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Opinion and Analysis: Oil and Gas

The Economics, Culture, and Politics of Oil in Venezuela

Perhaps the most important thing to know about Venezuela is that it is an oil exporting country, the fifth largest in the world, with the largest reserves of conventional oil (light and heavy crude) in the western hemisphere and the largest reserves of non-conventional oil (extra-heavy crude) in the world. This fact is of immense importance to understanding Venezuela because it has shaped practically every aspect of the country, its history, its economy, its politics, and its culture. In what follows I will provide a brief history of Venezuela’s oil industry. Next, I discuss how the oil industry has shaped the economy, polity, and culture. Then, I examine the criticisms leveled against the oil industry and how the Chávez government has proposed to address these. Finally, I present what the opposition has done to prevent the reform of the oil industry and how the government has reacted towards this opposition.

Oil industry history

Venezuela’s oil industry history can be roughly divided into four periods: the discovery and initial production of oil (1912-1943), Venezuela’s assertion of control over the oil industry (1943-1974), the oil boom and nationalization of the oil industry (1974-1998), and the government’s attempt to regain control over an increasingly independent oil industry (1999-2003).

Birth of the Petro-State (1912-1943)

That Venezuela had abundant supplies of oil was already known since the earliest pre-colombian times, when the indigenous peoples of Venezuela made use of oil and asphalt, which seeped to the surface, for medicinal and other practical purposes. However, it was not until 1912 that the first oil well was drilled. Shortly thereafter, first Royal Dutch Shell and then Rockefeller’s Standard Oil became major producers of oil in Venezuela. Within a few years, by 1929, Venezuela was the world’s second largest oil producer, after the U.S., and the world’s largest oil exporter. Between 1920 and 1935 oil’s share of exports went from 1.9% to 91.2%.[1] This, of course, had an immediate and dramatic impact on the country’s economy, known among economists as “The Dutch Disease,” which will be explored in greater detail shortly. The most important consequence of the “Dutch Disease,” was that agricultural production declined to almost nothing and the country fell behind in industrializing, relative to other Latin American countries.

Strengthening of the Petro-State (1943-1973)

In 1943 Venezuela passed a vast reform of its oil policy with the Hydrocarbons Act, which tied the Venezuelan state’s income even more tightly to the extraction of oil. While previously oil income was mostly based on concessions and customs, the new hydrocarbons act tied oil revenues to taxes based on income from mining. The law established that the foreign companies could not make greater profits from oil than they paid to the Venezuelan state. The continually increasing oil income led to an ever increasing reliance of the state on this source of income in lieu of individual income taxes.[2] By the 1950’s, however, the world oil industry began to feel the effects of the over-supply of oil, especially following the increased production of oil in the Middle East and the imposition of import quotas in the U.S. The consequence was a chronically low price of oil. So as to combat this problem, in 1960, the world’s main oil exporting countries, largely due to the prodding of the Venezuelan government, decided to form the Organization of Petroleum Exporting Countries (OPEC). Also in 1960, Venezuela created the Venezuelan Oil Corporation, which later formed the basis for the nationalization of Venezuela’s oil industry.

Oil Boom and Nationalization of oil Industry (1973-1998)

With the Middle East oil embargo of 1973, world oil prices and, along with it, Venezuelan government revenues, quadrupled from 1972 to 1974. This sudden and sizable increase in government income was historically unique in Venezuela (and would be to most other countries in the world). It allowed the newly elected president, Carlos Andrés Perez, to promise Venezuelans that Venezuela would become a developed country within a few years. His project was known as “La Gran Venezuela” and was supposed to “sow the oil” though a combination of fighting poverty, via price controls and income increases, and the diversification of the country’s economy, via import substitution. Part of this plan was also the nationalization of Venezuela’s oil industry, which became fully nationalized in 1976, with the creation of Petroleos de Venezuela (PDVSA). While the oil boom appeared to be a tremendous blessing to Venezuela, it did have some negative consequences, such as chronic inflation and, paradoxically, an increasing indebtedness. These problems were exacerbated when, in the mid-80’s the price of oil began to plummet, due to OPEC members’ breaking of their production quotas. By 1998, the price of oil had reached a new historical low of $3.19 per barrel (in 1973 prices).[3] This decline in oil prices had a significant impact on Venezuela’s economy, particularly on per capita income, which had been in a steady decline between the mid-80’s and the present.

Re-Founding of OPEC and Re-Nationalization of the Oil Industry? (1999-2003)

When Hugo Chávez first was elected in December 1998, it did not look like he had any particular plans for PDVSA. He did, however, have very clear plans for OPEC, which, under the leadership of Alí Rodríguez, was to be turned into a strong cartel once again. Until Chávez came to power, OPEC had turned into a shadow f its former self, with member states regularly ignoring their quotas. Venezuela, especially, had turned into one of the member states’ most unreliable partners. Production over allotted quotas, combined with the expansion of oil production in non-OPEC countries, such as Russia and Mexico, led to a steep decline in the price of oil. Chávez promised to put an end to this, by organizing OPEC’s second-ever meeting of heads of state in Caracas, in the year 2000. Also, Chávez spent the first years of his presidency visiting the leaders of OPEC and non-OPEC countries to convince them to adhere to production quotas, so as to maintain an oil price of between $22 and $28 per barrel.[4] Chávez’ efforts bore nearly immediate results, when the price of oil rose for the first time, since 1985, to over $27 per barrel (in nominal prices).

Very soon, however, Chávez ran into conflict with the management of PDVSA, which, for the past fifteen years, had been focusing on producing as much oil as possible, regardless of OPEC quotas. The result was, first, a steady rotation of PDVSA presidents and, later, an all-out confrontation between the Chávez government and the oil industry. Chávez used this conflict to argue that what the oil industry needed was a complete re-nationalization because it had become too independent of the state and had turned into a “state within a state.” I will examine the details of this conflict in greater detail below.

How Oil Shaped Venezuelan Society

Economically

Perhaps the most evident effect oil has had on Venezuela’s economy is the appearance of the “Dutch Disease.” This economic disease is caught whenever a commodity brings a sudden increase of income in one sector of the economy, which is not matched by increased income in other sectors of the economy.[5] What happens is that this sudden sectoral increase causes severe problems in the other sectors. The increased sectoral income causes a distorted growth in services and other non-tradables, which cannot be imported, while discouraging the production of tradables, which are imported. The reason for this disparity is that the greater income rapidly raises the demand for imports, since domestic production cannot meet demand quickly enough, and also raises the demand for services, which the domestic market has to supply because services cannot be imported as easily as tradables can. The increased demand for imported goods and domestic services, in turn, causes an increase in prices, which ought to cause domestic production to increase, but doesn’t because the flow of foreign exchange into the economy has caused a general inflation of wages and prices.

One can observe the symptoms of the Dutch disease in the Venezuelan economy quite clearly, when one looks at the extent to which the increase in oil production and income was followed by a corresponding decrease in agricultural production delaying industrialization. While agricultural production made up about one third of

Venezuela’s GDP in the 1920’s, it shrank to less than one tenth by the 1950’s. Currently agriculture makes up about 6% of GDP. Also, industrial production declined between 1990 and 1999 from 50% of GDP to 24% (compared to the all of Latin America, which declined from 36% to 29% in the same period).[6] The other Dutch disease symptoms are evident in the constant devaluations of the currency and subsequent inflation which have existed in Venezuela’s economy ever since the oil booms of the late 70’s and early 80’s.[7]

In addition to the typical Dutch Disease problem, the sudden increase of oil revenues in Venezuela caused a serious problem in the government’s fiscal policies. That is, the new revenues caused the illusion that the oil income could be used to industrialize the country via massive infrastructure projects, to “sow the oil,” as the president at the time of the oil boom, Carlos Andres Perez, used to say. What happened was that the quadrupled government income caused government spending to quickly increase and even surpass the newfound revenues. When the oil income began to decline again, it was not as easy to reduce government spending as it had been to increase it. The result was that the government gradually went deeper and deeper into debt. Between 1970 and 1994, foreign debt rose from 9% to 53% of GNP. So, as was already stated earlier, while oil prices and revenues declined, so did per capita income and the Venezuelan economy as a whole, and poverty increased. In 1996 Venezuela was one of the very few countries in the world where per capita income was lower than it was in 1960.[8]

Culturally

Perhaps the most visible consequence of Venezuela’s reliance on oil is that it has fostered a rentier and clientelistic mentality among Venezuelans. That is, the oil wealth has promoted the idea that one can do well in Venezuela, as long as one has access to the country’s oil wealth. The consequence was that rather than engaging in creative entrepreneurial activity, Venezuelans were encouraged to ally themselves with the state, seeking either employment or contracts from the state, which had a monopoly on Venezuela’s oil income. Political analyst Terry Lynn Karl describes the consequences of oil as follows:

In the manner of a petro-state, rent seeking had become the central organizing principle of [Venezuela’s] political and economic life, and the ossified political institutions in existence operated primarily to perpetuate an entrenched spoils system. Both state agencies and political parties had given up their programmatic roles to become machines for extracting rents from the public arena.[9]

Another observer of Venezuela, the cultural anthropologist Fernando Coronil, argues that Venezuela’s oil wealth, which is concentrated in the state, has caused the state to appear to have magical powers, to be able to accomplish just about any feat at no cost to the population.

Thus transformed into a petrostate, the Venezuelan state came to hold the monopoly not only of violence, but of the nation’s natural wealth. The state has exercised this monopoly dramaturgically, seeking compliance through the spectacular display of its imperious presence—it seeks to conquer rather than persuade. … By manufacturing dazzling development projects that engender collective fantasies of progress, it casts its spell over audiences and performers alike. As a “magnanimous sorcerer,” the state seizes its subjects by inducing a condition or state of being receptive to its illusions—a magical state.[10]

Politically

Venezuela’s oil economy and culture of course also left a mark on its politics. As a natural consequence of the clientelistic and magical nature of the state was that the state would become very bureaucratic. It is estimated that of the people employed in the formal economy (about 50% of the total working population), approximately 45% are employed through the government.[11]

Another consequence that Venezuela’s oil wealth has had for its political system is that it turned it into what political scientist Terry Lynn Karl calls a “pacted democracy.” The term pacted democracy describes a democracy which is held together via an agreement among different elite groups. It is a kind of truce among opposing powerful interest groups in the society, so as to maintain their privileges. In Venezuela this truce took the form of the pact of “Punto Fijo,” where all major parties were guaranteed access to power in proportion to the voting results. In other words, even if one party won the presidential and legislative elections, it would still be obliged to share the spoils of Venezuela’s oil economy among the other parties, more or less according to the vote results. This way each of the main parties (primarily Acción Democratica and Copei) was guaranteed access to jobs, contracts, ministries, etc. To further minimize conflict, the main union federation, CTV, was similarly divided among the parties, although Acción Democratica, as its founder, always was in control of it. Radical socialist and communist parties were completely excluded from this pact. The pact of Punto Fijo, however, began falling apart once oil rents began to decline in the mid 80’s. It then received its deathblow when Hugo Chávez was elected president in 1998.

In terms of Venezuela’s level of bureaucratization, the “pacted” nature of its democracy, and the degree of clientelism, Venezuela in many ways resembled one-party state socialist regimes, except that it was governed by an alternating two-party system. Oddly enough, the system neared its end in the same year Eastern Europe’s did, in 1989, with the “Caracazo,” when there was a general uprising and riots against IMF-mandated economic reforms.

PDVSA and the Chávez Government

All of the foregoing sets the stage for showing just how extremely important the country’s conflict over oil is. At the most overt level, the conflict between the Chávez government and the oil industry is one about who controls PDVSA. Beyond that, the specific issues that control is being fought over have to do with the company’s efficiency, its internationalization program, its outsourcing and subcontracting practices, OPEC membership, and special oil contracts.

Control

Control over the state-owned oil company, PDVSA, has been in dispute in Venezuela, perhaps ever since the company was first nationalized in 1976. When PDVSA was first nationalized, the transnational corporations’ dependencies were turned into fourteen Venezuelan companies, which corresponded with the fourteen main transnational oil companies that did business in Venezuela.[12] The entire management had years earlier already been Venezuelan and this management did not change with nationalization. For example, the former president of Shell Venezuela was the same as the new president of Maraven, the newly nationalized Shell Venezuela. Critics of the nationalization process, such as Carlos Mendoza,[13] say that the newly nationalized oil industry was nothing more than a Trojan Horse. Venezuela’s oil industry maintained an anti-statist and transnational corporatist management culture throughout its existence. The ties to the former owners of the nationalized Venezuelan companies were maintained primarily through technical assistance contracts with the former owners and through commercialization contracts, which heavily discounted the price of oil to their former owners.

The government’s lack of control over the oil industry was further institutionalized in PDVSA’s board of directors. While normally a board of directors is supposed to represent the interests of the owners vis-á-vis the management, in the case of PDVSA the board of directors, almost in their entirety, was appointed from PDVSA management, who, due to their backgrounds, tended to represent management. This is why, when Chávez appointed a board of directors who were oil experts and who did not come from PDVSA, the PDVSA management protested and joined the April 2002 work stoppage against the government. Chávez was breaking a decades-old tradition that regarded board membership as the highest promotion a PDVSA manager could receive.

Efficiency

Perhaps the first and foremost issue on the Chávez’ government’s mind with regard to reforming PDVSA has to do with the company’s efficiency. PDVSA critics point out that the company has become increasingly inefficient over the past twenty five years. From 1976 to 1992 the average percentage of PDVSA’s income that went towards the company’s costs was approximately 29% and the percentage that went towards the government was 71%. For 1993 to 2000, that relationship had practically reversed, so that 64% were kept by PDVSA and only 36% went towards the government.[14] Also, according to rankings of the business magazine, América Economía,[15] PDVSA was the largest Latin American company in 2000, but in terms of efficiency it ranked among the lowest of the fifty most efficient companies, far below any of its state-owned competitors, such as Petrobras of Brazil, Pemex of Mexico, or Petroecuador of Ecuador.[16] Other measures of profitability show similar results. For example, in terms of the Dollar revenues provided to the government per barrel of oil produced, PDVSA paid only about a quarter ($8.34) of what Mexico’s PEMEX paid out to the government ($24.66) in 2001.[17]

Ironically, PDVSA has a fraction of the number of employees that PEMEX does, something that might be traced to PDVSA’s more extensive use of outsourcing and sub-contracting. Still, it is well known within PDVSA that it has nearly twice the number of administrative workers that it needs. In 1997 PDVSA merged three of its holdings, Corpoven, Lagoven, and Maraven) into PDVSA proper. Carlos Rossi, a former PDVSA economist, says that the Caracas headquarters of PDVSA acquired the nickname “Hollywood” because, “everyone there [in PDVSA Caracas] seemed to have a double.”[18]

Internationalization

A large part of the reason for PDVSA’s drop in efficiency from the mid 1990’s on has to do with its internationalization policy and a change in its accounting methods. In 1989 PDVSA adopted a worldwide combined accounting method, so that costs and losses outside of Venezuela would be balanced against the revenues and profits within Venezuela. Previously the accounting for transactions within Venezuela and for those abroad was done separately. The result of the account consolidation was a large-scale import of costs that were incurred abroad. Since PDVSA’s tax rate within Venezuela is about twice that in the U.S., for example, the company had to transfer a much smaller proportion of its revenues to the government.

From the early 1980’s to late 1990’s, PDVSA engaged in a program to vertically integrate the company on a global level. What this meant, in essence, was the purchase of refineries and of the U.S. gas station network Citgo. In all, in the period between 1983 and 1998, PDVSA purchased 23 refineries in Europe and the U.S. While other state-owned oil companies initiated vertical integration projects, Venezuela’s was the most ambitious. One of the official reasons for this was that Venezuelan oil is mostly of a very heavy crude variety, with many components that are undesirable for finished oil products, such as sulfur, nitrogen, and several metal elements. In other words, Venezuelan crude requires a fairly sophisticated refining process, which not all refineries can handle. The logic of acquiring foreign refineries was that such refineries could be retrofitted to process Venezuelan crude and to then provide finished oil products to the market closest to the refinery. The idea thus was to guarantee a market for Venezuelan heavy crude oil.

However, many, if not most, of the refineries that were acquired were purchased at a bargain, mainly because the vendor could not find a way to make it profitable. As a result, PDVSA tried to avoid losses in these refineries either by providing Venezuelan crude at below market rates or by avoiding the costly retrofitting process altogether and providing the refinery with lighter crude from other countries, such as Russia.[19] The net result of the internationalization process and of the new accounting procedure was that tremendous PDVSA costs that were incurred outside of Venezuela were “imported” to the national branch of PDVSA, thus lowering overall profits and transfers to the government.

Outsourcing

Another source of increased costs developed as a result of outsourcing, whereby PDVSA opened up marginal oil fields to private investors. So as to attract private investors, PDVSA negotiated lower taxes and royalties on the oil production, since the early 90’s. While on the surface this makes sense because marginal fields are much more costly to operate, the result was the production of much more costly oil, which counts against OPEC quotas, displacing oil production that might be more profitable. Of the 3.2 million barrels per day that Venezuela currently produces, about 500,000 barrels per day come from costly outsourced oil fields.[20]

INTESA

Another whole dimension of outsourcing is related to contracts involving the general operations of PDVSA. Perhaps the most important instance of outsourcing, in terms of the management of PDVSA, is the joint venture it engaged in with the U.S.-based company SAIC (Science Applications International Corporation) to create INTESA (Informática, Negocios, y Tecnología, S.A.) in 1996. INTESA was to manage all of PDVSA’s data processing needs. After four years of outsourcing this important task to INTESA, it became increasingly clear that INTESA was not saving PDVSA any money, but that it was costing PDVSA much more than it expected.[21]

Following the April 2002 Coup attempt, Alí Rodríguez, the new PDVSA president assigned Juan Fernandez, who was later to be the leader of the December 2002 PDVSA strike, to cancel the contract with INTESA. Fernandez negotiated that the contract would end, perhaps not so coincidentally, by the end of December 2002. INTESA joined the strike, however, and shut down all of its services to PDVSA, well before the contract expired. The result was that PDVSA could not transfer its data processing to new systems, nor could it process its orders and bills for oil shipments. PDVSA ended up having to process such things manually, since passwords and the general computing infrastructure were unavailable, causing the strike to be much more damaging to the company than it would have been, if the data processing had been in PDVSA’s hands.

A recent investigation into INTESA, and especially into its majority owner SAIC (60%), revealed some information that ought to be quite disturbing to the government of Hugo Chávez.[22] That is, INTESA, which controlled all of PDVSA’s information, is in turn controlled by SAIC, a Fortune 500 company (revenues in 2002: $6.1 billion) that is deeply involved in the U.S. defense industry, particularly as it relates to nuclear technology, defense intelligence, and computing technology. Its managers included two former U.S. Secretaries of Defense (William Perry and Melvin Laird) and two former CIA directors (John Deutch and Robert Gates). Its current Board of Directors includes the former commander of the U.S. Special Forces (Wayne Downing), a former coordinator of the National Security Council (Jasper Welch), and the former director of the National Security Agency (Bobby Ray Inman). Whether or not SAIC was actively involved in the PDVSA strike and whether it passes crucial company information on to other oil companies is unknown. However, the very fact that these connections exist ought to be a cause of great concern to PDVSA and the Venezuelan government.

Oil Industry Reform under Chávez

Venezuela’s oil industry reform encompasses four main areas: solidification of state ownership of the oil industry, tax reform, subordination of the oil industry to national interests, and the strengthening of OPEC.[23]

State ownership

The 1999 Constitution, which was written by Chávez’s supporters, anchors state ownership of Venezuela’s oil industry in the constitution. It is well known that the government of Rafael Caldera, Chávez’ immediate predecessor in the presidency, wanted to privatize PDVSA. The new constitution, however, clearly states that “for reasons of economic and political sovereignty and of national strategy, the state will maintain the totality of the shares of PDVSA or of the entity created to manage the oil industry…”[24] In some ways, this article of the constitution was supposed to mark a definitive break from neo-liberal economic policies that PDVSA had been pursuing prior to Chávez’s election.

However, some critics say that a backdoor to privatization remains open because the constitution also says that the state shall own all shares of PDVSA, “except those of subsidiaries, strategic associations, businesses, and whatever other that has constituted or constitutes PDVSA as a result of the development of its business.”[25] In other words, in theory, PDVSA could turn its various activities into subsidiaries and then sell them off, one by one. Following the December ’02 to January ’03 oil industry strike, this is what PDVSA’s directors have been considering, mostly in order to rid itself of unprofitable subsidiaries or activities.

Related to state ownership is a provision in the hydrocarbons law which specifies that all state activity related to oil exploration and production are to be dedicated to the “pubic interest.”[26] More specifically, it states that all oil related activity must be oriented to support “the organic, integrated, and sustainable development of the country, paying attention to the rational use of resources and the preservation of the environment.” Income derived from oil “for the most part” must be used to finance health care, education, and the FIEM (the fund for macro-economic stabilization, a governmental savings fund).

Tax reform

The next major target for reform is the way that the Venezuelan government extracts revenue from the oil industry. Here the government introduced a change in the taxation of the oil industry. Since 1943 the government required a royalty payment of 16.6% for every barrel of oil that either PDVSA or a foreign company extracted. In many cases this royalty had even been negotiated to drop to 1% of some foreign investors. A new oil reform that PDVSA was working on in 1998 even suggested eliminating royalty payments entirely. With the new oil reform law of 2001, however, royalty payments were nearly doubled to 30% of the price at which every barrel is sold. At the same time, the government lowered the income tax levied on oil extraction from 67.6% to 50%.

When the government introduced this change, the opposition cried out that the doubling of royalty payments would ruin Venezuela’s cooperation with foreign investors and would practically eliminate foreign direct investment in Venezuela. The government’s main argument for increasing the royalty payments is based on the fact that it is much easier for the government to collect royalty payments than it is to collect taxes on oil income. That is, the government can track very easily how much oil is being extracted and what the royalty payments should be based on the current price of oil. However, taxes based on oil income are much more difficult to control because PDVSA or other oil companies deduct their expenses from the income on which they have to pay the taxes. Since expenses are not that easily identifiable for an outside auditor, the tax payer can attempt to inflate expenses, in order to lower their tax payments. By shifting government revenues from taxes to royalties, the government is basically closing loopholes in the tax collection process.

A second and closely related reason for the change in the oil revenue collection process has to do with PDVSA. Chávez and his supporters have long claimed that PDVSA is providing too little of its revenues to the central government, the company’s only shareholder. One way to make the company more efficient would thus be to increase its contribution to the government, regardless of its expenses. That is, by making fewer expenses tax deductible, which is what the shift from income tax to royalties does, the company is faces a strong incentive to make its operations more efficient. In other words, a tax which allows the deduction of expenses penalizes the oil producer if production is made more efficient. If, on the other hand, the producer has to contribute just as much to the government, regardless of costs or expenses, the “royalty makes the interests of the natural resource owner [the state] and of the investor coincide.”[27]

“Re-nationalization”

As mentioned earlier, some critics of PDVSA, such as Carlos Mendoza, have called PDVSA’s 1976 privatization “phony.” Chávez, in his speeches following the collapse of the December 2002 to January 2003 oil-industry shut-down, has thus referred to the regaining of control over PDVSA as a “re-nationalization.” What this regaining of control involves is first and foremost increasing PDVSA’s efficiency and profitability, so that the company can transfer a greater share of its revenues to the government treasury. The government plans to increase the company’s efficiency through the aforementioned changes in taxation, by selling off unprofitable subsidiaries, and by reorganizing the company into two major geographic subdivisions, PDVSA East and PDVSA West. The details of which subsidiaries will be sold and exactly how the company is to be reorganized are still largely unknown as of this writing.

OPEC

When Chávez first came to power, in February 1999, among his highest priorities was to strengthen OPEC and raise the international price of oil. Oil had dropped to less than $10 per barrel, to a large extent because Venezuela was ignoring its OPEC oil production quotas during the previous government of Rafael Caldera. Also, non-OPEC members such as Mexico and Russia, were increasing their production considerably, further driving down the price of oil. Chávez immediately put Alí Rodríguez in charge of the Ministry of Energy and Mines (MEM), which oversees PDVSA and oil policy. Within the new government’s first 100 days, Rodriguez visited most OPEC and non-OPEC oil producing countries and returned with a commitment from most these countries to reduce production or abide by their OPEC quotas. The price of oil immediately went up, from an average price of $12.28/barrel for 1998 to $17.47/barrel for 1999, one of the largest non-war related increases of the past decade. Later, Chávez and Rodriguez managed to convince OPEC to introduce a price band system, of $22 to $28 per barrel, which OPEC would try to maintain.

The following year, 2000, President Chávez spent much time traveling to both OPEC and non-OPEC countries, to consolidate their commitment to restrained oil production and to convince them to attend the second-ever gathering of OPEC heads of state, to be held in Caracas.[28] On September 27 of 2000, Chávez opened and hosted this second OPEC summit. For the Chávez government, the summit had the following six objectives:

  1. Reestablish a dialogue between Venezuela and its partners in OPEC
  2. Recuperate the credibility of Venezuela in OPEC
  3. Strengthen OPEC
  4. Defend oil prices
  5. Reassume a leadership position within OPEC
  6. Consolidate relations between Venezuela and the Arab/Islamic world

Given the strengthened position of OPEC in the world today, it is safe to say that the summit’s objectives were largely achieved.

[Ultimately, the renaissance of OPEC could be a large part of what motivated the U.S. to attack Iraq. That is, if OPEC had remained as defunct as it was when Chávez came to power, it is quite possible that the Bush administration would never have considered controlling Iraq’s oil reserves much of an issue. But with the return of OPEC, the consequent rise in oil prices, and the general lack of control the U.S. government felt in the face of an energy crisis and the attack on the World Trade Center, “breaking OPEC’s back” became a top priority.]

Opposition to Oil Industry Reform

As has been noted elsewhere, opposition to the Chávez government did not really gain much momentum until Chávez proposed the 49 “enabling laws” (“leyes habilitante”), among the most important of which was the “Organic Law of Hydrocarbons,” which specified the institutional and legal changes for governing Venezuela’s oil industry. When the law was made public, the outcry, especially among oil industry executives was immediate.

The opposition declared that the new law would doom Venezuela’s oil industry because the higher royalties and the limitations placed on joint ventures would make foreign direct investment completely unattractive. One of the main arguments here is that Venezuela’s crude oil is mostly heavy and extra heavy, a type of crude that is quite expensive to extract from oil fields. The shift from taxes to royalties would mean that companies could deduct substantially fewer expenses from the transfers they are required to make to the government. As a result, the extraction of oil from “marginal fields” (fields which yield less oil) and heavy and extra heavy crude become much less attractive to foreign investors. To support their argument, the opposition points to the fact that Venezuela’s royalties are among the highest in the world.

Another element of critique of the government’s oil policy has always been that the constitution prohibits the privatization of PDVSA. While few in Venezuela openly favor privatization, due to the strong nationalist sentiment in the country, many have suggested that Venezuelans would be better off if PDVSA were privatized to the general public, in the sense that all citizens would receive shares of PDVSA that they would then be free to buy and sell on the stock market.

While the opposition roundly criticized the new law when it was first introduced in October 2001, the real problems within PDVSA did not begin until Chávez decided to fire his appointment to the presidency of PDVSA, General Guaicaipuro Lameda, in February 2002. Lameda had has said that he was surprised about his appointment because he never considered himself a supporter of Chávez. But he took the post anyway and for 15 months he ran PDVSA mostly from the perspective of a businessman, mostly adhering to the concerns of the upper management, instead of the Chávez government. One of the reasons the government gave for firing Lameda was independent audit of PDVSA that had been initiated in January of that year, which indicated that numerous dubious contracts had been entered under Lameda’s watch, which appeared to personally benefit managers of PDVSA, leading to serious losses for the company.

Chávez replaced Lameda with Gaston Parra, a leftist economist and former president of the Central Bank of Venezuela. Also, he appointed five new members to PDVSA’s board of directors. Lameda, together with members of PDVSA’s upper management charged that Chávez was politicizing PDVSA by appointing individuals to the board on the basis of political loyalty, rather than merit. Ever since PDVSA’s founding, the board of directors was regarded as the culmination of a long management career at PDVSA. Upper management generally filled most of the positions of the board. PDVSA managers regarded this policy as the foundation for the company’s meritocracy.

By appointing a board that did not come from within PDVSA, Chávez broke with that tradition for the first time, thus earning him the charge of breaking with meritocracy in the company and replacing it with politicization. Forgotten, however, was that previous presidents had also appointed individuals to the PDVSA board who did come from within PDVSA.[29] Also, as the representative of the owners, the board of directors, in theory, should be appointed by the owner (the state) and represent the owner’s interests. Appointing a board from within the company, as had largely been the tradition, actually represents a conflict of interest because the managers appointed to the board are more likely to represent the interests of the management, rather than the state.

Another, though largely unarticulated, reason for why PDVSA’s management and most of its administrative employees opposed Chávez following the introduction of the new oil law and the appointment of a new board had to do with the overstaffing mentioned earlier. That is, with the change in taxation PDVSA had to drastically cut its overhead. Since it was already quite overstaffed in the administrative offices in Caracas, due to the recent merger of three of PDVSA’s subsidiaries, the staff reductions were going to be even more severe.[30] Already, PDVSA had reduced its payroll by 26%, between 1995 and 2000. Still, the overstaffing remained a problem, which became more severe with the new oil law, which forced even greater cutbacks in overhead. Ultimately, the upper management issued an ultimatum to Chávez to dismiss the newly appointed directors, or it would join the strike called by Fedecamaras and the CTV for April 9.

 


 

[1] Tugwell, Franklin (1975) The Politics of Oil in Venezuela. Stanford University Press, p.182

[2] For example, while Venezuelan individual income taxes during the 70’s made up only 4.1% of total tax income and corporate taxes made up 70.3%, in neighboring Colombia, the tax burden is distributed much more evenly among different sources, so that individual income tax makes up 11% and corporate tax 12.8% of total tax income. (Source: Terry Lynn Karl, 1997, The Paradox of Plenty: Oil Booms and Petro States, University of California Press, p.89)

[3] Source: OPEC Annual Statistical Bulletin, 2001

[4] Chávez’ visits to Saddam Hussein and Muammar Qaddafi would come to haunt him over and over again, as his opponents would site these visits as reasons for their dislike of Chávez.

[5] As was the case of Dutch gas, which is where the name for the problem comes from.

[6] World Development Report 2000/2001, p.297

[7] Average annual inflation was over 50% between 1988 and 1998.

[8] Terry Lynn Karl, p.235. This was a fate suffered by only 19 countries in the world in 1996.

[9] Terry Lynn Karl (1997), p.184

[10] Fernando Coronil (1997) The Magical State: Nature, Money, and Modernity in Venezuela. University of Chicago Press. p.4

[11] [Source?]

[12] To list a few name changes: Shell became Maraven, Exxon became Lagoven, Mobil became Corpoven , Gulf became Menoven (sp?).

[13] An oil industry expert, who briefly served on the PDVSA board of directors in the days leading to the April 11, 2002 coup attempt.

[14] Bernard Mommer (2001) “Venezuelan Oil Politics at the Crossroads.” Oxford Institute for Energy Studies, Monthly Commentary.

[16] PDVSA ranks #24 in terms of return on assets, #49 in terms of return on sales, and #50 in terms of return on fixed assets.

[17] Source: Mark Weisbrot and Simone Baribeau (2003), “What happened to Profits?: The Record of Venezuela’s Oil Industry,” Center for Economic Policy Research paper: www.cepr.net/what_happened_to_profits.htm (their figures are based on SEC filings).

[18] Carlos Rossi, “PDVSA’s Labor Problems,” The Daily Journal, April 18, 2002.

[19] See: El Nacional, “Cuentas Crudas, Precios Refinados”, November 17, 1998

[20] For 2001 outsourced oil fields cost $10.94 per barrel of oil equivalent produced, while non-outsourced oil fields cost only $2.03 per barrel of oil equivalent (in 1997 dollars). Source: CEPR Research Paper, “What Happened to Profits?”

[21] See: www.soberania.info/tercerizacion_portada.htm The excess costs averaged about $90 million per year for 1998 to 2000.

[22] See: Alexander Foster and Tulio Monsalve, “Quien Maneja las Computadoras de PDVSA?” Venezuela Analitica, December 17, 2002 www.analitica.com/bitbiblioteca/tulio_monsalve/computadoras_pdvsa.asp

[23] Alí Rodríguez, the former president of OPEC and current president of PDVSA provides a good summary of the policy in: “La Reforma Petrolera Venezolana de 2001” in Revista Venezolana de Economía y Ciencias Sociales, No. 2/2002, May/August 2002.

[24] Constitution of the Bolivarian Republic of Venezuela, Article 303.

[25] Ibid.

[26] Article 5 of the “Ley Organica de Hidrocarburos.”

[27] Alí Rodríguez (2002), p.204

[28] Chávez’ visits to Iraq—the first of any head of state since the Gulf War—and to Libya, both members of OPEC, would later be used repeatedly by his opponents at home and in the U.S. as proof for his unreliability and dangerous tendencies.

[29] President Caldera had named the son of his chancellor to the board and Chávez’ first appointment to the PDVSA presidency, Hector Ciavaldini came from a lower management position. No protests were voiced against these appointments at the time.

[30] Carlos Rossi, “PDVSA’s Labor Problems,” The Daily Journal, April 18, 2002. According to Rossi, PDVSA employees referred to the Caracas headquarters as “Hollywood” because every employee had at least one double that performed the same functions within the company.