Blog Article

Petro-state: After Hugo Chávez’s tumultuous presidency, how can Nicolás Maduro avert disaster in Venezuela?

by Ethan K.F. Brooks

Oil-Well-Sunset

Although it may not be something that immediately comes to mind, President Maduro’s Venezuela possesses the largest proven oil reserves in the world, with, by some estimates, just under 297,570 billion barrels of oil, or nearly 20% of global reserves. [1] The Bolivarian Republic has reserves greater than Saudi Arabia, and more than Iran and Iraq combined. At the moment due to the poor conditions of its fields, the weaknesses of its state oil company Petróleos de Venezuela, S.A. (PDVSA) and the low grade of the oil, Venezuela accounts for less than 5% of global oil production at just over 3 million barrels a day.

Venezuelans should be among the richest in the world. Indeed, by 1978 it seemed that this was going to be the case, but today the country is still a poor and unequal one.  Its per capita wealth is around $13,000. [2] When we compare this indicator to another oil endowed country, albeit one even less democratic, we see that it is three times poorer than Saudi Arabia. Even this sad figure obscures many of the country’s problems. In recent years the price of oil has been high, sweetening the figures.

Did it have to be this way? Maybe. I would argue though that Venezuela is the archetypal resource-cursed petro-state. Its story illuminates the difficulties faced by the many countries that fall into this category, Nigeria and Russia among them.

For countries who do not rely on oil exports for income, a fall in global oil prices acts as an economic stimulus. People pay less to fuel their cars and heat their homes. Fuel takes such great importance in the average basket of goods that inflation is low allowing an increase in consumer spending. Life is good.

The fortunes of the major oil exporters are even more tied to the price of oil. For petro-states like Venezuela, oil exports make up to 90% of export earnings and the vast bulks of their economies. Therefore when crude prices plummet, GDP follows.

The industry is capital-intensive and creates few jobs, so during ‘oil booms’ governments have an incentive to create many jobs as they wish to share the wealth. When these states are poor to begin with, governments tend to build large-state controlled economies to marshal growth as quickly as possible. Outlining his vision for ‘La Gran Venezuela’ in the 70s, this was clear to President Pérez. ‘We couldn’t lose time.’[3] The state becomes a battleground for the distribution of oil wealth and rent-seeking behaviour, allowing strong-men like Chávez to entrench cronies and weaken democracy. A phenomena known as ‘Dutch Disease’ also strikes. This is a combination of currency appreciation that renders exports uncompetitive and the ‘business’ of getting a share of the oil wealth replacing hard work, innovation and entrepreneurship. When prices drop, what follows can only be spiralling deficits and sudden budget cuts. When the state threatens to turn off the taps, unrest and great political change follow. It was one such episode that brought Chávez to national prominence in Venezuela.

Nearly a year on from his death after a 14-year presidency, Chávez’s economic legacy is laid bare. Even with oil prices just under $100 a barrel, public spending is out of control. In 2013 the budget deficit was 8.5% of GDP and growth scant. [4] The country’s infrastructure is crumbling and disorder is spreading. But Venezuela has been here once before and its experience of economic hardship and political turmoil twenty years ago can teach us a lot about how Maduro can fare in averting disaster.

During the first oil boom, President Carlos Andrés Pérez oversaw a transformation of the country and the first nationalisation of the oil industry in 1976. Unlike other nations in a developing world swept by resource nationalism, Pérez’s government carried out the nationalisations well. Most jobs in the industry were already held by Venezuelans so nationalisation meant a change of control, not personnel. [5]

In 1979 Pérez left the presidency and while money flowed things seemed fine. However as prices fell, the country tumbled into crisis. The deep state built on the mirage of oil wealth was suddenly unaffordable and debt crippled the state as huge swathes of revenues were diverted to fund payments to foreign creditors. Slums grew around Caracas. Initial populist reactions involved a complex array of price controls which caused distortion and hardship. By the time Pérez returned to the presidency in 1989, incomes had returned to 1973 levels. He sought a way out of the crisis, but the unpopularity of his budget cuts and liberalisation sparked riots and political opposition. This was the climate in which Chávez arose. This is the choice Maduro faces today.

Despite Lieutenant-Colonel Chávez’s coup failing in 1992, Pérez’s unpopularity allowed him to be ousted by political enemies in 1993 after a Supreme Court ruling for embezzlement went against him. This should also provide a lesson for Maduro. Factional fighting is also rife in his government.

By the middle of the 1990s the only way out was to increase oil production. To facilitate this, the PDVSA head proposed an opening or la apertura of Venezuela’s oil industry. Rather than a rolling back of nationalisation, the international companies were to be invited to invest in joint ventures with the PDVSA. [6] The state required expertise and money only the oil majors possessed. It seemed that ideology was to be done away with, but as things turned out, la apertura proved too controversial.

Caldera, Chávez’s predecessor, was sold on la apertura, but Chávez, a deeply ideological man, saw la apertura as selling out to ‘the foreigner’. After his election in 1999, Caldera fired Luis Guisti, the head of the PDVSA behind la apertura and reversed the changes. Under a new law, royalties paid by private companies dramatically increased and by 2007 he announced the industry’s re-nationalisation.

The government took a majority share in the ventures being operated by the international oil firms. Chevron, Total and BP agreed to the plan which allowed them to continue operating as minority shareholders. However as a result of a failure to agree terms, the PDVSA took over projects owned by ConocoPhillips and ExxonMobil.

The policy saw oil production in Venezuela fall from 3.2 million barrels per day in 1998 to 2.4 million by 2004 and keep falling until 2010. It was noted that the PDVSA couldn’t increase production to deliver people the riches they expected of an oil-rich state.

The problems are as linked to refinement as drilling and thus there is a bottleneck in Venezuelan production. US experts estimate that it would take investment of up to $32 billion to build the upgrading units necessary for the country’s heavy crude and unconventional oil reserves. [7] In order to bring this investment to Venezuela, Maduro would need to discard chavismo, betraying the legacy of the man whose popularity won him the presidency. He would also need to review the possibility of another la apertura. This would be politically toxic, as would rolling back the price controls that have caused distortions and left the economy in ruins. Without the necessary reforms the economic crisis will only deepen. This not only weakens the position of Maduro’s government in the long-run as people lose faith in Chávez’s vision. It also hamstrings Venezuela’s diplomatic objectives, which during the boom years had led to the country being discussed alongside Brazil as the preeminent Latin American power.

Even though it has experienced a decade-long oil boom and has the resources it does, Venezuela has the worst-performing economy in South America. This is Chávez’s legacy and the reason Maduro ought to abandon his ‘Socialism for the 21st Century’. [8]

Today we can see the parallels with Venezuela’s position twenty years ago. Pérez’s ousting exists as the example of what happens to reformists who defy the popular ideology. If Maduro follows Chávez the hardship will only grow, but if he follows Pérez’s two-decade-old example, he will be seen as betraying Chávez, who is still revered. [9] Despite his impeccable chavista credentials, economic necessity is pushing him toward reform. In the short-term, were Maduro to abandon Chávez’s legacy he might lose power. However if he could manoeuvre through that phase both he and Venezuela will be more secure. We must wait and see if he can be the man to rescue Venezuela or whether the country will continue its downward spiral. For Venezuela’s sake, let’s hope he succeeds.

 

Ethan Brooks is currently studying International Relations at King’s College London. You can follow him on Twitter @EthanKFBrooks.

________________________
 NOTES
[1] http://www.eia.gov/cfapps/ipdbproject/IEDIndex3.cfm?tid=5&pid=57&aid=6
[2]http://www.imf.org/external/data.htm
[3]Daniel Yergin, (2012), The Quest , pp. 113.
[4]http://www.economist.com/news/leaders/21576399-narrow-tainted-election-victory-fitting-epitaph-his-rotten-predecessor-venezuela
[5]Daniel Yergin, Ibid.
[6] Ibid. pp. 119.
[7] http://www.telegraph.co.uk/news/worldnews/southamerica/venezuela/3183417/Venezuelas-oil-output-slumps-under-Hugo-Chavez.html
[8] http://www.economist.com/news/leaders/21576399-narrow-tainted-election-victory-fitting-epitaph-his-rotten-predecessor-venezuela
[9] http://www.economist.com/news/americas/21586850-adjustment-and-reform-are-economically-essential-politically-impossible-maduros-balancing

About these ads

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s