The Perils of Petrocracy
Ambroise
Tezenas for The New York Times
PDVSA HQ in Maracaibo, Venezuela
By
Tina Rosenberg
Who holds
the world’s oil? You might assume it’s
in the hands of big private oil companies like ExxonMobil.
But in fact, 77 percent of the world’s oil reserves are
held by national oil companies with no private equity, and
there are 13 state-owned oil companies with more reserves than
ExxonMobil, the largest multinational oil company. The popular
perception in the United States is that if leaders of oil countries
nationalize their oil, they are bucking a global trend toward
privatization. In reality, nationalized oil is the trend. And
the percentage of oil controlled by state-owned companies is
likely to continue rising, mainly because of the demographics
of oil. Deposits are being exhausted in wealthy countries — the
ones that exploited their oil first and generally have the
most private oil — and are being found largely in developing
countries, where oil tends to belong to the state.
Nationalization
is also a political trend in some regions, mainly Latin America,
where the populist presidents of Bolivia
and Ecuador have made it part of their discourse. They are
led, of course, by Hugo Chávez of Venezuela. He has
made private producers accept state control of their operations.
When they wouldn’t, as in the case of ExxonMobil and
ConocoPhillips, he simply nationalized their holdings. Chávez
has also asserted his control over Venezuela’s state
oil company, which before him operated very much like a private,
profit-driven enterprise.
Chávez is a prophet in search of disciples. He seeks
to present Venezuela as a more moral world power, uniting Latin
America and poor countries everywhere in a socialist alliance.
He has invented a new kind of socialism, which he calls Bolivarian
socialism, named for the independence hero Simón Bolívar:
a little Marx, a little Jesus, a little anti-imperialism and
a lot of the whim of Hugo Chávez, dedicated to the “comprehensive,
humanist, endogenous and socialist development of the nation.” His
is a gospel greased by oil, which is financing his transformation
of Venezuela. Chávez is a genius of a politician: charming,
folksy, flirtatious. I first met him in New York in 1999, the
year he became president. I sat next to him at an interview,
very pregnant. He embraced me — “But you should
come have the baby in Venezuela!” he enthused.
The appeal
of his message transcends the charisma of the messenger.
To other countries — especially the oil and gas nations
in Latin America that watch Chávez with particular interest — the
appeal is simple to understand. Oil- and gas-dependent countries
are historically ill governed. Today their people are in rebellion
against globalization, which promised much but has brought
them little. They have been told their countries are rich,
but they see they are poor. So someone must be stealing the
profits.
Most often,
nationalization is a reaction to the idea that the thief
is a foreign company. For populist leftists, El Petroleo
es Nuestro! — the oil is ours — is an alluring
slogan. Now as the record high price of oil has made exploitation
worthwhile even in places that are remote or geologically complicated
(Chad comes to mind), more underdeveloped countries have to
choose what to do with their oil. Those that have long held
oil must decide how to spend the incomprehensible amounts of
money oil is now bringing them.
Historically,
almost every country dependent on the export of oil has answered
this question in the same way: badly. It
may seem paradoxical, but finding a hole in the ground that
spouts money can be one of the worst things to happen to a
nation. With one or two exceptions, oil-dependent countries
are poorer, more conflict-ridden and despotic. OPEC’s
own studies show the perils of relying on oil. Between 1965
and 1998, the economies of OPEC members contracted by 1.3 percent
a year. Oil-dependent nations do especially badly by their
poor: infant survival, nutrition, life expectancy, literacy,
schooling — all are worse in oil-producing countries.
The history of oil-dependent countries has produced what Terry
Lynn Karl, a Stanford University professor, calls the paradox
of plenty.
Oil not
only creates very few jobs, it also destroys jobs in other
sectors. By pushing up a country’s exchange
rate, the export of oil distorts the economy. “Oil rents
drive out any other productive activity,” Karl says. “Why
would you bother to produce your own food if you could buy
it? Why would you bother to develop any kind of export industry
if oil makes your money worth more and that hurts all your
other exports?” The most successful societies develop
a middle class through manufacturing; oil makes this extremely
difficult.
Oil concentrates
a country’s wealth in the state, creating
a culture where money is made by soliciting politicians and
bureaucrats rather than by making things and selling them.
Oil states also ask their citizens for little in taxes, and
where citizens pay little in taxes, they demand little in accountability.
Those in power distribute oil money to stay in power. Thus
oil states tend to be highly corrupt.
II.
Venezuela
is a typical victim of the oil curse. It has become a rich
country of poor people. Teodoro Petkoff has seen Venezuela
through booms and busts. Once a daring leftist guerrilla who
in 2006 was briefly a candidate against Chávez, he publishes
a newspaper, Tal Cual, that criticizes both Chávez and
the opposition. “The state is booty,” Petkoff said
when I met him in his small office in Caracas. “The state
is hypertrophic here, a monster complex on top of society,
heavy and corrupt. It has been the great contractor, the great
buyer, the great provider, the great receiver. To win government
is to get access to a source of personal enrichment. Money
has to pass through the state. Oil has weakened our collective
morality. It obliges you to be corrupt. You can’t do
business if you are not corrupt. We are waiting for the easy
deal, big winnings.”
Chávez has promised to break this curse, to finally
use Venezuela’s oil to benefit its people. Oil is everything
in Venezuela; it pays for at least half the government’s
expenditures and 90 percent of its foreign exchange, according
Orlando Ochoa, a prominent economist. Now “zero misery” is
one of the government’s slogans, and the vehicle to get
there is oil. Chávez’s oil company, Petróleos
de Venezuela S.A., or Pdvsa (pronounced peh-deh-VEH-sah — S.A.
stands for “sociedad anónima,” or incorporated),
is proudly inefficient, proudly political. Chávez has
called his revolution “oil socialism.”
“We are doing what the old regimes didn’t do,” Bernardo Álvarez,
Venezuela’s ambassador to Washington and a former vice
minister of hydrocarbons in the Ministry of Energy, said to
me. “We are putting oil into a sustained process of development.
Our first priority is a fight against poverty and exclusion.”
To that
end, Pdvsa is investing the company’s profits
in helping dropouts finish high school and not just in drilling
wells. “Perhaps it was better run before Chávez,” says
Roger Tissot, a Latin America analyst based in British Columbia
who works for PFC Energy. “But it wasn’t efficient
in meeting the needs of the shareholders — the people
of Venezuela. Today perhaps it is less efficient but better
at meeting social goals.”
Whether
this is the right decision turns on whether this policy is
sustainable. In the 1990s, Venezuela’s state oil company
was a sleek machine, an excellent exploiter of oil, well fed
on its own profits. It floated above society, unmoored from
the problems of the average citizen. Today, oil money feeds
and educates poor neighborhoods. The purpose of the national
oil company is not to produce more oil, but to produce Bolivarian
socialism. These are two very different ways to handle a nation’s
oil resource. Can either model show poor countries how to convert
natural resources into sustained wealth? Few questions in economic
policy are more important today.
III.
Many nationalized
oil companies are poorly managed — on
average, national companies are 65 percent as efficient as
private ones, according to one study. Still, it is possible
to have a stellar national oil company, efficient in the classic
sense, one that can compete favorably with any Western major.
Saudi Aramco and Petrobras, in Brazil, are two examples. But
perhaps the best-run national oil company that ever existed
was in Venezuela. It was Pdvsa.
“On Dec. 31, 1975, I went to sleep as an Exxon employee,
and I woke up on Jan. 1, 1976, as an employee of Pdvsa,” Antonio
Szabo told me. Szabo now runs a software company in Houston,
but until 1983, he was a high-level executive at Pdvsa. “I
went to the same office, same everything. It was a brilliantly
executed nationalization process. What became different the
next morning? Except for the destination of the revenues, nothing.
Literally nothing. That was the whole point — to continue
to produce money for the country without disruption.”
President
Carlos Andrés Pérez nationalized Venezuela’s
oil because in the early 1970s there was an oil boom, with
a barrel reaching $12 in 1974 (about $50 in today’s dollars),
having quadrupled from the $3 a barrel fetched in 1973. Venezuelans
demanded that the profits stay at home. The expropriation of
Exxon, Shell and Gulf was negotiated and seamless, the lack
of acrimony stemming from the fact that the foreign companies’ concessions
had been designed from the start to be temporary, and were
to expire in 1983. “I believe that everybody realized
Pdvsa was the goose that laid the golden egg,” Szabo
says. “To keep it healthy you must leave it alone. Every
president believed this was sound policy — until Chávez.”
Paradoxically,
nationalization brought the government less money and less
control. When Venezuela’s oil was still
in private hands, the government collected 80 cents of every
dollar of oil exported. With nationalization the figure dropped,
and by the early 1990s, the government was collecting roughly
half that amount. This low return to the country’s coffers
was partly a result of that age-old conflict between short-
and long-term reward. Because wells run dry and machinery ages,
oil companies everywhere must invest lots of money just to
keep production steady, and to grow, they need even more. Without
new investment, Pdvsa would lose 25 percent of its oil production
every year. Its officials were convinced that Venezuela benefited
more if Pdvsa’s profits went to producing more oil, not
more government. “Social revenue has always overshadowed
investing in the industry,” said Ramón Espinasa,
who was chief economist of Pdvsa from 1992 to 1999. “But
I think the priority has to be to maintain oil. If you have
one dollar left, it should be invested in keeping capacity.
Otherwise next time around you will not have a single dollar
to distribute.”
Espinasa,
now 55, lives in Washington and works as an energy consultant
to the Inter-American Development Bank. As chief
economist for Pdvsa, he was a persuasive voice for the strategy
of “oil first.” During the early ’90s, the
company had an extraordinary need for investment. The bulk
of Venezuela’s oil lies under a 4,500-square-mile savanna
called the Orinoco Belt. The reserves are enormous, but 20
years ago it was not clear that they would be commercially
viable. The oil was heavy and extra-heavy crude, thick as Play-Doh.
It required expensive technology and expertise to extract,
and even then only a small percentage of the oil could be recovered.
This crude also needed a special refining process and would
most likely sell at a discount.
To ensure
there would be a market for Orinoco crude, in 1982 Pdvsa
began to buy refineries overseas able to process it.
Among its purchases was Citgo, the American refining and distribution
network. By the end of the 1990s, Pdvsa was among the top three
oil refiners in the U.S. “With heavy oil, if you don’t
own a refinery, your production does not have a home,” Szabo
says. “If you own a refinery, you have market share.” And
Pdvsa in the 1990s was focused on maximizing its market share
in the United States.
Pdvsa executives
also decided they didn’t want to take
on the debt and risk of developing the Orinoco, so in 1989
they began to open it to private participation. Pdvsa lowered
the normal royalty rate of 16 percent to a mere 1 percent to
attract investment to this capital-intensive project. The royalty
was meant to jump to 16 percent once the private company had
recouped a certain percentage of its investment.
In hindsight,
these were brilliant business decisions. Pdvsa’s
refineries overseas are making record profits, and the United
States is the company’s biggest customer. But back then,
the gathering of adequate revenue for the Venezuelan state
did not figure highly among the company’s priorities.
The Orinoco contract, for example, was so generous that in
2004, with oil at $46 a barrel, the private oil companies were
still paying royalties of 1 percent. (That year Chávez
raised royalties to 16 percent by decree.)
In fact,
some of Pdvsa’s shrewd business decisions seem
to have been made with an eye to shielding its gains from the
government. Pdvsa bought its first shares in an overseas oil
refinery after the government seized its multibillion-dollar
investment fund to help solve a financial crisis. Economists
on the left who are critical of the old Pdvsa argue that the
foreign holdings allowed the company to play with costs and
profits. It could sell oil to its refineries at less than market
price — thus incurring lower taxes.
Pdvsa attracted
the cream of Venezuela’s professional
class. Espinasa, who was educated at Cambridge, had an office
full of young (and very well paid) Ivy League- and Oxbridge-educated
Venezuelans. Pdvsa’s resources and talent outshone that
of the Energy Ministry, which was supposed to be overseeing
it. “In the 1990s most oil policy and macroeconomic policy
for Venezuela was done inside Pdvsa,” one Venezuelan
economist told me. “When the I.M.F. came to Venezuela,
the meetings were done in the office of Espinasa. The figures
they used came from Pdvsa and the Central Bank rather than
the Finance Ministry.”
Ambassador Álvarez was one of those trying to keep
control over Pdvsa, first as head of the energy and mines committee
in Congress, and later as vice minister of energy for hydrocarbons. “At
the ministry,” Álvarez says, “we had gone
from 200 engineers to 25. Pdvsa was the only one that had cars,
people. One energy minister used to call it ‘the Empire.’ ”
Pdvsa won
virtually every argument. But many people, not just Chavistas,
would argue that Venezuela lost. By 1998, real wages
in Venezuela were less than 40 percent what they had been in
1980. A third of the country was living in extreme poverty — up
from 11 percent in 1984. “It was normal for people working
for Pdvsa to be very proud — it was recognized as one
of the best oil companies,” says Tissot, the oil analyst. “In
contrast, the politicians were making a mess managing the rest
of the country. Pdvsa was working, but Venezuela was not working.”
I asked
Espinasa to respond to the charge that his Pdvsa didn’t
do much for the average Venezuelan.
“It shouldn’t have,” he replied. “It
was an oil company.”
IV.
Ten years
later, Pdvsa is no longer an oil company, at least by Espinasa’s standards. It now exists to finance Chávez’s
transformation of Venezuela. The integration is illustrated
by the fact that Rafael Ramírez, the minister of energy
and petroleum, is also president of Pdvsa. “The Pdvsa
that neglected the people and indifferently watched the misery
and poverty in the communities surrounding the company premises
is over,” Ramírez has said. “Now the oil
industry takes concrete actions to deepen the revolutionary
distributions of the revenues among the people.” If the
Pdvsa of the 1990s thought it was Exxon, today’s Pdvsa
amounts to the president’s $35 billion petty-cash drawer.
Chávez travels a lot. Foreign presidents who receive
him may enjoy receiving his customary gift — a replica
of the sword of Bolívar. But they probably appreciate
even more the oil that sometimes comes with it. Chávez
provides discounted or free oil to Central American and Caribbean
countries, sending nearly 100,000 barrels a day to Cuba in
exchange for doctors and Cuban expertise on state security.
He has given millions in non-oil aid to various Latin American
countries, much of it in the form of energy projects. Citgo
says it gave $80 million in heating oil to poor residents of
the South Bronx last winter.
Pdvsa is
also subsidizing Venezuela’s domestic oil consumption.
Cheap oil for Venezuelans is nothing new; when President Pérez
tried to raise gasoline prices in 1989, the riots nearly toppled
him. The Venezuelans feel it is their oil; why should they
have to pay for it? But the subsidies are much deeper and the
quantities greater today. A gallon of gasoline costs 6.3 cents
at the pump at the unofficial exchange rate. And Venezuela
is now gorging on gas. Venezuela will add 450,000 new cars
this year — about four times the number of four years
ago. Six Hummer dealerships are set to open early next year.
Oil is
now used to create electricity. Some of Venezuela’s
electric plants used to burn natural gas, but gas production
has dropped, creating shortages that oil is filling. Domestic
consumption of oil has reached at least 650,000 barrels a day,
according to Venezuelan economists. Venezuela is importing
oil products and may soon have to import gasoline. There is
also the problem of contraband: subsidized gasoline smuggled
out and sold at world-market prices in Colombia and the Caribbean.
Between its domestic consumption and its use of oil to make
friends overseas, Venezuela gives away or subsidizes a third
of its production. Most of the rest is sold in the United States.
The money
that Pdvsa does get from selling at market prices goes to
finance Chávez’s revolution at home. Last
year, Pdvsa’s payments to the state totaled more than
$35 billion, counting taxes, royalties and direct support for
social programs. This is 35 percent of the company’s
gross earnings.
Almost
$14 billion is spent at the sole discretion of Chávez.
It is called social-development money, although it appears
that there is little “social” in some of its spending.
Much of the money goes to the Fund for National Development,
or Fonden, an off-budget fund controlled by Chávez,
which also takes foreign reserves from the Central Bank. Fonden’s
Web site in July listed 130 projects — infrastructure,
foreign aid, some social projects like health clinics — as
well as the purchase of helicopters, submarine technology,
assault rifles and plants to build other munitions. The list
was taken off the Web site shortly after it drew notice in
the press and was replaced by a list containing no arms purchases.
What Fonden actually buys, for how much, from whom and through
what process is a mystery.
The more
celebrated of Pdvsa’s projects is a network
of social programs, called misiones. These missions bring health
clinics and classrooms directly into poor neighborhoods. They
are financed and in some cases run directly by Pdvsa. “If
Pérez wanted money from his oil boom, he had to wait
for Pdvsa to pay taxes, and he had to go to Congress and approve
extraordinary spending,” one Venezuelan economist told
me. “Today, the president gets on the phone with Ramírez
and in an hour can get $200 million.”
To finance
all these ambitious projects, Pdvsa must produce oil. Theoretically
this should not be a problem. When Chávez
was elected, Venezuelan crude went for about $9 a barrel (about
$11 today). At press time it was about $78. (Venezuela crude
trades at slightly under the average OPEC crude price.) Chávez
is the beneficiary of the greatest oil windfall the world has
seen, one based in part on political upheaval in Iran, Iraq
and Nigeria but also on a surge in demand from China and India
that is unlikely to end soon. So, for the foreseeable future,
there should be money for everything.
Yet Pdvsa is in trouble.
V.
One good
way to see Pdvsa’s many challenges up close
is to look at the mystery of the missing drilling rigs. A rig
has two jobs: to drill down in auspicious spots to look for
oil, and to clear out working wells when they clog, like a
giant Roto-Rooter. Because oil is so profitable and people
are drilling madly, there is a global shortage of rigs, and
the price of renting them has gone up. But Venezuela’s
shortage is worse than elsewhere. In testimony before the National
Assembly in July, Luis Vierma, Pdvsa’s vice president
for production, called the rig shortage “a significant
operational emergency.” The country needs 191 this year
to meet its production goals, Vierma said. But according to
Baker Hughes, the Houston firm that provides the world’s
standard count of rigs, there are only 73 active rigs in Venezuela.
Rig procurement
is going badly. Vierma testified that Pdvsa recently invited
63 companies to bid to supply rigs, but only
22 bid. Twelve received contracts, to supply 27 rigs, but only
five companies actually took rigs to Venezuela. Vierma called
this “a silent sabotage by multinational companies.”
Others
might call it the market at work. Rigs are in high demand;
rigs cost at least $15 million, and an offshore rig
can cost more than $95 million. Why go to Venezuela? “The
big contractors want to take their rigs somewhere with less
risk and threat of confiscation,” one executive of a
big drilling contractor in Venezuela told me. “The way
this government talks, it sends investors running.”
I went
to Lake Maracaibo to see the problem for myself. Maracaibo
is South America’s largest lake, a huge basin of duckweed
and sewage, where significant oil drilling first began in the
1920s. I expected to see very few rigs. But what I found was
more complicated.
Driving
down the lake’s eastern shore one hot, rainy
morning, I passed Pdvsa’s Maracaibo complex. Huge oil
storage tanks stood near the road. The entrance to the complex
was marked by a sign with one of the revolution’s slogans: “Fatherland,
Socialism or Death!” The lake was strung with electrical
lines and dotted in checkerboard fashion with wells, electrical
towers and the graceful, 170-foot-high towers of drill rigs.
In 1997, there were 57 rigs working on the lake. On the day
I visited, there were 29. I saw more rigs, including seven
in Pdvsa’s yards, along the lake shore, docked along
the bank. I asked one drilling contractor what they were doing
there. “Why aren’t they out on the lake working
if there’s such a shortage?”
“Ahh,” he said, and smiled. Like others I spoke
with, he didn’t want to be identified. “I estimate
that there are about 22 rigs sitting idle around the lake,
but not all of them are operable, due to lack of maintenance,
or because they require additional equipment,” he told
me. He said there were more idle rigs in Pdvsa docks across
the lake.
In June,
Pdvsa took back operating and maintenance contracts for its
working rigs from the contractors who held them. Ramírez,
the oil minister, said that contractors were “cannibals” who
were robbing the country, and that Pdvsa could do the work
for a third of the price. But it’s not clear that Pdvsa
can do the work at all.
I counted
at least 10 rigs belonging to Pdvsa that were not even being
worked on — the company’s management
is so poor, contractors said, that it cannot coordinate getting
rigs repaired. Pdvsa is responsible for servicing all rigs
working on the lake. “You need a boat to come out to
give you water, diesel, empty the cuttings, take away waste,” one
contractor said. “But I’ve waited a week for them
just to take trash off the rigs.” There may be other
reasons there are few working rigs. Vierma himself was briefly
being investigated by the National Assembly — notable,
given that it contains no opposition members — for overseeing
the purchase of rigs from companies that supposedly had no
rigs, no experience and little capital.
VI.
Pdvsa’s administrative troubles can be traced back to
one of the biggest threats to Chávez’s presidency.
In December 2002, Pdvsa’s managers, fed up with Chávez’s
attempts to control them, locked out the workers and shut down
Venezuela’s oil production for two months. The goal was
either to take back control of Pdvsa or to topple Chávez.
The economy collapsed, but ultimately Chávez triumphed
over the “oil sabotage,” as his government called
it, cementing his hold on power.
In the
aftermath of the strike, Chávez fired 18,000
of Pdvsa’s 46,000 workers — the vast majority of
them were managers and professionals, many of whom have since
gone to work in Calgary, Houston or Riyadh. Pdvsa has since
replaced the strikers, though the new hires are largely inexperienced.
In fact, Pdvsa now employs 75,000 workers, many more than in
the past, and Chávez says he wants to increase the number
to 102,000 next year. Part of Chávez’s new “oil
socialism” is to make Pdvsa more self-sufficient, reducing
dependence on outside service companies. So Pdvsa is creating
new subsidiaries. One is a new oil-services unit — “our
own Halliburton, ours, the ‘Bolivarian’ one,” Ramírez,
the energy minister, told state TV. Pdvsa has also announced
plans to build oil ships and drill rigs. In June, Pdvsa approved
the creation of seven new subsidiaries, including ones to grow
soybeans for ethanol, to build food-processing plants and even
to make shoes. Pdvsa is running a parallel state.
The company’s workers must all have at least one qualification:
they must be Chavistas. Ramírez told oil workers, in
a speech that was taped clandestinely and passed to a TV station,
that they should back the president or give their jobs to a
Bolivarian. The company is “red, red from top to bottom,” he
said. Pdvsa also wrote a letter to its contractors, warning
them not to hire any of the 18,000 fired workers.
As Pdvsa
has been molded to Chávez’s will, it
has also become less and less transparent in its dealings.
The company used to publish a standard annual report, but after
2004 it stopped filing its annual reports to the U.S. Securities
and Exchange Commission. In recent years it has released only
a page or two of basic figures, with no breakdowns or auditors’ notes.
When Pdvsa does release information, some of it is of questionable
credibility. Even the most fundamental operational fact — how
much oil Venezuela produces — is subject to debate. In
1997, Venezuela produced 3.3 million barrels per day of crude
oil. Today, Pdvsa claims the country produces the same amount,
but independent sources, including OPEC, say that figure is
too high; OPEC puts Venezuela’s production at 2.4 million
barrels a day last year.
What is
clear is that much of the oil revenue is going to social
spending. Last year, Pdvsa says it spent nearly $14
billion on social programs. That includes the missions and
Fonden, but does not include taxes and royalties of $21 billion
paid to the government. Pdvsa says it put $5.8 billion back
into the company last year. While this is a $2 billion hike
from 2005, it most likely includes items that no one would
call investment in oil; a secret addendum to the 2007 budget
described “investment” as including money for national
infrastructure and social projects. Pdvsa’s own business
plan calls for rapid growth in production, but oil analysts
say the company is clearly not investing enough. According
to Pavel Molchanov, who studies oil in Houston at Raymond James,
a financial services company, Pdvsa has had two years of production
decline and is likely to have at least two more. “This
is against a background of global oil production increasing
1 to 2 percent a year,” he says. “If they were
spending enough would their production be down? I don’t
think so.” (I would have liked to have asked Ramírez
about this and many other matters. His office promised me an
interview with him, but it never materialized, and Pdvsa officials
said no one else could even give me background information
unless Ramírez authorized it personally.)
Pdvsa is
also taking on debt. The company had very little debt until
2006, but this year it has borrowed $12.5 billion.
While raising cash through debt offerings can be fiscally sound,
and many companies do so, critics contend that Pdvsa is issuing
bonds for the wrong reasons. “Their debts are low, but
they didn’t have any before,” says José Guerra,
formerly chief of the research department of the Central Bank,
who left in disagreement about Chávez’s economic
policies. “Other oil countries are getting rid of debt.
And what is the debt going for? Their spending on exploration
is almost nothing. They are taking on debt to have a party.”
Some of the private companies that the old Pdvsa had brought
in are still working in Venezuela, but they are now only minority
partners and are paying higher taxes and royalties. On May
1, foreign companies working in the Orinoco were told to cede
majority control of their projects to Pdvsa. Two companies,
ExxonMobil and ConocoPhillips, left and are now negotiating
with Venezuela about compensation. Other companies, seemingly
chosen for their geopolitical value, have come into the Orinoco
to take their place and develop virgin areas: national oil
companies from big producers like Russia, China, Brazil and
Iran, but also Cuba, Chile, Uruguay, Argentina and Belarus,
which presumably can bring little expertise to the business
of heavy oil.
VII.
Pdvsa is
now dedicated to creating a new oil product: it is turning
petroleum directly into math problems. I watched this
alchemy one night in the living room of Félix Caraballo.
Caraballo, who is 32, lives in the El Encanto section of La
Vega, a slum on the side of one of the steep mountains around
Caracas. Caraballo has been working in La Vega on community
projects since he was 14, when police officers killed a friend
of his during the 1989 protests over the government’s
attempt to reduce gasoline subsidies. He is a committed Chavista
and a committed socialist. “Money should serve people
and not the other way around,” he told me.
The night
I visited, the couches in his living room were pushed to
one side to make a classroom. Yulimar Medina, a 25-year-old
college student, stood at a whiteboard with a marker and walked
the students through an equation. There were 11 adults, some
with young children, in the room, studying the addition and
multiplication of fractions. The students — known in
the program as vencedores, or triumphers — all had workbooks,
and they had already watched a 45-minute video of a math lesson.
This was
an eighth-grade class of Misión Ribas, a program
that brings grades 6 through 12 to barrios around the country.
This class meets from 6 p.m. to 9 p.m. every weeknight in Caraballo’s
house. The videos come from Cuba, and facilitators like Medina
lead the class in discussion and exercises afterward. The vencedores
study math, Spanish, history, geography, science and English,
and must work together to do a community project, like building
a staircase or planting a vegetable garden — that’s
the part Caraballo guides. Not only is school free but most
of the students also receive stipends of $85 a month to attend.
The students themselves choose who gets the stipends, based
on need and dedication.
Ribas is
one of an ever-growing list of Chávez’s
missions. One teaches people to read. Another has imported
thousands of Cuban doctors and dispatched them to poor neighborhoods
around the country. Another set up stores in barrios that carry
basic foodstuffs and medicines at highly subsidized prices.
Another provides identity cards to undocumented citizens. While
I was in Venezuela in September, Chávez announced another
mission, to expand universities. The vast majority of the financing
comes straight from Pdvsa.
The missions
are popular and have benefited more than half of Venezuela’s poorest sector. Venezuela’s millions
of poor take them as a sign of Chávez’s commitment
to them and to the government’s slogan of “zero
misery.” When I visited another Ribas class in an even
more remote corner of La Vega, I asked the students what they
valued most about the mission. “It comes to our barrio,” one
student said. “It doesn’t exclude anyone,” another
said.
Spending
oil money on schooling and doctors for the poor seems, intuitively,
like the right thing to do. “This is an
investment in human capital,” argues Mark Weisbrot, co-director
of the Center for Economic and Policy Research, a left-leaning
Washington policy group. “You’ve had a focus on
food and health care and education. It doesn’t cost that
much, and it’s reaching a lot of people.”
The Venezuelan
who finishes high school with Misión
Ribas may not have the same education she would get in a formal
school. But without Ribas, she would have no high-school education
at all. Chávez cares about reaching zero misery, something
that can be said of few governments with oil. But no one really
knows if the missions are actually moving Venezuela toward
zero misery; the programs have no visible internal evaluation.
Increasingly, the missions are replacing their formal counterparts.
It is wonderful for poor neighborhoods to have health clinics
staffed with Cuban doctors — wonderful, unless you happen
to need the services of one of Venezuela’s hospitals,
which are falling apart.
Political
and ideological training, Ribas officials told me, is the
top qualification for a facilitator. I attended a session
for new Ribas students in Las Torres, a La Vega barrio near
the top of the mountain. After Ribas officials told students
how to register for classes and what would be expected of them,
María Teresa Curvelo, the district coordinator, began
a 90-minute talk about a referendum of great importance to
the government. The referendum, to be held on Dec. 2, proposes
changing the constitution to remove Chávez’s term
limits and increase his power among other things. She urged
students to attend marches and street demonstrations supporting
Chávez. “Chávez is someone who comes along
every 100 years,” she told them. Afterward we rode down
the mountain in a truck. When she got out, I thanked her. “Fatherland,
Socialism or Death!” she replied.
VIII.
Venezuela’s poor have become much less so under Chávez.
The population living in extreme poverty, measured by cash
income, dropped from 20.3 percent in the last half of 1998
to 11.1 percent in the last half of 2006, according to official
statistics. But an oil boom might be expected to alleviate
poverty. The real question is whether the gains will be sustainable.
Weisbrot says he thinks they will. He points to the missions
and figures there are gains in health and education that cash
income doesn’t measure. But so far there is no sign of
them: the percentage of those living without running water
and living in inadequate housing, as well as the number of
young children not attending school, has scarcely budged in
the last 10 years. The percentage of babies born with low birth
weights actually rose from 1999 to 2006. And this is according
to government statistics. It is early, but these numbers may
mean that the missions are mainly helping through the stipends.
Whatever
success the missions have at helping the poor may be dwarfed
by the grotesque distortions in the economy as a
whole. Inflation is officially at 16 percent but is most likely
higher, according to Orlando Ochoa, the economist, who is usually
critical of Chávez. He says that in the basket of goods
and services used to measure inflation, just under half the
items are sold at government-controlled prices. Many goods
simply can’t be bought at those prices, and consumers
must pay double the price in a street market. Or the goods
can’t be found at all, their producers forced out of
business by price controls. Beans and sugar were hard to find
cheaply when I visited Caracas in September; fresh milk and
eggs hard to find at all. Recently, people had to line up for
five hours to get a liter of milk. One proposal in Chávez’s
constitutional referendum could increase inflation much further
by abolishing the autonomy of the Central Bank and giving the
president power over Venezuela’s international reserves.
The proposal would also essentially allow Chávez to
print money.
The major
threat to the economy comes from the exchange rate. Oil caused
the bolívar to be overvalued. Farms and factories
are in trouble. They can’t export and must compete at
home with products imported at the official exchange rate,
which is now about a third of the market rate. And so the country
is awash in artificially cheap imported products, from basic
foodstuffs, like Brazilian cooking oil, to fancy cars. “Our
productive capacity is too weak to create jobs,” Petkoff
says. “But we consume like a rich country.”
The disparity
between the official exchange rate (2,150 bolívars
to the dollar) and the black-market rate (6,200 bolívars
at press time) has created a new class known as the Boliburgesía.
Bankers, traders, anyone who works in finance or commerce,
can get very rich manipulating the exchange rates. Buy all
the imported whiskey and Hummers you want, is the message.
Live a life of wild excess. Just don’t try to produce
anything.
Even if
the price of oil stays high, it may not be able to sustain
Venezuela if oil production continues to drop, subsidized
domestic consumption keeps rising and government spending continues
unmeasured and unchecked. While other oil producers, like Russia
and Nigeria, are piling up surpluses, Venezuela is spending
everything it gets. Venezuela once had a $6 billion oil fund
to be saved for lean years; Chávez has spent all but
$700 million of it. The vast majority of Chávez’s
new missions and worker cooperatives are dependent on state
handouts — unsustainable when government revenue falls.
A devaluation of the currency would wipe out the income gains
of the poor.
This is
classic oil curse, and Venezuela has seen it before. In 1973,
and in 1981, Venezuela spent oil money wildly, without
controls. Each time a boom ended, it left Venezuela worse off
than before it began — per capita income in 1999 was
the same as in 1960. Chávez has quite likely intensified
these cycles, and the country is less able to produce anything
other than oil.
Venezuela’s adventures in oil nationalization have produced
two very different models. At a time when oil prices were low
and the country in dire need of social spending, the old Pdvsa’s
focus on reinvesting in oil production was undemocratic and
unfair to the Venezuelan people. But the new way has produced
something arguably worse — economic failure despite a
boom in oil prices, and it is unfair to future generations.
IX.
Nationalization
is often a response to the failure of privatized oil to respond
to the people’s needs. Even in the United
States, where there is a good chance of getting caught, oil
companies have inflated their costs or illegally deducted costs
and engaged in other machinations to minimize payouts. For
poor countries, the risks of getting a raw deal from private
oil companies are much greater. History is littered with contracts
that give Big Oil obviously unfair advantages — Shell
in Nigeria, Mobil in Kazakhstan and Texaco in Ecuador to name
a few. Oil can also be an irresistible seduction to a country’s
ruling class. Where democratic institutions — or even
merely transparent processes — don’t exist, the
lure to corruption is powerful. Oil in Russia, for example,
was sold off not for maximum profit to the country but maximum
profit to the officials who oversaw privatization. In Equatorial
Guinea, ExxonMobil, Amerada Hess, Marathon and others made
payments to President Teodoro Obiang or his family for land,
security and other services, according to a Senate investigation
of money-laundering involving Riggs Bank, where some of those
payments ended up.
Nationalization,
however, doesn’t cure these ills, and
it can deprive a nation of its rightful take of its natural
wealth in other ways. One is simply lack of know-how. One reason
President Evo Morales of Bolivia pulled back from his threats
to radically nationalize the country’s gas industry is
that Bolivian officials realize they cannot manage the business
themselves. Morales has focused on raising royalties on fields
with known reserves, fields where companies essentially are
guaranteed a return on investment. The royalty had been at
18 percent. Under pressure from popular protests, the previous
government raised the rate to 50 percent, and last year Morales
raised it to 82 percent in some cases. While foreign investment
in Bolivia’s natural-gas industry has fallen, every analyst
I talked to said it was not because of the royalty hike. Morales’s
nationalization rhetoric, not royalty rates, made private companies
skittish. “There’s a big difference for an investor
when there’s a worry about nationalization,” said
Amy Myers Jaffe, a fellow at the nonpartisan James A. Baker
III Institute for Public Policy, at Rice University in Houston. “There
are intangible factors I can’t control, and it’s
creating all this political risk.” Roger Tissot of PFC
Energy adds: “Companies don’t have a problem paying
more rent and taxes. They do have a problem giving up control.”
So perhaps
the best strategy for resource-rich countries is to keep
the oil private, watch it carefully and tax the hell
out of it. Better yet, raise royalties, which are more straightforward
and easier to collect. “If your objective is to maximize
rent, then the best way is to have companies compete with one
another in open bidding for access,” Tissot says. “Angola
and Libya have done this very successfully. Libya invited private
companies to come back and is squeezing 90 percent of the profits
out of them.”
As a slogan, “Negotiate a Better Royalty Rate!” doesn’t
have the ring of “The Oil Is Ours!”; nationalization
of natural resources can bolster a country’s psyche even
if the management of those resources is a failure. The urge
to nationalize is, at its core, a political one. Chávez
seized Pdvsa not so it would produce more but so he could directly
control the money. When governments give into this urge, they
tend to be susceptible to the temptations of using oil for
short-term gain.
But not
always. Nationalized oil production doesn’t
necessarily lead to political corruption or shortsightedness.
If the old Pdvsa were operating in today’s booming oil
market, there might be plenty of money for investment in oil
and social programs. But it would be the government’s
job to watch the company closely to make sure the state got
its fair share — in other words, to ensure oil does what
it should do: produce maximum sustainable money for the state.
It’s also the government’s job to use the money
wisely. That is a more important and difficult problem than
the dilemma of whether to nationalize, and the solution does
not depend on whether production is nationalized or privatized.
It is not even an oil problem at all.
All oil
production ends up at some point in the realm of politics — whose
interests will the bounty serve? The only way to mitigate the
political influence is transparency for state-owned and private
companies alike. “There should be a law that a national
oil company has to publish its corporate figures, matching
an S.E.C. filing,” says Jaffe, the Baker Institute fellow. “We
recommend that there be a regulator in Parliament that requires
full reporting. And it should be open to the public. It’s
easy to say and hard to do.”
Private
companies do release credible annual reports — but
many of them never reveal what they pay host governments. Several
new nongovernmental campaigns, like Publish What You Pay and
the Extractive Industries Transparency Initiative, are trying
to shame companies and governments into bringing the books
out into the open. So far they have had limited success.
“The problem isn’t who owns the resources, it’s
what you get from the proceeds,” says David Mares, a
professor of political science at the University of California,
San Diego, who studies energy in Latin America. “If you
waste it in corruption and unsustainable programs, it’s
as bad as if you have international corporations dominating,
who pay very few taxes.”
Nationalization
won’t keep oil from being stolen. Good
oversight, accountability and management of the funds will,
no matter who owns the oil. “On Jan. 1, 1976, the day
of nationalization, Pérez gave his speech with a banner
behind him that read ‘El Petróleo Es Nuestro,’ ” Antonio
Szabo says. “Guess what? It was nuestro all along.”
Tina Rosenberg is a contributing writer for the New York Times
Magazine.Petroleumworld
not necessarily share these views.
Editor's
Note: This commentary was originally published in The
New York Times Magazine ,
on Nov.4. 2007.
Petroleumworld reprint this article in the interest of our readers.
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