Hugo Chávez, Venezuela and the World

Since 1999, Hugo Chávez is the 56^th and current president of Venezuela. He follows a political ideology inspired by Bolivarianism and Socialism (but adapted to the 21 Century). As part of a social project known as “ The Bolivian Revolution,”, Chávez has focused on implementing social reforms that favor the poor people. Additionally, he has enacted a new constitution, has nationalized several key industries, secured government control over oil projects in the Orinoco oil belt and caused Venezuela to withdraw from the International Monetary Fund.

Born from a Venezuelan working class family, Chávez became a career military officer. In 1980, he founded the secretive Revolutionary Movement-200 in order to overthrow the government at the time. According to Chávez, the government was corrupt, undemocratic and only represented the interests of the elites. In 1992, Chávez led an unsuccessful military coup against the president Carlos Andrés Pérez, for which he was imprisoned for two years.

After he was released from prison, he founded the political party named the Fifth Republic Movement, and was elected president of Venezuela in 1998. He enacted a new constitution, which altered the structure of Venezuelan government, and allowed him to be reelected. However, opposition movements started to arise in Venezuela because of the nationalization of various industries and the firing of the management of the state-owned oil company. This policies angered the upper and middle class resulting in an unsuccessful military coup in 2001 and a recall referendum in 2003. Although Chávez was briefly ousted in 2002, he was again elected president in 2003.

Chávez blamed the administration of President George W. Bush for the incident, and his rhetoric became steadily stronger. Chávez openly criticizes capitalism and, in particular, neoliberalism. Additionally, Chávez has been in strong opposition to the United States’ foreign policy. In a speech to the United Nations in September 2006, Chávez, speaking the day after Bush had addressed the General Assembly, declared that the room stank of sulphur because “the devil” had been there. Furthermore, Chávez has had diplomatic problems with other Western nations like Spain, whose bilateral relations were disturbed after the King of Spain publicly told Hugo Chávez to “shut up” when Chávez repeatedly called the former Spanish prime minister a “fascist.”

Chávez within Latin America

He has aligned himself with the socialist governments of Fidel Castro (Cuba), Evo Morales (Bolvia) and Rafael Correa (Ecuador). Chávez is trying to reinforce and expand socialist governments in the region and, by criticizing Western “imperialist policies” he is making himself the hub of anti-American sentiment in Latin America.

In 2009, together with Argentina, Brazil and Bolivia, Chávez incorporated a regional bank to function as a development lender called Bank of the South, based in Caracas, in an attempt to distance Latin American countries from international banks – such as the IMF – and give these countries more financial freedom.

Nonetheless, Chávez has encountered difficulties not only with the United States but also with some Latin American governments. For example, the relationship between Venezuela and Colombia has suffered tremendous damages because of Chavez “secret” support to Colombia’s largest revel group (FARC).

Chávez and China

In April 2010, Chávez said that China had agreed to extend $20 billion in loans to Venezuela. This measure tries to deepen ties between Venezuela, which needs investment in the oil sector, and china, which seeks to secure oil supplies. Furthermore according to the article of the New York Times:

“The announcement of the loans followed other financing agreements with China that softened a sharp economic downturn in Venezuela, including a $12 billion bilateral investment fund. China’s ties with Venezuela have grown increasingly warm in recent years, marked by rising Venezuelan oil exports to China, the Chinese launching of a satellite for Venezuela and the sale of Chinese military aircraft to Venezuela”

If the loans materialize, they could give Mr. Chávez a much-needed cash infusion. Some financial analysts said that Venezuela could soon face a cash crunch as it grapples with low oil revenues and a dearth of foreign investment. Venezuela, faced with a slump in oil production, has recently been seeking to reach similar deals with energy companies from Russia, India and Spain, as well as the Chevron Corporation from the United States”

How rents on concessions developed in Venezuela

The introduction and first chapter of El petroleo en el pensamiento economico venezolano by Asdrubal Baptista and Bernard Mommer (Ediciones IESA 1997) give a good historical background to how oil rents began in Venezuela.  In the 1930s, there were two very different economies developing in the country: one linked to the traditional agricultural activities of the region and the other was found in the foreign dominated petroleum industry.  The question that the State needed to address was how to handle the oil concessions.

Europe's social revolution was defined by the historical pressure to reduce or eliminate the profits landowners received from their monopoly on land ownership and it's development.

SAGD and JIVE: The Feasibility of Future Production Techniques of Venezuela's Heavy and Sour Oil Fields.

As I mentioned in an earlier post, Venezuelan oil reserves, while vast, are very heavy and sour. This type of oil is generally more expensive to both extract and refine, cutting into the countries overall profit margin. This presents a number of problems for the country including difficulties finding domestic impetus to fund necessary upkeep and repairs, problems securing FDI to further advance production, and challenges reaching a global market in general, since transportation to growing economies means higher transportation costs, further eating in to profit.

Venezuela's contribution to OPEC: Juan Pablo Perez Alfonso

Chapter 25 of Daniel Yergin's The Prize (New York, 1992) describes the origins of OPEC, in which Venezuela was heavily involved.  According to Yergin, talk about beginning a society of oil-exporting states began in the 1950s, and the Venezuelan Minister of Mines and Hydrocarbons, Juan Pablo Perez Alfonso, had a "catalystic role" in making the organization a reality (509).

Perez Alfonso left Venezuela after being briefly imprisoned after the 1948 coup.  He and his family moved to Washington DC, where he spent much of his time studying the American oil industry in the Library of Congress.  He became very interested in the structure and policies of the Texas Railroad Commission (TRC), an organization that regulated Texan oil production to match changes in demand.  Many of his ideas about OPEC were inspired by the TRC (512).

Brief History of the Role of Oil in Venezuela

This post summarizes the events and ideas laid out in The History of Venezuela by Michael Tarver and Julia C. Frederick (Palgrave McMillan: 2006). Page numbers have been given where appropriate.

When looking at Venezuela and its oil production today, it's important to have some historical knowledge of oil's role in the country's political and economic development. Venezuela currently has more proven petroleum reserves than any other Latin American country and oil revenues have been used for public work projects and loans to sympathetic nations as well as the Bretton Woods institutions. However, a percentage of the revenue has disappeared into the bank accounts of those well connected to the oil industry and petroleum has not brought an increase in the standard of living for the average Venezuelan citizen. A look back will help better understand the country's current situation.

Colonized by the Spanish in the early 1500s, by 1830 Venezuela had managed to liberate itself from the Spanish crown, initially as part of Gran Colombia (comprised of what is now Colombia, Ecuador and Venezuela) and finally breaking away as an independent nation.

Extravagant Claims dogged by economic reality.

Hugo Chavez's recently expressed desire to sell 1 million barrels of oil a day to China may be best described as a pipe dream (no pun intended) as he and his government run into capacity building problems due to a confused national strategy within the oil sector. In a country where actual production has slipped from 3.3 million barrels a day to 2.3 over the past decade, this ambition seems to be wildly hopeful and suggests a disconnect between Venezuela's leadership and the realities on the ground.

A recent article in the Wall Street Journal has outlined a number of difficulties Venezuela will face in trying to reach Chavez's bold ambitions. First the country has failed to secure investments which would allow it to increase production in the future, and has been suffering from maintenance issues and industrial accidents which threaten to further decrease production levels as soon as next month.

Just in the last few weeks, PdVSA, as the state oil monopoly is known, has had to tackle fires and technical problems at a number of plants, including its largest refinery Amuay, which produces around 640,000 barrels a day.

Second, shipping oil to China presents a whole new set of issues for Venezuela. Venezuelan oil is notoriously expensive to refine, as it is extra heavy and very sour. Pair this with the added transport cost of shipping to a trading partner as far away as East Asia, add in the rumors that China has struck a discounted pricing structure deal with Chavez, and it is hard to imagine how any increase in shipments could be justified from an economic perspective, even if price of a global barrel stays high.

"...experts question the practicality of making expensive long-range oil shipments to China, which sources more than 90% of its oil from suppliers closer to home, mainly the Middle East, Africa and Russia. Likewise, Venezuela's natural and traditional market, the U.S., is just on the other side the Caribbean."

The relationship has been described as problematic, but indeed it may be more than that. Chavez's desperation to cultivate relationships with powers that he sees as being possible counters to American Hegemony mey be blurring his vision.

"U.S. Embassy cables from February 2010, released by Wikileaks, cited an unnamed PdVSA official saying China was paying as little as $5 per barrel of oil and then in turn selling it at a "sizable" profit."

If this is even partially true it uncovers some fairly foolish bahavior on Chavez's part and serves to discount much of his rhetoric about the relationship between America and the developing countries of the world. His imagined global position may indeed be self fulfilling.

Petróleos de Venezuela Sociedad Anónima (PDVSA)

Petroleos de Venezuela Sociedad Anonima (“PDVSA”) is a State-owned company dedicated to the exploration, production, refining, marketing and transportation of Venezuelan oil. PDVSA was created by Decree No. 1.123, published in the Official Gazette (Extraordinary) No. 1.170, on August 30, 1975 as a result of the nationalization of the oil industry in 1975. Since that time, PDVSA has dominated the oil industry of Venezuela.

PDVSA is the world’s fifth largest oil exporter and is third in the ranking of the 50 oil companies in the world – exceeded only by Aramco (Saudi Arabia State-owned company) and ExxonMobil of the United States. Among PDVSA’s greatest assets are international Citgo refineries in the United States (of which owns 100%), the German Ruhr Oil (of which owns 50%), and Nynas in Sweden where it shares equal ownership with an oil company in Finland.

The Bolivarian Republic of Venezuela owns all the shares of PDVSA, which depends upon the Ministry of Popular Power for Energy and Petroleum. The 1999 Constitution requires PDVSA to maintain a monopoly of the Venezuelan oil, and PDVSA’s shares cannot be sold to individuals. The company, however, can partner with and provide concessions for the provision of any service related to their products pursuant to Article 5 of the Organic Law Reserving to the State the Industry and Commerce of Hydrocarbons, published in the Official Gazette (Extraordinary) No. 1.769, on August 29, 1975:

“The State shall carry out the activities indicated in Article 1 of this Law directly through the National Executive or through entities owned by it, being able to enter into the operating agreements necessary for the better performance of its functions, without these arrangements affecting in any case the very essence of the activities assigned. In special cases and when convenient to the public interest, the National Executive or the aforesaid entities may, in the exercise of any of the aforementioned activities, enter into association agreements with private entities, with a participation such that guarantees the control by the State and with a determined duration. In order to enter into such agreements, the prior authorization of the Chambers in a joint session shall be required, under the conditions [the Chambers] establish, once they have been duly informed by the National Executive of all relevant circumstances.”

Until 1999 , PDVSA (through its affiliates) had the monopoly of the oil industry in Venezuela. However, that same year, after the so-called “apertura petrolera”, other companies entered the Venezuelan market – such as Shell, BP and Texaco. These foreign companies were allowed to commercialize and sell petroleum products within certain limitations, such as a controlled pricing of their gasoline. This control continues independently of the international market prices. The local pricing is approximately .045 US dollars per liter of 91 and 95 octane gasoline. This is the least expensive gasoline in most if not all of the world.

In 2005 they stopped producing leaded gasoline so they would be in compliance with the international environmental rules.

According to the net income from sales that PDVSA reported in 2007, this company is the eighth largest in the world with a balance of $6,273 million US dollars (15% higher than in 2006). By comparison, Pemex of Mexico reported $4,287 million US dollars and EcoPetrol reported $2,800 US dollars for the same 2007 period.

PDVSA has the world’s third largest refining capacity with a production of 3.3 million barrels per day. PDVSA owns 24 refineries throughout the world, of which 18 are outside Venezuela and 6 in country. Refinador Paraquena in Falcon state (Venezuela) is the world’s largest refinery with a production capacity of 940,000 of crude every day. On its part, the refinery Puerto La Cruz has a production capacity of 200,000 barrels per day, and El Palito refinery has a capacity of 130,000 barrels per day.

Through Citgo, PDVSA owns eight refineries in the US. They are located at Houston, Texas, Illinois, New Jersey, Louisiana and Georgia. The production capacity of all the refineries in the US is approximately 1.12 million barrels per day. In Europe, the refining capacity is over 252,000 barrels per day and is produced by its affiliate Nynas in Nynasshamn (Sweden) and Antwerp (Belgium), as well as in the United Kingdom. Furthermore, approximately 608,000 barrels are refined every day at refineries in the Caribbean.

In May 2010, PDVSA purchased a 49% share of Refidomsa in the Dominican Republic for $133.4 million US dollars. In August 2009, PDVSA acquired 20% of the shares in the Canadian company Enbridge.

U.S Energy Information Administration Assessment of the Venezuelan Oil Industry.

In March of 2011 the U.S. Energy Information Administration issued an updated country analysis brief for the Venezuelan Oil industry. The brief goes into detail underlining some of the major events and trends that may shape the future of oil in the Venezuela and its place on the global market.

Some important aspects of the report are summarized as follows:

Venezuela has the largest proven oil reserves in Western Hemisphere and, in 2009, was the worlds 11 largest net oil exporter. While the country obviously benefits from such large amounts of oil, it has become increasingly difficult for Venezuela to bring it to market due to quality issues and limits to both its drilling technology and refining capabilities.

In the last year Venezuela has seen a drastic increase in proven oil reserves up to 211 billion barrels in 2011 from 99.4 billion barrels in 2010. However this increase has mostly been in the form of extra heavy sour crude which must be sent to specialized refineries to be made usable. The country also has had problems keeping up its production in general as many of its fields are very mature and require major investments to maintain current output. It is estimated that Petroleos de Venezuela S.A (PdVSA) must spend approximately 3 billion dollars a year in infrastructure adjustments and upgrades just to maintain current production levels.

In an attempt to preempt these issues, in the mid 90's Venezuela divided its largest extra heavy crude region of Orinoco into the management of four companies, all majority PdVSA owned, to convert the heavy crude to lighter sweeter crude. While the efforts have been consistently held back by maintenance and safety issues, Venezuela expects the project to yield an additional 2,000,000 bbl/d of oil production by 2014.

Venezuela's petroleum exports have dropped precipitously since the mid 90's partly because of the above mentioned problems, and partly because the United States has decreased its level of imports from the country in recent history. Venezuela has has been trying to diversify its trading partners and has more than tripled its annual exports to China since 1995, but limits in the refining process, in which refineries found only in the Western hemisphere are specially built to handle extra heavy Venezuelan crude, have created difficulties in getting quality oil to other parts of the world. The United States and the Caribbean still make up its largest export destination by far.

Important dates in the history of Venezuelan oil

I'm currently reading The History of Venezuelan Oil by H. Michael Tarver and Julia C. Frederick (2006) and it begins with a timeline of important dates in Venezuelan history. Since our group is just beginning to research Venezuela and we have little prior knowledge of the region, I thought it would be interesting to cherry pick the Tarver/Frederick timeline for important dates in the history of oil within the country. It will be interesting to later look back at these dates and see what we can add or subtract from the list, once we have a bit more research under our belts.

• 1914 - discovery of first oil field in Venezuela with the drilling of the Zumaque-1 oil well. The oil field was christened Mene Grande.


• 1918 - massive oil exploitation begins


• 1926 - oil becomes the #1 Venezuelan export (note: it would be interesting to look a history of where oil exports from Venezuela have gone over the years)


• 1948 - first democratically elected government in power, led by Romulo Gallegos. Overthrown by military coup in the same year. The miliary regime that followed was brutally led by Coronel Marcos Perez Jimenez (note from Daniel Yergin's The Prize (1992) is that oil production advanced rapidly during the years of the military regime (pg. 510)).


• 1958 - Perez Jimenez' dictatorship overthrown and the military has since withdrawn from Venezuelan politics and there has been relatively continuous civil democratic rule.


• 1973 - Venezuela benefits from oil boom as Bolivars begin to peak against the dollar.


• 1976 - The petroleum industry is nationalized


• 1983-4 - low oil prices cause cuts in state spending to be made


• 1989 - "Caracozo" in Caracas. 200 people are killed in rioting that protests government's austerity plans


• 2000 - Chavez elected to 6 year term following modifications to the constitution in 1999.


• 2002 - Chavez appoints a new board of directors to Petroleos de Venezuela (PDVSA) in an attempt to gain more control of the industry. The industry is opposed to the change and executives strike in April, supported by the trade unions. There are clashes between the strikers and the National Guardsmen in which 10 people are killed. Chavez shuts down the media to minimize coverage of the violence. The military demands that Chavez resign, which he does on April 12, but returns two days later. The strike by the opposition calling for his resignation cripples the oil industry and leads to fuel shortages in the country.


• 2003 - The strike ends in February with a deal brokered by the Organization of American States (OAS) and a framework is st for a referendum on Chavez' rule.


• 2004 - There is a class over the referendum and allegedly false signatures


• 2005 - Chavez continues to antagonize the United States as oil prices increase and the Bolivar is devalued, causing inflation (Dutch disease)

Venzuelan oil exports by country