The Political Economy of Oil Contract Renegotiation in Venezuela

Abstract

This chapter reviews three episodes of oil contract renegotiation in Venezuela, occurring in 1943, 1958–1976, and 2004–2008. It shows some common elements within these episodes, including significant sunken assets deployed in the successful development oil reserves, a politically favorable environment for renegotiation, and the existence of increasing rents in the context of nonprogressive contracts, which generally did not incorporate the different price contingencies in an effective manner. The main contentions of the chapter are that the renegotiations were the result of the absence of an appropriately progressive tax regime, which made governments increase taxes in periods of increasing rents and that nationalization was a consequence of the way the renegotiations were conducted, generating high uncertainty with respect to property rights as well as declining investment.

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