To what extent has the oil policy of Chávez helped in achieving his objectives?

Translated June 2008

Chávez won the presidential election of 1998 on the platform of 3 basic promises: dismantle the old political system of ‘puntofijismo’ [a], alleviate poverty and end corruption. When he came into power in February 1999, Venezuela was going through a recession, and in order to carry out his social policies, he needed access to funds. In a primarily oil-producing country, the answer lies in this resource and the control of the oil industry.

However, since he took office, it is clear that his ambitions lie beyond ameliorating the suffering of his people. From the beginning, Chávez had always declared his Bolivarian ideology, inspired by Simón Bolívar, Simón Rodríguez and Ezequiel Zamora [b]. His aims are economic and cultural sovereignty and independence for Venezuela and Latin America from developed countries, especially the USA, social justice for all and the unification of South America.

All of these objectives are very closely intertwined. The attainment of social justice necessitates economic independence and willingness on the part of the government, and economic independence in turn, requires a complete breakaway from the economic hegemony of the USA. In order to achieve this independence, it is important for him to advocate a multipolar world and a united South America. Above all, his ‘Bolivarian revolution’ can only be realized with the possession of a powerful financial leverage – complete control of the oil industry.

I will be analysing Chávez’s petroleum policy, his social programmes which aim to redistribute petrol wealth to the dispossessed majority, and finally his foreign policy, also known as his oil diplomacy, which includes his fight against neoliberalism in favour of a socialist economic model, the diversification of international relations and his attempts to further interdependence amongst the South American countries.

Firstly, in order to understand the significance of Chávez’s oil policy, one needs to appreciate the history of oil in Venezuela, and its considerable effects on every aspect of the Venezuelan society.

In May 2008, the Minister of Energy and Oil, Rafael Ramírez, announced the Venezuela’s proven oil reserves have increased to 130 billion barrels (2). The new figure places Venezuela as having the third largest oil reserves in the world after Saudi Arabia and Canada. Venezuela has the largest oil reserves in Latin America. It also has the world’s largest reserves of extra heavy crude oil, as well as massive gas reserves. In 2006, Venezuela was the fifth largest oil exporter in the world (3). It provided 1.5 million barrels per day to the USA which constituted 11% of the US oil imports, and 60% of Venezuela’s oil exports. Oil generates 80% of the country’s total export income, constitutes half of the government’s total income, and is responsible for a third of its gross domestic product (GDP)(3).

During the pre-Colombian times, the abundant existence of oil is widely known – the indigenous people used oil which seeped to the surface, for medicinal purposes. It was not until 1912 that the first oil wells were drilled, and by 1929, Venezuela had become the world’s largest oil exporter (4). The immediate economic impact of this spectacular increase in petroleum income was ‘Dutch Disease’[c](4,5), and its effects will be discussed later.

In 1943, Venezuela reformed its oil policy with the Hydrocarbons Act, which bound the state’s income even more intimately to the extraction of oil (4). This continually increasing income led to an increasing reliance of the state on this source of income. In the 1950s, the price of crude oil fell due to oversupply, and to combat this, the Organization of Petroleum Exporting Countries (OPEC) was formed, largely instigated by the Venezuelan government.

During the Middle East oil embargo in 1973, oil prices worldwide along with governmental revenue quadrupled. In 1976, the oil industry was fully nationalized and Petróleos de Venezuela SA (PdVSA) was formed. The oil boom created the illusion that the oil income could be used to industrialize the country via massive infrastructure projects (4). The consequence was the increase in both the governmental expenditure as well as debts. External debts increased from 9% to 53% of GDP between 1970 and 1994 (6). Meanwhile petrol prices together with the income per capita as well as the entire economy plummeted in the 1980s and for the following 20 years, and poverty increased. Its GDP fell by 3.8% (almost 25% per capita) between 1981 and 1989, and in 1989 it fell by 8%, inflation rose to 81% and unemployment was estimated at around 50% (7). In 1996, Venezuela was one of the few Latin American countries whose income per capita was lower than its level in 1960 (6).

Ironically, oil had played an important role in obstructing industrialisation in Venezuela. Venezuela suffered from the ‘Dutch Disease’, which is contracted when a raw material produces a sudden increase in only one sector of the economy. The first effect is an increase in the purchasing power of the population, which eventually leads to inflation. The second effect is that imported goods become cheaper than locally produced goods, which in turn increases the volume of imports and at the same time discourage local production (8,5). The ‘disease’ has affected the entire social structure and political panorama of Venezuela.

One can observe the symptoms in the economy – the increase in oil production was followed by a corresponding decrease in agricultural production and a delay in industrialization (4). In the 1920s, agriculture constituted a third of GDP. This fell to 10% in the 1950s, and currently it makes up only 6% of GDP (9). Not only is this the lowest figure in Latin America, but Venezuela is also the only South American country that is a nett importer of agricultural produce, importing 75% of its food requirements (8). Between 1990 and 1999, industrial production fell by 50% to just 24% of GDP (9). This situation was worsened by the mentality of both the Venezuelan people as well as government, who believed that the only way to riches is via access to the country’s oil wealth rather than engaging in entrepreneurial activities.

At the beginning of the 19th century, 70% of the population lived in rural areas (10), and 60% of the workforce in 1935 was agricultural. By the 1990s, the percentage living in rural areas was reduced to scarcely 12%. This transformed Venezuela into one of the most urbanized countries in South America. This urbanization happened rapidly and the result was the formation of huge ‘barrios’ (ghettos) in the peripheries of Caracas and other large cities (8).

The combination of a decline in oil income [d], duplication of the population [d], a rising foreign debt and the ‘Dutch Disease’ led to an increase in the poverty rate. The economic downturn forced a reduction of public spending, and poverty rose spectacularly from 33% of the population in 1975, to 70% in 1995 (11), the highest increase in South America during this period. The sporadic turns to neoliberal economic policies by the Carlos Andrés Pérez (1989 – 1993) and Rafael Caldera (1994 – 1999) administrations further aggravated the poverty problems. As a result, inequality increased considerably between 1984 and 1998, making Venezuela the most unequal society in the world (12).

Other economic symptoms of ‘Dutch Disease’ were the currency devaluations and subsequent inflation during the oil boom in the late 1970s and the 1980s (4).

‘Dutch Disease’ had created a clientalistic and consumeristic culture more voracious than anywhere in South America, primarily influenced by imitation and import of the North American mass culture (7).

Another consequence of Venezuela’s oil wealth on its political system is that it became a ‘pacted democracy’[e], which took the form of the ‘puntofijismo’. It controlled the entire governmental bureaucracy, and won elections through its patronage system [e](4).

The control of the state-owned PdVSA had always been in dispute since its nationalisation in 1976. The management had not changed and therefore the same management from the previous multinational companies continued managing PdVSA (13). It maintained a corporalistic and anti-state tradition, and functioned like ‘a state within a state’. The Board of Directors almost in their entirety, was appointed from PdVSA management, and therefore represented management rather than the owner, the state (4).

Since 1943, the government levied a royalty charge of 16.6% for every barrel of oil extracted, and income tax on oil profits of 67.7%. With the passage of time, this royalty was negotiated to a level as low as 1% (4). In the mid-1990s, PdVSA adopted a worldwide combined accounting system in which the costs and losses outside Venezuela were balanced against revenues and profits within Venezuela. Since Venezuelan income tax rate was double that in the USA, for example, the company transferred a smaller proportion of its revenues to the government. Between 1972 and 1992, 71% of PdVSA’s income went to the government, but during the ‘Apertura’ in the 1990s, only 36% reached the government (14), while most of the industry was in foreign hands. In the late 1990s under the neoliberal Caldera administration, PdVSA not only was it working on a plan that suggested eliminating royalty payments entirely, but also on privatisation. The company was viewed as corrupt and a social divide was developing between the PdVSA staff (which employed 40,000 workers, equivalent to less than 1% of the population) and the rest of the country (15).

Even before he was elected president in 1998, Chávez had always been explicit about his view of oil being a geopolitical weapon. He realised that he would never achieve his social objectives without full control of the oil industry. When he came into office in February 1999, world oil prices were at their lowest point in many years at just $8.43 per barrel (14), and Venezuela was producing 800,000 barrels over its OPEC quota (16) which contributed to the low price. In order to ensure that oil income reached the government, he had to regain control of PdVSA, improve the oil price, introduce tax reforms, and subject the oil industry to serving national interests.

First of all, he anchored the state ownership of PdVSA by means of the new 1999 Constitution, which prohibits its privatisation. At the same time, Chávez reduceVenezuela’s crude oil production, and encouraged the OPEC countries to reduce oilproduction in order to shore up oil price. Alí Rodriguez, the Minister of Energy and Mines then, managed to secure the agreement of nearly all the OPEC as well as non-OPEC countries to either lower their production or adhere to their quotas. With the strengthening of OPEC, the oil price immediately jumped up to $27 per barrel by November 1999, making it one of the highest increments outside a war situation in the last century [f]. He also convinced OPEC to introduce a system that linked production cuts to a $22 - $28 a barrel price band.

Another significant development was the modification of the Fondo de la Estabilización Macroeconómica [g]. If the price of oil were to go above $14 a barrel, the extra income would be channelled into the fund. Rodríguez reduce the benchmark to $9 a barrel (17).

The next step was the introduction of tax reforms to enable the government to access a larger proportion of the oil revenues. Under the revised 2001 Hydrocarbons Act, royalty payments were raised from 16.6% to 30% per barrel, while the income tax was reduced from 67.7% to 50%. At the same time, PdVSA was guaranteed to at least 51% share in new oil production and exploration. By shifting the government revenues from taxes to royalties, it was closing loopholes in the tax collection process. This was also a means of improving the company’s efficiency. Related to state ownership is a provision in the Hydrocarbons Act that specifies that all its activities are to be dedicated to ‘public interest’(18).

In December 2001, business leaders, the CTV, the Fedecámeras [h] and the opposition, including the president of PdVSA, Guaicaipuro Lameda, opposed the Hydrocarbons Act and instigated an industrial action. Chávez fired Lameda, replaced him with Gastón Parra, appointed 5 new members to the Board of Directors, none of whom were from PdVSA management (19). Chávez had thus gone against the deeply rooted tradition and was accused of politicising the industry despite the fact that as representatives of the owner, the Board of Directors should be appointed by him (the state in this case).

The conflict reached a head on April 11, 2002, when a coup d’etat occurred. The coup was quelled within 48 hours thanks to huge popular support and the civic-military alliance that Chávez had been developing as soon as he took office. His conciliatory and tolerant attitude towards the coup conspirators after his triumphant return to power only served to embolden the opposition. In December 2002, a lockout was started in PdVSA. The government overcame the crisis with the help of loyal employees and ex-employees, as well as the army who guarded the oil installations and supervised the distribution of imported fuel across the country. This time, Chávez dismissed 18,000 disloyal employees, which included many from management. The lockout resulted in a drop in oil production from 2.65 million to 250,000 barrels a day (20), $14 billion in losses and a quarterly decline of 28% of GDP (21). However, this recovery of control over PdVSA, also known as ‘re-nationalization’, was one of the most decisive victories of the ‘Bolivarian revolution’.

Chávez wasted no time in implementing his social programmes once he surmounted the lockout at the beginning of 2003. Now under total state control, PdVSA had also contributed significantly to these - $2 billion in 2005 (22), nearly a quarter of its annual profits. Governmental social spending increased from 8.2% of GDP in 1998 to 12.6% in 2006 (23), consisting almost 40% of its total expenditure. With strong economic recovery since 2004 and an increase of GDP of 10.3% in 2006, the social spending had risen 170% in real terms between 1998 and 2006.

The educational ‘missions’ are Missions Robinson, Ribas and Sucre [i]. Within a year in 2004, Mission Robinson had taught 1,200,000 illiterate adults to read and write, and Mission Ribas had incorporated 250,000 students into secondary education (24). Access to education had improved substantially. The number of students in primary education had risen from 271,593 in 1999/2000 to 1,098489 in 2005/2006. Prior to the commencement of Mission Sucre, university colleges were located in 60 municipalities, and in 2006, there were colleges in 272 municipalities (25). In 2007, Mission Sucre awarded 30,000 new scholarships (26). In October 2005, 2 years after the launch of Mission Robinson, UNESCO declared Venezuela 99% free of illiteracy (25). Following the success of the literacy campaign, Mission Robinson II was set up to follow on from the original ‘mission’.

Mission Barrio Adentro [j] is a publicly funded healthcare programme in the deprived areas, staffed by Cuban doctors. In 1998, there were 1,628 doctors per head for a population of 23.4 million, and in 2006, this increased to 19,571 per head for a population of 27 million. The following phases, Mission Barrio Adentro II and III were launched in 2005 and 2007, and these aim to improve healthcare provision even further. Many patients were also sent to Cuba for their treatment, and many Venezuelan students study in Cuban medical schools.

The housing programmes include Missions Avispa and Habitat, which aim to increase the availability of affordable housing. The following are examples of the numerous social programmes – Mission Vuelvan Caras [k] directed at the unemployed, Mission Identidad for registering the electorate, Mission Zamora looking after the affairs of peasants, Mission Guaicaipuro for the indigenous people and Mission Piar for the mining communities.

During the lockout of 2002, the government introduced the ‘Mercal’ programme in which the army bought basic foodstuffs directly from the rural producers and sold them at low prices in the poor areas. The ‘Mercal’ was very popular and successful, and has since become permanent.

The ‘missions’ represent an enormous investment in the marginalized population who were living in poverty. In 1999 when Chávez first came to power, the poverty rate was 42.8%, and this had dropped to 37.9% in 2005 (23). The definition of poverty is based on cash earnings and does not take into account the improvement in the quality of life of the poor in Venezuela. For example, 54% of the population receive free healthcare through Mission Barrio Adentro, 47% buy subsidised food through the ‘Mercal’ programme, and the educational ‘missions’ offer free education.

The level of unemployment was 50% in 1998 (7) compared to 7.9% in April 2008 (27). Currently, the minimum salary in Venezuela of $286 per month is the highest in Latin America. Inflation was 81% in 1989 compared to 21.9% in 2008.

In order to achieve a truly independent economy, it is important for Venezuela to become self-sufficient for all its necessities, and hence the ‘endogenous development’[m] programme was introduced. An important component of this strategy is micro-credit [n]. The Bank of Development for Women (BANMUJER) is an example and it has awarded 42,000 micro-credits so far (28). In 2006, the non-oil industry had increased more then the oil industry (29).

To support industrialisation in general, it is necessary to improve the infrastructures. Amongst the infrastructural works being carried out are expansion programmes of the metros, motorways and ports, an ambitious railway construction programme, constructions of bridges, hospitals, schools, housing and new football and baseball stadiums.

The results of Informe Latinobarómetro 2007 (30) confirmed the success of these social programmes. 70% of Venezuelans believe that the government is concerned with the wellbeing of the people, 77% have confidence in the democracy of their country, and 55% think that the distribution of wealth is just (compared to the average of 21%) – the highest figures amongst all the Latin American countries. The levels of satisfaction of the current economic situation, healthcare and education were 52% (a rise from 43% from last year), 64% and 74% respectively – rates ranking amongst the highest in Latin America.

Apart from the social programmes, Chávez also intends to pay off Venezuela’s foreign debts earlier in order to attain economic freedom. The total public debt had fallen from 47.7% of GDP during the economic crisis of 2002-2003, to 23.8% of GDP in 2006, with total interest payment of only 2.1% of GDP. Venezuela has accumulated foreign exchange reserves of as high as $45 billion in 2006, while its oil income was $28.9 billion in the same year (29). In the face of an unanticipated decline in oil prices, the government can draw on these reserves before having to increase its borrowing.

Venezuela’s oil policies are closely linked to its foreign policy, and Chávez has established his priorities – reduce Venezuela’s dependence on the USA, develop an alternative socialist economic system (to neoliberalism), and unite South America. Once again, Chávez employs oil diplomacy in his attempts to achieve them.

A principal way of breaking the hegemony of the USA is diversification of Venezuela’s international relations in an effort to promote a mulitpolar world, a corrective for the current ‘unipolar world’. Recently the president of the Commission of Energy and Mines, Angel Rodríguez, stated that ‘the oil policies of the Bolivarian government is multipolar and is neither subordinate to North American interests nor to those of large transnational companies’. Venezuela has signed agreement in the energy sector with China, India, Indonesia, Canada and various EU, Latin American and Caribbean countries. Eleven companies of different nationalities are currently operating in the Orinoco oil belt, and the majority are state-owned. Venezuela foresees the involvement of a further 50 companies in the future, 32 of which are state-owned companies (31).

Apart from joint ventures in the energy sector, Venezuela also has other commercial agreements, eg. it signed contracts for construction of a fleet of tankers with China and Argentina, bought weapons from Russia & Spain, etc. The latest important products of such joint ventures were the ‘Bolivarian computers’[o] which run on the open-source Linux operating system instead of Microsoft. They are manufactured in Venezuela with Chinese technology (32).

The relationship with the energy-hungry, up and coming economic powers such as China & India is an important leap in the diversification strategy and the reduction of Venezuela’s economic and technological dependence on the USA. Furthermore, it may need cheap consumer products from these countries. In the last 2 years,Venezuelan oil export to the USA has dropped by 8.2% (33), while that to China hasrisen from 150,000 to 120,000 barrels a day in 2003. Chávez is expecting this to increase to 1 million by 2012 (34).

Chávez is against the Free Trade Area of the America (FTAA) agreement proposed by the USA. He believes it is another form of globalisation and neoliberalism that seek to undermine the sovereignty and democracy by reinforcing the power of corporations, and that privatisation would only worsen the poverty level within the hemisphere and would neither benefit Venezuela and Latin America, nor any of the Third World countries. Through skilful oil diplomacy, Chávez convinced most of the South American countries of his convictions and prevented the any agreement on FTAA so far (35). Instead, Chávez proposed the ‘Bolivarian Alternative for the Americas’ (ALBA – ‘Alternativa Bolivariana para las Américas’), an agreement which differs from FTAA in that it advocates the formation of a socially focussed commercial bloc, which allows the fluid exchange of goods and services in a manner that would bypass the international banking systems and corporate interests. In fact, ALBA distinctly excludes the participation of the World Bank and other international financial institutions. For example, Venezuela sends oil under preferential rates to Cuba in exchange for the services of 20,000 Cuban doctors and teachers currently working in the healthcare and educational ‘missions’. It also has similar agreements with Argentina where it provides oil in exchange for cattle, and with Uruguay, Brazil, Bolivia, the Caribbean, Portugal and even London. Thus, Chávez challenges the USA and the large banks through control of the energy sector and introducing measures with significant socioeconomic contents. Another step that has considerably reduced the influence of the International Monetary Fund (IMF) and therefore that of the USA, is Venezuela’s repayment of Argentina and Ecuador’s foreign debts.

Chávez has astutely used oil as a means of forging alliances within South America. He established regional initiatives such as Petrosur, PetroCaribe and is currently in the process of negotiating the formation of Petrandina. Petrosur is an alliance of the state-owned energy companies of Venezuela, Brazil, Argentina and Uruguay. It coordinates oil distribution, exploration and processing, and encourages construction of large-scale infrastructures such as pipelines and refineries. Petrosur would supply oil to various countries under preferential financial terms, and the profits would be channelled into social programmes.

Venezuela joined the Mercosur in 2004 through which Chávez hopes to further deepen ties with South American countries. Commercial agreements have already been signed with the majority of these countries [p].

Another project proposed by Chávez is the creation of Bancosur [q] as an alternative financial institution to the IMF and World Bank. This regional bank aims to free those heavily indebted South American countries and their dependence on large financial institutions which serve US interests. It would provide loans at lower rates and without demanding any neoliberal conditions. In the long run, Chávez also aspires to develop a common monetary unit.

Other initiatives Chávez has promoted in his attempts to integrate Latin America include: Telesur (launched in July 2005)[r], Unasur [s], Petroamérica [t] and a South American Defence Council [u].

In his fight against neoliberalism and with the aim of demonstrating the benefits of a commercial system that places emphasis on social justice, he has taken a step further by extending oil diplomacy to the poor communities in the USA. Venezuela provided help to the victims of Hurricane Katrina via CITGO [v], which is currently selling oil at below market prices to the disadvantaged. Besides proclaiming solidarity with the minority groups, this is also improves his political standing internationally.

Conclusion
Without a shadow of doubt, the additional funds derived from oil wealth as a result of his oil policy has allowed Chávez to redistribute the country’s wealth in the form of social programmes in the short and medium terms. As a result, he has consolidated the staunch support of the majority who has confidence in his reforms. However, the sustainability of this social evolution in the longer term will depend on achieving Venezuela’s economic sovereignty and independence, which in turn will require the unity of purpose and will of the governing party.

The key to ‘Chavismo’ is Hugo Chávez, its charismatic leader, and for the large part, the ‘Bolivarian revolution’ is focussed on his personality. Maintaining total unity within the party could well prove to be the Achilles heel because as is obvious in the PSUV elections [w](36), there are many types of ‘chavistas’ who each has his own motives. In order to safeguard the survival of this ‘revolution’, the party will have to embrace his ideals completely so that it will continue even when Chávez is no longer in power. This could be something that is difficult to achieve.

However, the most dangerous obstacle is US retaliation against this gradual but definite erosion of its political and economical control over South America, under the leadership and strong influence of Chávez. Since the declaration of the Monroe Doctrine in 1923 [x], the USA has always treated Latin America as its own backyard. The economic hegemony of the USA can be viewed as imperialism of the modern era. This loss represents an immense threat to the empire, and therefore the USA will defend its political and economic control of that region at all costs. Within the last 6 years, all the South American countries apart from Colombia, have elected leftist governments – the ‘pink tide’ sweeping across the continent. As such the time has never been as ripe as now in the entire history of South America to liberate itself from the jaws of the USA. This could only be achieved through international diplomacy backed solidly by oil diplomacy. Should Chávez manage to achieve a true political and economic independence from the USA such as the formation of a united South America, it could signal the beginning of the end of the US empire.

These aspirations would have been only a wish list if it were not for Venezuela’s oil riches which has significantly increased their viability. Chávez has become an actor to be reckoned with in the international political stage, at a level never before seen in all the previous leftist and radical populist governments of Latin America (37). As Paul Michael Wihbey, president of GWEST in Washington, and Strategic Fellow of a Jerusalem-based think tank group commented, ‘Chávez is playing treaty chess whereas Cuba’s Fidel Castro played chequers’(38).


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