Political Economy: Oil and Gasoline in Venezuela

Subject: Economics
Pages: 10
Words: 2867
Reading time:
11 min
Study level: College

Introduction

Venezuela has huge reserves of natural resources with oil and gasoline reserves being some of the country’s greatest assets. This is a clear indication that the country has the capacity to realize economic sustainability and remarkable development in social aspects. However, Venezuela still grapples with the challenges of poverty which have plunged it into economic, social and political unrest in the last 10 years. When Hugo Chavez who is a populist took over the leadership of the country, he promised to make major changes including amending the constitution and introducing changes in critical industries that play a major role in the economy of the country (West, 2004).

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The programs started by Chavez were aimed at assisting the less fortunate in society through provision of free health services and reduced cost of food. These measures have been successful in reducing the poverty rates to a great extent. The reduction in poverty which has been influenced by the growth of per capital income has seen poverty levels decrease by13 % during this period.

However, poverty levels keep on changing due to the changes in economic conditions. Polarization is evident in Venezuela resulting from the style of rule that has been exercised by Chavez for a long period of time. The popular masses laud his leadership but a lot of criticism comes from the middle class people and a section of the elite who accuse Chavez of leading the country dictatorially. The country has faced unrest including protests during his rule consequently creating strong opposition against him (West, 2004).

Oil and Nation Competitiveness

The economy of Venezuela is highly dependent on the prevailing world oil prices. The oil reserves in the country place the country in a better position in terms of competition. However, when oil is not performing well in the global market, the economy of the country is affected negatively since oil accounts for about 30 per cent of the GDP. The country is forced to take drastic measures aimed at dealing with the fluctuating oil prices. Some of the steps the country takes to cushion itself from these challenges include reducing its budget. In addition, there has been reduction in the salaries of high officials working in the government alongside increasing taxes (Alvarez & Hanson, 2009).

Since 1999 when Hugo Chavez became the president of Venezuela, the economy of the country has highly relied on oil production. In 2006, the government announced that all oil fields that were under the management of foreigners were to be nationalized. This increased government control in the oil projects through increased share holding of up to 60 percent. However, the country is not focused on entirely relying on oil for economic growth. Other economic activities such as mining, agriculture and manufacturing are also used to boost the economy. The country’s economy suffered greatly in 2002 when there was a failed attempt to overthrow Hugo Chavez. The effects were also worsened by the employee strike at PDVSA which is the state oil company in the country. The strike which led to loss of jobs for thousands of the employees caused a decline in the country’s GDP. The economy however improved subsequently after oil prices continued rising (Alvarez & Hanson, 2009).

Background of oil and gasoline Industry in Venezuela

The oil and gasoline deposits found in Venezuela are among the greatest oil deposits in the world. Oil is a major source of revenue for the country constituting about 80 per cent of the revenue earned by the country. It is estimated to contribute one third of the gross domestic product of Venezuela. Recent worldwide increase in the prices of oil have made it necessary for the country to diversify its programs of social spending and its economic relationships with other countries in order to improve its profile on the global map. The main state company which is involved in oil exploitation has been experiencing problems in the recent past. This has been attributed to political instability in the country. Analysts have pointed out that the financial crisis experienced across the world and the volatile oil markets have caused the problems faced by Venezuelan companies dealing in oil.

Oil Scarcity

Global oil scarcity is a sensitive issue since oil is crucial in the production and transport sectors. It is also one of the commodities that are highly traded in the world. The prices of oil are influenced by the market forces or the demand and supply. An increase in demand leads to increased prices, which ultimately leads to high supply and low demand. The value at which oil sells is usually a reflection of how costly it will be to bring the commodity into the market. Generally, a record of high oil prices is indicative of the fact that the commodity is scarce while abundance of the commodity is indicated by low prices. There are usually changes in market prices which do not last for long and usually lead to rise in oil prices like it was witnessed in the 1970s. On a long term scale, changes in the prices of oil are definite starting with slight increases before major ones set in.

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Oil scarcity is an issue that raises serious contentions. Players in the oil industry have concurred that there is an imminent global crisis in the supply of oil and gasoline. The decrease in the quantity of oil available is proof enough that nature has constrained the industry with regard to its capacity to produce more oil. Decrease in the prices of oil decreases capital expenditure which in turn eases the constraints facing supply. The increasing oil prices have led to technological advancements which have made it difficult for the industry to successfully exploit some oil reserves. The qualities of oil itself also have a close relation with the scarcity of the commodity. Its qualities make it impossible for the commodity to be substituted with any other commodity. If there were substitutes for oil, its price and the scarcity that is often witnessed would be eliminated. Oil influences world economy because it is widely used as a crucial source of energy. Its consumption has increased over the recent past, leading to the occasional scarcity (DiJohn, 2009).

Oil Wars

In 2004, the highest increase in the prices of oil was recorded when a barrel of oil went up to $40. This increase was attributed to the US inability to refine crude oil, hoarding of the commodity in anticipation of increased prices and insecurity in oil producing zones. However, this crisis was heightened by the oil strike that took place in Venezuela. The strike reduced the supply of oil and gasoline in many places. This was the first time oil supply especially in the US was affected by unrest coming from places outside the Middle East. The strike in Venezuela was also one of the few disturbances in the oil industry whose cause was not either war or revolution.

Political Issues in Oil and Gasoline Production

Oil and gasoline economy have influenced the politics of Venezuela in many ways. One of the effects of oil and gasoline business on the country’s politics is the increase in bureaucracy in the country. It is estimated that about 45 per cent of all the people working in the formal set up are employed in accordance with government procedures. Oil wealth in Venezuela has also turned the country into what many political scientists have described as pacted democracy. This is a kind of democracy sustained by consensus among different classes of elites (Twugell, 2004).

The powerful groups in society who oppose most of the government policies are brought together to make a truce on condition that they will continue enjoying their privileges. For instance, political parties in Venezuela were promised power after the results of the elections. This meant that the winning party was under obligation to share the benefits of oil and gasoline industry with other parties. In addition, the parties were promised access to employment opportunities and government contracts. The level of bureaucracy in Venezuela and its type of democracy made the country seem more or less a one-party state. The difference was only that the leadership of the country was composed of two parties governing the country. This system of government almost came to an end in 1989 when uprisings arose fighting the economic reforms steered by IMF (Wilpert, 2003).

Oil and Gasoline Legislation

The ownership of the oil and gasoline industry in Venezuela has been limited to the state as stipulated in the constitution of the country written by supporters of Hugo Chavez in 1999. The government of Venezuela that preceded the rule of Chavez was fighting to privatize PDVSA, the major state oil company in the country. In the 1999 constitution, it was clearly stated that the government was to remain in control of the company or any other company intending to manage the oil and gasoline industry. This was explained to be a result of political and economic motives. This section of the constitution ended the search for neo-liberal policies of economy that PDVSA was looking for before Chavez came to power (Chanxia, 2008).

However, the constitution is also criticized because there is a perceived avenue through which the services of PDVSA could be privatized. Although the government is entitled to fully own all PDVSA shares with an exception of shares owned by subsidiaries, businesses and other constituents of PDVSA, the situation can be changed. PDVSA can decide to change its services into subsidiaries and then invite people or businesses to buy them out. This is a consideration that has been made by the directors to shield the company from incurring losses like the ones caused by the strike among workers in the industry (Wilpert, 2003).

The hydrocarbons statute also has a section which is closely related to the government ownership of oil and gasoline reserves in Venezuela. The law has a provision requiring activities of exploiting oil and gasoline in the country to remain public for the sake of the citizens (Lei & Heikki, 2009).It is further stated that oil and gasoline exploration should be aimed at enhancing sustainable development and integration efforts in the country. As a result, the activities should focus on rationally using the resources and taking care of the environment. Income from oil and gasoline is supposed to be directed towards provision of health care services, education and other economic activities aimed at stabilizing the country.

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Tax reform

The legislation regarding taxation of oil and gasoline in Venezuela since 1943 requires that a certain percentage of royalty per barrel be paid when oil is extracted. This is applicable to the state company PDVSA involved in extracting oil and any other foreign company in the oil industry. Foreign companies have been advocating for the royalty to be lowered while PDVSA has been preparing reforms intended at abolishing it completely. However, Venezuela enacted reform laws governing extraction of oil and gasoline in 2001 where the royalties were increased according to the selling price per barrel (Kun & John, 2008).

Changes in the tax system caused opposition leaders to cry out by arguing that this was likely to destroy the cooperation of Venezuela and other countries and possibly discourage foreign investors from conducting their activities in the country. The government increased the royalty on the premise that it is easier to collect royalties on oil and gasoline trade rather than collecting taxes (Joanna, 2003).This meant that the government was able to monitor the amount of oil being extracted and impose royalties on the basis of oil and gasoline prices in the market. However, controlling taxes from oil and gasoline sales is difficult since oil and gasoline companies do not include their expenses in the price. The government argued that collecting royalties was a way of dealing with the weaknesses that were experienced in the process of collecting taxes (Weisbrot & Ray, 2010).

Macro economics

Venezuela’s economy recorded rapid growth in the first quarter of 2003 after the strikes that had caused devastating effects on the economy came to an end. The growth continued for a period of six years during which the country recorded cumulative economic growth. The GDP increased by 95 per cent from 2003 to 2008 (Wilpert, 2003). This caused a 70 per cent reduction in poverty among the citizens of Venezuela. Social spending per individual also increased and many programs supporting health sectors and education were started. This period also recorded high reduction in unemployment rates making Venezuela one of the countries that recorded remarkable reduction in inequality rates.

Economic downturn in Venezuela started being experienced in the first quarter of 2008. This is the same period when recession was witnessed in America. Growth in the private sector was almost stagnant while productivity in the manufacturing industry was declining sharply. The biggest blow on the Venezuelan economy was witnessed in 2008 when the prices of oils collapsed. The prices had reduced by 50 % in the fourth quarter of the year. This made the situation worse because there was public spending that had already started. The public sector was also growing at a slow rate of 0.9 percent as opposed to a rate of 16.3 per cent in 2008 (Weisbrot & Ray, 2010).

Venezuelan economy has been recovering but the question that remains is whether the recovery will be sustainable. It has been argued that the recovery will highly depend on policies made by the government. Different people have argued that the Venezuelan economy is likely to remain stagnant or be affected by recession for a long period of time (Liang-Hing & Yu-Ling, 2009).There is a possibility that the investment climate created by the government of Venezuela is not favorable hence the development and growth of the country will remain limited. Formation of private capital in relation to GDP percentage has been going down even before the economic recession of 2009. This decline is likely to continue because of the policy changes that have been taking place in the country. In addition, the private sector is not in agreement with the changes and the government in general. The impact of lack of support from the private sector is that the economy of Venezuela which had grown significantly between 2003 and 2004 is likely to experience constraints.

However, the rate at which capital formation recovered since 2003 leaves the country optimistic that it would not be faced by serious economic problems. This is because although the powerful business interests are against the government, local investors take the opportunity to invest causing stability in the economy. The government can also intervene and prevent the country from experiencing economic problems by increasing public investment. This was done in 2008 and the government discovered it was possible to increase public investment. The government can also make investments in constructing residential houses, investing in transport and other public sectors (Quey-Jen & Xiaojun, 2010).

These steps will fill the gap that is left by private investors and improve the economic development of the country. The government of Venezuela is capable of achieving and maintaining a steady economic growth as long as there is no crisis in financial exchange. It is important to note that financial exchange crisis is one of the problems experienced by countries that do not have stable currencies. However, the country is not at a risk of financial crisis since it has enough reserves at the central bank. In addition, the government of Venezuela has sufficient borrowing capacity to enable it to borrow money just in case there is a collapse in oil prices (Weisbrot & Ray, 2010).

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Hypotheses

The study is based on the following hypotheses

  • The fluctuating world prices of oil and gasoline have affected the economy of Venezuela negatively
  • Oil and gasoline industry is the backbone of Venezuelan economy
  • Government legislation in Venezuela is important in determining exploitation of oil and gasoline resources

Conclusion

Despite the fact that oil is an important natural resource, the increase in oil and gasoline exports in Venezuela have at different times led to social inequalities. Oil trade has repeatedly caused problems in the budgetary allocations of the country. Continued exploitation of oil has left Venezuela lagging behind in terms of development due to the inequalities in world production. The government of Venezuela has been striving to see fair distribution of revenue from oil and gasoline but initiating reforms is not the only mechanism of ensuring equal distribution. When there are uprisings and unrest in countries that are involved in oil production like Venezuela, the solution is not to initiate reforms in the industry.

The oil and gasoline industry in Venezuela has experienced fluctuations resulting from oil scarcity and oil wars. This is because oil is one of the most traded commodities all over the world due to its widespread use as a source of energy. This implies that countries that rely on oil as the primary way of economic development should come up with alternative and reliable means of sustaining their economies. For instance, Venezuela should focus on developing its economy through agricultural activities alongside relying on its oil reserves. This is an important way through which the country can meet basic social needs of the population and be self-sufficient.

Reference List

Joanna, L. (2003). Confucian Business Ethics and the Economy. Journal of Business Ethics , 153-162.

Kun, C., & John, E. (2008). Ethical Perceptions of Business Students: Differences between East Asia and the USA and Among Confucian Cultures. Journal of Business Ethics , 121-132.

Lei, W., & Heikki, J. (2009). The Impact of China on Corporate Social Responsibility: the Harmony Approach. Journal of Business Ethics , 433-451.

Liang-Hing, L., & Yu-Ling, H. (2009). Confucian Dynamism,Culture and Ethical Changes in Chinese Societies-Acomparative Study of china, Taiwan and Hong Kong. International Journal of Human Resource Management , 402-2417.

Quey-Jen, Y., & Xiaojun, X. (2010). The Effect of Confucian Work Ethics on Learning about Science and Technology Knowledge and Morality. Journal of Business Ethics , 111-128.

Twugell, F. (2004). The Politics of Oil in Venezuela. California: Stanford University Press.

Weisbrot, M., & Ray, R. (2010). Update on the Venezuelan Economy. Web.

West, B. (2004). Oil and development in Venezuela during the 20th century. New York: Greenwood Publishing Group.

Wilpert, G. (2003). The Economics, Culture, and Politics of Oil in Venezuela. Web.