Global Policy Forum

Venezuela's Oil-Based Economy


By Cesar J. Alvarez

Council on Foreign Relations
November 27, 2006

Venezuela has an oil economy. It is the world's fifth-largest oil exporter and its oil reserves are among the top ten in the world. Oil typically generates 80 percent of the country's total export revenue, contributes about half of the central government's income, and is responsible for about one-third of the country's gross domestic product (GDP). Increases in world oil prices over the last few years have allowed Venezuelan President Hugo Chavez to push the government's social program spending, expand its commercial ties to other countries, and boost his own international profile. Chavez's anti-U.S. rhetoric has raised concern because he has threatened to stop exporting Venezuelan oil and refined petroleum products to the United States, its biggest oil-trading partner. Although Venezuela is trying to develop new markets for its crude oil, a significant short-term shift in oil relations between Venezuela and the United States is unlikely since Venezuela remains heavily dependent on oil exports to the United States. Has Venezuela's economy changed during Chavez's presidency? Since Chavez took office in 1999 the economy has remained largely centered on oil production. Venezuela's ambassador to the United States, Bernardo Alvarez Herrera, writes in Foreign Affairs that the non-oil sector, which includes mining, manufacturing, and agriculture "has been growing faster than the oil sector," but this is challenged by experts such as Miguel Tinker-Salas, professor of Latin American history at Pomona College. He says although Venezuela may be trying to diversify, "oil still predominates."

In 2002, the Venezuelan economy experienced a significant downturn caused by a failed military coup to overthrow Chavez and a two-month strike by the state-run oil company PDVSA. The response to the strike-the dismissal of more than 17,000 PDVSA employees-resulted in a rapid drop in GDP in 2002 and 2003. In 2004 rising international oil prices aided the economy's recovery. In 2005 economic growth continued with a 9.3 percent rise in GDP, putting Venezuela's economy well above its prestrike levels, according to the Economist Intelligence Unit. In addition, unemployment has recently fallen below 10 percent for the first time under Chavez, underscoring the economy's increasing growth. Mark Weisbrot, codirector of the Washington-based Center for Economic and Policy Research (CEPR), says he's skeptical of the accuracy of unemployment figures in the region but believes that "unemployment has decreased significantly." In this CEPR report (PDF) he claims that economic growth and Chavez's implementation of social programs to benefit the poor have been instrumental in reducing poverty rates.

What is PDVSA?
PDVSA (Petróleos de Venezuela, S.A.) is Venezuela's state-owned petroleum company. It oversees the exploration, production, refinement, and export of oil as well as the exploration and production of natural gas. According to Tinker-Salas, after the nationalization of oil in 1976, PDVSA was very much like a "state within a state." It "insulated itself from the government" and functioned largely as its own entity with control of the nation's wealth. In 2002 Chavez moved to increase his influence over the company and redefined PDVSA's role to include the government's social priorities. Under Chavez, PDVSA must now spend at least 10 percent of its annual investment budget on social programs. Peter Hakim, president of the Inter-American Dialogue, a Washington-based center for policy analysis, says that Chavez's gradual takeover of PDVSA has given him an enormous "black box" to pursue his political and economic ambitions.

How much oil is PDVSA producing?
According to the U.S. government's Energy Information Administration (EIA), production of crude oil reached an estimated 3.1 million barrels per day (mb/d) in 2000 before falling to about 2.3 mb/d after the PDVSA strike. It is not clear whether Venezuela's average output has been able to return to its prestrike production levels. Since 2004 it has reportedly been yielding a relatively consistent 2.6 mb/d, according to the EIA. In contrast, PDVSA estimates the rate at around 3.1 mb/d in 2005. But PDVSA's estimate also includes over 600,000 barrels a day of extra-heavy crude oil from the Orinoco belt, whereas the EIA's estimates do not specify what type of oil grades make up its crude oil supply figures. A report (PDF) by the International Energy Agency, which does account for the extra-heavy crude oil production, put PDVSA's 2005 production rate at 3.2 mb/d, but showed a decreased rate of 2.55 mb/d in September 2006.

Venezuela has an estimated 78 billion barrels of conventional crude oil reserves and an additional estimated 235 billion barrels of unconventional extra-heavy crude oil in the Orinoco Belt region located southeast of Caracas. If development in the region can turn this extra-heavy tar-like oil into a more marketable commodity, Venezuela's total reserves could rival those of Saudi Arabia, reports the New York Times. Yet Professor Tinker-Salas argues that production of extra-heavy crude oil is "only viable long as the price of oil remains over $50 per barrel."

How much Venezuelan oil goes to the United States?
Venezuela supplies about 1.5 million barrels per day of crude oil and refined petroleum products to the U.S. market, according to the EIA. Venezuelan oil comprises about 11 percent of U.S. crude oil imports, which amounts to 60 percent of Venezuela's total exports. PDVSA also wholly owns five refineries in the United States and partly owns four refineries, either through partnerships with U.S. companies or through PDVSA's U.S. subsidiary, CITGO, Inc. A U.S. Government Accountability Office (GAO) report (PDF) says Venezuela's oil exports of crude oil and refined petroleum products to the United States have been relatively stable with the exception of the strike period. Vicente Frepes-Cibils, lead economist for Venezuela at the World Bank, says "Venezuela will continue to be a key player in the US market." He argues that in the short term it will be very difficult for Venezuela to make a significant shift in supply from the United States. Nevertheless, Chavez has been increasingly making efforts to diversify his oil clients in order to lessen the country's dependence on the United States. The GAO report says the sudden loss of Venezuelan oil in the world market would raise world oil prices and slow the economic growth of the United States.

How is Chavez expanding Venezuela's commercial ties with other countries?
. China. Venezuelan oil exports to China have gone up to 150,000 barrels per day in 2006 from the 12,300 barrels per day being delivered in 2004 and are expected to increase to 500,000 barrels per day within five years. As part of agreements signed in 2005, China is investing $2 billion in oil-related exploration and development projects in Venezuela's Zumano region and Orinoco oil belt. China is also investing $9 billion in transportation infrastructure as well as telecom, mining, and the agricultural industry.
. Iran. Venezuela and Iran made agreements in August 2006 to build joint oil refineries in Indonesia, Syria, and Venezuela. In addition, Iran's state-owned oil company Petropars has begun to invest in oil exploration and development in the Orinoco belt.
. India. Venezuela agreed in April 2006 to begin sending two million barrels per month to India, according to India Daily. Both countries are jointly exploring for heavy crude oil in India.

What are Venezuela's regional ventures?
Venezuela is South America's third largest market and is actively pursuing further economic integration with other countries in the region. In July 2006 it became a member of the South American trade group Mercosur (Mercado Común del Sur), joining Brazil, Argentina, Uruguay, and Paraguay.
. Argentina. Venezuela and Argentina have made agreements to create an investment bank for infrastructure development, as well as joint hydrocarbon exploration and development in both countries, according to Oxford Analytica. Venezuela has also purchased $3.5 billion in bonds to help pay off Argentina's debt.
. Brazil. In 2005 Brazil's state-owned oil company Petrobras invested roughly $190 million in oil exploration and production in Venezuela, according to Petrobras' website. PDVSA and Petrobras are also building an oil refinery in northeastern Brazil. Crude oil will be supplied by both countries to refine a projected 200,000 barrels per day.
. Colombia. In 2005 Venezuela and Colombia signed an agreement to build a $335 million gas pipeline to be operational in 2007. It will supply gas from northern Colombia's La Guajira gas fields to Venezuela's Paraguana refining complex in western Venezuela.
. Bolivia. Venezuela and Bolivia signed agreements in January and May 2006 for Venezuela to supply preferentially priced diesel and invest $1.5 billion in the Bolivian oil and gas sector in exchange for Bolivian goods and services, according to Oxford Analytica.
. Ecuador. Under agreements signed in May 2006, Venezuela is expected to refine up to 100,000 barrels of Ecuadorean crude oil per day at discount prices, according to Voice of America.
. Cuba. Commerce between Venezuela and Cuba will increase by 42 percent this year to about $1.7 billion, says Bloomberg news service. Venezuela is selling up to 100,000 barrels of oil per day to Cuba, discounted by as much as 40 percent.

How does Venezuela spend its oil revenues?
. Social Programs and public works. PDVSA spent nearly $7 billion on social programs and public works in 2005, up from $4 billion in 2004, says Oxford Analytica. These programs include projects such as medical clinics providing free health care, discounted food and household goods centers in poor neighborhoods, indigenous land-titling, job creation programs outside of the oil business, and university and education programs.
. Foreign Aid. Increased oil revenues have also given Chavez the ability to extend assistance programs outside Venezuela's borders. For example, he has provided $400 million in aid to Uruguay since March 2005, $140 million to Bolivia for scholarships and other programs, and $260 million to repave a Jamaican highway, according to the Associated Press. In 2005 Chavez also began offering subsidized heating oil to poor Americans in eighteen U.S. states.
. Defense. Chavez is spending up to $3 billion to modernize Venezuela's military. As part of deals signed with Russia in 2006, Venezuela has received its first shipment of 100,000 Kalashnikov rifles and plans to purchase twenty-four Sukhoi-30 fighter planes and fifty-three Russian helicopters.
. Oil Infrastructure. Critics of Chavez think he should be investing more oil income into infrastructure to ensure a sustainable oil industry rather than allocating so much for social expenditures. According to the Wall Street Journal, PDVSA "spent just $60 million on exploration in 2004, compared with $174 million in 2001." But Vicente Fretes-Cibils says "investment is increasing" and Venezuela has an accumulation of reserves including outside funds ranging from $10 billion to $15 billion that it is planning to use for oil infrastructure.

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