President Donald Trump’s worldview essentially consists of dividing countries into two camps: those whose leaders flatter him or kowtow to his demands and those whose leaders balk at such subservience.
In this view, dictatorships — even avowed enemies of the United States — are fine, as long as they play the game. This is not new in American politics. It echoes the famous quote attributed to Franklin D. Roosevelt about Nicaragua’s military dictator, Anastasio Somoza Garcia, who ruled the country from 1936 until 1956 (when he was assassinated): “He may be a son of a b****, but he’s our son of a b****.”
True to this maxim, Trump turned his back on Venezuela’s democratic majority, led by Nobel Peace Prize winner Maria Corina Machado, and recently signed the so-called biggest oil deal in world history with leftist Delcy Rodriguez, who was put in power after the U.S. captured and removed Nicolas Maduro in January.
The agreement gives the U.S. control over some 65 billion barrels of Venezuelan crude — nearly a fifth of Venezuela’s massive oil reserves. In exchange, the Venezuelan regime will receive an estimated $200 billion in royalty and tax payments during the first 25 years of the 100-year agreement, along with the investments it desperately needs to rebuild its oil industry, which was devastated under the rule of socialist-populist strongman Hugo Chavez and his successors.
At the core of the deal is North American Blue Energy Partners, a private Venezuelan firm that controls 100-year concessions for 17 oil fields with proven reserves. The deal gives the U.S. a 35% equity stake in NABEP, the right to purchase 20% of its current and future oil output at production cost, and the right of first refusal for the remaining 80%.
NABEP allegedly plans to invest up to $100 billion in drilling operations, with U.S. and international oil companies adding billions more.
This may look like a win-win situation, but don’t be fooled. Venezuela remains a dictatorship and dictatorships frequently make promises today they have strong incentives to break tomorrow, a phenomenon known to economists as the “time-inconsistency problem.”
At this stage of the agreement — before American companies invest billions of dollars in drilling, pipelines, and extraction equipment — Venezuelan authorities have every reason to promise generous returns, favorable taxes, and decades of political stability. Those promises are intended to persuade investors to commit capital, as Chevron recently did, announcing a $7 billion investment.
After capital is on the ground, however, the incentives change. A drilling operation cannot simply be moved to Texas; the capital becomes a sunk cost trapped inside Venezuela.
At that point, the Venezuelan dictatorship has an entirely different set of incentives. It can demand higher taxes, renegotiate contracts, impose new regulations — or seize the assets outright.
Venezuela already knows the drill. In the 2000s, then-dictator Chavez arbitrarily changed the rules after ExxonMobil, ConocoPhillips, and other foreign companies had invested huge sums in Venezuela’s oil industry. The industry faltered under the regime’s heavy-handed interference. The oil companies were awarded billions of dollars in compensation in court settlements, much of which Venezuela still has not paid.
So how do societies solve the time-inconsistency problem and make credible commitments?
The answer starts with protecting private property through enforceable rules and divided political power — the opposite of Venezuela’s current system, both in law and practice.
If governments want long-term investment, they must first convince investors that their property and contracts will remain protected after their money is committed. That commitment must be embodied in constitutional rules, enforceable through democratic institutions.
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If a government can be voted out, challenged in court, or blocked by another branch of government, investors are not simply trusting that the regime will remain true to its word — they are relying on a system in which the government cannot easily do the wrong thing.
A century-long oil deal requires a century-long commitment to the rule of law. No dictatorship can make that promise credible.
Daniel Sanchez-Pinol is a research fellow and director of research reports at the Independent Institute, Oakland, California.