Dead oil
While it is now fashionable to blame the collapse of the Venezuelan oil industry solely on Chavez’s socialism, Caldera’s privatisation of the oil sector was unable to forestall the decline in oil production, which peaked in 1997 at around 3.5 million barrels a day. By 1999, Chavez’s first actual year in office, production had already dropped dramatically by around 30 percent.
A deeper look reveals that the causes of Venezuela’s oil problems are slightly more complicated than the ‘Chávez killed it’ meme. Since peaking around 1997, Venezuelan oil production has declined over the last two decades, but in recent years has experienced a precipitous fall. There can be little doubt that serious mismanagement in the oil industry has played a role in this decline. However, there is a fundamental driver other than mismanagement which the press has consistently ignored in reporting on Venezuala’s current crisis: the increasingly fraught economics of oil.
The vast bulk of Venezuela’s oil is not conventional crude, but unconventional “heavy oil”, a highly viscous liquid that requires unconventional techniques to extract and flow, often with heat from steam, and/or mixing it with lighter forms of crude in the refining process. Heavy oil thus has a higher cost of extraction than normal crude, and a lower market price due to the refining difficulties. In theory, heavy oil can be produced at below break-even prices to a profit, but greater investment is still needed to get to that point.
The higher costs of extraction and refining have played a key role in making Venezuela’s oil production efforts increasingly unprofitable and unsustainable. When oil prices were at their height between 2005 and 2008, Venezuela was able to weather the inefficiencies and mismanagement in its oil industry due to much higher profits thanks to prices between $100 and $150 a barrel. Global oil prices were spiking as global conventional crude oil production began to plateau, causing an increasing shift to unconventional sources.
That global shift did not mean that oil was running out, but that we were moving deeper into dependence on more difficult and expensive forms of unconventional oil and gas. The shift can be best understood through the concept of Energy Return on Investment (EROI), pioneered principally by the State University of New York environmental scientist Professor Charles Hall, a ratio which measures how much energy is used to extract a particular quantity of energy from any resource. Hall has shown that as we are consuming ever larger quantities of energy, we are using more and more energy to do so, leaving less ‘surplus energy’ at the end to underpin social and economic activity.
This creates a counter-intuitive dynamic — even as production soars, the quality of the energy we are producing declines, its costs are higher, industry profits are squeezed, and the surplus available to sustain continued economic growth dwindles. As the surplus energy available to sustain economic growth is squeezed, in real terms the biophysical capacity of the economy to continue buying the very oil being produced reduces. Economic recession (partly induced by the previous era of oil price spikes) interacts with the lack of affordability of oil, leading the market price to collapse.
That in turn renders the most expensive unconventional oil and gas projects potentially unprofitable, unless they can find ways to cover their losses through external subsidies of some kind, such as government grants or extended lines of credit. And this is the key difference between Venezuela and countries like the US and Canada, where extremely low EROI levels for production have been sustained largely through massive multi-billion dollar loans — fuelling an energy boom that is likely to come to a catastrophic end when the debt-turkey comes home to roost.
“It’s all a bit reminiscent of the dot-com bubble of the late 1990s, when internet companies were valued on the number of eyeballs they attracted, not on the profits they were likely to make,” wrote Bethany McLean recently (once again in the New York Times), a US journalist well-known for her work on the Enron collapse. “As long as investors were willing to believe that profits were coming, it all worked — until it didn’t.”
A number of scientists have previously estimated the EROI of heavy oil production to amount to around 9:1 (with room for variation up or down depending on how inputs are accounted for and calculated; the unfashionable but probably more accurate approach would be downwards, closer to 6:1 when both direct and indirect energy costs are considered). Compare this to the EROI of about 20:1 for conventional crude prior to 2000, which gives an indication of the challenge Venezuela faced — which unlike the US and Canada, had emerged into the Chavez era from a history of neoliberal devastation and debt-expansion that already made further investments or subsidies to Venezuela’s oil industry a difficult ask.
medium.com/insurge-intelligence/venezuelas-collapse-is-a-...
