History of Oil Production in Venezuela - Essay Example

History of Oil Production in Venezuela Introduction The history of Venezuelan oil production can be traced to the 1800s when Venezuela’s first oil company was established. However, for purposes of conciseness, this analysis will only focus on developments that occurred after the decade 1960. An analysis of oil production history indicates that the government played and continues to play a significant role in the sector thus leading to some significant setbacks. A history Prior to 1960, Venezuelan oil production was mostly done by the Royal Dutch Shell oil company and it was under the organization’s leadership that Venezuela’s oil entered the global market. This was possible due to the huge demand brought on by the First World War; the country participated in the provision of necessary resources. By the time the Second World War commenced, Venezuela had secured itself as a reliable oil supplier for its immediate neighbor, the United States. This was the point at which the two countries became trading partners and continued to establish that relationship based on Venezuela’s continual oil supply. A monumental event occurred in 1960 when Venezuela joined 4 nations in the Organization of Petroleum Exporting Companies (OPEC); this was also the same year that the international body was formed. Several other nations continued to follow suit later in that century with countries like Gabon joining as late as 1994. Venezuela’s goal for joining the body was to secure stable and just oil prices; this also happened to be the main objective for the other member states in the multilateral body. If the latter objective was achieved, it would ensure fair returns on resources invested in oil production within the country; consumers would also benefit via having an efficient and reliable supply of the resource. Within the same time frame, Venezuela also began to nationalize its oil resources by adopting a policy of no concessions (Guriev, Anton and Konstantin 308). The nationalization agenda really took shape in 1976 when President Carlos Perez decided to place all commercial control of hydrocarbon production under the government. He did this through the creation of one of the most relevant bodies in the country’s oil industry to date – PDVSA. The above acronyms represent the Spanish phrase for Oils of Venezuela, and these would be coordinated, planned and supervised by the body. That fateful year saw the production of oil reach 2.3 million barrels daily from the body; afterwards, these quantities would later increase (Guriev, Anton and Konstantin 320). In the subsequent decade after its formation, the organization began expanding to other areas of the globe such as the Caribbean, the United States and even Europe. In these locations, the company would buy refineries or consolidate with other organizations in order to take advantage of their resources and capabilities. Similar patterns were replicated in Nynas, which is located in Belgium and Ruhr Oel, which can be found in Germany. Perhaps the most significant decision made in this decade was the acquisition of Citgo in 1986; a petroleum company in the US. The organization had found a way of selling petroleum production to its closest and most beneficial trading partner through an internal firm. In modern times, Citgo has a presence in several parts of the US and accounts for as much as 20% of oil supply in the country (Hammond 353). Nationalization would soon be put to a test in the 1990s when the company encouraged foreign investment or exploration of areas in oil fields that were not operating. Organizations from around the world showed considerable interest, and they eventually made agreements with the country starting from 1993 and continuing on to 1996. The country enjoyed an increase of slightly more than a quarter barrels a day of oil production because of the billions worth of investment made. Two years after the last agreements between the country and its foreign investors, Venezuela sought to strengthen its national body by bringing together some of its three affiliates; it was hoped that revenue streams would be solidified if the three units worked towards similar goals. However, after the consolidation, PDVSA had three major departments -a services side, production and marketing the latter also encompassed its manufacturing function. In the late 1990s, Hugo Chaves was elected as president and would later prove to be one of the most influential forces in the country’s oil industry. He consolidated with leaders of OPEC nations one year after entering into office in order to strengthen his country’s position in the organization; he also wanted to improve oil prices through cooperation with Arabic nations. Members of OPEC declared in 2000 that they would be united in pursuing a fair and equitable pricing policy for themselves and their consumers. This would be achieved through the use of a price policy that was both competitive and stable; input from key consumer countries was welcomed (Monteiro, Luiz and Alexandre 59). Owing to the role that President Chavez played in revamping OPEC, the body became stronger and more influential in the oil industry. Their active involvement in price lobbying led to its doubling as Venezuela began enjoying as much as $20 for their oil resources. Notwithstanding, the above victory was overshadowed by some political developments; Chavez passed laws that would favor increases in oil revenue within the country. Venezuela created Hydrocarbon laws that necessitated increased taxes from oil producers thanks to a majority of his supporters in parliament. This new development sparked outrage among the opposition as well as oil companies thus causing them to organize a strike in 2001. Shortly after, a coup attempt to oust Chavez proceeded; this was unsuccessful but would prove to be one among several other coup attempts against the President (Alvares and James 56). Oil strikes took on a political turn in 2002 as some people affirmed that the President’s supporters were trying to attack members of the opposition participating in the strike. It did not help that some 17 people were killed and the media happened to be biased against President Chaves. The media repeatedly showed images of people being shot in the strike and placed the blame on the President; those developments gave his opponents fodder to replace him. In that same year, the country also suffered from another strike among PDVSA workers who were organized by their trade unions and had plenty of support from the opposition. The strike dragged on for months and led to substantial losses with barrel production dropping to only 100,000 barrels daily (Jilberto 44). This move eventually led to a decline in production to the point of importing gasoline from Brazil in order to meet the domestic gap that existed after the strike. The government tried to get a handle on the situation, but this was not an easy task owing to the political forces involved in the strike; eventually, some loyalists to the Chavez regime opted to get back to work. Through efforts by the Army and the few individuals who went back to work, oil production got to reasonable levels eight weeks after the effort began. The strike led to the biggest layoffs in the country’s history, with approximately forty thousand workers losing their jobs. Venezuela’s economy suffered tremendously from this setback with some analysts saying that about 6.5 billion dollars worth of revenue had been lost due to the interruption. Currently, the nation is still dealing with these loses because it lost a lot of skilled workers whose expertise has been impossible to replace (Jilberto 88). Regardless of the above political setbacks, President Chavez continued to revamp the oil industry in 2005 and the years after. He passed stringent policies for oil producers in the country such that royalties to the government would increase by 16% (Alvares and James 19). Additionally, the country is working on minimizing its reliance on the United Sates as a key oil market by establishing relationships with other nations. Chavez has attacked the United States for their dominant policies with trade partners and has even stated that it is not willing to be someone’s colony. Such ideas have explained why the country entered into partnerships with nations like Brazil, Argentina, and now China. Through the above developments and more, Venezuela currently has the 5th most significant oil reserves in the globe; further, these figures place it as the first in the West. Gas reserves reach about 148 trillion feet cubed while Crude is about 78 billion although the production capacity currently stands at 4 million barrels daily and 8.81 billion feet cubed of gas per day. Refining also takes place in the country with the country boasting of about 3.282 million barrels per day of petroleum being refined (Alvares and James 33). This is possible due to the numerous refineries owned by PDVSA in the country and outside; six refineries operate inside Venezuela while eight and nine refineries exist in the US and Europe respectively. 93% of all the oil products in the Latin American country go to the external market with the United States taking up the largest share followed by its other North American counterpart, Canada (Reynolds and Michael 6049). The government has several ambitious plans in place designed to expand its production capacity and to make the country less dependent on the United States. A number of obstacles prevent the country from reaching its potential as the country does not have an institutional climate that can facilitate this change. Analysts state that the government does not rely on technocracy within this sector; as if that is not enough, problems within PDVSA are yet to be resolved as the country has never reached its pre 2001 levels. The national organization lacks transparent financial processes thus impeding investors from working with it; this explains why oil is still being produced by many third parties on behalf of the national body (Jilberto 90). Conclusion Venezuela is a formidable force in the oil production sector as it has tremendous reserves and production capabilities that are capable of causing an upset in the global market. However, the nation has been marred by political turmoil not just in the social sphere but largely in the production of oil. Furthermore, while the government seems to be doing much to generate income for itself, this may not encourage external parties from garnering interest in the oil sector. Generally, the investment climate in Venezuela is not favorable to the growth and expansion of oil production, yet development is badly needed to ensure sustainability. Works Cited Alvares, Johannes and James Fiorito. Ethics of development in a global environment. Stanford: SUP, 2008. 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