Towards Correctly Measuring the Role of the Oil Sector in Economic Growth

Recently President Hugo Chavez heralded the report of the commission sponsored by France’s President Nicolas Sarkozy urging redefinition of Gross Domestic Product (GDP) to take into account non-monetary measures of human welfare, such as Venezuela’s free “missions” in health and elsewhere. 1 Earlier, Chavez had stated: “We must not continue to measure our socio-economic process with the same tools with which capitalism is measured.”

Recently President Hugo Chavez heralded the report of the commission sponsored by France’s President Nicolas Sarkozy urging redefinition of Gross Domestic Product (GDP) to take into account non-monetary measures of human welfare, such as Venezuela’s free “missions” in health and elsewhere. 1 Earlier, Chavez had stated: “We must not continue to measure our socio-economic process with the same tools with which capitalism is measured.”2

The basic argument of this paper is that even with such adjustments, for OPEC countries like Venezuela, the conventional method of analyzing economic growth by calculating the growth of “real GDP” using “price deflators” for different sectors of the economy to try and take into account the effects of inflation is fundamentally flawed. Moreover, this is not simply a technical problem but has very important economic and political ramifications for OPEC countries.

One result of this flaw is to greatly understate the role of the oil sector in promoting economic growth.  Additionally, it also tends to put pressure on the country’s decision-makers in the oil sector to increase the quantities of production, despite the negative impact this would likely have on oil prices and on total oil revenues. Finally, insofar as this pressure to reduce oil prices tends to increase oil consumption, it flies in the face of the universally recognized need to cut future oil consumption.

Pros and Cons for using GDP deflators

Leaving aside the many valid criticisms that can be made of GDP as a measure of economic well-being, it is in general a sensible idea to try and avoid attributing real growth to an economy in which the output of goods and services in quantitative terms remains relatively constant, but the GDP in monetary terms increases because of price increases. For example, if a country is producing 1 million tons of steel, and the price this year is $300 per ton, then the contribution of the steel sector to GDP in current prices would be $300 million. If, for some reason, the price of steel rises next year to $400 per ton, and production in the country remained at 1 million tons, then the contribution of steel sector to GDP in current prices would be $400 million, or an increase of one third over the previous year. However, in real terms the people of the country would be no better off because the production in quantitative terms had remained the same.

Economists  conventionally try to overcome this problem by using “price deflators” for each sector of the economy to transform GDP in current terms to GDP in “real” terms;  in this example, the deflator would be the one-third increase in steel prices, so that after taking into account the impact of steel price inflation, the steel sector’s contribution to “real GDP” would only be $300 million ($400 million divided by 1.33).

However, while such a procedure might make sense in a situation where the country’s production has no influence on the prices of what it produces, in the case of an oil exporting country, this makes no sense at all. The fact is that, in the case of oil, the actions of the OPEC countries have a very major impact on the price of oil. It is well known that the demand for crude oil is very “inelastic,” i.e., relatively small changes in the amount of supply trigger relatively large changes in the price. Thus, if they increase the quantity of output so as to increase their “real GDP,” they are likely to reduce the total value of this output and hence reduce the countries’ economic well-being.  Conversely, if they are able to increase the price by reducing output, while “real GDP”as measured definitely  will decline, in fact because total revenues likely will rise this will increase the countries’ economic well-being.

The case of Venezuela

Venezuela is an excellent and politically important example of how the use of “real” GDP measures distorts the performance of the economy and of the oil sector in particular. In the period from 1998 through 2008, the “real GDP” of Venezuela, as measured by constant prices (based on year 2000 prices), increased from $120 billion to $159 billion, or 32%. This amounts to an average annual increase of 3.3 % per year, which is not a bad figure but is not particularly impressive. Yet, during this same period, exports of oil (which accounts for 95% of the country’s total exports), increased from $12 billion to $89 billion USD, or by 640 %; the average annual increase was 22 percent per year. (This is not surprising given that during the same years world crude oil prices also increased by 660%.)

So, how do we square the rather anemic performance of the Venezuelan economy as measured by “real” GDP with the dynamic growth of revenues in the Venezuelan oil sector? And with the tremendous improvement in Venezuelan living standards in this era, while at the same time the country was providing large amounts of assistance to foreign countries and still building large amounts of foreign exchange reserves?

The answer, of course, is that in prevailing conventional methods of calculating changes in real GDP you do this by treating the oil sector, like all other sectors, as if none of this huge increase in oil prices, and hence oil revenues, had taken place. In a case like Venezuela, where the oil sector is so crucial, in my view this is patently absurd.

The Weisbrot Analysis

The contradiction caused by the use of “constant” oil prices is unwittingly revealed in an article in Venezuelanalyis by U.S.-based economists generally supportive of the Chavez government (Mark Weisbrot, Rebecca Ray and Luis Sandoval), entitled “The Chavez Administration at 10 years: The Economy and Social Indicators.”3 Much of the article provides a detailed analysis of the improvements in the Venezuelan economy in these years: reduction of poverty and infant mortality, increases in social spending, especially for education and infrastructure, and sharp reductions in public debt and foreign debt as a percentage of GDP.4

However, in attempting to analyze how the Venezuelan economy was able to accomplish this, the authors unwittingly reveal the fallacies of applying constant prices to the oil sector. In their section on “Components of Economic Growth,” Table 2, entitled “Venezuela: Sectoral Growth (1998-2007) (real percent change),” shows the annual percentage change in growth in real GDP in various sectors. Based on this data, we are led to believe that while real GDP generated by the non-oil sector in this period increased by 40 percent, oil sector GDP actually decreased by 14 percent.   

Further, the authors see the period from 2003 to 2007 as crucial because “the current economic expansion began when the government got control over the national oil company in the first quarter of 2003. Since then, real (inflation-adjusted) GDP has nearly doubled, growing by 94.7 percent in 5.25 years, or 13.5 percent annually.” 5

In discussing the “Components of Economic Growth” they add: “As can be seen from Figure 2 and Table 2, the non-oil sector has accounted for the vast majority of the growth during the current expansion [since 2003]. In fact, the oil sector had negative growth for 2005-2007, after a 13.7 percent jump in 2004 after production was restored following the strike. Even in 2004, however, the non-oil sector grew faster than the oil sector….

The fastest growing sectors of the economy have been finance and insurance, which has grown 258.4 percent during the current expansion, an average of 26.1 percent annually; construction, which has grown 159.4 percent, or 18.9 percent annually; trade and repair services, (152.8 percent, or 18.4 percent annually); transport and storage, (104.9 percent, or 13.9 percent annually); and communications (151.4 percent, or 18.3 percent annually). Manufacturing grew 98.1 percent during the expansion, or 13.2 percent per year.” 6

One might ask, how could these extremely high  growth rates take place in the non-oil sector if the largest and most crucial sector of the economy, the oil sector, was basically stagnant? And isn’t there a contradiction between saying that Venezuela’s expansion took place when the government got control over the national oil company in the first quarter of 2003, since according to the real GDP data the oil sector  was in decline after 2004? (As regards the huge growth in other sectors, for example, finance, are we to believe that Venezuela suddenly became the center of derivatives trading in South America?)

The answer, in my view, is that these contradictory growth rates are simply an artificial fiction resulting from measuring real GDP by using “constant prices” for the oil sector. By this method, “real GDP” in Bolivares, (in constant 1997 prices) is reported by the Banco Central de Venezuela to have increased in the 1998-2008 period from 42.1 trillion  to 57.9 trillion, or by 3.2% per year; during the same period real GDP in the oil sector is reported to have decreased from 7.9 trillion to 7.0 trillion, or by 1.1% per year.7  If we are to believe these numbers, in this era of booming oil revenues, the share of the oil sector in real GDP has declined from 26% to 16%!

Implications re quantities of oil output

The implication of this methodology is that there is no real increase in the value of oil output unless there is an increase in the quantity of oil output. In the corporate world, this calculation of “real” values would be analogous to saying that a drug company, which raises its prices by 20% and its profits by a multiple of that, while producing the same amount of drugs, didn’t effect any real increase in profits because “it was just due to price increases.”

A further implication is that the greater the quantity of oil output, the greater oil’s contribution to real GDP growth, even if the increased output drives down prices and the country’s real oil revenues! As Francisco Rodriguez has noted in a study of Venezuelan GDP in the 1950-1998 period: “Alternative methodologies for the construction of GDP indices yield considerably different results, with the differences so high as to seriously question the validity of any growth calculations.” 8

The changing role of Venezuela in OPEC

Rodriguez further points out that “it can be argued that the most important transformation that occurred in the Venezuelan oil industry during the 1970s is that it went from being a price taker to participating actively in price setting mechanisms.” 9 Once the OPEC countries began to obtain control over the supply of oil in the 1970s, they were in a position collectively, like monopolists such as drug companies, to try and increase the price of oil away from the virtually giveaway levels of $2 per barrel to which competition among the international oil companies had driven it. (I remember vividly having breakfast with a Third World oil client in a New York City hotel in the early 1970s where he noted that the price of a glass of orange juice was greater than that of a barrel of oil!)

Although this OPEC control has waxed and waned over the years, certainly after 1998 when the average price of crude oil at $13 per barrel had fallen to the level of the mid-1970s, this control has been relatively strong. And in fact, the most important role that the Chavez administration and Venezuela played starting in 1999 was to lead in ending the insane competition among the OPEC countries to increase production and market share which had driven down drastically oil prices and each country’s oil revenues.

As Minister of Mines Rafael Ramirez has noted: “… the norm in PDVSA from the very day of its foundation onwards…. [was] ultimately, production policy all came down to Volume versus Prices. To produce and produce, with no regard for prices and even less for fiscal contributions…. In this way we found ourselves faced with the disastrous price collapse of 1998, most of the blame for which has to be laid at the door of that same [PDVSA] meritocracy, not only because of the wanton  overproduction that it sanctioned but also on account of its dogged refusal to participate in any coordinated actions within OPEC aimed at stabilizing the market. Prices began to recover in 1999, as soon as President Chavez reasserted our traditional posture of always considering prices to be an integral part of a conservationist policy.” 10

The reality of this Chavez era is that the oil sector, by bringing in tens of billions of dollars of foreign exchange, provided the capital which powered the growth of the rest of the economy. These sums from oil exports, all in foreign exchange, are equivalent to a huge influx of capital from foreign grants. Moreover, in the case of Venezuela, because the profits from oil exports went to the state, rather than to the private sector, the government was able to direct the flow of this capital into the sectors it chose to develop, particularly health and education as well as infrastructure. It was the secondary effects of these injections of huge amounts of capital which spilled over into the non-oil sector and allowed for their rapid growth rates in real terms. In other words, it was the oil sector that was the driving force in the economy pulling along the rest of the economy, rather than, as the constant price GDP data would imply, the non-oil sector being the locomotive.

The case of Saudi Arabia

It is worth noting that the absurdity of the use of this “real GDP” for analyzing economic growth also applies to other OPEC countries. For example, according to the real GDP data, in the same 1998-2008 time period Saudi Arabia had an average growth rate of 3.5% per year. Yet, at the same time its exports of oil increased from $33 billion to $283 billion, or an average increase of about 24% per year. (While the ratio of Saudi Arabia’s oil exports to its GDP [in current prices] in 1998 was about 26%, by 2008 the ratio was 59 %.) With this increase in real GDP of only 3.5% per year, are we really supposed to believe  that Saudi Arabia somehow managed to catapult from a per capita income in 1998 of $7,400  to $19,000 in 2008 (in current dollars), and from rank number 60 in the world to rank number 31. (A similar performance is shown in Venezuela, where per capita income increased from $3,900 to $11,200, and its world ranking improved from 81 to 43.)11

Negative ecological implications

Insofar as this use of real GDP data both understates the key role of oil in OPEC countries economic growth, and sends the wrong signal to oil sector decision-makers that only increasing the quantity of oil output is what counts, it has serious negative ecological implications. The fact is that from an ecological point of view, the higher the price of oil and hence the lower the quantity used, the better off we all are. Indeed, the whole purpose of a “carbon tax” which the industrial countries are proposing as the solution to the CO2 emissions problem is to achieve that reduction in the quantity of oil used. Only here, the industrial countries propose to siphon off for themselves the increases in oil consumption costs, rather than to allow the OPEC countries to get the benefit of the higher oil price to the consumer.

But this approach is nothing new, since  the developed countries have always siphoned off potential revenues from the oil countries by putting consumption taxes on gasoline and fuels which effectively reduces the prices and revenues that the oil exporters could obtain from these consumers. In the case of the G-7 industrial countries, in the 2004-2008 period their combined governmental oil taxes were just about equal to the combined oil revenues of all OPEC countries.12  

Conclusion: Toward a new measure: “Genuine GDP”

In conclusion, we would argue that it is crucial for Venezuela and the other OPEC countries to develop more realistic measures of the oil sector’s role in economic growth. While there is no obvious solution to the question, in our view it is extremely important from an economic and political viewpoint to undertake such a task.

As an illustrative interim step, we constructed a measure of ‘Genuine GDP” as the sum of GDP from the oil sector in current prices (deflated by the index of prices of U.S. exports of goods and services) plus GDP in the non-oil sector in constant 1997 prices. The rationale for this is that while the non-oil sector GDP sector may appropriately be deflated by conventional measures of domestic inflation, oil sector GDP is overwhelmingly earned in foreign exchange, and thus the correct deflator is the cost of purchasing imports of goods and services with these foreign exchange earnings.

Unfortunately, we have not been able to find,fromthe Banco Central de Venezuela’s online database, GDP data in current prices for the oil sector; such data would tell us the oil sector’s contribution to GDP in current prices.13 To overcome the lack of data on oil sector GDP in current prices, we used as a rough surrogate oil exports minus oil imports in current prices. 14 (This seems a reasonable approximation, since data available online from Venezuela’s  National Institute of Statistics for 1997-2003 shows a close fit between the actual numbers and our surrogate.15)  

Based on this methodology, in 1998 oil sector GDP would have been 6.4 trillion Bolivares and non-oil sector GDP 34.2 trillion Bolivares, for a total “Genuine GDP” of 40.6 trillion Bolivares.  Similarly, for 2008, since estimated oil sector GDP in current prices was 141 trillion Bolivares and non-oil sector GDP (in constant 1997 prices) was 51 trillion Bolivares, total “Genuine GDP” would be 192 trillion Bolivares. Note that between 1998 and 2008 oil sector “Genuine GDP” would have increased from 6.4 trillion Bolivares to 141 trillion, or by 36 percent per year.  (See Table 1.)

Table 1: “Genuine GDP” versus conventional “real GDP” : growth by sector, 1998-2008

Trillion Bolivares*Average Annual Percent ChangePercent of Total
Conventional Measure (1997 prices)
Non-oil (1)
Total GDP42.157.93.2100.0%100.0%
“Genuine GDP” Measure
Oil (current prices, deflated) (2)6.4141.336.015.8%73.5%
Non-oil (1997 prices)
Total (composite)40.6192.217.0100.0%100.0%
Memo: GDP in Current Prices
Oil (current prices,undeflated)6.4177.739.012.8%26.4%
Non-oil (3)43.6496.027.087.2%73.6%
Total GDP50.0673.730.0100.0%100.0%

*Historical figures are in trillions, or millions of millions. After the recent conversion of the Bolivar to the “strong” Bolivar, current data would be in billions (thousands of millions) of Bolivares.

(1) Equals Banco Central de Venezuela (BCV) data on “non-oil” plus “taxes”, or BCV Total minus oil.

(2) Oil sector in current prices, deflated by Index of prices of U.S. exports of goods and services.

(3) BCV data on total GDP less my estimated oil GDP

Clearly, there is a vast difference between the apparent growth of the Venezuelan economy as measured by “Genuine GDP” compared to conventional “real GDP.” Most strikingly, our measure shows that the oil sector increased by 36% per year versus a decline of 1% per year using the conventional measure. As a result, our measure shows that total GDP increased by 17% per year versus the 3% figure of conventional measurement.

Finally, while according to conventional measurements oil sector GDP as a share of total GDP dropped from 19% in 1998 to 12% in 2008, according to our “Genuine GDP” measurement the oil sector’s share would have increased from 16% in 1998 to 74% in 2008. According to the current price figures for GDP, the oil sector in 2008 only accounted for 26% of Total GDP. This percentage figure lies between the 12% figure by conventional methods and the 78% figure by our measure. Thus,  it would seem that the true role of the oil sector in GDP growth undoubtedly lies somewhere between that shown by the two measures.

It is worth noting that the omission of nonmonetary elements, such as the value of various social welfare “missions,” from both sets of measures undoubtedly serves to overstate the share of oil sector GDP in total GDP. (This is because if we add non-monetary elements,  total GDP in both cases increases, while the oil sector values remain the same.) Hence, adding the value of these nonmonetary elements to GDP as now measured, by increasing total GDP while oil GDP remains the same, would serve in both measures to reduce oil’s share of total GDP. This would tend to be a corrective factor to reduce the gap between oil’s share as measured by our “Genuine GDP” and its actual share of current price GDP.

Given that much of the nonmonetary elements which would be counted in a revised GDP are in fact financed by the monies earned by the oil sector (in many cases directly financed by PDVSA payments to various social welfare missions), it seems particularly important to make these adjustments in GDP in order to truly reflect the significance of the oil sector in economic growth.


1. “Chavez to change GDP measuring to Stiglitz report recommendations,” www.VHeadline.com, September 22, 2009.

2. Latin American Herald Tribune, December 2008, (www.laht.com)

3. Mark Weisbrot, Rebecca Ray and Luis Sandoval, “The Chavez Administration at 10 Years: The Economy and Social Indicators,” www.Venezuelanalysis.com, February 2009, Also available at www.cepr.net, from which my page citations are taken.

4. Weisbrot,et al, Executive Summary.

5. Ibid.

6. Weisbrot et al, p.7.

7.   http://www.bcv.org.ve/c2/indicadores.asp, Agregados Macroeconómicos:  Producto interno bruto Por clase de actividad, A precios constantes de 1997,(Miles de Bolívares).

8.  Francisco Rodriguez, “The Anarchy of Numbers: Understanding the Evidence on Venezuelan Economic Growth,” Canadian Journal of Development Studies 27(4), 2006, p.2.

9. Rodriguez, p.21.

10.  Rafael Ramirez, “A National, Popular, and Revolutionary Oil Policy for Venezuela,” www.Venezulanalysis.com, June 9, 2005, pages 14-15.

11.   Data from United Nations and OPEC.

12.   OPEC, Research Division, “Who gets what from imported oil?” July 2009, p.5. 

13.  Interestingly, the Banco Central de Venezuela publishes (online) annual data on total Venezuelan GDP in both current and constant prices (base year equal 1997). However, it shows the sectoral composition by type of economic activity (e.g., oil and non-oil) only in constant prices, and not in current prices. Clearly these sectoral economic activity data in current prices exist, because calculating constant price GDP by any sector requires as a starting point current price GDP for that sector.

14.   Current price oil exports and imports for 1997-2008 are from Banco Central de Venezuela. (http://www.bcv.org.ve/c2/indicadores.asp, “BALANZA DE PAGOS Y OTROS INDICADORES DEL SECTOR EXTERNO.” 

 http://www.ine.gob.ve/, particularly: Anual Producto Interno Bruto a precios constante, según clase de actividad económica, 1995-2003; Producto Interno Bruto a precios corrientes, según clase de actividad económica, 1995-2003

Michael Tanzer is the president of Tanzer Economic Associates, Inc. which for forty years has specialized in consulting to Global South governments in the oil, energy and natural resource areas. His most recent paper (with Idrian Resnick) is “Multilateral Barter Trade for the Global South: the Barter Trade Organization,” (BTO) and is available in Spanish from [email protected].