For Venezuela, There Still is Power through Petro

Viva La Revolución
The Bolivarian revolution propelled by Hugo Chávez has transformed Venezuela, its messianic vision for the country brought to fruition by its vast oil reserves. The petro-revenues have permitted President Chávez to encourage an abundance of social welfare programs around the Caribbean basin and have allowed him to cement his hold over the country. Oil has granted profits from the country’s hydro-carbon reserves that account for almost 30 percent of its GDP, 90 percent of export earnings and 50 percent of its federal budget revenues in 2006. Until this past winter, the steady growth of oil revenue allowed Chávez to press on with his left leaning agenda as well as expand his influence throughout the Andean and Caribbean regions. However, the dependence on petroleum has left the country vulnerable, as the global recession has quickly led to a precipitous plunge in prices that have caused revenues to dwindle. As a result, many flaws in the Venezuelan economic model are now becoming evident due to the overdependence on oil.

The economic backlash has manifested almost like a disease, as oil has created enormous profits during the boom years which caused distorted growth in services and non-traded goods’ sectors . The country’s current financial state is in an uncertain position due to an over-dependence on oil and the ongoing global economic crisis.

Oil History
Since the discovery of petroleum at the turn of the 20th century, fuel stocks have provided Venezuela with a medium of stability, as well as the makings of an authoritarian government. Oil remains a critical fixture in the country 10 years after Chávez’s ascension to the presidency. It was through the nationalization of the PVDSA (Petroleos de Venezuela) in 1974, producing a precedent for further nationalization and implanting dreams of a socialist society.
21st Century Socialism

In January 2005, Chávez came forth with his doctrine of “21st Century Socialism.” He outlined a broad concept for the future of a socialist Venezuela based upon solidarity, fraternity and equality through its central principle of non-private ownership. Essentially, his aim was to be less state absorbed and more pluralistic in economic practices. Chávez promised the elimination of pure profit for the country’s economic elite, wealth distribution occurring among social classes, and increased investment in social services. Other components of his platform included the “creation of state companies, seizing abandoned private factories and establishing programs pertaining to food, health, and education.”

PDVSA Programs
Chávez’s socialist strategy, together with the management assistance provided by PDVSA administrators, has stressed the creation of a number of cooperatives aimed at assisting the poor. Revenues brought into the company are being created under a “revolutionary concept” consisting of three separate trusts for the purpose of national development. The first trust is designated for the construction of hydro and thermoelectric power plants as well as the launching of a new national airline, and investments for a comprehensive irrigation system throughout the country. The second trust has been allocated the responsibilities for housing and infrastructure developments. Meanwhile, the third trust has been created for investments in agricultural development projects. In addition to the three trusts, the Social Development Management Department of PDVSA is providing financial support for governmental education, health care, and productivity programs.

The Fund for Social and Economic Development (FONDESPA), a publicly funded program managed by PDVSA, promotes social development through a prudent distribution of oil revenues. Social Production Enterprises (another PDVSA offspring program) targets the undoing of the country’s internal social divide, by providing “the means, possibilities, and real resources to enable citizens to improve conditions in personal, social, cultural, and professional aspects of their own lives.” This includes, but is not limited to, basic health-care, education, and public works. Without question, the rise in social spending has produced a much desired economic opportunity for Venezuela’s poor, including a reduction of poverty, a decrease in unemployment rates, which fell below 10% for the first time in a decade, and an increase in formal employment.

Keeping Afloat
Over the years, Venezuela has prudently engaged in trade arrangements with other like-minded countries, by establishing ALBA (The Bolivarian Alternative for Latin America) as well as the PetroCaribe oil alliance. Through these multi-lateral agreements, Chávez promotes a non-exploitative alternative to Washington’s bilateral free trade plans. Established in 2005, PetroCaribe is an energy cooperation agreement comprised of seventeen semi-peripheral nations, which rely on discounted Venezuelan oil delivered to Caribbean ports. In return, the participating nations partially pay for oil with in-kind payments. Jamaican Prime Minister Bruce Golding best encapsulated the benefits of the association when he stated that: “PetroCaribe has helped to buffer the effects of high oil prices and is helping to stabilize regional economies.” Relations between Venezuela and Cuba demonstrate the basic layout of a PetroCaribe agreement; Cuba provides 20,000 doctors to Venezuela in exchange for over 100,000 barrels of daily oil shipments. Recently, various state leaders convened upon the islands of St. Kitts and Nevis for the 6th Annual PetroCaribe Summit, where the discussion centered on the consolidation of energy companies to develop future projects and provide for more effective and proper channels of oil exchange. However, due to the bottoming out of oil prices in January 2009 and the subsequent decline in domestic production, President Chávez has been forced to consider other economic tactics. He now is looking into the option of foreign investment in PDVSA to keep the mainspring of the country’s and regimes economy buoyantly afloat.

The revenues generated by the oil industry, prior to their plummeting in January, inspired renewed interest from foreign investors, such as the U.S.’s Chevron and France’s Total, as figures in 2008 reported Venezuela grossed an estimated $85 billion in net gains from oil. In an effort to rebuild burnt bridges, Chávez has extended peace-offerings to western oil companies which have shown some belated interest in investing in the Orinoco oil region of southern Venezuela, an area containing one of the world’s largest oil reserves. This conciliatory gesture was in response to the nationalization of up to 74 new facilities to date. This offer applied to oil companies that had initiated legal battles after Chávez’s nationalization of oil fields in 2007. Venezuela currently continues courtroom actions against several of the larger oil servicing companies like Halliburton and Schlumberger Ltd. Frustration continues as a result of overdue payments to Halliburton and Schlumberger Ltd. from PDVSA. Fears have risen among the 70 expropriated oil service companies in the western portion of the country, while Chávez maintains his hope to nationalize their operations in Venezuela. Earnings by foreign and multi-national oil companies are valuable to the Venezuelan economy, as they often provide technology and highly skilled labor, which Venezuelan oil services desperately need.

The global financial crisis disrupted the Venezuelan economy, although President Chávez asserted the country’s economic and social programs would still be adequately maintained. In response to the current financial shock, Mr. Chávez is trying to curb inflation, keep interest rates low and contain budget shortfalls. However, the social programs initiated by Chávez now have accrued a $13 billion debt. Of this figure, as well as $8 billion being paid out to the China Development Bank and $3.5 billion to Japan’s Mitsui & Co. as well as to the Marubeni Group as a consequence of the country’s diversifying oil exportation. According to the IMF, the Venezuelan economy will contract by 2.2 percent in 2009. Other statistics register current social spending at 18.6 percent of GDP (2008), down from 21.8 percent (2006). In addition to already decreased spending, inflation is on the rise, growing from 25.7 percent to 31 percent in 2009, causing Venezuela to post one of the highest inflation rates in the world. Standard & Poor reduced the credit rating of PDVSA citing a negative outlook due to an uncertainty of the company’s willingness to meet contractual obligations to suppliers. A once powerful vehicle of government spending that was created from the oil consumption boom during the early 2000s is now stalled. Still, this crippling circumstance is not a nouveau phenomenon. Chávez remains optimistic and dwells upon the means to derive needed funds from a variety of sources for the continuation of his welfare programs and the creation of new ones.

Presently, Venezuelan authorities were reported as renegotiating purportedly unjust tariffs with foreign multinationals in order to avoid accruing more debt. Simultaneously, they were strong-arming the companies to accept PDVSA’s commercial terms if they intend to retain their projects in Venezuela. In response to growing tensions, Oil Minister Rafael Ramírez said “Venezuela will not nationalize all the oil services present in the country.” However, it could be argued that continued interest on the part of foreign companies already once-burned, to invest in PDVSA projects may only point to the scarcity of projects of sufficient interest to foreign oil giants around the globe. Chevron, Royal Dutch Shell, and Total eventually might be persuaded to heavily invest in the Orinoco because of the magnitude of the Orinoco Belt petroleum reserves estimated to contain a projected 1,200 billion barrels of recoverable oil.

As Venezuela looks toward the future, foreign investment again seems to be considered vital to the development of the Andean country. This idea had its origins when the 1999 Constitution was being drafted, in which private investment was described as critical to the country’s development. However, the dissolving of the constitution after the attempted 2002 golpe represented a setback and an obvious sign of the high degree of political turbulence in the country. Consistent efforts by Chávez to boost the economy through the generosity of the PDVSA have generated inquiries as to why the self-proclaimed 21st century socialist society is participating in such an overtly capitalist game plan. Plainly stated, the response may be that stability within the oil market provides continued economic success, therefore helping to guarantee the maintenance of the current status quo.

Future Projections
As Venezuela is being lashed by economic adversity, many have begun to speculate the next step of Chávez’s rule. As it now stands, crude oil prices are still too low to alleviate the financial strain currently affecting the government. According to economic projections, the government will encounter a cash shortage of $12 billion if the export price of oil returns to $40 USD throughout this year , although the price currently stands at $70 USD as of June’s statistics. Meanwhile, former regional competitor Brazil has issued a $4 billion loan for various projects being planned in collaboration with Venezuela. Alternative initiatives are being planned by Chávez to export more oil to expanding Asian and Cuban markets rather than continue Caracas’ reliance on U.S. imports, which have gradually dropped from 1.7 million to 1.5 million bpd in 2008. Already, exports to Cuba have progressively increased by 32%, while sales to Asia have doubled from 223,000 to 422,000 bpd. As another potential remedy to avoid economic stagnation, Venezuela could rejuvenate its productivity by tapping its international reserves. Chávez has already begun taking such measures, as well as drawing on finances from the National Development Fund in order to stave off damaging economic consequences and sustain ongoing social spending. Other monetary support could be found by dipping into PDVSA’s investment fund or by borrowing from the local sector of its recently nationalized industries.
Striving to keep its own economy afloat, Venezuela has greatly cut back on its financial investment abroad. Venezuela’s projected outlay of $6 billion in 2009 pales in comparison to the $79 billion in special funds spent abroad in 2008. These actions have caused a number of past recipients of Venezuela’s largesse to look elsewhere for needed resources. Argentina is now focused on China, Ecuador on the IMF, and Cuba on Brazil for monetary aid and the United States for potential future investment. Despite these dire developments, Venezuela maintains significant national reserves, allowing investments to continue to flow into PDVSA. Criticism of Chávez continues to be heard at home and abroad, but has done little to offset the balance of power in Venezuela; a staggering 70% approval rating resoundingly affirms Chavez’s hold on his nation and secures his longevity as its incumbent leader into the future.