Oil in Venezuela - Research Paper Example

?Oil in Venezuela Introduction Oil was initially being used for medicinal purposes, but when the Spanish arrived in Venezuela in the 16th century. They learnt from the indigenous people how to use the naturally occurring bitumen for caulking their ships and also treating their weapons. The first shipment of oil from Venezuela is actually documented to have been done in 1539. Despite the knowledge of oil for ages the, the first oil wells were not drilled up until 1910s. According to McBeth (2005) asserts that when Juan .V. Gomez took the reigns of power in 1908, he granted several concessions to explore, produce and refine oil. Most of these concessions were actually given to his closest allies, and they in turn passed them over to foreign oil companies that could develop them. From 1914 to 1917, more oil fields were discovered across the nation. By the end of 1918, petroleum had appeared for the very first time in Venezuelan export’s statistics at 21,194 metric tonnes (Martinez, 1979). After 20 years, Venezuela became the largest oil exporter in the whole world and second largest oil producer after the United States of America. This led to an influx of foreign investors. By 1929, with the nation being the second largest oil producer in the world. Currently, Venezuela is the fifth largest oil exporting nation in the world, with the largest reserves of both conventional oil in the western hemisphere and non-conventional oil. This fact is very immense importance to the understanding of Venezuela because it has shaped the country’s political, economical, cultural, and historical scenes (Wilpart, 2003). Venezuela has 77.2 billion barrels of proven conventional oil reserves, the largest in any state in the Western Hemisphere. Approximately 267 barrels of this might be producible at current prices utilising the current technology. Venezuela was the first country to make a move towards the establishment of the Oil Producing and Exporting Countries (OPEC). It approached Saudi Arabia, Kuwait, Iran, Gabon, and Libya in 1949, but OPEC was not set up until 1960. This was when the United States forced import quotas on the Persian and Venezuelan Gulf oil so as to support the Canadian and Mexican oil industries (Martinez, 1979). In 1973, OPEC wielded its first power with the 1973 oil embargo against Western Europe and the United States. Discussion Economy In Venezuela, there was dramatic development of the oil industry, and the oil sector commenced to dominate all other economic sectors in the country. On the other hand, agricultural production began to decline slowly. Agriculture accounted for about one third of the economic production in 1920. According to Yergin (1999) argues that this sudden change increases attention on oil and neglecting the agricultural sector causing the Venezuelan economy to suffer from a phenomenon referred by economists as the “Dutch disease”. The occurrence of this disease is manifested when a commodity brings substantial increase in income in one sector, resulting in strengthening of the currency which in turn harms exports of the other manufacturing sectors. This increased sectoral income has caused a distorted growth in services and other non-tradables, which can not be imported whilst discouraging the production of tradables, which are actually imported. The reason for this disparity is that, greater income dramatically raises the demand for imports because the domestic market production can not meet the production quickly enough. This raises the demand for services of which the domestic market has to supply because the services can not be easily imported as the tradables. When one looks at the extent to which there has been increased oil production and income, which was followed by a corresponding steady decrease in agricultural production, one can clearly observe the symptoms of Dutch disease in the Venezuelan economy. This resulted in a delay in industrialization. The other Dutch disease symptoms are evident in the constant devaluations of the currencies, and subsequent inflation which have been existing in the Venezuela’s economy since the oil boom of the late 70’s and the early 80’s (Martinez, 1979). Another effect of the increased oil revenues in the Venezuela’s economy has caused serious problems in the government’s fiscal policies. The new revenues resulted to an illusion that the income generated by the oil industry would be used to industrialize the country through massive infrastructure projects. What actually happened was that the quadrupled government income caused the government’s spending to quickly increase and even surpassed the new found revenues. So, when the oil’s income began to decline again, it was absolutely not easy for the government to reduce its spending as it had increased it. The result was that the government slowly went into deeper and deeper debt. According Lapper (2009) asserts that between 1970 and 1994, the foreign debt increased from 9 % to 53 % of the GNP. Whilst the oil prices and revenues declined, so did the per capita income and the Venezuelan economy as a whole, thereby increasing poverty. The government had ignored serious socio-economic problems such as health, education, agriculture, and the domestic industries causing the Venezuelan economy to fall behind other industrialized nations. Influence on the society Oil has transformed the cultural, political, and socio-economic landscapes. With regard to the influence to the society, corporate and class ambitions combined to shape many of the Venezuelan’s ideas on citizenship. The middle class Venezuelans embraced the oil industry from the beginning, highly anticipating that it would transform the country by the introduction of modern technology, breaking the landed elite’s stranglehold, and sparking economic development (Salas, 2009). Eventually, the Venezuelan employees of the oil industry found that their benefits, which included relatively higher salaries, were fuelled by loyalty to the oil companies. That loyalty often trumped allegiance to the nation. As a consequence, the British and North American petroleum companies that sought to maintain their stakes in Venezuela promoted the idea that their interests were synonymous with national development. They would typically set up oil camps; residential communities so as to house their employees, something which brought together the Venezuelan employees and others from Britain and America, and eventually with the Chinese, West Indian, as well as the Mexican migrants. Through the camps, not only did the companies offer housing, schooling, and leisure activities, but also an acculturation into a structured and corporate way of life. This practises helped to shape the heart and soul of the generations of Venezuelans whom the oil industry had provided an access to middle class lifestyle (Salas, 2009). According to Salas (2009, p.242) asserts that the oil camps became “social laboratories”, implanting new models social life, work life, consumerism, and citizenship. For example the company commissaries introduced, patterns, and brands of the supermarket type of shopping that had become hallmarks for the middle class lifestyle, whilst the foreign managers sought to inculcate the values of the company of corporate loyalty, appropriate use of leisure time, and an internalized work discipline. Although only a section of the Venezuelan labour force found employment in the oil sector, the centrality of the oil resulted in the projection of these innovations more widely throughout the nation, if only as the ideals to which all the Venezuelans might aspire. During the early development of oil in Venezuela, there was interplay between the oil industry and the environment, migration from the various regions of Venezuelan nation and the Caribbean to the oil fields. The oil companies began to encourage the decision of the American and European workers to bring their families to the oil zones, and an eventual shift towards the hiring of more Venezuelans into the skilled and professional positions. It was during their first few decades in the country that the companies followed a policy of ‘enlightened industrialism’ (Salas, 2009, p. 88). This is where they provided utilities and services to the communities where they operated from, in part to compensate for the disruption caused by their operations. The social effects of the dependence on oil can be viewed as relatively positive. The proceeds generated from oil industry has promoted the idea that one can actually do well in Venezuela provided that one has access to the country’s oil wealth. The result was that other than engaging in creative entrepreneurial activity, most of the Venezuelans allied themselves with the government, seeking either employment or contracts (Wilpart, 2003). On the positive side, Chavez spearheaded several beneficial social reforms to better the country and the people of Venezuela. The reform programs Chavez’s government initiated promised to utilize the country's oil revenue to reduce the spiraling rates of poverty, thus making him a hero for anti-globalization activists and also prompting a burgeoning interest in Venezuela. Consequently, he is strived to provide impoverished people with better education, healthcare, and decent employment opportunities. Politics The political situation in Venezuela is greatly influenced by the prices of oil. When the oil prices are high, there is an increase in the cash flow thus giving the state more opportunities to raise the social and political contributions. As a consequence, this leads to the creation of more support to the government. When the oil prices decline, as they were in the period of 2008 and 2009, there is a less room for spending. It is approximated that of the individuals employed in the formal economy, about 45% are employed through the government that is almost 50% of the total working population. Venezuelan oil economy and culture has left a mark on its politics. As a natural consequence, the clientalistic and magical nature of the state made the political system to become bureaucratic. Moreover, due to the country’s oil wealth, the political system has been turned into a pact democracy. The term “pact democracy” refers to a democracy which is held by together by an agreement among different elite groups. This kind of a true among the opposing powerful interests groups in the society, in order to maintain their privileges (Coronil, 1997). In Venezuela the truce took the form of the pact of ‘Punto fujo’. According to Noormohamed (2011) argues that it means that all the major parties were to be guaranteed access to power in proportion to the voting results. Even if one of the parties was victorious in the presidential and legislative elections, still it will be obliged to share the spoils of Venezuela’s economy among the other parties, more or less in the accordance with voting results. In this way, each of the main parties was guaranteed access to jobs, ministerial positions and contracts. So as to minimise the conflict, the CTV which was the main union federation was also divided among the parties. As a consequence, the communist and socialist parties were excluded from the pact completely. The pact of Punto fujo commenced falling apart once the oil rents started to decline in the mid 80s. It went ahead and a received a major blow when Hugo Chavez was elected the president in 1998. The pact nature of Venezuela’s democracy and degree of clientalism resembled the one party state socialist regimes, except that this one was governed by an alternating two party system. All the above fore goings sets the stage for the showing of how crucial the country’s conflict over oil is. The political forces are struggling over oil companies’ efficiency, outsourcing and subcontracting practises, internalization program, OPEC membership, and the special oil contracts. Venezuela first nationalised its oil industry in 1975-1976 leading to the creation of Petroleos de Venezuelan S. A (PDVSA), the state managed oil and gas company. Besides being the largest employer in Venezuela, PDVSA accounts an estimated one third of the country’s GDP, 50 % of the government’s revenue 80 % of Venezuela’s total export earnings. In the recent times, through the leadership of President Chavez, the government of Venezuela has immensely reduced the autonomy of PSVDA and also amended the rules that regulate the country’s hydrocarbon sector (Tugwell, 2005). Because of oil, the Venezuelan leaders typically did not invest in developing the oil industry, but they stayed in power not because they were governing but they doled out profits to the right group of people. As oil prices soared, the money was enough to support the growing middle class (Kozloff, 2007). The government introduced changes in the tax reforms, re-nationalization, and the strengthening of the OPEC membership. The opposition parties have blamed Chavez’s government of forcing the state run oil company PSVDA to spend a substantial part of its income in funding government programmes, as a result neglecting the company’s own requirements and compromising the oil production levels. In 2010, the official figures have put the level at 2.89 million barrels each day (Ministry of Energy and Petroleum , 2011). Control over the state owned PSVDA has been associated with disputes since the company was nationalised in 1976. The dependencies of the transnational corporations were turned into fourteen Venezuelan companies, which correspond with the fourteen (14) major transnational companies that did business in Venezuela. The entire period after nationalization the management remained to be Venezuelan. The board of PSVDA was typically appointed by the PSVDA management, who, due to their backgrounds were represented the management. As a result, when Chavez took power, he appointed board of directors who were specifically oil experts and did not hail from PSDVA. This made the PSVDA to protest. The government of Chavez reformed the PSVDA so as to improve on the efficiency of the company. This is attributed to the fact that it has been inefficient for the past twenty five years. PSVDA increased its revenues from 29 % to 64 % from 1993 to 2000. Moreover, the efficiency of PSVDA dropped because of the internationalization policy and the changes in the accounting methods. Another source of increased cost in the PSVDA was the extensive use of outsourcing services. They opened up marginal oil fields to the private investors (Kelly, 2009). The PSDVA has been fought with regard to company’s efficiency, outsourcing, OPEC membership, special contracts, internationalization programs, and sub contracting practises. When Hugo Chavez was elected president in 1998, it did not look like he had special plans for PDVSA. Up until Chavez came to power, OPEC had turned into a former shadow of itself, with the members states frequently ignoring their quotas. Production over the allotted quotas combined with the expansion of oil production in the non-OPEC nations, has led to a steep decline in the oil prices. Chavez was determined to put an end to this. The efforts of Chavez bore immediate results as oil prices rose from the first time since 1985, to approximately $ 27 per barrel. Later, Chavez run into conflict with PDVSA’s management, which for the past 15 years had been focusing on the production of as much oil as possible, regardless of the OPEC quotas. The results were rotation of PSVDA’s presidents, later, a full blown confrontation between Chavez’s government and the oil industry. Chavez used this conflict to assert that the oil industry in Venezuela required complete renationalization because it had become too independent. Following the December 2002 to February petroleum industry strike, Chavez termed the regaining of the industry as re-nationalization. He aimed at improving the efficiency and effectiveness of PSVDA by distributing a greater amount of its revenue to the state and particular changes in taxation. However, certain tax reforms had earlier been implemented during his first term. Under Chavez, the Venezuelan oil industry reform encompassed mainly four major areas: tax reform, strengthening of OPEC, solidification of state ownership of the oil industry, and subordination of the oil industry. Oil is the only ticket to prosperity to many countries. It has made Venezuela one of the wealthiest nations in Latin America; in addition, it was one that was one of the most unequal. This necessitated Chavez to streamline the industry with various policies. So when oil prices slumped in 1990, revenue of Venezuela plummeted. The government cut back on spending. Chavez came to power he pledged to democratize the oil industry and spend the profits on the poor, who never had benefited from oil proceeds before (Stockman, 2013). It was these reforms on PSVDA that brought him to at logger heads with the PSVDA managers resulting in revolt that ousted him from power. It was in the year 2002 that these opposition groups tried to out him from power, but after two days of conflict the president then returned to office. He later went on and won a referendum that stipulated whether to he should serve for the rest of the term (Genova & Falola, 2005). Conclusion Today Venezuela has the largest known oil reserves in the world. According to an announcement made in 2011 by Chavez’s government, reported that they had proven reserves that amounted to 297 billion barrels surpassing the long term leader Saudi Arabia. As at 2011, whilst Venezuela held 17.9 pc of the total worlds known oil reserves, Saudi Arabia and Canada held 16.1 pc and 11 pc respectively (White & Rowley, 2013). However, this only represented 3.5pc of the global production compared with 13.2pc in Saudi Arabia (Stockman, 2013). This makes it the fifth largest oil exporting nation in the world and the second largest reserves of heavy crude oil after Canada. Consequently, Venezuela and Canada have shown significant potential for capacity expansion. In 2005, PSVDA opened its first office in China, and later announced plans to triple its fleet of oil tankers operating in the region. The now late Chavez stated that he would like to sell more of Venezuelan oil to China so that they can become independent of the US. As of March 2010, PSVDA’s strategic plan was to forecast on 5 million barrels per day (Stockman, 2013). Venezuela’s development of its oil reserves has typically been affected by the recent political unrests. This is evidenced when in December 2002, approximately half of the government run PSVDA went for a politically instigated strike, after which the company went ahead and fired 18,000 of them. Moreover, the nation has so much dependence on oil as its major source of revenue. Consequently, its continued dependence on the petroleum industry makes it to face economic instability. This is attributed to the fact that a fluctuation in oil price, in turn leads to a political change and the institution of other major social reforms. Although there are social, political and economic effects on Venezuela dependence on oil, the most devastating of them all are the economic impacts. By solely relying on the oil industry, the economy of Venezuela is at risk (Noormohamed, 2011). Therefore, diversification of the economy is the remedy as to when the oil prices decline and the country goes in an economic slump. In addition, the living standards of the people would drop, leading increased unemployment and poverty (Lapper, 2009). Reference List Coronil, F. (1997). The Magical State: Nature, Money, and Modernity in Venezuela. Chicago: University of Chicago. Genova, A., & Falola, T. (2005). The Politics Of The Global Oil Industry: An Introduction. Westport: Greenwood Publishing Group. Kelly, R. A. (2009). Energy Supply and Renewable Resources. New York: Infobase Publishing. Kozloff, N. (2007). Hugo Chavez:. New York: Palgrave Macmillan. Lapper, R. (2009). Venezuela's Oil-Based Economy. Council on Foreign Relations. Westwood: Greenwood Publishing. Martinez, A. (1979). Chronology of Venezuelan Oil. London: Purnell and Sons Ltd. McBeth, B. S. (2005). Juan Vicente Gomez and the Oil Companies in Venezuela, 1908-1935. Cambridge: Cambridge University Press. Ministry of Energy and Petroleum . (2011). The Ministry of Energy and Petroleum Annual Report to the National Assembly. Edificio Del Rio, Caracas: Government Publisher. Noormohamed, S. (2011, May 8). Venezuela's Dependence on Oil. Retrieved April 29, 2013, from The Effects of Oil Dependence on the Venezuelan Economy: http://aquinascasa.blogspot.com/2011/05/effects-of-oil-dependence-on-venezuelan.html Salas, M. T. (2009). The Enduring Legacy: Oil, Culture, and Society in Venezuela. Pomona: Duke University Press. Stockman, F. (2013, March 13). Retrieved April 27, 2013, from Politics of oil in Venezuela : http://www.bostonglobe.com/opinion/2013/03/11/politics-oil-venezuela/yVl1PKWeGUTv5T1JJvubaL/story.html Tugwell, F. (2005). The Politics of oil in Venezuela. Stanford, Carlifornia, U.S.A: Stanford University Press. White, G., & Rowley, E. (2013, March 11). Retrieved April 30, 2013, from Death of Hugo Chavez propels Venezuelan oil production into the spotlight: http://www.telegraph.co.uk/finance/commodities/9920725 Wilpart, G. (2003, August 30). Retrieved April 27, 2013, from The Economics, Culture, and Politics of Oil in Venezuela: http://venezuelanalysis.com/analysis/74 Yergin, D. (1999). The Prize: The Epic Quest for Oil, Money, and Power. New York: Simon and Schuster. Read More