Chavez Blows Venezuela's Fortune

Energy: Venezuela's oil exports to the U.S. are falling sharply. But that won't make Hugo Chavez less of a problem for us. Without his oil earnings, the communist dictator is likely to be more trouble than ever.

The latest figures from the U.S. Energy Department show a long slide in imports of oil from Venezuela, a nation that as recently as 1998 was our top energy supplier.

In January, Venezuela's exports to the U.S. fell below the 1-million-barrel mark. Only 955,000 barrels a day were shipped that month, far less than the 1.2 million barrels sent in January a year earlier. Now Venezuela is our fifth-biggest supplier, as 12 of the top 15 foreign suppliers have raised their energy exports to the U.S.

Given Chavez's anti-American sentiment, and his threats to cut off oil to the U.S., some might view this as a good thing. But short term, oil prices will rise worldwide as Chavez continues to mismanage resources like a wastrel blowing his inheritance. Longer term, his policies will drive Venezuela's economy to collapse. Worse still, the damage from a lack of investment will outlive Chavez.

Venezuela's state oil company is a mess. Revenue in 2006 came to $101 billion, down 26% from the year before, and profit was only $4.8 billion. The poor results were due in part to the $13 billion of investment money that Chavez diverted to handouts for the poor. It is estimated that the company needs to be spending at least $3 billion a year on infrastructural maintenance and capital improvements.

Chavez is also giving away at least 100,000 barrels a day to Cuba, something the ruling Castro brothers sell on the open market at their own profit, draining Venezuela's finances further.

The biggest reason for the decline in exports is falling production, the inevitable result of a long string of broken contracts and private-property expropriations. The investment that's been chased out is not being replaced, not even by other state oil companies that Chavez claims to favor. Investment from U.S. companies has fallen more than 90%.

None of this comes as a surprise, considering how Chavez has arbitrarily altered long-standing operating agreements with foreign oil companies. The state oil company, PDVSA, has also suffered from the firing of 19,000 skilled workers after a 2002-03 strike.

In his latest insult, Chavez set a May 1 deadline to force U.S. and European energy companies to write off their $10 billion investment in the Orinoco oil fields, the last region to face confiscation, and to submit to minority partnerships on his terms with his own managers.

These managers, of course, are not the experienced workers the firms contracted with in the 1990s, but political loyalists whose numbers have grown 29% since 2001.

Venezuela's declining production ought to be more of an issue here. How the U.S. deals with the loss of a key supplier that accounts for about 12% of its imported oil will be an economic issue.

The near-doubling of imports from friendly Brazil and Colombia in the last year is one part of the response, as is coming ethanol production.

But more is at stake than access to Venezuelan oil. Chavez's mismanagement will morph more from an economic problem to a political one for the U.S. For example, it could trigger a huge wave of immigration to the U.S. as Venezuela's economy tanks.

It could also bring a violent overthrow of Chavez as he no longer provides easy cash and jobs to his loyalists. Chavez is unlikely to go down without a fight, and his remaining weapon of control for an angry citizenry will be Cuba-style repression. There are signs this is starting already.

Copyright 2007 Investor's Business Daily, Inc.