Cuban Oil: A Study in State-Run Stupidity

A state-run oil company in Cuba announced that it has approximately 20 billion barrels of oil in its offshore fields, which is more than double its previous estimates.  If correct, it would make Cuba the 20th largest oil producing nation in the world and bring “unprecedented wealth” to Fidel Castro’s tiny, backward island.  Drilling could begin as soon as the middle of 2009.

Imagine if free market principles were at work in Cuba.  If there was an incentive to generate profits, an oil company would have long ago discovered these stores of oil.  Why?  Because making money is a heck of a motivator.  Money would be flowing into Cuba now, raising the standard of living for millions of people.  They would’ve been able to make money, oodles of it, when oil cost $140/barrel.  They can only make half-oodles now that oil is around $70/barrel.  It is better than nothing though.

State-run institutions do not have the drive to innovate or drive creative destruction because the incentive structure is more of a disincentive structure.  Working hard won’t be beneficial because you will still get paid in the state-run company. With oil resources of that magnitude, Cuba could be one of the wealthiest nations in the world.  Instead, well, you know.  Likewise, Venezuela could be one of the world’s wealthiest nations given its oil supply, but instead, Hugo Chavez squanders the hope and future of his country and its people.

The moral of the story is simple: State-run institutions don’t work.  Now, if you’ll excuse me, I have to go to the bank.

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