Energy: A Global Market, a Domestic Need

By January 9, 2007Energy

The latest news from South America features familiar and depressing stories about Venezuela’s caudillo, Hugo Chavez, destroying more of the country’s productive wealth by nationalizing the telecommunications industry and electric utilities. And he sent a threatening message to foreign oil companies:

International companies have the control of the upgrading of heavy crude. No! This should pass to be property of the state.

Not that socialism — and concommitant draining of oil revenues to serve populist ends — has served Venezuela’s oil industry well. Investment has plunged and productivity faltered.

The consequences may damage the U.S. economy, according to this June 2006 GAO report on energy security (.pdf file):

(Long-term) reductions in Venezuela’s oil production and exports are a concern for U.S. energy security, especially in light of current tight supply and demand conditions in the world oil market. If Venezuela fails to maintain or expand its current level of production, the world oil market may become even tighter than it is now, putting further pressure on both the level and volatility of energy prices.

Venezuela is one of several major oil-producing countries where corruption, incompetence and lack of investment may cripple the flow of petroleum from government-run companies. Foremost among them are Mexico and Russia, with Nigeria and other African nations in the running, notes Ronald Bailey in this illuminating piece on the Reason Magazine website.

We hear a lot from the new Congress about achieving “energy independence,” but the rhetoric seems too often divorced for international reality and market forces. In the real world, corrupt, power-hungry and inefficient state monopolies are threatening the supply of oil, a global commodity. In that real world, singling out the U.S. oil industry for punitive tax treatment and blocking further energy development on government lands makes no sense at all — economically OR politically.

Or, as the Detroit News put it, cutting to the chase: “Special tax breaks to encourage oil and gas exploration are also in the Democrats’ sights. We know where this will lead — less exploration, tighter supplies and higher prices for consumers.”