Hugo Chávez, oil, and Venezuela

George Philip
20 February 2009

Venezuela is among the countries most vulnerable to the current global economic downturn. The reason is straightforward. Venezuela is overwhelmingly dependent on oil for both its exports and fiscal revenues - and oil prices have fallen steeply since their peak in mid-2008. Moreover, Venezuela's non-oil exports do not amount to much and cannot offset declines in the oil sector except perhaps in the very long run. George Philip is professor and reader in Latin American politics at the London School of Economics. He is the author of Democracy in Latin America: Surviving Conflict and Crisis (Polity, 2003)

If that were not enough, Venezuela's oil production has fallen since Hugo Chávez came to power in 1999; this leaves the economy more and more dependent on higher and higher oil prices. The Venezuelan leader may appear to be riding high after his referendum victory of 15 February 2009 lifting presidential term-limits; but longer-term trends present serious difficulties to his model of "21st-century socialism". As the logic of economic decline starts to play out, what are his options in avoiding an anti-climactic end?

The terms of constraint

There are two ways of approaching this question, one asking whether a severe downturn in Venezuela can be avoided or at least mitigated, and the other whether Chávez and his government can survive bad economic times.  The answers are "probably not" and "just possibly". Chávez's political prospects are not good - but they are less bad than those for the economy.  Also by George Philip in openDemocracy:"The politics of oil in Venezuela" (24 May 2006) "Hugo Chávez at his peak" (28 March 2007)

Chávez has been accused of being slow to respond to the collapse in oil prices, preferring instead to concentrate on winning the plebiscite that now makes possible his re-election in 2012. This criticism is not entirely fair. Chávez has put a lot of effort into persuading the Organisation of the Petroleum Exporting Countries (Opec) to restrain oil production. This strategy genuinely reflects Chavez's overall worldview and high international profile; offers significant help to the other hawks within Opec; and has some initial plausibility.

It is true that the increase in the international oil price to over $140 a barrel in mid-2008 had less to do with Opec than with the vagaries of the international financial system. However, since prices started to fall back, Opec members have responded, promising to cut back output by a total of more than 4 million barrels per day. There is some evidence that these promises are being followed by action.

More cuts in Opec production are entirely likely, since it is hard to see countries such as Saudi Arabia remaining content with oil prices at their current level. If the global downturn turns out to be as severe as some pessimists (or perhaps realists) fear, it is unlikely that, production cutbacks will rescue the oil price. However, provided that 4 million daily barrels or more are actually withheld from the market over a significant period, then oil prices might be expected again to increase at a relatively early stage of any global recovery. Meanwhile, Venezuela almost certainly has enough foreign-exchange reserves to survive a year or so of low oil prices. So far, so good. 

What is happening in Venezuela? openDemocracy's many articles on the Hugo Chávez years offer detailed, independent analysis and argument. They include:

Ivan Briscoe, "The invisible majority: Venezuela after the revolution" (25 August 2004)

Ivan Briscoe, "All change in Venezuela's revolution?" (25 January 2005)

Jonah Gindin & William I Robinson, "The United States, Venezuela, and ‘democracy promotion'" (4 August 2005)

Ivan Briscoe, "Venezuela: a revolution in contraflow" (10 February 2006)

Ben Schiller, "The axis of oil: China and Venezuela" (2 March 2006)

Phil Gunson, "Hugo Chávez's provocative solidarity" (14 June 2006)

Phil Gunson, "Bolivarian myths and legends" (1 December 2006)

Juan Gabriel Tokatlian, "After Bush: dealing with Hugo Chávez" (13 March 2007)

Phil Gunson, "Hugo Chávez: yo, el supremo" (13 April 2007)

Julia Buxton, "The deepening of Venezuela's Bolivarian revolution: why most people don't get it" (4 May 2007)

Ivan Briscoe, "Venezuela: is Hugo Chávez in control?" (9 August 2007)

Stephanie Blankenburg, "Venezuela: a complicated referendum" (4 December 2007)

Adam Isacson, "The Colombia - Venezuela - Ecuador tangle" (17 March 2008)

Ivan Briscoe, "Venezuela: troops, polls and an itch at the top" (21 November 2008)

But there is a further difficulty, which is that the continuing decline in Venezuelan oil production is starting to make the arithmetic of adherence to Opec increasingly tight. There is some dispute as to the exact amount of Venezuela's current oil production, though the consensus of expert opinion puts capacity in the region of 2.4-2.5 million barrels daily. This involves a considerable reduction since 1998, mostly as a result of inadequate investment (though there have also been efficiency problems within the Petroleos de Venezuela SA [PdVSA] since the 2002-03 strike).

Around 0.7-0.8 million of these (perhaps) 2.5 million daily barrels are sold on the home market (where prices are below the cost of production), and some are smuggled to neighbouring countries where oil-product prices are higher. Of the remaining output, an indeterminate amount is sold on concessionary terms to Cuba ("oil for doctors"), central America, the Caribbean, and elsewhere. It seems probable that some of this concessionary oil, or at least the generosity of its terms, will be reduced during the downturn. Even so, it is hard to imagine Chávez cutting off Cuba. Thus, a component of Venezuelan oil will continue to be sold cheaply to Chávez's friends abroad, a further restriction on Venezuela's total oil income. 

The economics of pressure

An even more important difficulty for Venezuela is the Opec cuts themselves. It is unlikely that Venezuela will be able - or will want - to persuade the rest of Opec to cut production without doing the same itself. It would be more than embarrassing if Chávez were to be accused of cheating on Venezuela's Opec quotas. This probably won't happen. Thus far Venezuela has promised to cut output by 0.35 million daily barrels, and I would expect it to at least come close. It may soon find itself under pressure to cut by even more. Yet Venezuela's exports of non-concessionary oil, after Opec production cuts, may already be in the process of falling to 1.2 million daily barrels or even fewer. This is already, even without further reductions, uncomfortably low for an oil-dependent middle-income country with a population of 25 million. This population is increasing apace - and its expectations have risen during Chávez's decade of rule.  

The pressures are clear. The oil industry already needs extensive investment to maintain production at its current levels ($12 billion is probably a reasonable estimate). Venezuela's current foreign-exchange reserves are drawing down in the context of current market conditions. It is difficult, then, to see much money being left over for general public spending. For the figures to look genuinely friendly, the international oil price would have to go back above $100. The current weakness in the global economy makes this look unlikely and (if it occurred) unsustainable.

It is hard to see how Venezuela can find plausible ways out of this difficulty. For example, even if the Venezuelan government successfully attracted fresh capital investment from politically friendly countries - and it would need to attract a seriously large amount of money to make much difference - any resulting production increases would be constrained by Venezuela's Opec commitments.  

The response to decline

It is hard to escape this rather brutal logic. If Venezuela restricts its production to keep prices up, it will find its export surplus being eaten away; but if it seeks to increase production, then it risks keeping world prices low. True, Opec-inspired production cuts may allow Venezuela to cut its fresh investment in the oil industry in the short run, but cutting long-term capacity in line with current Opec quotas would have the effect of holding back any recovery in production (if and when the market does recover). In the absence of some major catastrophe in the middle east, the Venezuelan economy does indeed face some very hard times. 

So what is to be done? In the long term, Venezuela needs to diversify out of its dependence on oil. There is, however, enormous popular hostility to the kind of policies necessary to make a serious strategy of diversification work. After all, Venezuela has been a major oil exporter for around eighty years. Most Venezuelans believe that oil should make them rich and do not see oil dependence, as such, as a problem.

Indeed, former Venezuelan governments that tried to diversify away from oil came seriously unstuck. Hugo Chávez, with his energetic attitude toward wealth distribution and lack of serious interest in wealth creation, very much reflects these popular attitudes. That is why he keeps winning elections and referendums, and why the political opposition is so frequently wrong-footed.

Chávez is likely to respond to the decline in Venezuela's economy by refocusing his rhetoric to emphasise solidarity with the poor, rather than taking painful measures to tackle the underlying problems. It is entirely possible that a strategy of deflecting blame rather than finding practical solutions might keep Chávez's core supporters behind him, if only because poorer Venezuelans have good reason to fear the consequences of serious adjustment. Thus, even amid economic hard times, a majority of Venezuelans may prefer to stick to the leader they know. An economic vice may still offer a political escape-route.

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