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.
 At this time there was a need for strong leaders, who traditionally came from the landed farmers, or caudillos. Caudillos ruled the new nation for the next century, through conservative and then more liberal oligarchies.
Primative production of oil began in the Venezuelan Andes in 1879 by the Compania Petrolera del Tachira. These efforts were extremely labor intensive and did not flourish.

However, in 1914 the Mene Grande oil field was discovered under the presidency/dictatorship of Juan Vincente Gomez. Gomez ruled from 1908-1935 through elections as well as repression and torture to stay in power. The new oil generated revenue was used by Gomez to pay of the foreign debt and to undertake public works. A new urban middle class developed in association with the oil industry, but the majority of citizens saw little change in their day to day life besides inflation, increased imports and a decreased interest in the development of domestic agriculture, which had been previously dominated by coffee production (81). There was no increase in investments in public health or education, and employment and wages did not increase in this period. Tarver and Frederick claim the two major beneficiaries of the new revenue was President Gomez and his friends, especially the military and his native region of Tachira, leading his tenure to be called a "petro-dictatorship" (80). By 1928 Venezuela was producing 100 million barrels of oil a year (up from 37 million barrels/year in 1926), more than any county in the world (15).

After WWI, the Venezuelan economy shifted definitively from its traditional agricultural base (coffee, cacao and cattle hides) to petroleum production and export (82). Modernization took off with the death of President Gomez in 1935 and during WWII, almost all the oil used by Great Britian was imported from Venezuela (88).

In 1948 Venezuela's first democratically elected government was overthrown by a military coup. A dubious election in 1952 was won by Marcos Perez Jimenez, who quickly re-wrote the constitution to give the president more power than ever before (95). Petroleum revenues incentivized rampant corruption by the regime and there was little improvement in health care or education during this period. One important aspect of the regime was its anti-communist tendencies, which were welcomed by the United States. Foreign oil companies had favored dealings with the Venezuelan government based on its support of anti-communist policies.

The miliary withdrew from politics in 1958 with the overthrow of Perez Jimenez. Romulo Betancourt was elected president, inheriting a Treasury that had been emptied by the dictatorship's corruption and large public work expenditures, many in the oil industry (102). Unemployment was also high. Betancourt initiated a plan based on rentism (defined by Tarver and Frederick as the idea that oil wealth is transitory and should be exploited with goal to derive maximum future benefits). The new government embraced a policy of not allowing new oil concessions and Betancourt also founded the Corporacion Venezolana del Petroleo (CVP) to oversee the national petroleum industry. Please see later blog about Mining Minister Juan Pablo Perez Alfonso's role in creating OPEC. The mood in the new government at this time echoed the discontent that was being felt in the oil producting countries in other parts of the world, as these nations sought to derive the maximum benefit out of their resources, instead of having all revenue go to foreign oil companies.

Betancourt handed over power to Raul Leoni in 1964, which was a huge accomplishment in a country that was beset by coups and power struggles (115). Leoni instituted major changes in the oil industry's policies allowing:

• the Venezuelan government a greater participatory role in the fiscal process that regulated the industry
• the CVP the responsibility of supplying 1/3 of the national oil market
• reforms of the Law of Hydro-carbons incorporating a legal role for contratos de servicio as a substitute for concessions with the aim that foreign oil companies would train Venezuelan oil workers so that the maximum benefit of the oil industry could eventually go to Venezuela (118).

Dr. Rafael Caldera was elected in 1969, and in 1971 passed the Hydrocarbon Reversion Law, which declared that all foreign owned assets became property of the state when concessions ran out. The measure backfired as IOCs began to allow their equipment to fall into disrepair as the concession's end neared (120).

In 1974 Carlos Andres Perez was elected president and he nationalized the oil and iron industries in 1976. At the time there were 19 oil companies working in Venezuela, 16 were foriegn owned and and 3 Venezuelan (123). The nationalization agreement gave $1.16 billion in compensation to the foriegn companies and also authorized the Venezuelan government to enter into contracts with those same companies for technical assistence and equipment (124). The CVP that was created by Betancourt in 1960 was transformed into Petroleos de Venezuela (PdVSA) which had the power to coordinate, program and control the activities of the newly nationalized oil industry. By 1980, 70% of the national revenue and 26% of GDP was linked to oil production and export.

Perez now turned his attention to improving the distribution of oil revenued and controlling the inflation that they were causing. He created Fondo de Inversiones de Venezuela with the aim to channel 35-50% of new income into loans to Latin American countries (125). In 1974 the Fondo also lent $850 million to the International Development Bank, The International Monetary Fund and the World Bank. (Question SG: why then does Venezuela still have a high foriegn debt at this time?) Luis Herrara Campins was elected in 1978 when the Iranian hostage crisis had spiked the price of oil to $32/barrel.

Looking back at this history, it becomes clear that by the 1980s corruption was an integral part of the political process. Both Carlos Andres Perez and Herrera Campins were continually accused of corruption, and the populace began to feel disassociated from and betrayed by their leaders. This distrust of traditional political class would help form the base of Hugo Chavez Frias' support of the people through his populist policies (141).

Chavez won the presidency in 1998 on a platform of ending corruption and distributing the nation's resources more fairly.
In order to further the plans of his Movimiento Quinta Republica, Chavez had to gain control of the petroleum industry, whose executives were nerviously watching his socialist tendencies. In February of 2002 he appointed a new board of directors to the PdVSA, an action that was opposed both by oil executives and by the trade unions. 500,000 people took to the streets On April 11, 2002 in protest and Chavez shut down the media so that the violence of the clashes between the demonstrators and the National Guardsmen would not become public. More than 100 people were injured and 5 were killed in the protests (152).

A general strike caused by dissatisfaction in the Chavez administration was begun in early December of 2002 and the petroleum industry joined in on December 4, causing the Venezuelan economy to begin to shut down. Fuel shortages began to occur, with daily losses averaging about 2.8 million barrels a day (153). In May of 2003 the OAS helped broker a deal to end the crisis. Afterwards, Chavez began to use oil revenues for misiones whose goals are to eradicate illiteracy and poverty in Venezuela, with the majority forming part of a program of medicine and education in return for oil that has been set up with Cuba (154). Misiones are increased as oil revenues climb. The opposition sees these policies as ill-disguised propaganda for socialism.

During his presidency, Chavez has not been able to diversify Venezuela's economy and oil remains its #1 resource. Due to this dependency, Chavez follows a policy in OPEC of constantly calling for higher prices and lower quotas, while he uses the revenues to garner political support at home. He has also explored selling Citgo's, the state owned oil company's, assets (156). All revenue goes to short term plans to maintain popularity, and real development takes time. Opponents wonder if the country's oil revenues will be able to maintain long term social development.