from the federal government.
The second option would be a semi-nationalization of U.S. companies’ new operations in Venezuela, with the government footing the bill and calling the shots. It would be state-directed resource development: the government helps pay for firms’ investments and, in exchange, it gets to order them where to drill and how much. Presumably, the government would expect repayment once profits begin to flow.
It is this second option that President Trump appears to have in mind. He said Monday that he hopes to have U.S. firms extracting Venezuelan oil in fewer than 18 months. To achieve that speedy production from the country’s dilapidated energy infrastructure, “A tremendous amount of money will have to be spent, and the oil companies will spend it, and then they’ll get reimbursed by us or through revenue.” Reimbursed by what funding source, and wouldn’t Congress have to approve? Oh, never mind.
Trump is now arranging meetings with major oil companies to recruit them to his vision. That vision, it’s fair to say, is a Venezuelan oil sector under the president’s personal direction. But Venezuela already has one of those.
Petróleos de Venezuela, or PDVSA, has been the nationalized oil and gas company in Venezuela since the government nationalized its energy resources in 1976. It absorbed the oil assets already built by private companies that year and has since held a near-monopoly on production, serving as the Venezuelan government’s primary revenue source. The company is 100 percent state-owned and has no operational independence from the regime.
Predictably, under socialist Maduro’s thumb, PDVSA has managed the total collapse of Venezuela’s oil sector. The country has gone from churning out 3.5 million barrels of crude oil per day in the 1970s to just over 1 million today — or from 7 percent of global oil output to 1 percent. Despite having the largest proven oil reserves of any country, at 18 percent of the world’s total, Venezuela is only the 17th largest oil producer. As its oil industry has shriveled, Venezuela’s resource-dependent economy has deteriorated with it.
The causes of PDVSA’s failure derive from its status as a state-owned enterprise. Nationalized corporations, such as Venezuela’s oil giant, are protected against financial losses by their government backers. Consequently, they are prone to making risky or otherwise imprudent investments. Alternatively, absent any incentive to stay competitive thanks to a state-granted monopoly, they may allow their valuable assets to fall into disrepair. Such habitual neglect is what turned Venezuela’s oil infrastructure into very expensive ruins.
Venezuela’s biggest problem was that PDVSA’s decisions and capital were driven far more by political concerns than by the pursuit of profit. Officials spent the company’s resources on favored quasi-governmental projects like social programs or infrastructure as a means to bypass formal budget constraints. Patronage was substituted for expertise, as then-president Hugo Chávez fired 18,000 experienced workers — half the company’s workforce — as punishment for a strike in 2003 (which ironically protested the firm’s politicization), filling their roles with political loyalists. Corruption and systemic inefficiency are endemic. A former Venezuelan official estimated in 2014 that $300 billion was straight-up stolen from PDVSA, and tens of billions more were wasted by politicians. From 1998 to 2013, the firm’s oil production barely budged while its consumption increased 60 percent.
These are natural outcomes for a company that is insulated against the disciplining incentives and signals of capitalism: prices, profits and losses, and competitive pressures. When businesses are accountable not to investors and the customers they serve, but to politicians and bureaucrats, we cannot expect them to be commercially successful because that is not their aim.
The domestic U.S. oil sector shines in contrast. Oil companies here are all privately owned, and the industry is open to foreign investment from firms like British Petroleum and Shell. Distinct among nations, even the oil still beneath ground is privately held by landowners. Investment decisions are made by people with a financial stake in their proceeds. As a result of this capitalist orientation, the American oil sector is the largest in the world.
Industrial policy enthusiasts in America envy how authoritarian countries like China wield their industries as geopolitical tools, or how state-administered cartels like OPEC can manipulate commodity prices at will by switching production on and off. But the surest way to wreck an industry’s competitiveness is to nationalize it, either explicitly or implicitly through ensnaring subsidies and mandates. And the U.S. oil industry is already exceptionally productive. It was free markets and unguided technological innovation that made it so, not government supervision.
If Venezuela’s oil industry has a future with U.S. involvement, it should follow the example of America’s private energy sector. The softer retread of nationalization that Trump is hinting at would only guarantee more of the same.