Saturday, March 27, 2004

What does Hugo Chavez have to do with oil? 

What does oil have to do with what is going on in Venezuela?

The short answer is a lot.

The less short answer is Venezuela is one of the world's largest producers of oil and as such is a key player in international oil markets. It is also one of the largest suppliers of oil to the United States and its proven reserves are enormous.

For a long period of time Venezuela had a very nationalistic oil policy. It was a founding member of the Organization of Petroleum Exporting Countries. In the mid 1970s it nationalized its oil industry taking control away from the foreign oil companies of Exxon and Shell. It had an assertively pro-producer policy of defending prices, ie it sought to boost prices by restricting production. This policy had significant benefits for Venezuela as oil revenues soared and the people of Venezuela saw their standard of living increase.

In the late 1980s and early 1990s this changed dramatically. The Venezuelan state oil company which was formed after its nationalization, Petroleos de Venezuela SA, or PDVSA, started to become more autonomous and be run not in the interest of the Venezuelan nation but in the interest of the small number of technocrats running it. That is, instead of trying to maximize income for the Venezuelan state, as state owned industries are supposed to do, it tried to increase its own size so as to provide more and higher paying jobs for the technocrats running it.

There are also a couple of key facts regarding the executives running PDVSA in the 80s and 90s that need to be kept in mind. First, these executives were the same people who had been employed by Exxon and Shell in Venezuela prior to the nationalization of the oil industry. This meant that these executives had personal loyalties not to Venezuela but to the large oil companies of the West. Secondly, many of the PDVSA executives actually had separate private businesses in the oil industry. Hence, they had a direct financial interest pursuing oil policies that benefited their own private companies rather than trying to maximize revenues for the Venezuelan nation.

The end result of this was that in the 80s and 90s Venezuela pursued an oil policy which was really more in the interest of consumer nations than producer nations. That is, they wanted to produce large quantities of oil even if that meant the per barrel price of oil collapsed. Further, they saw there interests as being intertwined with the interests of the United States. On numerous occasions Venezuela went out of its way to make sure its oil policies accommodated the U.S.

Perhaps the most clear example of this is in 1990. After the invasion of Kuwait when oil prices spiked Venezuela, rather than reaping the benefits of higher prices, maximized production and released oil from its reserves, to keep prices low. In fact, throughout this period Venezuela consistently boosted production and became known within OPEC as a quota buster by virtue of it always exceeding its OPEC quota. In fact, the executives of PDVSA sought to take Venezuela out of that organization.

Enter Hugo Chavez, the current president of Venezuela who was elected in 1998 and re-elected in 2000. Among his major actions was to effect a 180 degree change in Venezuelan oil policy. Instead of a policy geared to accommodating the US and oil executives by maximizing production Venezuela would now pursue a policy of maximizing revenues by cutting back on production to boost prices. Instead of being a quota buster Venezuela now rallied OPEC to strictly enforce quotas and seek higher prices.

This policy proved spectacularly successful for Venezuela as the price for a barrel of Venezuelan oil went from $8 per barrel to over $20 per barrel. The additional billions of dollars of oil income were used by the Chavez government to fund its ambitious social programs. So far, so good - for Venezuela.

However, all of this created quite a consternation within the U.S. for obvious reasons. As a net importer of oil higher oil prices are an anathema to the U.S. government. So the actions of Hugo Chavez put him on a collision course with the U.S. government.

This brief background raises many points which will have to be detailed in other posts. However, it does show how oil is central to the conflict between the U.S. government and the current Venezuelan government.


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