Oil Wars

This blog, as the title implies, has an awful lot to do with oil, in spite of the fact that it has been ages since I wrote anything about it. Today however I ran across this informative article on the subject of when world wide oil production is likely to peak. A couple excerpts:

Could the petroleum joyride — cheap, abundant oil that has sent the global economy whizzing along with the pedal to the metal and the AC blasting for decades — be coming to an end? Some observers of the oil industry think so. They predict that this year, maybe next — almost certainly by the end of the decade — the world's oil production, having grown exuberantly for more than a century, will peak and begin to decline.

And then it really will be all downhill. The price of oil will increase drastically. Major oil-consuming countries will experience crippling inflation, unemployment and economic instability. Princeton University geologist Kenneth S. Deffeyes predicts "a permanent state of oil shortage."

According to these experts, it will take a decade or more before conservation measures and new technologies can bridge the gap between supply and demand, and even then the situation will be touch and go.

...............

The pessimism stems from a legendary episode in the history of petroleum geology. Back in 1956, a geologist named M. King Hubbert predicted that U.S. oil production would peak in 1970.

His superiors at Shell Oil were aghast. They even tried to persuade Hubbert not to speak publicly about his work. His peers, accustomed to decades of making impressive oil discoveries, were skeptical.

But Hubbert was right. U.S. oil production did peak in 1970, and it has declined steadily ever since. Even impressive discoveries such as Alaska's Prudhoe Bay, with 13 billion barrels in recoverable reserves, haven't been able to reverse that trend.

There is a whole debate raging on this question of peak oil - that is when the world will start running short of oil. No one, including this bog, really knows. But this much does seem to be clear - oil is likely to be ever more scarce as worldwide demand increases and the easily found and exploited reserves are depleted. And even more importantly, the oil that does exist will be concentrated more and more in the hands of countries that are members of OPEC. For example check out this quote from a “peak oil” doubter in that article:

But many experts see no reason global oil production has to peak at all. It could plateau and then gradually fall as the economy converts to other forms of energy.

"Even in 30 to 40 years there's still going to be huge amounts of oil in the Middle East," said Daniel Sperling, director of the Institute of Transportation Studies at the University of California, Davis.

This person is mentioning a fact that is much overlooked by most people. Even though OPEC’s share of world oil output has declined in recent years its share of proven reserves has not. The majority of the worlds proven reserves are in the Middle East and Venezuela. And other countries that are currently producing a large amount of oil such as Russia, Norway, England in the North Sea, and the U.S. are pumping oil at a rate that will deplete their reserves in the not too distant future. To get a sense of this take a look at the following display of proven oil reserves by region:



There are a great many people who downplay the significance of oil in current events. Taking a good look at this graph gives a strong indication of why they are wrong.

First things first, the Middle East is clearly sitting on top of the vast majority of the worlds oil. Its not even close. It is obvious that if the industrialized world, and the U.S. in particular, were to lose access to the oil reserves of the Middle East, the gig would be up. Modern day life in the United States, Japan and Western Europe, which is dependent on fossil fuels and the internal combustion engine, would simply not be sustainable.

Seeing this it is all of the sudden clear why the U.S. is very happy to cavort with the Medieval regimes of Saudi Arabia and Kuwait. Even Qaddaffi is ok as long as he stops blowing up airplanes and doesn’t develop nuclear weapons. More importantly this explains why the U.S is willing to spend hundreds of billions of dollars and much blood to control Iraq. From their point of view they simply can’t be denied access to the country with the second greatest amount of oil on the planet. And they especially can’t be denied access when the future of world oil production is in doubt.

Moreover, if the U.S. could subdue Iraq, have it pull out of OPEC, and flat out produce as much oil as possible it could effectively destroyed OPEC's ability to keep prices high and would have undermined some governments that the U.S. doesn’t care for – namely Venezuela’s Hugo Chavez.

This brings me to one final point. In reading the press on Venezuela most of the commentators and pundits who argue that Chavez presents a problem for the U.S. (which is in a way true) also argue that the U.S. has neglected Venezuela, hasn’t been aware of the “threat” that he poses and hasn’t had a plan for dealing with him.

In reality that is not true at all. Fine, so what was the plan for dealing with Chavez? Simple, invade Iraq. Invade Iraq!?!? – how could that possibly be a plan for dealing with Venezuela? Again the answer is simple. The Venezuelan economy, and hence its government, is highly dependent on oil. When the price of oil is high Venezuela’s economy booms and when it is low the economy tanks. Because of this the fate of Venezuelan governments is closely tied to oil. So much so that it is often said in Venezuela that the only thing that brings down governments is the price of oil (BTW, its not a topic for this blog but Russia is in the same position and Putin is also someone the U.S. would like to cut down to size).

So if you want to bring down Chavez what better way to try to do it than bring down the price of oil. And there is no doubt that this was one factor is the calculations that led the U.S. to invade Iraq. If Iraq was now exporting 4 or 5 million barrels of oil a day the price would be much, much lower than it is today (the price of oil turns on about 1 million barrels) and they may well have rid themselves of Chavez. Unfortunately for them Iraqis haven’t been co-operating with their plan.

Obviously, this is an involved topic and there is much more to be said on it. But this should give some idea why a blog on Venezuela and Iraq would have “oil” in its name. And why "peak oil" means Venezuela and Iraq will be front and center in world events.
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I mentioned this in a comments post but it deserves a post of its own. Over the past couple of days we have seen lots statistics about how rapidly the Venezuelan economy is growing and how much unemployment has been reduced.

Today though an article by Mark Weisbrot, who is an economist and co-director of the Center for Economic & Policy Research, was published that tied everything together and showed what this means for the Venezuelan people. Here is an excerpt from the beginning of the article:

It is sometimes asserted that Venezuela under President Hugo Chavez Frias (1999 to the present) has been an economic failure, as compared with the past. For example, a recent news article in the Washington Post referred to "Hugo Chavez, the populist Venezuelan president whose giveaways to the poor have slowed economic progress." These claims have no basis in fact. From 1970-1998 per capita income in Venezuela fell by 35 percent. This is the worst economic decline in the region and one of the worst in the world -- much worse even than what happened to Africa during this period.

Since the present government took office, per capita income growth is about flat, and will be positive at year's end. So the Chavez government can at least claim credit for reversing the terrible long-term economic decline in Venezuela, according to the undisputed data measuring economic growth.

Just this opening segment debunks much of the incessant opposition distortions and falsehoods that we hear on a daily basis. But that is just the beginning. This article is a must read – go read it
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I ran across a rather amusing article on an opposition website . Such articles are a dime a dozen. However, there were a couple points that caught my attention. First, there was this:

The street mobilizations of late 2002 and early 2003 was the second attempt. Unfortunately, a segment of the movement used PDVSA as a weapon against Chavez. When PDVSA workers shut down oil production all Venezuelans suffered, and those with a financial cushion were best able to withstand the assault. The opposition lost potential sympathizers as a consequence. It took many months before the opposition was able to rebuild.

An apologist for the opposition admits the opposition screwing the country by shutting down the oil industry was a mistake?!?!? Will miracles never cease? Too bad for the opposition, for Venezuela, for everyone that this rocket scientist wasn’t around in December 02. Oh well, I guess this kind of sums up the oppositions problems, they have no leaders, only Monday morning quarterbacks.

But here is the real howler:

Over the past few years Venezuelans have demonstrated an incredible ability to mobilize peacefully against authoritarianism. With no hopes for a fair election in 2006 [read: with the opposition not having a snowballs chance in hell of winning an election no matter how fair - ow], any realistic opposition strategy will almost certainly include a massive people power movement. While Venezuelan citizens are not likely to get much support from most OAS members, it is clear that the United States has finally come to grips with the dangers of Chavez's authoritarianism. In its next battle for democracy Venezuela's people power movement will surely have an ally.

So they want a “people power” movement like in the Ukraine or Lebanon. Errrh, I think that might be a little difficult. See, I think to have a successful “people power” movement you actually need to have the people on your side. Mind you, I’m not positive about that but I think that is the general idea behind it – you know, having the majority on your side. I think when you’re at 10% in the polls and the person you’re trying to overthrow is over 70% you might have to go a different route – like maybe a coup? Now, I don’t mean to encourage coup attempts – far from it. Its just that I would hate to see my opposition friends get their hopes all worked up about “people power” only to have them dashed when no one shows up.

So to any anti-Chavez people reading this remember: first the horse, then the cart; first the horse, then the cart;….
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For an idea of how badly things are going in Iraq check out who this article from Iraq in the Christian Science Monitor is by-lined to.

Yep, things are so bad their regular correspondents refuse to go and they have to use convicted wife killers like Scott Peterson to run their Baghdad bureau!!!



Now with the Army and Marines missing their recruiting targets and U.S. prisons bursting at their seems you wonder what they are going to think of next...
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In the opposition’s self-serving histrionics about how much oil Venezuela is or isn’t producing one little sub-plot has developed. The complaint has arisen that we don’t know what is going on because the state oil company hasn’t submitted its 2003 financial statements. Indeed, they are at this point over a year late. So maybe the opposition does have a reason to bitch.

Well, maybe not. See there is a little detail that has to be remembered. Back in the good old days when the opposition was running everything the then executives of PDVSA were in to finding ways to use their control of PDVSA to make profitable businesses for themselves. One idea they came up with was to set up a data processing company called Intesa. They then had PDVSA outsource all its data processing and information technology tasks to Intesa. And who did Intesa have as one of its directors and shareholders? None other than Luis Guisti, the President of PDVSA up to 1998. Nice little piece of insider dealing there, no?

BTW, another little factoid about this Intesa is that it was partly owned by a U.S. company called SAIC a US company heavily involved in military work and said to have ties to the CIA. That’s too far a field for this post but for those desiring more info check out Soberania.org.

What does any of this have to do with financial statements. Well one of the things that was outsourced to Intesa was all the computerized accounting functions of PDVSA. Nothing per se harmful in that. But then along comes December 2002 and the management of PDVSA goes on “strike”. And who joins them? You guessed it, Intesa. They came up with a whole bunch of rather lame excuses for why they could no longer do their work and joined the strike. They kept the computers, the software, the data and in one fell swoop eviscerated PDVSAs ability to manage its finances (not to mention that most of the PDVSA finance department joined the strike).

The story doesn’t end there. PDVSA went to court to force them to a least give back the software and data so that their finance department would have the information they needed to work with. And sure enough the Venezuelan Supreme Court ordered Intesa to hand it over. Of course the opposition being what it is, Intesa refused.

PDVSA, desperate for the materials, kept pursuing the case and in March 2004 the Supreme Court gave a final order to Intesa to turn everything over to PDVSA. What was Intesas response this time?

The sentence that the Supreme Court gave yesterday to Intesa to reinstall all the information systems that it had taken from PDVSA and return equipment and data that it has in its possession can’t be complied with in practice as just a week ago the company Intesa closed its doors for good and gave away its keys.

So too bad for PDVSA, they aren’t getting back their information, not their ledgers, not their accounts payable, nor receivable, nor anything.

And I wonder if these same people who went on strike and did billions in damage, who destroyed property, and who flouted the law as in this clear example are the same people bitching about the tardiness of the financial statements. Probably. It would be par for the course.
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We’ve heard some pretty bizarre things out of Iraq over the past couple of years but this one has to rank right up there:

BAGHDAD, Iraq - Iraq announced plans Thursday to deploy 40,000 police and soldiers in the capital and ring the city with hundreds of checkpoints "like a bracelet" in the largest show of Iraqi force since the fall of Saddam Hussein .

In a reminder of the difficulty Iraqi security forces face in stopping insurgent attacks, violence claimed at least 15 lives Thursday in Baghdad including a car bomb that exploded near a police patrol, killing five people and wounding 17.

Prime Minister Ibrahim al-Jaafari told a small group of Western reporters that next week's planned crackdown, dubbed Operation Lightning, was designed "to restore the initiative to the government." Insurgents have killed more than 620 people since his government was announced on April 28.

"We will establish, with God's help, an impenetrable blockade surrounding Baghdad like a bracelet surrounds a wrist," Defense Minister Saadoun al-Duleimi said.

This is just so off the wall on so many levels. First, even if they did seal off Baghdad how exactly does that help them? There are just as many insurgents inside Baghdad as there are outside. So what is this going to accomplish – insurgent Ali in Baghdad won’t be able to visit his cousin, insurgent Omar, over in Ramadi?

Secondly, given that the U.S couldn’t even cordon off Fallujah properly and most of the insurgents there got out what makes anyone think that 40,000 Iraqi government troops can effectively cordon off Baghdad? Lets keep in mind out of any given 40,000 Iraqi troops probably at least 20,000 of them are working for the insurgents. Not to mention, if you have all these troops spread out to make a circle around Baghdad they will have to be in small isolated groups that will make easy pickings for the insurgents. Lets see how long the 40,000 saps who get assigned to this detail agree to put up with that.

Quite frankly, this shows that things in Iraq are in even worse shape than I had thought. Its been clear for some time that the U.S. military is clueless in how to deal with the insurgency. But there was always the hope for them that an indigenous Iraqi force would be more adept at dealing with it. Based on this, it appears not.
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Remember from Posada update V that when they were threatening Afghanistan to turn over Bin-Laden the U.S. claimed it didn’t have to show proof that he was involved in the 9/11 attacks as Bush said “we already know he’s guilty”. And failure to turn him over would result in an immediate bombing campeign.

Well today State Department hack Roger Noriega had this to say about the Posada case:

“It is very important to recognize that the extradition process is a formal legal process. It is not a process of press releases or declarations to the press”

Yeah, the damm laywers are holding things up. That is probably what the Taliban were saying right before the first cruise missile hit. Can it be more clear – there are two sets of laws and procedures, one for the U.S. and one for everybody else.

But if the US were trying to deal with situation in an honest way they may want to look at a copy of the 1922 extradition treaty between the U.S. and Venezuela that one of our readers, Pulpo, found. Maybe this would be helpful, if the Bush administration really about dealing with terrorists, which clearly it doesn't.
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Following yesterdays news about the Venezuela’s strong economic growth continuing into 2005 today there was good news on the employment front.

According to the National Institute of Statistics the Venezuelan unemployment rate fell to 12.1% in April 2005 from 16.3% a year earlier in April 2004. This represents a decrease in the unemployment rate of 4.2%.

In December 2001 the unemployment rate, which had been going down, reached 11%. However, a strike in December 2001 and then the coup of April 11, 2002 started to increase the unemployment rate. Then with the strike/oil sabotage of December 2002 the unemployment rate shot up to over 20%. It is from that peak of over 20% that the unemployment rate has now declined to 12%.

A large segment of the Venezuelan workforce is in the “informal” sector that is composed of people such as street vendors. After the December 2002 strike the percentage of the workforce in the informal sector rose to 53%. However, with the strong growth last year and early this year the percentage of workers in the informal sector has been reduced to 47.1%.

Clearly, there is a long ways to go and much to be done. But given the tremendous obstacles the Venezuelan economy has faced over the past several years these numbers are to be both welcomed and applauded.
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About a month ago the Chavez government, which is always promoting new education initiatives, had hundreds of thousands of copies of "Don Quixote" printed up to be given out for free. This proved quite popular as thousands and thousands of people all over Venezuela lined up to get a copy. Interestingly, the opposition, which likes to deride Chavez and his supporters as illiterates, has had nothing to say about this.

Apparently it didn't escape the attention of the Christian Science Monitor who had a interesting article on it today. Some excerpts:

A month ago, says Antonio Zambrano, surveying Caracas's historic Plaza Bolivar, there were maybe 4,000 people standing in single file right here.

The line wound its way around the Congress, cut up near the cathedral, and snaked around the statue of 19th-century independence hero Simon Bolivar. Mr. Zambrano had come, just like everyone else, for his "personal copy of 'Don Quixote.' "

Derided by some at the time, Venezuelan President Hugo Chavez is playing an Oprah Winfrey-like role in Venezuela, turning the country into one giant book club - and stimulating a fresh appreciation of literary classics.

"We are all going to read 'Quixote' to feed ourselves once again with that spirit of a fighter who came to undo injustice and fix the world," the populist leader announced on TV in April, promptly printing 1 million copies of Miguel de Cervantes's 1605 tome.

Everyone interviewed in the plaza on a recent afternoon was ready to discuss the man of La Mancha. Better still for the president, many are making positive comparisons between the idealistic would-be knight who roams Spain and dares to dream, and Chavez, a leader from humble origins who sees himself as the champion of the poor, traversing Latin America to speak to the masses about a better, common future.

........................................

"To be really honest, I suppose some number of those people who lined up to get the book were illiterate, and the others had probably already read the book in high school, like myself," says Mr. Zambrano, "but that is part of the genius of this program. It's about being more educated, but it's also about everyone having the right to a library at home. Why should only rich, reading-types have libraries? We are all equal and worthy - that is what Don Quixote and Chavez are trying to tell us."

Nobel laureate Jose Saramago of Portugal, in a special introduction to the edition, stresses this theme of betterment and equality, writing that "curiosity moved Alonso Quijano [the ordinary man who later transforms himself into Don Quixote] to read, reading led him to imagine, and now, free of the ties of habit and routine, he is able to travel the roads of all the world."

Most Venezuelans, explains Zambrano's son, Rolando, grew up on a steady Don Quixote diet: "We watched the story in cartoons when we were kids, and then we heard it referred to everywhere later - from our churches to our telenovelas [soap operas]. But we never actually read the text carefully," he says. Now the country reminds him of "one big schoolroom," where everyone, armed with a personal copy of the book, is encouraged to "really think about the meaning for us today."

"Both Chavez and Don Quixote are fighting for justice and equality and the oppressed, they are both tolerant to all, and they both want to create better worlds," he adds.

His father nods gravely. "Indeed," he says.

Read the whole article here.
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Last Fall President Chavez increased the royalties that oil companies operating in Venezuela's Orinoco Belt had to pay from 1% to 16.66%. The absurdly low 1% royalty had been negotiated by previous administrations which were much more pliant to big oil's interests than is Chavez. And Chavez of course needed the royalties to fund his ever growing social program.

Predictably, there arose a hue and cry from the opposition and those who always bent over backwards to accommodate foreign oil interests. They claimed that to raise the royalties to such high levels would scare away the oil companies. And to these peoples way of thinking the worst thing you can do is cross an oil company.

Today in the Wall Street Journal there was an editorial that spoke exactly to this issue in a very interesting way. Here is an excerpt:

Drilling for Dollars
................
All this takes place within the context of a larger debate over "royalty relief." Since 1995, the federal government has waived its traditional 16.6% royalty on many offshore leases; currently some three-fourths of all the oil and gas being drilled in the Gulf of Mexico's deep waters is subject to relief. That may have made sense when oil prices were low. But now House leaders want to extend royalty relief for future lease sales in deep waters, on the grounds that it would encourage further exploration, particularly by smaller energy companies.

Maybe so, but it's also a giveaway to the larger ones, which already have the technology and resources to go after these deposits. As President Bush put it recently, "With oil at more than $50 a barrel... energy companies do not need taxpayer-funded incentives to explore for oil and gas."

Amazing, even the Wall Street Journal and George Bush can see that when oil prices are high letting oil companies get away with paying only 1% royalties is absurd. Isn't it interesting that Bush and the WSJ can stick up for the U.S. government's interests but when Chavez does the same in Venezuela he receives nothing but criticism from the "vendepatrias" of Eastern Caracas.

What is a "vendepatria"? Translated literally it is someone who sells out their country. And that is what the people who ran Venezuela's oil industry prior to Chavez were. They always conducted Venezuelan oil policy to benefit foreign interests, be is busting OPEC quotas to help keep prices low or giving sweetheart deals, like 1% royalties, to foreign oil companies. In turn they got nice "commissions" and cushy jobs working for big oil - screw your own country for a nice bank account in Miami.

Fortunately the days of the vendepatrias are over.
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Today the Venezuelan Central Bank released its report on the Venezuelan economy for the First Quarter of 2005. The Venezuelan economy grew 7.9% during that period which coming on the heals of last years 17% growth is excellent. So much for Chavez being bad for the economy.

Here are some more details. By sectors, the petroleum sector of the economy grew 1% and the non-petroleum sector grew by 9.3%. Also, the public sector grew by 5.1% while the private sector grew by 8.9%. So much for Chavez being bad for capitalists !

Manufacturing grew by 6.4%, commerce and services by 17.8%, construction by 15.4%, and transportation by 14.7%.

Government spending increased 8.5%, private spending 12.2%, and investment 38.8%.

Excellent numbers across the board and ones of which President Chavez should be very proud
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The other day I ran across very good blog I handn't seen before. It's called Bug's Blog and its written by a Trade Unionist from California who is living in Venezuela for a while to experience the Bolivarian Revolution first hand.

Bug's blog is filled with lots great information but I particularly enjoy her first hand reports of her experiences that range from Bolivarian Circle meetings to trade union events to her Spanish classes. A good place to start? Check out her great description of the May Day events in Caracas replete with photos
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Telesur, the new continent wide network of, by, and for Latin America went on the air for the first time today. It was a test signal and regular programming isn't expected until the Fall. But good news nevertheless. Lets see how long it takes for the right wing crowd to start referring to it as the Al-Jazeera of South America.



"Today starts our integration" and "Our north is the south" says the ad.
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Events are fast so fast paced these days that often we don't recall things that happened even just a few years ago. I think of this because today I read a letter by Kenneth Tellis at Vheadline which brought up an excellent point related to the Posada case.

When the United States was attacked on 9/11 they immediately pinned the blame on Osama Bin-Laden who at the time was believed to be in Afghanistan. So what did they do? Simple, they gave an ultimatum to the Afghan government that either it turn over Bin-Laden or the U.S. would attack it. Here are a couple of quotes from the period. From The Guardian:

President George Bush rejected as "non-negotiable" an offer by the Taliban to discuss turning over Osama bin Laden if the United States ended the bombing in Afghanistan. Returning to the White House after a weekend at Camp David, the president said the bombing would not stop, unless the ruling Taliban "turn [bin Laden] over, turn his cohorts over, turn any hostages they hold over." He added, "There's no need to discuss innocence or guilt. We know he's guilty". In Jalalabad, deputy prime minister Haji Abdul Kabir - the third most powerful figure in the ruling Taliban regime - told reporters that the Taliban would require evidence that Bin Laden was behind the September 11 terrorist attacks in the US, but added: "we would be ready to hand him over to a third country".

Note how in those days the U.S. talked about not needing to prove guilt - "we know he's guilty". I wonder how they'll feel if Venezuela says the same about Posada? Also, note how the Taliban tried to float the idea of sending Bin-Laden to a third country. That was of course a complete non-starter for the U.S. but its interesting how many pundits there are advocating the U.S. do precisely that with Posada.


And here is another quote from the press in September 2001

The White House has rejected requests from Afghanistan's ruling Taliban for proof that Osama bin Laden was responsible for last week's attacks. According to the US Secretary of State, Colin Powell, the United States has enough evidence to try bin Laden in an American court.

The US Government said there would be no negotiations. It said that President Bush had made his conditions clear in a speech before Congress last night. Their position remains that there will be no discussions and no negotiations.

President Bush warned unless his demands were met, Afghanistan would share the same fate as the terrorists, and said that the hour was coming when America would take action.

Nothing to discuss or negotiate! Isn't that kind of what Chavez was saying on Alo Presidente yesterday?

Fortunately for the U.S. their harboring of terrorists isn't likely to provoke an invasion or bombing campaign by Venezuela. But their completely hypocritical approach to international terrorism is being clearly revealed.
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Yesterday I mentioned that one of the pro-Chavez mayors, Juan Barreto, led a clean up effort in local neighborhood of Caracas. Not to be outdone, yesterday the opposition responded by helping to clean another neighborhood, La Pastora:



The people in the yellow vests are from Proyecto Venezuela (Venezuelan Projet) which is an anti-Chavez party, and a fairly right wing one at that (to give you an idea, Gustavo Coronel, linked to on the right, is closely tied to them).

If this keeps going maybe all of Venezuela will get cleaned up!!!

Actually, I think not. There is too much garbage in Venezuela and all these opposition parties have very few actual members.
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To give those who don’t have much of a frame of reference for what Venezuela was like before Chavez’s ascension to power I will publish a little series of articles called “The Good Old Days”. Why the “Good Old Days”? Because for some people, primarily those who make up the opposition, they were the good old days. The opposition held power, did things as they saw fit, and life was good for them.

Why should we care? Because if the opposition ever manages to get its act together maybe it will again challenge for power. It will then be important to know what an opposition government will be like. What better way to know what they will likely do in the future than to look at what they did in the past.

To that end, enjoy the first installment of “The Good Old Days” which shows what it was like when Venezuela had bankers who knew how to have a good time.

Failure of High-Flying Banks Shakes Venezuelan Economy

James Brooks Special to the New York Times

May 16,1994

Caracas, Venezuela- In Latin America’s worst banking crisis of the free-market 1990’s, a string of failures since January has left half of Venezuela’s banking industry in the hands of the Government.

Venezuelan taxpayers face a $6.1 billion bailout bill, as the government props up nine banks, including Banco Latino, the nation’s second largest. More banks may fail as inspectors unravel a five-year-long banking spree generated by deregulated interest rates and minimal supervision. This often resulted in banks offering rates for deposits that were far higher than were justified by loan demand.

“Eighty to 90 percent of the banking system is comprised in this catastrophe,” said Oscar Garcia Mendoza, president of one of the strongest banks here, Banco Venezolano de Credito. “If you don’t have policeman on street corners, bankers will run red lights.”

The costly bailout is contributing to political instability. And while fugitive bank directors enjoy comfortable overseas exile, Venezuelans are paying for the bank failures with high inflation, reduced government services and shrinking economic activity.

For Venezuela’s economy, today’s financial crisis is roughly 10 times as severe as the failure of savings and loans institutions in the early 1990’s was to the United States. The $105 billion savings and loans bailout represents 1.6 percent of the United States’ gross domestic product and 7 percent of the projected 1995 Federal budget.

By contrast, Venezuela’s $6.1 billion bailout represents 11 percent of Venezuela’s gross national product and 75% of the Goverments 1994 national budget. Banco Latino had 1.2 million depositors – about 10 percent of Venezuela’s adult population.

By setting interest rates far higher than sound banks, Banco Latino lured many depositors, then used the funds to build a lavish headquarters, charter jets for each director of the bank , throw lavish parties and make loans to insiders.

“There was absolutely no supervision”, one American banker here said, reviewing the collapse. “The regulators weren’t trained. They didn’t have a budget”

Late last fall, when Banco Latino officials began to realize that their house of cards was collapsing, they started transferring hundreds of millions of dollars overseas. In the final frenetic days, one bank director foresaw judicial orders on freezing assets and sold his million dollar mansion. Another office, Folco Falchi, the bank’s coordinator for international investments, was reportedly seen loading suitcases stuffed with dollars into his corporate jet on the Caribbean island of Curacao.

After the authorities padlocked Banco Latino on Jan. 14, bank officials, operating from offshore refuges, entered the bank’s computer electronically with a modem and erased and altered thousands of records.

At the time, Venezuela’s Superintendent of Banks, Roger Urbina, was buying race horses in Argentina. He decided not to come home.

Guidelines Ignored

At the Deposit Guarantee Fund, Venezuela’s equivalent of the Federal Deposit Insurance Corporation, Esperanza Martino, the president, apparently got the job in 1990 because she was married to the chief bodyguard of President Carlos Andres Perez, who was impeached last year for misuse of Government funds. Despite her training as lawyer, the director ignored guidelines and concentrated almost half of the money for banking emergencies in only two of Venezuela’s 47 banks: Banco Latino and a bank that collapsed in February.

The two regulators resigned on Jan 21. Without displaying any urgency, Venezuela’s Senate waited for three months to ratify their replacements. One legislator, Pablo Medina, charged that Congress’s reluctance to investigate Banco Latino stemmed from past generosity by the bank’s public relations department. With a $3-million-a-month budget, the department reportedly paid the bills of Banco Latino credit cards furnished fee of charge to 36 congressmen.

Venezuela has no tradition of punishing white-collar crime. Three bank failures in the late 1970’s resulted in one officer being jailed for one year.

In the Banco Latino case, a criminal court judge issued 83 arrest warrants in early March. The list was apparently prepared by copying names out of the bank’s most recent annual report. The following week the judge excused herself from the case, but left the arrest warrants standing.

Four months later, only 6 out of 83 suspects have surrendered. Virtually all the others are believed to be abroad.

Venezuelans, displaying little confidence in their banking system, legal or political systems, keep some $50 billion in foreign banks. Deposits in Venezuelan banks total only $12.7 billion. Venezuela’s dollar reserves have dropped by 25 percent since the start of this year a hemorrhaging that was worsened by the Banco Latino crisis.

The gigantic problems in Venezuela’s small banking sector have their roots in a free-market change adopted by Mr. Perez when he was president: the freeing of Government regulated interest rates.

“Free interest rates were adopted in 1989, but banking supervision was not adopted until 1994,” Tesalio Cadenas, Venezuela’s new superintendent of Banks, said in an interview here. “That gap was responsible for the Banco Latino crisis.”

With a relationship between Government and the bank, ministries moved their accounts to Latino. The army and the Government-owned oil company put their pension funds in the hands of Latino trust managers.

Flush with money, Latino built a lavish high-rise headquarters here and decorated it with expensive oil paintings and sculpture. Expanding aggressively, the bank became a ubiquitous presence in this country operating 101 branches, including one in the United States Embassy here. Affiliate banks were opened in Colombia, in Curacao (Banco Latino, N.V.) and in Miami (Banco Latino international).

When a Banco Latino representative office was opened in Paris, the bank filled a Concorde with guests for an expense-paid weekend in Paris. The bank also bought a corporate jet for virtually every bank director.

Lax Loan Policies

Struggling to keep up with rocketing deposits, Latino bankers made increasingly poor-quality loans. The same collateral was used for multiple loans. Loans were made to bank officers.

“You cannot apply Swiss standards to Spain,” one director, Ricardo Cisneros Rendiles said from Miami in a telephone interview. “Venezuelans are like some regional banks in the U.S. 15 years ago, there is a lot of community interest, everybody knows each other.”

Building a real estate empire, the bank bought 500 office buildings, only to see the market fall. Speculating in the stock market, it invested heavily in Caracas’s state electricity company at $10 a share in 1992. Today, the stock sells for $2 a share.

Without informing their Venezuelan depositors, Latino officers transferred millions of dollars in deposits to the Curacao affiliate bank. There, the bank did not have to meet the Venezuelan reserve requirements or pay the deposit insurance taxes.

Eventually, Banco Latino become a multibillion-dollar Ponzi scheme, a financial operation that could be maintained only by attracting more and more investors. Last year, the bank paid 105 percent interest on one-year certificates of deposit, more than double Venezuela’s 1993 inflation rate of 46%. Depositors over 60 years of age received interest premiums of 3 percentage points.

But when Mr. Garcia of the Banco Venezolano de Credito publicly urged banking officials to investigate Banco Latino’s high interest rates, the only reaction was a threat by the National Banking Council to expel him. (This industry group happens to be housed in Banco Latino’s headquarters building.)

‘Doing Dumb Things’

“They were doing dumb things, but all the banks were,” said Mr. Cisneros, a minority shareholder who said he was only actively involved in Banco Latino affairs when shareholders mounted a last-ditch attempt to save the bank in early January. “If it hadn’t been Banco Latino, it would have been any other bank. The proof is that eight other banks are under receivership.”

When the collapse came in mid-January, the Government suddenly had more than one million angry depositors on its hands. After one huge street demonstration, several depositors invaded a judge’s legal chambers, where they waved toy guillotines.

Seeking to buy political peace, Venezuela’s new President, Rafael Caldera, signed into law an emergency banking bill on March 10. This law retroactively raised depositors’ insurance from $9,000 to $35,000. With 99.8 percent of savings accounts and 94.3 percent of checking accounts fully covered, Banco Latino reopened uneventfully on April 4 as a Government run bank.

To placate some 2,000 depositors in Latino’s Curacao branch, Government officials announced in early May that the Government would extend the $35,000 coverage to their previously uninsured deposits. The banks in Miami and Colombia are to be sold, and the Government hopes to sell Banco Latino, as well as the other eight banks now under Government control: Banco de Amazonas, Bancor, Banco Barinas, Banco de la Construccion, Banco La Guaira, Banco Metropolitano, Banco de Maracaibo and Fiveca. To keep these banks afloat, the Government has pumped in $3.3 billion, more than the $2.8 billion in Government aid extended to Banco Latino.

“The idea is to privatize Banco Latino, the sooner the better” Edgar Dao, a member of the Government intervening board, said in an interview at Banco Latino’s headquarters.

But many analysts believe that Venezuela’s market needs only about 10 banks and that the rest will either have to be liquidated or merged with stronger banks. “They’ll put Banco Latino on the block, but I doubt they will get a nibble,” said Marco A. Gomez, president of the 78-member Foreign Bankers Association of Venezuela. “I don’t know of anyone who wants a bank of that magnitude.”

To prevent further bank frauds of Banco Latino’s size, the Bank Superintendent’s office is quadrupling its budget, is expanding its investigative team by one third and is seeking technical assistance from the United States Government.

As for the perpetrators of the multi billion-dollar collapse, prospects seem to be dim that they will ever be tried and convicted.

“I maintain that the presidents of many banks in Venezuela have signed many more balances with false figures than I ever have,” Gustavo Gomez Lopez, Banco Latino’s president until three weeks before the fall, wrote in March in a statement defending himself against charges of fraud, criminal conspiracy and undue appropriation.

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There has been some tit for tat and debate in the press over a report on social indicators and poverty in Venezuela. I had been meaning to write on it myself but I’m afraid that will have to wait until my HTML skills get a little better and I can make tables. In the meantime there was an excellent article on the subject by Carlos Herrera over at Vheadline. I highly recommend going over and reading it.


On another topic, anyone who has spent time in Venezuela knows that country has huge environmental problems. One source of pollution is of course the oil industry which has never been concerned about the environment and has gone from one environmental disaster to another over the years. And unfortunately the Chavez administration hasn’t done much to remedy that problem either. For an excellent account of this I recommend watching the film “Nuestro petroleo y otros cuentos” – “Our oil and other stories” (it is in Spanish and unfortunately I haven’t found a version with sub-titles)

But another source of pollution is Venezuelans themselves. Almost all public spaces in Venezuela – streets, parks, beaches - abound in litter. The Christian Science Monitor had a good article on this here. Here is one quote: “We are great generators of garbage. The Venezuelan culture isn’t environmentalist and [is] much less into recycling”. That has to be the understatement of the year.

Fortunately, someone was out yesterday at least trying to do something about it. Here is a picture of the Metropolitan Mayor of Caracas, Juan Barreto, out helping clean up trash in the El Cementerio section of Caracas.


Its a small gesture but still nice to see.


Finally, there is another very interesting little piece in the CSM. Their anti-Chavez reporter, Danna Harman, became ill and had a less than agreeable experience with a private Venezuelan physician. So much so that she wished she had just gone to one of the Cuban doctors in Missione Barrio Adentro!! Her final thoughts: "The critics may be right about President Hugo Chávez's antidemocratic tendencies, but it's hard to dismiss the effect these Cuban workers are having on the poor. I'm not surprised that Chávez's popularity has risen."
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