Tuesday, June 26, 2007

Venezuela ruffles feathers in the U.S. as it moves forward to nationalize its petroleum sector.

Source: ABC--"Venezuela Forces US Oil Giants Out."

Since January, Venezuela has been on track to nationalize its petroleum sector. Today, it moved a significant step forward in that regard by signing agreements with four multinational corporations that give it the lion’s share of the profits that result from reserves found in the nation's Orinoco Basin. Two U.S. companies, ExxonMobil and ConocoPhillips, pulled out entirely, being dissatisfied with the terms developed by the Venezuelan government.

In the past, foreign ventures like ExxonMobil and ConocoPhillips paid only a 1% royalty on the Venezuelan oil they extracted. Changes in regulatory requirements in that nation raised royalties to 33.2%. Additionally, taxes on the sector were raised from 34% to 50%. Essentially, the Venezuelan government has found a way to muscle in to the sector by virtue of a regulatory regime that they feel will ensure that the people of Venezuela profit from that nation’s national resources.

The news was met with criticism in the U.S., with the Trade Representative noting that he expects Venezuela to award big oil companies “fair and just compensation” according to international agreements. Additionally, U.S. analysts predict that this move by the Chavez administration will result in the Venezuelan oil industry being in a “shambles.”
However, Venezuela’s Energy Minister counters that nationalization of the petroleum industry is not simply an economic matter, but also an issue of national sovereignty.

For discussion:

An interesting parallel may be made to the current situation with Venezuela’s nationalization of its petroleum resources with the nationalization of Mexican petroleum in 1938.

Should developing countries cede their natural resources to foreign multinationals?

Is it unreasonable that a nation would want they ability to exercise more control over resources that directly affect its national security? For example, would the United States welcome almost exclusive foreign control of its domestic energy sector? Recall the recent upset in Congress over a domestic oil firm Halliburton's plans to move its headquarters to Dubai.

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