Venezuela’s nationalization of the oil industry has been a disaster. After running off the evil capitalists, the government hasn’t been able to extract and process oil at a competitive rate. The nationalization scheme has also failed to compensate oil companies fairly for their assets. Companies are entitled to fair market compensation if their assets are confiscated, but they rarely get it. Governments typically underpay because they get to set the price. Consider the case of Exxon in Venezuela.
In 2007, Venezuela expropriated Exxon’s Cerro Negro oil venture. Exxon attempted to negotiate a fair settlement with the government, but got nowhere and appealed to arbitration. Two years ago the International Chamber of Commerce ordered Venezuela to pay Exxon an additional $900 million. The World Bank’s International Center for Settlement of Investment Disputes (ICSID) just raised that payment to $1 billion.
This might sound like justice for Exxon, but the $1 billion figure is much less that the company should have received. Exxon was actually seeking $10 billion in additional compensation. While the actual value of the venture can be legitimately debated, most analysts agree that $1 billion is far too low.
This type of government intervention is not only inefficient—Exxon would have done a better job managing the venture—but it violates basic property rights. It is not disputed that Exxon has a right to fair compensation for its assets. However, Exxon should not have been required to sell the venture in the first place.
But socialist governments like Venezuela don’t respect private property. They take what they want and pay what they determine is fair. It’s an immoral system. If I tried this with my neighbor’s big screen TV I’d be in jail.
Venezuela’s bully government has run off oil producers, retailers, airlines, and a host of other foreign companies. The private sector is vanishing, leaving production to the bureaucrats. It’s no wonder that the Venezuelan economy is in shambles.