Venezuela
- introduction
Under its bombastic, populist left-wing President Hugo Chavez, Venezuela's
economy has shifted away from the cautious market reforms introduced in the
1990s and
back towards the statist, top-heavy system that existed under the military
strongmen who rules the country from independence in 1959.
President Chavez's program of '21st century socialism' has been a mixture of
Venezuelan nationalism, America-baiting rhetoric, avuncular authoritarianism,
and
high levels of social spending. All of this is underpinned by oil, which
constitutes 80% of Venezuela's export earnings and around half of government
revenues.
The fact that President Chavez's socialist experiment should also seek control
over the country's oil reserves is therefore not surprising. Local content, in
its
broadest sense, is a central part of this resource nationalism.
The government's desire to assert its control over 'strategic sectors' of the
economy has worried investors – with good reason, since the Chavez
administration
has repeatedly made aggressive moves to limit the control of outside companies,
and even private firms from Venezuela itself. Attempts to control the industry
began in 2001, when President Chavez signed a new Hydrocarbons Law which
provided
that all oil production and distribution activities were to be the domain of
the
state, excepting joint ventures in the extra-heavy crude sector. In 2005 the
President ordered the termination of all contracts signed with foreign oil
companies, replacing them with joint ventures in which the state oil company,
PdVSA,
would hold a controlling stake. This led to lawsuits from ExxonMobil and
ConocoPhillips, who refused to acquiesce in the takeover (as Chevron, Shell,
Total and BP
did).
In May 2009 President Chavez sent in the army to take over oil service
companies, declaring a “revolutionary offensive” on firms which PdVSA argued
had been
paid unjustifiably high prices. This follows earlier deployments of the
military to
nationalise food factories and seaports, usually on the grounds that the
industry in question was unproductive. In the case of food companies this is
often
true, because government subsidies for food have not kept pace with inflation,
forcing them to sell at a loss or to hoard stock.
The nationalisations also seem to be removing competitors to PdvSA. Now the
third-largest oil company in the world, the firm increasingly acts as an
unaccountable 'state within a state', with its own housing, construction,
education, and
food production arms, and with close links to the President. PdVSA's strength
and
its backing by the security forces make the country's oil industry increasingly
confident and assertive when it comes to enforcing local content. Indeed, local
content for many of the more 'revolutionary' figures within the government does
not go far enough – hence the desire to directly control the industry.
The outlook for IOCs is very uncertain. President Chavez sends conflicting
signals, at times promising that foreign investors would be welcomed and
treated
fairly, and at other times decrying their presence as 'perverse'. Similarly, he
has
dismissed the IMF and the World Bank as tools of imperialism, but has yet to
follow through on his threat to withdraw from them. The most obvious example of
this contradictory policy is his relationship with the United States. Regularly
lambasted as 'the empire' (and, in President Bush's case, 'the devil'),
President
Chavez is well aware that the US remains his biggest trading partner, importing
one-third of Venezuela's food aid and buying up significant volumes of
Venezuelan
oil – 1.2 million barrels a day in January 2009.
When oil prices are low, the Venezuelan government is likely to tolerate foreign
investors provided that the state coffers receive a sufficient share. When oil
prices are low – as was seen during the first half of 2009 – an urgent need for
revenue will lead President Chavez to tighten the screws on IOCs. An extended
period of low oil prices would curtail Venezuela's geopolitical ambitions and
raise
serious questions about the sustainability of its ambitious social programmes.
However, even a period of high prices may not necessarily be good news for
foreign investors. President Chavez has repeatedly shown himself to be
unpredictable
and impulsive – regardless of oil prices, this is unlikely to change.