Caracas Chronicles

…well, not a sensible bumper sticker, anyway.

Oil policy in a context like Venezuela’s is irreducibly complex. You could say you want to maximize the cash flow to the public purse, but it only takes a moment’s reflection to realize that’s a non-answer, because the question becomes – when?

The policy that will maximize the tax take next year – invest nothing, hand every penny to the treasury – will be a disaster two years from now, when underinvestment causes wells to run dry en masse.

But the other extreme – invest everything, pay nothing out now – is fiscally untenable and politically impossible.

What we are faced with is a good, old-fashioned intertemporal optimization problem. What we need to find is a solution that spreads oil rents equitably over time. But what “equitably” means in this context isn’t at all straightforward. It hinges crucially on how well you think people will live in the future.

If the economy grows sustainably over the next 20 years, Venezuelans a generation from now will be far wealthier than they are today. In that case, equity demands that we front-load the bulk of the take, because the current generation needs the money more than its children will.

But if the economy continues to languish into the 2030s, then equity demands that we invest relatively more and spend relatively less, because the next generation’s going to be just as hard up as the current one.

The detail, of course, is that we don’t have any idea if the next generation is going to be richer or poorer than we are, so uncertainty floods any attempt to really give a definite answer to the question.

And notice that we haven’t even gotten to the whole vexed issue of market power: whether Venezuela might cause the global oil market to tank by ramping up production too far too fast. We haven’t stopped to ponder the unknowable mystery of what demand for crude oil is likely to be over the next 20 years. And we’re not touching with a 10-foot-pole such wildcards as whether physicists might finally crack Cold Fusion, putting everyone into electric cars and rendering the whole issue moot.

In fact, there’s a virtually endless line of other questions, each one surrounded by the kind of deep uncertainty that reduces us to mere speculation.

Let’s be clear: in the medium run – say, the next five years – nobody seriously disputes Venezuela needs to invest in much expanded production capacity. Not even PDVSA.

Whether it’s actually possible to raise the financing needed to achieve it given current institutional constraints is up in the air, but that the goal is desirable is one of the few points of consensus left in the polity. On the margin, Venezuela is a price taker, so ramping up production to take advantage of high oil prices is a slam-dunk.

Beyond that, though, we’re into wild guessing game territory.

Leopoldo López’s stated goal of turning Venezuela into the world’s top oil-producing country would require more than quadrupling our production to the neighbourhood of 11 million barrels a day. That would amount to a 10% increase in global oil production.

It’s simply impossible to overstate the sheer titanium-testicled ambition of the call. It’s for statements like this that the word “hubris” was invented for.

Whether Venezuela can ever find the international credibility and domestic institutional arrangements it would take to attract the gargantuan levels of investments required to make that happen is doubtful. Whether there’s even enough capital in the world economy willing to go into oil extraction to make it happen is questionable. Whether the massive deferral of consumption involved makes sense is an open question. Whether the Venezuelan economy would have a prayer of overcoming the titanic case of Dutch Disease this would bring on is unsure. And whether we may not find ourselves devoting a decade worth of dislocation to finance enormous investment just in time to be overtaken by new technologies is up for grabs too.

Raising production capacity gradually in tune with the oil market? By all means.

Pharaonic decade-long vanity projects? Me bajo en la parada, por favor…