An Examination of the Administration of Hugo Chavez and the Economy of Venezuela

President Hugo Chavez and Venezuela’s Economy

Introduction to Venezuela

Truth be told, everyday life is heavily dependent on oil – from pouring gasoline into cars to the lipstick women use. The importance of oil cannot be ignored when studying Venezuela, a country widely known for its oil industry. Unfortunately, Venezuela’s economy heavily depends on its oil industry rather than any other natural resource owned, such as natural gas – its secondary source of energy. Under former President Hugo Chavez’s rule, the oil industry became Venezuela’s primary source of survival.

President Hugo Chavez placed Venezuela in an unstable economic situation by placing and/or alternating policies that affect the oil sector.

He also made several changes to the Organization of the Petroleum Exporting Countries (OPEC) anoand Petróleos de Venezuela, S.A. (PDVSAtoto ensurVenezuela’sla economy. Former President Chavez influenced Venezuela’s dependency on oil by making and/or adjusting policies and changing relations with two major organizations in the oil sector.

The importance of Venezuela’s oil

As noted before, Venezuela’s primary energy source is oil. It is no surprise that Venezuela’s oil sector ranks among one of the top producers and exporters in the western hemisphere. According to CIA World Factbook, “Venezuela remains highly dependent on oil revenues, which account for roughly 96% of export earnings, about 40% of government revenues, and 11% of GDP” (CIA World Factbook). Moreover, OPEC reported, “oil generates about 95 percent of export earnings, about 45 percent of budget revenues, and about 12 percent of gross domestic product” (OPEC).

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In addition, it was estimated by January 01, 2015, Venezuela has the largest proved reserves of conventional (light and heavy crude) oil and non-conventional (extra-heavy crude) oil by 298.4 million oil barrels (CIA World Factbook). Due to this abundance of oil, Venezuela’s economy remains dependent on oil.

Venezuela’s primary source is followed by increased consumption of natural gas during the past few years. Their secondary source of energy is slowly developing importance to the Venezuelan economy because their oil industry is not a reliant source of income – although they heavily depend on it. Since oil is largely consumed, “gas in injection [is needed] to aid crude oil extraction. Due to the declining output of mature oil fields, natural gas use for enhanced oil recovery has increased by more than 50 percent since 2005” (Clough). The Venezuelan government begins to emphasize gas infrastructure not only for industrial needs but also for commercial markets. As a result of the growing industrial demand, Venezuela has resorted to importing natural gas from Colombia and the U.S. Increasing other economic sectors would benefit Venezuela’s economy by not relying on its oil sector.

Important periods

The following periods examined are important to understand why former President Hugo Chavez decided to alternate policies and increase Venezuelan presence in other organizations affecting their oil industry. Past political and economical history affected how Chavez would react to better lead Venezuela’s oil sector.

1943-1976: Several key factors rose during this period. First, the Hydrocarbons Act of 1943 was established. Former President Isaias Medina Argarita 1 Precise numbers vary from study to study because of the different methodology used.

established this law for the government to gain control over their oil industry. Some of the privileges the government implemented were collecting about 50 percent of profits and establishing that foreign countries “could not make greater profits from oil than they paid to the Venezuelan state” (Wilpert). Soon after, there was an oversupply of oil causing oil prices to drop to being their also time low. Consequently, other oil-exporting countries decided to form the Organization of Petroleum Exporting Countries (OPEC).

Discussion of OPEC will soon follow. In 1973, Venezuela participated in a historical event known as the oilcrioil crisis973. Venezuela and other OPEC members benefited from the oil crises by increasing their revenues. By 1976, Venezuela began to nationalize its oil industry. ITodo so, the government formed a petroleum state-enterprise known as Petroleos de Venezuela S.A (PDVSA).

1977-1998: Venezuela briefly enjoyed the prosperity 1973 oil the crisis brought. Soon after, there were several negative aftereffects Venezuela had to face such as chronic inflation and increasing indebtedness (Wilpert). To worse the case, by the mid-1980s, Venezuela’s oil prices began to fall as a result of OPEC members breaking their production quotas (Wilpert). On the other hand, PDVSA was also facing problems. From 1976 to 1992, PDVSA was facing shifts in income distribution from the company to the government.

1999-Today: In February of 1999, former President Hugo Rafael Chavez Frias became Venezuela’s president. Under his ruling, he was ready to make several policy changes such as the new Hydrocarbons law of 2002 to strengthen Venezuelan Economy Moreover, he acknowledged that two major organizations, OPEC and PDVSA, had the power to raise Venezuelan revenues. Although his intentions meant well, the following actions he took made Venezuela’s economy more interdependent on the oil industry.

President Hugo Rafael Chavez Frias

In 1997, Lieutenant – Colonel Hugo Chavez decided to run for Venezuela’s president. During his campaign, he distinguished himself from his opponents by offering an anti-poverty and anti-corruption blueprint for Venezuela’s everlasting struggles.

Additionally, “he offered a participative and pacific democracy where the welfare of the people would be the main focus of his presidential agenda” (Alvarez, Fiorito 08). On December 06, 1998, former President Hugo Chavez won the elections by 56 percent; he gained popularity votes among his citizens for his dedication to making Venezuela a striving country in the global arena. One of the several strategies that President Hugo Chavez used to make Venezuela’s oil industry strive, but also made Venezuela’s economy depend on it, was implementing significant policy changes. The Venezuelan National Assembly enacted a law granting President Chavez “the power to rule by decree in many sectors of the economy for eighteen months” (Pascal 533). By this enabling law, he enacted the new Hydrocarbons Law.

Effective in January 2002, the new Hydrocarbons Law of 2002 immediately suspended the Hydrocarbons law of 1943. The hydrocarbons law of 1943 was a step for the government to gain control over the oil industry and “introduced the concept of a fifty-fifty split in profits” for the government and private investors (Pascal 532). On the other hand, the new Hydrocarbons law implemented a different concept. According to USA International Business Publication, under the new law, “private investors cannot own 50 percent or more of the capital stock in joint ventures involved in upstream activities… [and] private investors may own up to 100 percent of the capital stock in ventures concerning downstream activities” (USA International Business Publications 24). This was a precaution taken to gain more revenues than private investors from their oil sector. In addition, royalties paid by private investors for oil exploitation in Venezuela were increased ranging from 1-17 percent to 20-30 percent (Alvarez, Fiorito 12). Chavez recognized that increasing such royalties would also increase revenues for the Venezuelan government and compensate citizens for the natural resource being used. As former President Hugo Chavez stated, “this new law will permit using our oil and the refinery activities as an instrument of the national development and the diversification of the production of the country” (Alvarez, Fiorito 12).?

The new Hydrocarbons Law took power away from private companies and placed it into the hands of the Venezuelan government. Although it gave the Venezuelan government more power over the oil industry, it also left its economy to depend on it. For example, if companies were to fail to pay the fees or disagreed to share profits, the Venezuelan economy would be severely hurt.

Organization of the Petroleum Exporting Countries (OPEC)

Another strategy used by President Hugo Chavez to make their oil sector prosper but made their domestic economy dependent on that sector was enhancing relations with OPEC. OPEC is one of the two major players influencing Venezuela’s domestic policies on oil. OPEC was created in September 1960 and originated in Baghdad, Iraq.

According to their OPEC declaration of 1960, OPEC’s mission is as follows:

To coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets to secure an efficient, economic, and regular ar supply of petroleum to consumers, a steady income to produce, rs and a fair return on capital for those investing in the petroleum industry (OPEC).

OPEC was created to benefit oil-exporting countries by coming into an agreement for fair and stable oil prices. OPEC is currently composed of 12 oil-exporting countries, which include the founding members Islamic Republic of Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. The remaining members that joined later are Qatar (1961), Indonesia (1962), Socialist Peoples Libyan Arab Jamahiriya (1962), United Arab Emirates (1967), Algeria (1969), Nigeria (1971), and Angola (2007). Even though OPEC was created in 1960, it was not until 1973thatn OPEC became powerful and started to set oil prices. Members took control of their domestic oil industriestogoodo set oil prices for production and exportation. Although OPEC was created with good intentions to benefit member countries, Venezuela seemed harmed rather than positively being impacted.

Before former President Hugo Chavez stepped into power in 1999, Venezuela’s relationship with OPEC jeopardiitsheir domestic economy for several years. Venezuela was in a poor economic position in competition with other oil industries, including OPEC members, because OPEC ignored production quotas (Wilpert). Ignoring production quotas caused oil prices to plummet, which affected Venezuela. OPEC’s production quotas were set to limit producttorgraspgasp control over oil prices. OPEC members were not concerned for other member countries; instead, they wanted to produce more to benefit their domestic economy (Wilpert). It was not until former President Chavez redirected into the initial direction – to stabilize and make fair oil prices. Chavez recognized OPEC’s potential to influx oil prices, which in the end would benefit all member countries.

In 1999, Former President Hugo Chavez planned to change several aspects of OPEC in an attempt to strengthen the Venezuelan economy. He began to path the way to Venezuela’s oil dependency by redirecting OPEC to their initial mission. As mentioned before, OPEC ignored production quotas and became an unreliable souroffor petroleum causing other non-OPEC members, such as Mexico and Russia, to expand their production (Wilpert). In hopes of reestablishing OPEC’s initial objective – to stabilize oil markets – Chavez hosted OPEC’s second summit in September 2000 – the second since 1975 – in Caracas, Venezuela (Alvarez, Fiorito 09). In general, “these summits were held to discuss issues of global importance and establish guidelines for the Organization’s policies” (OPEC). On the other hand, former President Chavez had other specific objectives on his agenda, which were the following:

• “To enhance communications between OPEC members – taking into consideration that their last meeting was 25 years ago).
• Recover Venezuela’s credibility in the Organization.
• Fortify the OPEC in the world.
• Recover oil prices.
• Regain [OPEC’s leadership) in the oil market.
• Consolidate the relations [between] Venezuela and the Arabic Countries”

(Alvarez, Fiorito 09)

There were several positive outcomes from OPEC’s second summit. As OPEC states “each summit concluded with the issuing of a Solemn Declaration in which principles were set out to guide the future work of the Organization” (OPEC). One of the results was the Solemn Declaration II. This declaration “ratified the unity of the organization. They also committed to maintaining price policies that are lucrative, stables and competitive with other sources of energy” (Alvarez, Fiorito 09). Moreover, another interesting result was an open invitation to their consumers to participate in debates and negotiations related to oil. Finally, Chavez’s goal to reaffirm OPEC’s position in the oil market was successful. Shortly after OPEC’s second summit, Venezuela’s oil prices increased dramatically from $3.19 per barrel to $28 per barrel (Wilpert). This is because OPEC members began to follow guidelines, such as production quotas, to benefit all members in the global oil market.

Petróleos de Venezuela, S.A. (PDVSA)

Another strategy used by former President Hugo Chavez was to enhance relations with Petróleos de Venezuela, S.A. (PDVSA) – (Oils of Venezuela). On January 01, 1976, PDVSA was created as the company in charge of planning, coordinating, and supervising Venezuela’s oil industry.

PDVSA missions include:

• Redistribution of oil to society in general.
• Contribute to Venezuela’s exterior political role.
• Guarantee the protection of energy.
• Advance social economics by industrializing and politics of equality.
• Promote technological advancements and develop human resources that are capable and motivated (PDVSA).

PDVSA is an important contributor to Venezuela’s economy because PDVSA produces and exports most of Venezuela’s oil. PDVSA has the power to produce 4 million barrels per day, which exceeds the initial set production of 3 million barrels per day (Alvarez, Fiorito 07). Additionally, PDVSA exports 93 percent of its total hydrocarbon production making it Venezuela’s largest economic contributor (Alvarez, Fiorito 07). Since Venezuela is greatly dependent on PDVDSA, it was important for former President Hugo Chavez to gain an upper hand in this company.

Former President Hugo Chavez knew PDVSA challenged Venezuelan authority of its history. PDVSA management was poorly handled which caused Chavez to address the matter. One of the problems that he intended to solve was making them follow the guidelines established. Similar to other OPEC members, PDVSA ignored production quotas. PDVSA focused on producing as much as oil possible not knowing that following production quotas would benefit them (Wilpert). Another problem Chavez encountered with PDVSA was that the Venezuelan government had no management over the company. Chavez criticized PDVSA for being dependent on the Venezuelan government. The government was unable to manage PDVSA through the early stages of nationalization because “management did not change with nationalization” (Wilpert). In other words, the management team did not keep up with changes. Chavez urged PDVSA to turn into a “state within a state” (Wilpert). Chavez wanted PDVSA to benefit Venezuela’s economy as much as it would benefit the company. InToain control PDVSA, Chavez required PDVSA to invest 10 percent of its profits into social programs and hired pro-Chavez workers (Wilpert).

Conclusion

As of today, Venezuela continues to rely on its oil sector. To avoid any greater damage to their economy, former President Hugo Chavez wanted the Venezuelan government to gain power over any organization or company that uses their primary source, oil. Throughout Venezuela’s history, it was clear that several things needed to change to safely rely on theireconomyomy in the oil industry. Venezuela’s history demonstrated that the Hydrocarbon law of 1943 was outdated and called for a new reform. Former President Hugo Chavez looked into the well well-being-being of their economy and created the new Hydrocarbon Law of 2002. Under this law, power was taken away from private companies,s and increased fees were to benefit the  Venezuelan economy. Unfortunately, this resulted in making Venezuela’s economy more reliant on its oil industry.

Former President Hugo Chavez also created changes in two major players that influence Venezuela’s oil industry, OPEC and PDVSA. Once again, past tensions between these two players caused Chavez to take action to secure Venezuela’s economy. First, to resolve tensions with OPEC, Chavez hosted OPEC’s second summit with a clear agenda of what he wanted to increase its oil sector. Secondly, Chavez accomplished to gain more power over PDVSA by managing the company and requiring them to contribute to the well-being of well-being action. His following actions were intended for the well-being of Venezuela’s economy but deepened their ties within the oil sector.

Bibliography

1. Alvarez, Johannes, and James Fiorito. “Venezuelan Oil Unifying Latin-America.” Stanford.edu. Stanford University, 02 June 2005. Web. 03 Dec. 2015.
2. CIA. “South America: Venezuela.” Central Intelligence Agency. Central Intelligence Agency, 19 Nov. 2015. Web. 03 Dec. 2015.
3. OPEC. “Our Mission.” OPEC. Organization of the Petroleum Exporting Countries, 2015. Web. 02 Dec. 2015.
4. Pascal, Larry B. “DEVELOPMENTS IN THE VENEZUELAN HYDROCARBON SECTOR.” Southern Methodist University, 02 June 2009. Web. 25 Nov. 2015.
5. PDVSA. “PDVSA – Petróleos De Venezuela S.A.” PDVSA. Petróleos De Venezuela S.A., 2015. Web. 02 Dec. 2015.
6. USA International Business Publications. Venezuela Mineral & Mining Sector Investment and Business Guide. Vol. 1. Place of Publication Not Identified: Intl Business Pubns USA, 2005. Print.
7. Wilpert, Gregory. “The Economics, Culture, and Politics of Oil in Venezuela.” The Economics, Culture, and Politics of Oil in Venezuela. N.p., 30 Aug. 2003. Web. 25 Nov. 2015.