Lifting Constraints: Venezuelan Oil and Global Market Adjustment

We quantify the contribution of Venezuela’s oil sector collapse to changes in global oil market responsiveness after 2007. We extend the multi-country structural model of Baumeister and Hamilton (2024) by modeling Venezuela explicitly and constructing a counterfactual production path that abstracts from the 2007 institutional shift. This counterfactual isolates the mechanical contribution of Venezuelan supply and provides an upper bound on its impact. We document a sharp decline in global short-run supply elasticity and a more than doubling of the oil price multiplier after 2007. Decomposition results show that this increase is driven primarily by a reduction in the effective inventory-related adjustment margin, with changes in other producers’ supply elasticities accounting for most of the remainder. By contrast, Venezuela’s contribution through its production share and contemporaneous supply elasticity is small. Restoring Venezuelan output raises global supply elasticity modestly but has limited effects on price amplification.