Earlier this month, New York Times correspondent Simon Romero reported on a tectonic shift in the South American energy landscape. To sum up: Brazil is fast becoming a global oil powerhouse, while petroleum-rich Venezuela is seeing its influence decline. Call it the Chávez effect.

After all, there is no good reason that the Venezuelan oil industry should slowly be crumbling. But thanks to disastrous government policies, a country that once dominated the regional energy game is losing ground to its neighbors (not only Brazil, but also Colombia). “Hugo Chávez is putting on a clinic in Venezuela,” energy expert Robert Rapier wrote last year. “The theme is ‘How to Destroy a Domestic Oil Industry.’”

According to central-bank data, Venezuela’s oil GDP dropped by 7.2 percent in 2009 and by 2.2 percent in 2010. During the latter year, its total oil production hit a seven-year low (in real terms). When we chart fluctuations in global oil prices between 2009 and 2010, these numbers don’t make much sense. As the Venezuelan newspaper El Universal has noted, the average price of oil was more than 27 percent higher in 2010 ($72.60) than it was in 2009 ($57.01). Yet “the operational capability of Venezuela’s oil industry was significantly affected by poor oil services (which were seized and nationalized in 2009), by poor maintenance of rigs and oil shipping facilities, and a higher number of plant shutdowns.”

A dearth of adequate operational capability will prevent Venezuela from realizing its full oil potential. Over the summer, OPEC announced that the South American country now boasts more proven oil reserves than any other country, including Saudi Arabia. Of course, OPEC estimates are notoriously suspect, and the Chávez regime is not exactly known for being trustworthy. According to the oil cartel’s Annual Statistical Bulletin, Venezuelan reserves increased by more than 40 percent (from 211.2 million barrels to 296.5 billion) between 2009 and 2010. It is reasonable to question the accuracy of these figures.

But even if they are perfectly sound, their significance should not be overblown. As Jorge Piñon, a former president of Amoco Oil Latin America, told the Miami Herald, extra-heavy crude oil (EHCO) accounts for roughly a third of total Venezuela reserves. That’s a big problem for Caracas, because EHCO is relatively difficult (and thus relatively expensive) to extract, refine, and transport. “You can be sitting on the largest reserves in the world but if you do not have capital and technology to recover them … they are worthless,” Piñon said.

Under Chávez, Venezuela has experienced a dramatic deterioration of its oil infrastructure, thanks to government mismanagement and a constant stream of anti-business policies that have scared away foreign companies. The country is also suffering from wild inflation: The Latin Business Chronicle estimates that it will finish 2011 with an annual inflation rate of 25.8 percent, the third-highest rate on earth (behind only Argentina and Belarus). And yet, the Chávez regime has embarked on a massive borrowing spree to fund even more profligate, inflationary spending. (On October 17, Fitch Ratings declared that “a significant macroeconomic shock could erode [Venezuela’s] sovereign credit quality quickly.”) For example, the country has signed around $32 billion worth of “loans for oil” deals with China. This past April, BCP Securities analyst Walter Molano estimated that the China deals were causing Venezuela to lose “almost half of the oil revenue that was being generated to service its external debt obligations.”