Venezuela’s Bankruptcy and the History of Oil Prices

Venezuela is about to go bankrupt, and I would like to bring to your attention the following Reuters article, titled “Venezuela’s president says oil industry needs $88 price”, October 2015. Venezuela is the richest country in the world in terms of oil reserves, but she is a highly corrupted socialist country, and obviously that’s not enough to keep her afloat. According to Reuters Venezuela was trying to convince the other OPEC members to cut oil production in order to push oil prices at 88 dollars per barrel, from the current price level of 40 dollars. OPEC = Organization of the Petroleum Exporting Countries.

Venezuela did not convince her counterparts. The main problem is that Saudi Arabia is not willing to cut her production, because she wants to hurt Russia and Iran who count on oil exports for their revenues. The Turks and the Arabs are currently fighting a war against the Iranians and the Russians in Syria and Iraq, and the lower the oil prices the harder it is for the Iranians and the Russians to finance the Shiite Islamists of Syria and Iraq. Moreover Saudi Arabia is trying to drive out of the market the American companies that produce oil from shale rock, or from deep sea oil fields at a higher production costs.

According to some analysts it is the first time that it is not the sellers but the buyers who have the upper hand in the oil market. Obviously that’s good for the United States, China, the European Union and Japan, who are the main oil importers. It is not good for Russia, Iran, the Arabs, Norway, Venezuela, Kazakhstan, Libya, Nigeria, Angola, Mexico and Canada, all of whom are major oil exporters.

There are of course more reasons that lead to low oil prices, and it is not only the increased Saudi production. But everyone agrees that the role of the Saudis is very important. Low oil prices are also due to the agreement for the Iranian nuclear program, which makes everybody less worried about future imports, because they now that soon the Iranian oil will reach international markets. The American attack on Sadam Hussein and Iraq is another reason. With Sadam in power, the West was not allowing Western firms to enter the Iraqi market, or import oil from Iraq. The reason was that the revenues would finance the army of Sadam Hussein, who was an international terrorist. But now all Western and Chinese oil companies operate in Iraq.

Moreover the United States and Canada have increased their oil and natural gas production, because new technologies allowed the production from shale rock. The world bad economic climate and recession during the last years must have also pushed oil prices downwards. Probably there are many other factors that contributed to low oil prices, some of which I do not know, and some of which I cannot think about right now. At the following diagram you can see oil prices from 1860. The diagram is taken from Business Insider “An Annotated History Of Oil Prices Since 1861”, December 2014.

Oil Prices

Chart of Oil Prices

You can see that oil prices were very high during the American Civil War (1861-1865). Then prices were relatively low, until they exploded in 1973, when the Arabs decided to punish the West for its support to Israel during the 1973 war between Israel on one hand, and Egypt and Syria on the other. After the oil embargo of 1973 the United States banned exports of American oil, because it was thought that the United States should enhance its energy security. The Americans wanted to reduce their dependence on their ally, Saudi Arabia, after the oil crises of 1973.

However I believe that the victory of Israel wasn’t too bad for the Saudis, because for the Saudis Egypt and Syria were greater enemies than Israel. There was of course a great problem, and that was that the Israelis had agreed with the Iranians to export the Iranian oil to the Mediterranean Sea through the Israeli port of Eilat and the Eilat-Ashkelon Pipeline. Remember that the Israelis and the Iranians were allies until 1979. The Israeli-Iranian agreement was hurting Egypt, because the Iranians would avoid the Suez Canal, but it was also hurting the Saudis, because they could not use Israel, since they had never recognized it as a country. Remember that Iran is the main competitor of the Arabs in the oil markets. For more details see the “The Intra-Arab War for Oil 1950-1970”.

Map Eilat-Ashkelon Pipeline

Map of Eilat Ashkelon Pipeline

Map Eilat

Map of Gulf of Aqaba

After 1973 prices were low, and they exploded again in 2008, when they reached 140 dollars per barrel. Again the price increases were due to a combination of factors, and I am not sure which one was the most important. For a discussion on the price increases see “The 2008 Oil Price Shock: Markets or Mayhem?”, November 2009.


“Venezuela’s president says oil industry needs $88 price”, October 2015

“The 2008 Oil Price Shock: Markets or Mayhem?”, November 2009

“An Annotated History Of Oil Prices Since 1861”, December 2014

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