Hugo Chevez died from cancer last night after 14 years as President of Venezuela. In the short term, Chavez’s death means little for the oil markets, which shrugged off the news. The question now is will things get worse for Venezuela with more turmoil, or will things get better, allowing Venezuela to regain its status as a top five exporter of oil.
Chavez’s presidency was strongly influenced by the rising price of oil. In 1998, oil was selling for peanuts, leading to unrest in the country, because the Venezuelan economy depends heavily on oil. Chavez took power, and was lucky that the price of oil rose steadily.
Chavez was a socialist whose time in office was marked with subsidies to the poor, the nationalization of thousands of companies, currency controls, and price controls, all funded by the country’s growing revenue from selling oil. While these policies were popular with the poor, they inevitably led to shortages, 20+% inflation, currency devaluations, and a widespread black market.
Oil Production in Venezuela
Oil production remained in a steady range of 3 million to 3.6 million barrels of oil equivalent per day until 2002, when the workers of Venezuela’s state-owned oil company PVDSA went on strike for two months. The country never fully recovered from the strike, and oil production declined steadily thereafter.
The production decline picked up speed in 2007, when Chavez nationalized the oil deposits of the country and demanded companies cede a 60% stake in all oil projects in Venezuela to state-owned oil company PDVSA.
Rather than cede control, Exxon Mobil Corporation (NYSE:XOM) and ConocoPhillips (NYSE:COP) walked away from their investments in Venezuela, and are seeking $40 billion in damages from the Venezuelan government. At the same time, Chevron Corporation (NYSE:CVX), BP plc (ADR) (NYSE:BP), TOTAL S.A. (ADR) (NYSE:TOT), and Statoil ASA(ADR) (NYSE:STO) agreed to the demands of the government. The nationalizations continued in 2009 with the government seizing control of some oil services companies, and refusing to pay others.