COMMENT: Trump is selling a Venezuelan pipedream
Source: bne IntelliNews
Donald Trump has promised a swift revival of Venezuela’s economy after American oil companies sweep into the country and pour billions of dollars into investment unleashing a flood of petrodollars that will make the country rich again.
That’s going to work right? After all, Venezuela has 303bn barrels of oil reserves. At today’s prices that’s worth $23 trillion – or 80% of the entire value of the US economy, one and half times more than China is worth and nearly five-times more than the nominal value of Germany’s GDP. So, Venezuela is about to become one of the richest countries on the planet?
US companies, Trump claims, will return, pump crude, and share the riches with the Venezuelan people. This has become possible by removing Venezuelan President Nicolás Maduro, who is now facing narcotrafficking charges in a New York court.
But this narrative betrays a fundamental misunderstanding of how countries create wealth.
Oil did not make Venezuela rich. Institutions did. Trump’s plan is a heady combination of arrogance and ignorance. Having the asset in the ground doesn’t make a country rich. It’s being able to pump it out, refine it and get it to market that makes a country rich. And that is not only hard – it’s extremely difficult to do.
The key is to run the country well. Singapore is a country without any significant natural resources, and yet it boomed, rising to become one of the richest countries in Asia largely thanks to revolutionary economic reforms and governance initiated under its legendary Prime Minister Lee Kuan Yew in the 1960s.
Before he took over, Singapore was a backward Asian agrarian subsistence economy like many others. Lee was Prime Minister from 1959 to 1990 and implemented a series of bold reforms focused on: rule of law and anti-corruption; investment in education and infrastructure; open trade policies and foreign direct investment (FDI); high-quality public housing and health systems; an efficient, technocratic civil service; and strategically positioning Singapore as a global logistics, finance, and services hub. Singapore’s economic success is a classic example of a country overcoming a lack of natural resources through strong institutions, good governance, and strategic policy.
What is Trump proposing to do in Venezuela? Currently, the US is proposing to leave the Chavist government in place, now headed by Maduro’s former vice president Delcy Rodrigues, and the corrupt cabal that surrounds her. Instead of talking about elections and institutional reforms he is focused on persuading the US oil giants to wade into a political and economic quagmire, who will simply turn on the spigots and unleash a torrent of cash.
It’s not going to happen. By focusing on a single colourful villainous character, Trump is painting a cartoonish parody of reality, complete with a Hollywood-esque action extraction by DEA elite commandos worthy of the Marvel film studio.
The reality is very different. The government is corrupt and dysfunctional. As bne IntelliNews reported, the extremely sour (high sulphur content) and toxic oil that lies in the massive Orinoco Belt oil fields is technically very hard to refine. The infrastructure is dilapidated by decades of neglect. And the supporting transport infrastructure is almost non-existent.
At its peak, Venezuela produced 3.5mn barrels of oil a day, but that fell to around 800,000 last year. Experts estimate that if the western oil companies did enter the market and go to work then they could reasonably expect to raise production by 200,000-300,000 in the next two years. It will take at least a decade and tens of billions of dollars of investment to just regain peak production – if things go smoothly.
For comparison, Russia’s total stock of proven reserves of oil is just 80bn barrels of oil and today it produces a little under 11mn barrels a day, exporting some 5mn barrels, making it one of both the biggest producers and exporters in the world. That is after 50 years of investment and development.
Venezuela heyday
Today Venezuela is one of the poorest countries in Latin America. It didn’t used to be. Venezuela was the richest country on the continent in the 1940s-1970s thanks to the same oil that is still there today and one of the top 20 richest countries in the world.
Oil was discovered in the 1920s and an institutional take-off started in the 1940s as Venezuela began to industrialise. In the 1950s, under leaders like Marcos Pérez Jiménez, Venezuela developed strong infrastructure, a functioning legal and financial system, and attracted waves of highly skilled European immigrants. By 1958, Venezuela had the fourth highest GDP per capita in the world, ahead of Spain, Israel, and Greece, and was rapidly closing the gap on the US. By 1958, Venezuelan GDP per capita was just 18% behind the US and 13% below Britain’s. Caracas was one of the most modern cities in the region, with a metro system, highways, and manufacturing. The country was flourishing.
But then it all fell to pieces. The collapse began in the 1980s, as oil prices fell, and public debt ballooned. Economic mismanagement, corruption, and rising inequality eroded earlier gains. The Caracazo riots in 1989, a failed coup by Hugo Chávez in 1992, and a severe banking crisis in 1994 plunged Venezuela into chronic instability from which it has never recovered.
The geology hasn’t changed in a century. What did change was Venezuela’s capacity to build a framework that enabled growth.
Now Trump is suggesting that a few large US companies can resurrect Venezuela’s former glory with no effort and overnight. But it is not the oil that made Venezuela great. It was contract enforcement, functioning courts, secure property rights and a convertible currency that brought investment.
Maduro was a problem. His regime has not merely neglected these institutions. It has systematically demolished them. Venezuela now ranks among the least free countries in the world. Freedom House scores it just 7 out of 100, placing it below Russia and Belarus. Good luck making any country like that ‘great again’.
Trump’s “plan” is beyond naïve. His approach assumes that economic growth will simply follow from pumping more oil, but has said nothing about promoting the root and branch reforms needed to create the institutions or investment climate where companies can and want to invest and the functioning democracy that is part and parcel of these deep societal changes.
The energy markets are well aware of the pipedream that Trump is flogging. Potentially Venezuela could inject an additional 3.5mn barrels a day onto the already bloated oil markets. Yet after Maduro’s extraction, oil prices have not reacted at all. None of the energy traders are expecting to see an extra drop of Venezuelan oil on the market for years – if then. The International Energy Agency projects a surplus of nearly 4mn barrels per day in 2026, with rising output from the US, Brazil and Guyana. Venezuela’s contribution, at best, would be marginal and delayed.
In addition to the shoddy infrastructure and high-risk investment climate, Venezuela has deeper structural problems that will hold it back: if it revives its oil industry, the skilled workforce in the oil sector – engineers, technicians, planners – have long since departed. Some six million Venezuelans live aboard, and few are expected to return in the short-term.
The government Trump appears ready to partner with is not a monolith but a “cartelised system,” in which power is divided among military, judicial and security elites. Removing Maduro doesn’t dismantle that system – it reshuffles it.
Rather than carve up Venezuela’s resources, the US should focus on creating the conditions for political and institutional restoration. Trump should be talking about a timetable towards free and fair elections. He should be sending in USAID technicians and Big Four consultants to restructure the government and business. Instead, it’s as if Venezuela is a cake ready to be cut up, with a slice served to the mobsters and a slice for Uncle Sam. Without the institutions, the investment won’t come. And neither will prosperity.
The original article: belongs to bne IntelliNews .
