Bryan Caplan  

A Dagger in the Heart of America

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As late as 1999, it was our single largest foreign supplier of oil. But then a hostile regime took over, struck up close friendships with our bitter enemies, and started strangling our economy. By 2003, it had cut its exports by 22%. Clearly, we can no longer "leave well enough alone" in this geopolitical hotspot.

[Drumroll]

It is time to get tough with the dagger in the heart of America: Venezuela.

The data is all at the Department of Energy website. From 1995 to 1999, the U.S. got more oil from Venezuela than from any other country in the world. But socialist Hugo Chavez came in power in 1999, and in the wink of an eye oil exports to the U.S. started to drop. The numbers:

Year Daily Venezuelan Exports to U.S. (in 1000's of barrels)
1996 1667
1997 1758
1998 1700
1999 1480
2000 1530
2001 1540
2002 1387
2003 1372

Chavez has even threatened to cut off all oil exports to the U.S. if we don't stop meddling in his country's affairs.

I'm pretty sure that if this happened in Saudi Arabia, there would be a foreign policy panic. If the decreased flow followed a fundamentalist take-over, Chicken Littles would be all over the news. But when a socialist and admirer of Castro takes over in Venezuela, we yawn.

And yawn we should. Chavez has been terrible for Venezuela. (And it would be far worse if the high world price of oil weren't compensating for his disastrous polices). But U.S. oil imports as a percentage of GDP are pretty trivial. $132 billion on oil imports in 2004 divided by around $11 trillion GDP is about 1%. And of course, when one country sells us less, we don't necessarily cut back at all. There are lots of fish in the sea, and lots of sources of oil in the world economy.

I've often heard the quip, "If the main export from the Middle East were bananas, we could stop worrying about them." It wouldn't surprise me if most Americans thought the top export of Venezuela were bananas! It doesn't matter. They sell us less oil, the U.S. government does little about it, market prices adjust, and we get on with our lives.

On the other hand, if you think me a naive economist who knows nothing of foreign affairs, perhaps we should get tough on our current Number One foreign oil supplier.

[Drumroll]

Yes, you know who it is: Canada.


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TRACKBACKS (9 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/237
The author at Exploit the Worker in a related article titled Foreign Policy Myths: Oil writes:
    Bryan Caplan exposes the United States' dependency upon foreign oil... from the Western hemisphere.... [Tracked on April 16, 2005 11:33 AM]
The author at Catallarchy in a related article titled Oh, The Things I Don't Know writes:
    I'm never really surprised when other people don't know things. They have an excuse: they're not me. But when I don't know something, man, that just throws me for a loop. For instance, Bryan Caplan reports that our current "Number One forei... [Tracked on April 16, 2005 3:30 PM]
The author at Houston's Clear Thinkers in a related article titled The grand mismanagement of Citgo writes:
    This New York Times article -- entitled The Troubled Oil Company -- reviews the Venezuelan dictator Hugo Chavez's mismanagement of Houston-based oil company Citgo, which is owned by PetrĂ³leos de Venezuela, the Venezuelan national oil company. Over the ... [Tracked on April 20, 2005 6:41 AM]
COMMENTS (22 to date)
jaimito writes:

Chavez is a clown. Left alone, he will be laughed off in no time. Even if he sells the oil to the Chinese, the money ends up in Miami.

Nathan T. Freeman writes:

Thanks for pointing this out, Bryan. People's misconceptions about where the US gets its oil are rampant.

The single largest supplier of oil to the US is, of course, itself. Most people also forget that some 40% of petroleum in the US is produced domestically.

John F. Opie writes:

Hi-

As something of a former foreign policy wonk, it's not that simple.

Saudi Arabia isn't just our supplier, but also that of Europe and Japan. For Venezuala, that's very much less the case. Having Saudi supplies disrupted means that US allies are also disrupted and would have massive, system-threatening world-wide repercussions.

But that said, Venezuala is a real problem: Chavez is funding populist/crypto-communist groups all over South America (Bolivia, Chile and Peru come to mind immediately) with oil money and is providing oil to Cuba at cost, effectively subsidizing Castro's regime. As a form of thanks, Cuba has provided Chavez with literally thousands of "experts" who are basically developing the same kind of pervasive security regime in Venezuala that has helped Castro keep power in Cuba for these many years.

Hence he shouldn't be ignored as a clown, but rather as the reincarnation of that old South American problem, the charismatic man on horseback who in realizing his vanities of glory ends up impoverishing everyone except his own cronies. But this time he's got oil money behind him.

Not a good development.

John

jaimito writes:

It is true that Chavez aligns Venezuela with communist China and Cuba, but in these days communism seems to have lost its virulent features. There may still survive a few pensioned-off cold warriors worrying about communist subversion, may be even having nightmares of a Russian invasion to East Germany, but lately there have been some developments. Chavez being the clown he is, it would not be surprising that he declares Venezuela not only a Bolivarian State as he did but also Bolivarian Communist People's Republic. He would be laughed off the map.

And I mean it. In Venezuela there is a new floruishing literary genre, the Chavez jokes. You dont have to be Venezuelan to enjoy them, but I would not even try to tell one in English.

Randy writes:

Communists with nukes worry me. Communists with oil, not so much. Communists with neither, not at all.

spencer writes:

Why isn't Venezuela just another example of the Bush administration spreading freedom around the world?

Really, you seem to want to credit the Iraq war with everything else-- why not Latin america.

Or could it be that a lot of things going on around the world have no tie to the Iraq war?

Lancelot Finn writes:

Hehe. Great post, Bryan. Funny, and with a good moral to it!

Dave Schuler writes:

We are getting tough with Canada. Have you been over to Captain's Quarters lately?

Duane Gran writes:

It is curious to me how Caplan, who espouses many Libertarian principles, overlooks the fact that Venezuela is free to choose whom it sells oil to. What is the subtext of this missive he wrote? Are we to believe that the mere existence of oil under a nations land mass denotes an obligation to sell it to the United States?

William Woodruff writes:

Duane,

You took the words right out of my mouth. There is evidence the Bush Admininstration had its hands dirty in the initial ousting of Chavez.

Remember when the english newspaper the Guardian published a list of undecided voters in Ohio, and their readers wrote letters to US citizens sharing their opinion on who they believe should win the election (overwhelming Kerry)? There were cries from the State Department to mainstreet about foreigners meddling in our countries affairs.

How soon we forget what we have done in the internal affairs in South America, the Middle East, etc.

Leave Chavez alone ! We are not the only consumers of oil on the world market. Eventually Dutchs disease will spread thoroughout Venezuela and the people will decide whether,how and when they see fit to replace Chavez.

Alex J. writes:

"Venezuela" is free to choose to whom it sells oil? Venezuelans are not individually free to choose the recipients of oil from Venezuela, that decision is made by government officials in Venezuela.

Randy writes:

It doesn't matter who Venezuela sells oil to as long as they sell it. Its a world market. The danger (minimal) is that instability in Venezuela results in the oil being taken off the market.

Lawrance George Lux writes:

China has already signed Development constracts with Chavez to the tune of $6b. It has also signed a Trade treaty with him for about $4b. They are planning on building a Pipeline to the Pacific. It is a worry!

The most telling point is China constructing a Cracking plant to use the sludge which Venezula calls Oil. I don't like the thought of a Chinese colony in South America. lgl

DeadHorseBeater writes:

I'm with Randy. Absent some very inconvenient short-run hiccups, it's a world market.
If Chavez boycotts the US, he'll either have to sell his oil elsewhere or wreck total havok on the Venezuelan economy.

That'll mean either other suppliers will supply directly to the US with slightly higher transport costs or oil will be transhipped through countries that Chavez hasn't boycotted, raising prices slightly again.

Similar arguments apply about oil conservation, of course. Prices are dictated on a world market, so the relevant question is not how much a given conservation scheme reduces US demand, but rather how much it reduces world demand.

Conservation schemes aimed at reducing oil usage per $ of GDP or reducing the elasticity of GDP wrt oil prices would be more fruitful.

Duane Gran writes:

Randy said It doesn't matter who Venezuela sells oil to as long as they sell it. Its a world market. The danger (minimal) is that instability in Venezuela results in the oil being taken off the market.

Would you also consider it a danger if the US didn't drill ANWR and put it on the market? Why would it be a danger if Venezuela made a reasoned decision to sit on their reserves and choose to sell it in the coming decades, hedging on a chance to sell the same commodity for a higher value? I can't help but hear a presumptuous tone when you declare "as long as they sell it", which seems to imply a moral imperative to exploit natural resources and sell to the United States. Possibly you meant something different.

jaimito writes:

if Venezuela made a reasoned decision to sit on their reserves ... Venezuela is powerless to do that. A new generation of military, union, political leaders has adquired "licence to steal public monies". China will make them happy.

Randy writes:

Duane,

Danger is probably the wrong word. Drawback is closer to what I had in mind. Less oil on the world market means higher prices for everyone - and yes, not drilling ANWR has the same effect.

No, I don't believe that Venezuela has a duty to sell to the US or anyone. I find it highly unlikely that they will choose to not sell. A little more likely that political instability could result in disruption of supply.

jaimito writes:

Sorry, I dont see export disruption or underinvestment in the future of Venezuela. China, having put her foot in the door, will do everything she can to turn its new partnership a success and a model for other LA countries searching for new patrons. If this new scheme of things fails, you know who to blame (or to congratulate).

Rick Stewart writes:

If the authorities in Venezuela think it would be a smart idea to 'sit on their reserves,' but would also like to spend some money today, they could both check their judgement against world opinion and get both a check and a bank account by attempting to sell long-term options on their oil.

If the markets agree that the value of the oil will increase more rapidly than all other investments, the market will be happy to pay a premium to Venezuela today, for the right to pump their oil tomorrow.

Then again, the people who believe this don't have to play the game with Venezuela, do they - they could just buy oil wells in the US, where there is less chance of political chicanery, and cap them.

In other words, talk of Venezuela 'sitting on its reserves' is not much more than nonsense.

jaimito writes:

Rick, no one in his mind would give a cent to Chavez for the promise that he will sell him oil next year. Firstly, as Argentina showed, there is no way to enforce such contracts. Secondly, Chavez is scheduled for defenestration much earlier.

On a second thought, lots of people are looking for a chance to get separated from their money.

guerby writes:

Bryan, you should know better about Venezuela, use google and find out the history of what really happened in the past few years in this country. Chavez is indeed very surprising, but he's been elected, won hand down a fair vote for his revocation, and is overall much better than the people that try to reverse him. Media are totally free in Venezuela and most of them, privately owned, routinely say things about their president that would cause any US citizen saying the same thing about Bush to spend their life in prison without trial (terrorists...).

Anony writes:

Actually - Their main fields are in decline.


From 1985 to 1998 Venezuela's Avg daily oil production grew from 1,744,000 barrels to 3,510,000 (a peak).
From 1998 to 2003 production DECLINED to 2,987.000.

Perhaps A reason Venezuela sells less to USA is they are pumping less.

YES - I know they have had some labor and production stops that have had effect from time to time.

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