Perhaps five years from now, if the MUD is wise and lucky, the dust of the economic crisis and coming adjustments will have settled, and Chavismo will have crawled back to the chiripero it sprang from.

Then, and only then – lest Mario Silva score some points for having us praise a gringo, and a Texan one, to boot–  we should erect a memorial to the man who unwittingly, but with more success than anybody else, sowed the seeds of Chavismo’s downfall. I’m talking about the late George Mitchell, the father of hydraulic fracturing.

This Texas tycoon was a bit of a paradox. In Houston, a town brimming with swaggering oilmen, he had a famously humble disposition. Well into his 90’s he could still be seen going, in his wheelchair, to his office in a downtown Houston skyscraper. No one who ran into this amiable, frail old man him in the elevator of the JP Morgan Chase tower would suspect this guy’s tinkering had shattered kingdoms – those of traditional oil behemoths ExxonMobil, Chevron and BP, and literal kingdoms in the Middle East.

In the 1980’s, Mitchell got ahold of a bunch of unwanted land in suburban Fort Worth. The acreage was on top of a shale rock formation that Mitchell thought contained large quantities of natural gas. It wasn’t until the late 1990’s, on the verge of failure, that Mitchell’s company cracked the rock open with powerful jets of water, chemicals and sand, unleashing huge amounts of the natural gas.

In a few years, others followed suit. The technique first reversed a looming shortage of natural gas in the U.S., turning that country into a potential exporter. About five or six years ago, even as Hugo Chavez basked in the admiration of Oliver Stone, gringo wildcatters figured out how to tap these rocks for a surprisingly big amount of high-quality light crude.

The locha about this world-changing bounty dropped in late 2013 amid surging crude inventories and a price war still being led by an unblinking Saudi Arabia, which intends to drive the upstart  U.S. wildcatters out of business by happily pumping away. In the grand chessboard opposing wily good old boy oilmen to OPEC’s only relevant member, the fall of Chavismo is just collateral damage.

 

One could say that no sane Venezuelan should cheer low oil prices. They, after all, create much suffering in a country that single-handedly depends on oil exports.

But I’d counter that most of the windfall from last decade was taxed at very high rates by corruption, waste and economic chaos.  Very clearly in the wrong hands, high oil prices enabled not only the establishment of anti-growth policies, they directly led to a budding dictatorship that impinged on every right.

Besides, we’ve seen worse. $31 per barrel is still better than the $8 per barrel that in the late 1990’s helped seat Hugo Chavez in Miraflores. An OPEC optimist would hope that Saudi oil minister Ali Al-Naimi’s bet is right, that it will drive debt-laden American wildcatters into the ground, and that in a few years a democratic Venezuela will be ready to capture the upswing, especially if China returns to galloping growth.

Barring a big change in U.S. regulation that forbids fracking and the transportation of crude via rail, I wouldn’t pin my hopes on that. After watching the U.S. energy revolution first hand for a decade, and looking through the crystal ball of my West Coast neighborhood, where 2 out of 10 cars are plug-ins and half of the rest are hybrids, I fear $31 per barrel will look positively generous 15 years from now. The prophecy of Ahmed Yamani, the Saudi oil minister who famously quipped that the age of stone didn’t end because of a dearth of stones, is slowly becoming true.

That said, hopefully the oil age will still last a while and perhaps prices will rebound a little, helping rebuild a country where power doesn’t just belong to whoever wields the oil spigot. Where, lacking the incentives to go empire-building and saving the humankind, government focuses on putting stop signs and policing the streets. A country with a little bit of an oil tailwind, meaning perhaps better public education and lower taxes, but not a tailwind so strong that it will crush us.

So right in front of the Cuartel de la Montana, I propose erecting a bust of Mitchell. Next to one of OPEC founder Juan Pablo Perez Alfonso, our criollo Cassandra, who during the go-go years of the first oil boom correctly forecast that the country would be in ruins (and like Cassandra, nobody believed him.) Add a life-size marble statue of Johnny Walker’s walking man, and there you have an entire picture of the rise and fall of the Venezuelan petro-state that will be the delight of future generations.

Who will pay for it? Not $31 oil. Perhaps we go knock on the door of Roberto Rincon, a maracucho expatriate who seems to have made a killing from PdVSA shenanigans. 

For Rincon is also a beneficiary of Mitchell’s contrarian vision. He has a multimillion dollar Palazzo that would make Scarface proud in the Houston suburb of The Woodlands. And it turns out the Woodlands is the brainchild of Mitchell, who in addition to drilling delved in urban planning, and dreamed of beauty and order in the midst of Houston’s raucous real estate laissez-faire. It would only be fair.

24 COMMENTS

  1. Though much less sexy in terms of storytelling, the other important culprits for the current oil debacle are Ben Bernake, Mario Draghi and Central Bankers everywhere. Thanks to global monetary stimulus to lower interest rates and nudge growth after the global financial crisis, oil companies were able borrow money to expand production and develop new oil fields at record low costs. This led to an investment boom which laid the groundwork for the excess global oil supply we see today.

    • Ben Bernake, Mario Draghi and Central Bankers everywhere.

      aka Benny and the Inkjets. The only thing that flowed more than oil in recent years is the quantitative easing, which may be slowing a trickle this week.

      In other news, the only thing tying up the approval of a spending bill to keep the US government going ( presumably so Ms. Yellen will finally make an overly deferred decision) is a disagreement in Congress on whether to finally allow petro exports.

      That should stir the crude pot even more….

  2. Excellent article, though we should never forget that Chavismo’s debacle began well before oil prices plummeted.

    If I were a Venezuelan economist in exile, though, I’d want to be thinking about the future of the country if most of the oil in the ground can never be marketed because of the consequences, long-term, of the Climate Treaty.

    What will Venezuela do to replace the product that generates 95% of its foreign exchange?

    • Venezuela solo podrá salir de la maldición populista el día en el cual la renta petrolera deje de ser el atractivo principal que lleva a todos los grupos políticos a querer gobernar el país. Estos grupos (rojos, amarillos, azules, todos ellos) no tienen el más mínimo interés en desarrollar un modelo económico coherente para el país: su plan de gobierno se basa en la repartición de la renta petrolera entre ellos mismos y sus votantes a través de transferencias directas e indirectas. Lamentablemente, mientras PDVSA sea parte del paquidérmico estado Venezolano, no habrá manera de desarrollar el resto de las actividades productivas.
      El venezolano promedio se cree con derecho a tener vivienda por el solo hecho de haber nacido en un país petrolero. Mucha gente vive bajo la falsa impresión de vivir en un país rico pero mal administrado.
      Precios bajos del petróleo, paradójicamente, es lo mejor que nos ha pasado en 17 años. Ojala podamos reeducarnos y comprender que solo el trabajo puede cambiar nuestras condiciones de vida.
      PDVSA debe ser privatizada (ya se discutirá la mejor manera), mientras esto no ocurra nuestra situación nunca cambiara.

      • Venelondoner: We agree to disagree. In Canada for example, oil industry is not government owned and the collapse of oil prices is really hurting provincial/federal coffers, as well as the overall economy.

        Privatization is not the solution, I’m not saying it may not be a good option under certain circumstances. What I mean is, even if you privatize, the money that Venezuela gets from royalties and taxes is still subject to be abused. Arguably you could say, we would be better off by privatizing because production would ramp up and we will get more money from taxes and royalties, or that we would be worse off because we would lose on the revenue and only have the royalties.

        Either way we would be a petro-state and have to deal with our corruption and mismanagement. The funds will continue to flow from the ground into government coffers. How much money is a matter of speculation, although we all seem to agree… it’s very unlikely it will ever flow in the quantity it has for the past decade.

        • Obviously privatization of PDSVA means nothing in a context in which we are all to be weaned off carbon entirely. It really is rearranging the chairs on the Titantic.

          What will Venezuela have to sell in 2030? 2050?

  3. I came here to make exactly the same point that Jeffry points out. Sooner than later, governments around the world will start charging taxes to private enterprises who burn the most contaminant energy sources and Venezuelan reserves are well know for its incredible size and … high viscosity.

    Sometime in the future, we would rather process our oil and sell derivatives instead of selling it in barrels, because it will be increasingly expensive for our customers to process it and/or get energy from it

  4. Excellent article. Venezuela should begin working to develop international tourism as a (partial) substitute for petroleum income down the road, recognizing the immense cultural/other roadblocks that this would entail. If Aruba, with far less beachfront/attractve tourist destinations could develop this industry in one generation, maybe Venezuela has a chance also?

  5. so if the oppo makes a statue for this guy shouldnt chavistas make a statue for Mr Danger Bush and Dick Chenney? After all both wars helped drive up the price of oil

    • yep, that’s kind of the idea. Not only the oil bump helped: the international revulsion generated my Mister Danger and Mister Cheney’s imperial adventures reflected well on Chavez.

  6. Great point from MacPapas , cheap easy money is part of what fueled the oil fracking revolution , that and ultra high oil prices fed in turn by the galvanizing effect of globalization on Chinese/Asian economic Growth.

    Now the markets are suffering spasms of fear with whats going to happen to all the debt the US frackers accumulated and will probably be unable to pay .

    While the slow process of Oil Industry economic flatening takes place ( a few decades) , oil fracking will probably remain a factor because once prices rebound (some years from now) there will be some fracking operations which can continue pumping keeping the oil prices balanced and comparatively low .

    I fear (or hope??) that the old days of heaven sent booms in the price of oil will be gone for good and that while oil might remain a money making industry (on a more modest scale) it will produce much less revenue than has been the case in the past , and that only if the handling of the business is kept efficient and expertly run .

    The transition towards this new kind of oil economics will be a big challenge for the future !!

  7. But I’d counter that most of the windfall from last decade was taxed at very high rates by corruption, waste and economic chaos. Very clearly in the wrong hands, high oil prices enabled not only the establishment of anti-growth policies, they directly led to a budding dictatorship that impinged on every right.

    Good point. The more oil money there was, the more Chavismo stole and wasted. I am reminded of a saying going ’round the oil field in Texas after the price of oil cratered in the mid ’80s, which went something like this. “God please let there be another oil [price] boom. I promise I won’t blow it next time.”

  8. excellent post!

    I am still amazed that chavistas let 6D election happen. They were either pushed to participate or didnt know the magnitude of what was coming. On that same line, I am deeply worried about a default of the external debt, PDV is being pushed by oil prices and chavistas seem to not know whats coming or are waiting for a miracle.

  9. I would also add that the strengthening of the US Dollar, along with the fracking revolution, brought the Chavismo party to a close. The US would have had a much, much higher inflation rate were it not for the growing demand of the Dollar around the world. The US Federal Reserve was able to print excess Dollars without consequence due to the bad monetary policies from other, mostly third world governments printing their own ‘funny’ money to their hearts content, the Chavez government being one of them. The rising demand for the US Dollar, along with the fracking bonanza, crushed the price of oil.

  10. “If one person deserves the credit for chavismo’s implosion, it’s George Mitchell, a low-key Texas oil man you’ve probably never heard of.”

    I know clickbait ledes sell, but this is just too much. So one lone gringo waged an economic war and won and the Venezuelan people were just pawns with no agency in their own affairs? Did this place suddenly turn into Green Left Weekly?

    Fracking made the US into a net energy exporter again. It also climbed down the price of oil permanently and checked the power of OPEC. It’s an important economic and political development whose role in Venezuelan economics cannot be understated.

    But Venezuela has ridden highs and lows in the oil market before. If you really want to point to what killed things, try looking at a farcical exchange rate that was totally unresponsive to the drastic change in the price of oil and beggared the country of all imports, shuttering a wide swath of commerce and creating all kinds of arbitrage schemes. That to me seems more key than anything.

    Apart from that, I don’t think any one person deserves credit for Chavismo’s implosion. Not even Maduro. But like CADIVI, he helped spur along the great misery that brought us all to this point.

  11. Fantastic article Gonzalo! What a change of mind you get when the cause-and-effect relationships are explained, or at least proposed one perspective into it. Keep them coming!

  12. No en el tópico. Pero mientras CC se “regodea” con la victoria perfecta de super mayorias marvel espacial plus

    Cabello les acaba de meter una asamblea paralela en toda la jeta.

    Sigan celebrando

  13. I still think it’s too early to put it down to fracking. Not only because as has been noted above the current debacle began when oil prices were still high, but because how much of it is fracking and Saudi policies in light of the significant ‘BRIC slowdown’? I’d argue both developments are significant but nevertheless dwarfed by the larger global recessionary dynamic.

    Nevertheless, call me an optimist, but I don’t take the sort of (ironically somewhat Marxist) view that Venezuela’s economic model has wholly determined its political structure and that doing away with the model will necessarily lead to something other than the nepotism or corruption of the past. This seems simplistic to me and I’ll always be more tempted to see the history of Venezuelan oil as consisting of a succession of more chronic criollo mis-planning, misuse and short-termism.

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