Oil Problems In Iran And Venezuela

It seems somehow correct that two thorns in America's side may be sowing the seeds of their own decline, if not fall, in regards to their domestic policies. Both Iran and Venezuela have been ignoring the infrastructure that supports their respective oil industries. Iran's neglect has been endemic since the fall of the Shah back in 1979. Venezuela's problems started when Hugo Chavez took office and replaced knowledgeable petroleum managers and engineers in Venezuela's oil company, Citgo, with political cronies with little or no knowledge or experience in running such a venture. Chavez is pissing away his country's wealth with his social giveaways while doing little to preserve the ability to exploit the source of that wealth.

What are the consequences when such self-made catastrophes come to pass?

In Iran, oil production has been falling while domestic demand has increased. Oil exports have declined 10 percent per year while domestic demand has increased 6 percent per year. At some point the two will cross each other and Iran won't be able to supply enough oil for its own use, let alone to generate much needed foreign sales. Also, Iran's lack or refining capacity means that it will be even more dependent upon foreign refineries to meet its needs, not a good formula for economic prosperity. It certainly explains their claims that they need nuclear power to meet their energy needs, despite their large oil reserves. But the money Iran is spending on nuclear research could be better used to repair and upgrade the existing petroleum infrastructure. However, as the article linked above explains, they don't want to “wait the four to six years to see a return on investment.” If nuclear power development does not continue apace, they could see ever increasing power shortages and forced power cuts to ration the dwindling power supply.

If the revenues continue to fall off, social unrest is a likely scenario because the mullahs won't be able to fund the social and military spending as they have in the past. As social services start suffering cutbacks and military spending drops off, neither the public nor the military is going to like the downward spiral. At some point there is going to be protests, then open rebellion, but the mullahs won't have the support they need to quash it. It's possible we could see a second Iranian Revolution, this time with the mullahs and their puppet government being overthrown.

In Venezuela, the situation is different, but the outcome could end up being the same.

As I mentioned earlier, Chavez is spending his nation's capital while at the same time jeopardizing the source of that wealth by ignoring the infrastructure that generates that wealth. While placating the poor in Venezuela with massive social programs, he is ignoring the physical infrastructure that allows the nation to function. While the petroleum infrastructure is important, it is the more traditional civil infrastructure – roads, bridges, highways, water and sewage systems, etc - that is suffering due to Chavez's spending on social programs, both domestic and foreign. In fact, because needed repairs were not done, a major bridge that links the Venezuelan capitol of Caracas with two airports as well as the country's second largest seaport failed, cutting off the city from easy access to them all. A trip that used to take an hour now takes all day. That certainly can't be good for the local economy.

Chavez has also been using some of Venezuela's oil wealth to embarrass the Bush Administration, offering home heating oil to needy Americans at well below market prices. While it is a PR coup for Chavez, it is eating away at Venezuela's oil revenues, something it really can't afford.

Should the petroleum infrastructure collapse, as in Iran, unrest wouldn't be all that far behind. But in Venezuela it may not be those with democratic ideals who might try to fill the gap. As always, the drug cartels have lots of cash and are willing to use it to usurp governments. It wouldn't be all that difficult to co-opt Chavez, or if it comes to that eliminate him and replace him with a puppet that will do anything the cartels want. It was very much like that in Colombia, though there were also Marxist revolutionaries involved in the mix.

Two nations with incredible wealth are squandering chances to do good with it, instead focusing on what will be seen as inconsequentials rather than “taking care of business” for their people.

While a failure of Chavez's government may or may not have a great effect on the world economy, the crippling of the Iranian Islamic regime could have political repercussions all throughout the Middle East and economic effects worldwide.

Mexico could be another oil producing country to add to the list. Mexico's petroleum infrastructure isn't in any better shape than Iran's and is in as much danger of collapse as Iran's, which does not bode well for the US. But that's a story for another post.