HOUSTON - After Tuesday's death of Hugo Chavez, Venezuela faces near-term political uncertainty that could bring further turmoil to its oil industry.
The country's oil exports fell by nearly half during Chavez's 14 years as president, and that kind of decline is not easily reversed. It will take years of investment to turn around the country's beleaguered oil sector.
But whoever emerges as the next leader of Venezuela - an OPEC member that sits on the world's second-largest oil reserves - will have a powerful economic incentive to make that a top priority.
Exports fell from 3 million barrels per day in 2000 to 1.7 million barrels per day in 2011. Chavez relied heavily on the country's oil income to fund social programs, but reinvested relatively little of it to exploit new oil fields and replace depleted ones.
Venezuela's refineries are so weak that the country is forced to import enormous amounts of fuel from the U.S. and elsewhere even as it exports crude. Those imports are especially costly because the government heavily subsidizes gasoline. Venezuelans pay only a few cents per gallon for gasoline, and the subsidies cost the government $25 billion per year, said Jason Bordoff, director of the Center on Global Energy Policy at Columbia University.
There has been no indication from the country's national oil company, Petroleos de Venezuela S.A., or PDVSA, whether it will invite more foreign investment or increase its own investment in new production. But Chavez held such sway over the company that his death means the direction could change dramatically.
"Without his charisma and force of character, it is not at all clear how his successors will maintain the system he created," said Daniel Yergin, author of a Pulitzer Prize-winning book on global energy politics.
The discontent in Venezuela that grew with the decline of oil prices in the late 1990s helped Chavez get elected. High oil prices that followed helped him consolidate power by funding programs popular with Venezuelans and making regional allies by offering cut-rate oil deals, Yergin said.
But his refusal to reinvest in the industry, along with a strike at PDVSA in 2002 that sapped the company of some of its best talent, led to deep decay in the country's most important industry. Chavez nationalized some oil and gas assets owned by international oil companies, such as Exxon Mobil, in order to make PDVSA the majority stakeholder in all Venezuelan projects. That prompted Exxon and others to abandon work in the country, further reducing the country's access to oil and gas technology and expertise.
Citgo, the company's U.S. division, operates refineries in Texas, Louisiana and Illinois, and sells fuel through thousands of gas stations. Citgo has been used by Chavez to distribute discounted heating oil to poor American families in a high-profile program aimed at criticizing Washington's approach to the poor.
The world oil market's response to Chavez's death was muted - oil rose slightly in electronic trading in New York to $91.05 per barrel. That's eight times the price of a barrel when Chavez took office 14 years ago. But on Wednesday, traders focused on a report that showed rising supplies in the U.S., and oil dropped to $90.15.
Analysts say Venezuelan production will likely fall further in the short term. But its oil supply has been declining for so long and oil markets are so well-supplied that traders are not concerned that further erosion in Venezuelan supply will disrupt markets.
That could change, however, if instability erupts as new leaders jostle for power and new elections are held, said Sarah Ladislaw, of the Center for International and Strategic Studies. Dramatic unrest could lead to a sharp drop in exports and higher oil prices.
Tearful Chavez backers carry his body / A16