How Bad Off Is Oil-Rich Venezuela? It’s Buying U.S. Oil

He said, he won't want to exchange dollars for bolivars. He is right, what are you going to do with with the bolivar? By the time you get to spend it, it's lost it's value by tons. Unless you are buying land, or paying people and doing business. But even then you run the risk of having your land, business seized. Anyone with dollar will hoard it as much as possible. It's your golden ticket out of the country.

There's much more to it than that.

1. Not all oil is created equal. Most especially, oil has different qualities of hydrocarbon lengths (longer == heavier, more tar-like) and contaminants ("sour" == more sulfer). Light sweet is the optimum input for most transport fuel needs (petrol, kerosene/jet fuel, diesel).

2. Not all oil has the same extraction costs. In particular, Venezuela's oil has a much higher cost of extraction than Saudi Arabia's.

While there's a very strong tendency to attack Venezuela for having a failed socialistic / command economy, possibly with some merits, a much more direct issue is that Venezuela benefitted from oil which in the past was easier to extract and bring to market than its offerings today, combined with a long history of extensive domestic market subsidies of basic goods, including both energy and food (which, if you think about it, both reduce to "energy).

The same story has already played out in large part through the nations affected by the Arab Spring. Whilst we're not used to thinking of Egypt and Syria as large oil exporters, the truth is that they had some local oil extraction operations, enough to provide exports and some hard cash (of a useful quality: US Dollars, which had the added benefit of not affecting the value of their domestic currencies in foreign trade). Tunisia, Libya, and Yemen are also being affected by falling oil exports (the first two were where the Arab Spring originated, Yemen has had ongoing conflicts).

Russia is watching its cash reserves fall, also hit by a soft market for global oil. This has some strong parallels to the fall of the Soviet Union itself, in the wake of the late 1980s oil glut, then driven by increased supply-side dynamics as North Sea and North Slope, as well as offshore Gulf of Mexico extraction came online.

Saudi Arabia has the optimum product -- light sweet crude which flows (fairly) freely from the largest oilfields and most productive wells in the world. But depressed prices are hitting it as well, and its financial status has been discussed for the past year or several -- as with Venezuela, Saudi Arabia buys domestic tranquility with its oil export cash. As with much of the Gulf region, it also faces some of the most rapid population growth in the world (oil exporting states are a curious exception to the usual rule of Demographic Transition).

There's another interesting situation, one I've just run across a standard economic treatment / term for -- inverted or "backward-S" supply curves. Usually applied to labour, this also seems to fit the situation of natural resources. Where market prices fall to close to the marginal cost of extraction, the tendency of suppliers, especially those with fixed costs to meet, is to increase rates of extraction. This is quite typical of oil boomtimes (Titusville, PA, Spindletop, TX, and the East Texas Oil Field most especially). In the case of the latter, oil prices in the US fell from $1/bbl to $0.13/bbl, and then further to $0.02/bbl, before the governors of Oaklahoma called out their respective national guards, and in Texas, the Rangers, to sieze wellheads at force of arms to constrain supply. The result was the implementation of US production quotas, in effect from 1932 - 1973, under the US Department of Interior and the Texas Railroad Commission. It's a fascinating bit of economic history.

The size of reserves doesn't matter so much if the costs of extraction, or quality of product, aren't in your favour. Venezuela is somewhat cursed with riches, in that respect.

The price of oil increases.

Or Venezuela discovers it's sitting on vast undiscovered reserves of Unicorn Poop.

What we're seeing is, IMO, far less the Evuls of Socialisum than the end-game of an oil state. There's a similar story playing out through much of the Arab world, as you may have noticed over the past few years.

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-...

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...

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

http://fuelfix.com/blog/2014/06/24/feds-open-door-to-condens...

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...

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.

> I still don't see what that has to do with Communism

> my point is its the incompetence and authoritarianism that caused the problems

A lot of people believe there's a causal road from Communist governing philosophies to incompetent authoritarianism (though you're right, it certainly wouldn't be the only way to get there).