The Oil Industry in Venezuela and How International Politics Affects It

Long before greedy corporations dominated the oil industry, the indigenous people of Venezuela were using the natural resource for medicinal and construction purposes. Around the turn of the 15th century, Spanish explorers visiting the coast of Venezuela observed this and introduced the various uses to Europe. It was not until the early 20th century, however, that the first oil well was drilled in Venezuela and oil became a major export product. Prior to that, agriculture exports dominated the economy. As the interest in the fossil fuel grew, so did the involvement of international politics, leading to the formation of Organization of the Petroleum Exporting Countries, or simply OPEC, in the 1960s (Hellinger). Anticipating its 172nd meeting in 2017, this intergovernmental configuration continues to boast communication, cooperation, and planning for a sustainable future. On the domestic front, the state-owned company Petróleos de Venezuela (PDVSA) came into being during the nationalization of oil and experienced a change of command during former president Hugo Chávez’s re-nationalization of the industry. As of 2016, Venezuela has the largest reserve of oil in the world and is ranked eighth in oil exports globally (Index Mundi). Reflecting on historical and current events, the close relationship between politics and oil is shown to have manifested itself through Venezuela’s nationalization of the oil industry.

At the time that the first oil well was drilled, Venezuela had few resources with which to harness the recent gush of oil and foreign oil corporations flocked to Venezuela. Despite the unequally large proportion of revenue which was gobbled up by the oil corporations, these oil exports created a tidal wave of economic growth and brought Venezuela to the international political scene. Due to the oil boom, agricultural exports dwindled and industrialization decelerated; this near total dependence on oil, known as the “Dutch Disease,” would prove to be highly disadvantageous for the economy. During this time, the growing middle class was pressuring for a shift towards electoral democracy. As the Second World War was coming to a close in Europe, Venezuela was undergoing a reorganization of their oil industry, which focused on dividing the profits between Venezuela and the presiding oil corporations equally. Throughout the following decade, it became clear that the combined supply of oil from Venezuela and the oil-rich nations in the Middle East would be severely detrimental to oil prices if action was not immediately taken. Thusly, Perez Alfonzo and other Venezuelan diplomats met with officials from Iraq, Iran, Kuwait, and Saudi Arabia to draft OPEC, an international petroleum organization which has drafted more members since its 1960 establishment (Wilpert).

The year of the oil crisis in 1973 marks the beginning entanglement of oil with politics on an international level. Instead of suffering from the Middle East oil embargo, Venezuela thrived economically. This significantly bolstered the ongoing attempt to nationalize the oil industry, a process which lasted almost 20 years in its entirety (Parra 175). Its culmination occurred in 1976, when Venezuela created the state holding company PDVSA. At this time, the president sought to transform Venezuela into an industrial supremacy and heavily borrowed against future earnings. As a result of these poor fiscal decisions, the Venezuelan economy crashed, allowing for Hugo Chávez, who had no ties to a political party, to insert himself into the political sphere. The charismatic candidate’s glorification of Simón Bolívar sparked a sense of nationalism and Chávez was looked up to by the lower classes. This, coupled with electoral promises to end poverty and social exclusion, swayed the majority; all of which led to his 1998 election (Hellinger).

During his first years of presidency, Chávez rewrote the constitution; reforming the oil policies and strengthening the role of OPEC. Understanding that he would need the corporation of fellow oil producing nations, Chávez urged leaders of OPEC and non-OPEC countries alike to maintain within the production quotas. This posed an issue between PDVSA and Chávez however, given that the former had been continually disregarding and overstepping OPEC quotas (Wilpert). The struggle between the two entities led to a military coup temporarily removing Chávez from office. A mere three days later, Chávez was reinstated and the turmoil with PDVSA continued, entailing a nationwide strike and attacks on the leaders of the opposition. The chaos came to a pinnacle when the oil minister was granted the power to impose executive action over the state holding company. One year after the conflict with PDVSA initiated, the government effectively seized the reins and the managers involved with the strike were replaced with members of the government’s Ministry of Energy and Mines. Despite this upheaval, Chávez was able to patch up internal divide and win a reelection. He succeeded in this by demonizing the motives of pre-government-takeover PDVSA and exaggerating his interest in the demands of the lower class (Wiseman 146).

One benefit from Chávez imposing authoritative control over PDVSA was the reinforcement of OPEC and the stability of oil prices. Additionally, in switching the oil revenue collection from taxation to royalty payments, the efficiency of PDVSA was heightened. On the other hand, with government at the forefront of PDVSA, Venezuela became more bureaucratic than previously and the majority of jobs were pursued in the governmental sector. Not only did this limit citizens in their ability to choose from a variety of occupations but also it stunted creativity in terms of establishing new businesses (Wilpert). Moreover, by tying administration with corporation, corruption in both spheres deepened.

Issues stemming from dependency on oil as an export product are worsened from nationalizing the commodity. Believing to have more revenue from oil exports than was actually the case, the government spent frivolously throughout the years, leading to even more debt than previously. Additionally, the lack of transparency in the treasury has resulted in a deterioration of social programs. Whereas the oil revenues were supposed to have been set aside for health and education institutions, corrupted social programs merely padded the pockets of the presiding officers (Coronel). At one point, the Venezuelan minister of energy even attempted to use PDVSA as a political platform from which to endorse Chávez, practically making the support of the president a stipulation for the workers’ jobs (BBC News). Although Hugo Chávez has since passed away and new leadership has taken over, the economic albatross continues to linger. Citizens are impassioned about the state of their economy; this sentiment was reflected in Venezuela’s last election in which the current president, Nicolás Maduro, was staggeringly opposed (Heath). Negative effects from the nationalization of oil is not contained to politics alone, however. Economic distress from the aforementioned “Dutch Disease” has placed Venezuela behind its Latin American counterparts in terms of industrial, agrarian, and humanitarian realms.

Given the aforementioned chronicle of events, it is evident that Venezuela has a long and complicated history with their crude oil reserves. Before the oil industry was nationalized, the country had a functioning democracy and the highest per-capita income on the continent. Now poverty and political instability appear on the headlines of nearly every news article regarding the country. Ironically, it was the affliction of these two issues from which Chávez promised to deliver Venezuela with his re-nationalization of oil. Although nationalization suggests an interest in the nation as a whole, that is clearly not a guarantee; the wealth from oil creates inequality and when such inequality seeps into the government, the very nature of democracy is opposed. OPEC co-founder Perez Alfonzo foreshadowed this downfall in the 70s with his famous quote, “Ten years from now, 20 years from now, you will see. Oil will bring us ruin. Oil is the devil’s excrement” (Useem). This prophetic sentiment echoes through the severe hyperinflation projected in 2017: a whopping 1,600 percent. In efforts to alleviate this, the Venezuelan government is creating six new bills which range from a 500 to 20,000 bolivar note. To put the enormity of this undertaking into perspective, the highest bolivar in circulation currently is the 100 bolivar note (Romo).

Although the natural resource is crucial to Venezuela’s identity, Venezuela must be pulled out of the rut in which the economy is currently stuck. In order to do so, the government would need to slow spending - almost bring it to a full stop - and use the money which they have to start diversifying the economy. The oil business alone cannot sustain the economy and continuing to depend on it as such will only bring Venezuela further ruin. Perhaps a reverse-nationalization of the oil industry would be beneficial; were foreign oil companies to assume temporary control over a portion of Venezuela’s industry, the economy might be able to stand on its own again.