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Topic / Environment and Energy

Citgo at a Crossroad: Venezuela’s Oil Socialism Comes to Roost

Last October, Venezuela’s President Nicolas Maduro accused the US of allegedly judicially “kidnapping” Citgo Petroleum, the country’s foremost overseas asset.1 The president’s comments referred to an ongoing court-mandated auction by a federal district judge in Delaware, who ruled that Citgo could be seized to satisfy international arbitration awards against the country.

While Maduro may wish to blame the former interim administration of Juan Guaido, recognized by the US in 2019 and briefly in control of the country’s foreign assets, for the court auction, the legal proceedings against Citgo underscore the tumultuous path of Venezuelan governance under oil socialism — a process which began decades prior with Hugo Chavez’s expropriation rampage in 2003.   

The Rise of Oil Socialism in Venezuela

To better understand how Venezuela’s oil refineries came to be on the cusp of being auctioned in the US, one would have to begin with the Latin American country’s “oil socialism” in the early aughts. During the sugar-high commodity years in the early 2000s, Venezuela was riding high on petrodollars. At the time, Chavez undertook countless oil-based geopolitical initiatives like Petrocaribe and ALBA–TCP. His plans constituted a Grand Strategy to leverage Venezuela’s wealth to counter US influence in the Western Hemisphere, extricate American energy supermajors from the country’s oil production and decouple Venezuela from the American market.

To this end, on May 1, 2007, Venezuela nationalized the Orinoco Oil Belt, home to one of the largest recoverable oil deposits in the world. On the occasion, a plethoric Chavez ordered party apparatchiks to begin advocating for “Oil Socialism,” which sought to assert greater state control over the oil industry.2 The decision marked a profound shift in Venezuela’s energy policy and strained its bilateral relationship with the US.

Venezuela-U.S. Oil Relations: A Historical Perspective

Historically, the two countries enjoyed amicable ties; following the nationalization of its oil industry in 1976, Venezuela’s symbiotic energy partnership with the US thrived. This robust bond, driven by geographic proximity and economic logic, held immense practical and strategic sense for Venezuela. Caracas’ decision to cultivate strong ties with the world’s largest oil market was compelling — tankers could reach the east coast of the US in a week, and refineries in the Gulf of Mexico were just a four-day voyage away. In fact, between 1995 and 1998, Venezuela was the largest supplier of imported oil to the US, accounting for 13.7% of its oil imports.3

In the 1980s, the newly created state-owned PDVSA formulated a strategic internationalization plan to vertically integrate into the US market. In 1986, the company took a pivotal step by acquiring a 50% stake in Citgo, Inc. and achieving full ownership by 1990.4 This acquisition solidified Citgo as a crucial operational and commercial hub for Venezuelan crude in the US, a position now at risk of being lost to creditors.

The success of the strategy was remarkable. At its peak, the company owned five refineries with a collective processing capacity of 750,000 barrels per day, equivalent to approximately 4% of the US refining capacity.5 Commercial alliances with four other refineries propelled the total refining capacity to an impressive 1.3 million barrels per day. By 1999, Citgo’s extensive network extended to 13,000 gasoline stations, capturing over 10% of the US retail gasoline market.6

The Pivot Away from the U.S. Market: Navigating Corruption and Change

However, a significant shift was on the horizon. In 2006, Hugo Chávez’s “Oil Socialism” strategy led Citgo to scale back operations in the US, ostensibly to reduce Venezuelan oil dependency on the US market. Yet, this nationalist rhetoric of independence masked a hidden agenda: the socialist government began privatizing national assets abroad, a move that went unnoticed by the Venezuelan public.7 The proceeds from these asset sales in the US were funneled into the corrupt, state-run grocery chain Mercal, which in 2010 was responsible for over 160,000 tons of food left abandoned and spoiled.8 This strategy enriched government cronies under the guise of revolutionary goals.

The Legal Battle Over Citgo: Historical Reckoning

Should the Delaware court proceed with Citgo’s looming fire sale to compensate expropriation creditors, revisiting Citgo’s backstory amidst government propaganda becomes essential. The toll for Chavez over 1,000 expropriations should be indelible in historical memory.9

This will be an uphill battle. Already, government proponents seeking to diminish Chavismo’s responsibility for this outcome cite the District Court’s 2023 ruling, which found that the Guaido interim government directed and controlled Citgo assets in the US in a manner materially identical to how the Maduro Regime controls PDVSA inside Venezuela. The court thus determined that Citgo is considered an extension of the Venezuelan state eligible to satisfy creditors’ claims.10

Government officials are shifting the focus to this ruling to draw attention away from the real issue: Chavez’s socialist dreams, marred by rampant mismanagement and corruption, led to Citgo’s downfall. It’s not about any blunders made by the Guaido interim administration but about the disastrous consequences of Chavez’s misguided policies.

The historical evidence plainly shows that the blame for this debacle lies squarely with Chávez and the ill-fated oil socialism of his Bolivarian Revolution.

A Path Forward for Venezuela’s Oil Industry: Embracing Markets and Property Rights

Looking to the future, a democratic Venezuela should unleash its animal spirits and open the country’s mineral wealth to foreign direct investment without national ownership requirements. Privatization and economic liberalization are essential to secure the $58 billion needed to restore crude output to pre-oil socialism levels.11 Critics, blinded by ideology and lacking insight into the industry’s investment dynamics, will contend that foreign capital plunders national wealth and that continuous national participation is the way forward. Yet, adhering to this flawed dogma is a surefire recipe for squandering the country’s vast mineral wealth, leaving it underground where it can’t help finance infrastructure and human capital.

Additionally, creating a citizens’ wealth fund and granting the property of the energy income to Venezuelan citizens as envisioned by Leopoldo López in “Venezuela Energética” offers the best path forward to defeat the resource course.12, 13, 14 This policy would democratize energy income through transparent management, direct dividend distribution, and sustainable development reinvestment.

Some may dismiss these policy recommendations as unrealistic, arguing that the rapid energy transition will drastically reduce future fossil fuel demand. However, as long as there is a global demand for hydrocarbons, it would be pointless for Venezuela to sit on the sidelines. The country should seize the remaining time to develop its natural resources and ensure every citizen becomes a property owner.

Perhaps this way, the stench of oil socialism will be forever dispelled.

  1. Marianna Parraga, “Delaware Court Will Not Seek to Set Minimum Price in Citgo Auction,” Reuters, October 23, 2023, ↩︎
  2. Hugo Chavez, “Discurso de Nacionalización de la Faja Petrolífera del Orinoco,” Complejo Industrial José Antonio Anzoátegui, May 1, 2007, ↩︎
  3. Mark Sullivan and Tracy Bius, “Venezuela under President Chavez: Political Conditions and U.S. Policy in 2000,” Congressional Research Service, Report No. RS20345, August 2000. ↩︎
  4. “CITGO – Our History,” accessed October 23, 2023, ↩︎
  5. “GAO-06-668, Energy Security: Issues Related to Potential Reductions in Venezuelan Oil Production,” June 27, 2006, ↩︎
  6. To understand the scope of this strategy and the importance of CITGO’s market share, the existing regulatory context in the US must be considered. There was an implicit agreement that the Federal Trade Commission would only approve mergers between oil companies if their share of the retail market did not exceed 15%. Please see Daniel Yergin, The Prize: The Epic Quest for Oil, Money & Power (Simon and Schuster, 2011), 97. ↩︎
  7. Marianna Párraga, Oro Rojo: Desentrañando el Misterio de la PDVSA Revolucionaria, (Caracas: Ediciones Puntocero, 2010), 52-54. ↩︎
  8. Transparencia Venezuela, “No Hay Comida en PDVAL y Mercal de la Gran Valencia, Sólo Desolación,” Transparencia Venezuela, ↩︎
  9. Charles Roth, “Venezuela’s Economy Under Chavez, by the Numbers,” The Wall Street Journal, March 6, 2013, ↩︎
  10. Rusoro Mining Limited v. Bolivarian Republic of Venezuela, 1:21-mc-00481, (D. Del.) ↩︎
  11. Luc Cohen, “Venezuela Needs $58 Bln to Restore Crude Output to 1998 Levels – Document,” Reuters, May 10, 2021, ↩︎
  12. Angela Cummine, Citizens’ Wealth: Why (and How) Sovereign Funds should be Managed by the People for the People (Yale University Press, 2016). ↩︎
  13. Pedro Rodríguez and Luis Rodríguez, “El Petróleo Como Instrumento de Progreso,” Una Nueva Relación Ciudadano-Estado-Petróleo, 2012. ↩︎
  14. Gustavo Baquero and Leopoldo López, Venezuela Energética: Propuesta Para el Bienestar y Progreso de los Venezolanos (Dahbar, 2017). ↩︎