Hugo Chàvez is
undoubtedly one of the most polarizing politicians in the world today. The
man who has led Venezuela for 14 years is vehemently anti-American, a proud voice
for Venezuela's poor, a patriot and a poet, and a firm believer that national
resources belong to the nation and no one or nothing else.
That final Chàvez
mainstay – that resources are best and most appropriately managed by
the people for the people – has positioned Venezuela at the head of a
group of Central and South American nations that are trying resource
nationalization on for size as they struggle to make the most out of their
oil and gas bounties. Venezuela is a global oil heavyweight – its 211-billion-barrel
reserve is one of the top three national oil reserves worldwide – so Chàvez's moves to nationalize his country's
massive oil machine gave neighboring countries the confidence to follow suit.
Sometimes national control over oil and gas resources
can work well. Saudi Arabia, Brazil, and Kuwait are all prime examples of
well-functioning, state-controlled oil sectors. However, resource
nationalization is a tricky business, and more often than not the process
Venezuela is no exception. Chàvez's
efforts to kick foreign firms out of Venezuela and use oil and gas revenues
to fund social programs worked pretty well initially, but despite rising oil
prices that early success has slipped away. In recent years Chàvez has demanded too much from the oil and gas
sector, expecting ever-increasing revenues despite his reluctance to fund
infrastructure and exploration programs. The result has been declining
production, an exodus of technical expertise, and a pariah reputation in the
international oil and gas industry.
Now, with a presidential election looming and Chàvez struggling with a cancer that it's rumored
will take his life within months, the path forward for the country that has
been a firebrand for South American resource nationalization is far from
Venezuela's Love-Hate Relationship with Resource
Venezuela nationalized its oil industry in 1976, at a
time when many countries in the southern hemisphere were asserting
sovereignty over their natural resources. The transformation of Petróleos de Venezuela SA (PDVSA) into a
state-owned company was hailed as a national victory. However, it did not
take long for trouble to begin.
In the 1990s global oil prices plunged and Venezuela,
having based its budget on a certain level of oil income, found itself in
deep economic trouble. PDVSA had 900 to 1,300 billion barrels of oil on its
reserve books, but the company didn't have the money or the technological
know-how to tap into these reserves, most of which sat trapped in the geologically
challenging Orinoco Belt. Seeing few other options, the country opened its
oil sector to foreign investors: PDVSA started seeking out international
partners willing to provide expertise and funding in exchange for a share of
the profits. Big Oil arrived and started spending billions of dollars to
unlock the heavy oil of the Orinoco.
Then Mr. Chàvez won
the 1998 presidential election on a populist ticket that promised to use the
country's vast oil wealth to benefit the poor. Venezuela's experiment with
foreign involvement in its oil sector slowly came to a halt. Despite
initially adopting "orthodox" economic policies, Chàvez soon started making good on his promise to
his people – he gradually closed the door on international investment,
raised rents, and changed fiscal agreements to retain ever more oil revenue
for Venezuela. Imagine this: at one point the government take on oil
contracts was more than 100% – foreign producers would have had to pay Chàvez for the privilege of producing oil in his
Chàvez brought a new form of politics to Venezuela. He
identified with his supporters because he was one of them, having grown up
poor, and he used language they understood, caring not that the elites saw
such language as one of many signs that he was a buffoon with limited
education and experience. His style stuck and the people grew to love him.
As he gained in popularity and confidence, Chàvez grew bolder in his moves to control
Venezuelan oil in its entirety. In 2002 a group of PDVSA executives kick-started
a general strike aimed at ousting Chàvez
that lasted for a month and cut oil production to about 30% of normal levels;
in response Chàvez fired nearly half of the
company's employees – 18,000 people in all – erasing large swaths
of technical know-how in one fell swoop but sending a clear message that he
would not tolerate dissent against his control over Venezuela's oil.
By 2007 Chàvez had
gained enough confidence to essentially complete his oil renationalization
campaign – he expropriated oil assets in the Orinoco by issuing a
decree that PDVSA hold at least 60% ownership in all international
partnerships. What little was left of Big Oil pretty much packed up and left
Venezuela. National oil production immediately fell by 25%.
You could say that was the beginning of the end, or the
end of what had been a great beginning. That great beginning was undoubtedly
aided by rising global oil prices: when Chàvez
came to power, oil prices were sitting near $12 per barrel. By 2006 prices
were averaging almost $60 a barrel, Venezuela's coffers were overflowing, and
the Venezuelan president felt unstoppable.
Those rising prices created such a sense of success
around Chàvez's experiment with
renationalizing Venezuela's oil and gas sector that Chàvez
was able to convince his compatriot leaders in South America to follow in his
footsteps. And it worked – Bolivia and Ecuador renationalized their oil
sectors, and the concept of resource nationalization took hold in Argentina.
As his geopolitical influence grew, Chàvez
also devoted attention to the oil-needy nations in his neighborhood,
implementing an oil-transfer program to energy-needy Central American and
Caribbean countries. With his oil sector seemingly able to provide for so
many, resource nationalization took on new life across South America, and
Chavez was the movement's proudest spokesman.
But here the word "seemingly" is key. As oil prices rose, PDVSA profits also rose, and it
seemed that nationalization had been a boon to Venezuelan oil. But the increased
profitability stemmed only from rising prices; the company itself was being
strangled by a lack of investment – Chàvez
spent all of PDVSA's profits on his domestic fuel subsidies and social
programs – and its dearth of technical expertise.
In short, a sector can only provide profits
if it is also supplied with investment; and that is where Chàvez went wrong. Like so many other socialist
leaders who nationalized resource sectors with great fanfare only to see the
sectors wither away because of insufficient TLC, Chàvez
failed to put money back into PDVSA.
Now the country's once-proud oil and gas sector is in
disarray. Infrastructure is old and insufficient, and production volumes are
declining instead of climbing. In 2005 the company launched a new six-year
plan calling for investment of US$239 billion to boost oil production to 5.8
million bpd by 2012. Instead, output has fallen from 2.9 million barrels per
day (bpd) to 2.5 million bpd. Things are even worse when you look at Chàvez's tenure as a whole: from 1998 to today,
production has fallen from 3.5 million bpd to 2.5 million bpd, a decline of
production is declining to such an extent that the US Department of Energy is
warning the world has crossed a critical oil threshold.
Not only has production declined, but PDVSA's financials
have also deteriorated dramatically, its debt increasing from US$2.7 billion
in 2005 to some US$33 billion now. Yet PDVSA continues to borrow money at an
incredible rate, in large part to fund those domestic oil subsidies that are
so very popular among Chàvez supporters.
These subsidies cost the company US$15 billion a year.
The view forward is unclear. PDVSA lacks the technical
expertise to take advantage of the heavy oil in the Orinoco. With foreign
investment – and therefore involvement – in the oil sector banned
and PDVSA drowning in debt, the prospects for turning Venezuela's fading oil
sector around are pretty dim.
Unless, of course, the sector is opened up to outside
investment… which could well happen if Chàvez
ceases to be part of the picture.
Over the last 12 months Chàvez
has made regular trips to Havana for cancer treatments. The only official
information about these treatments is that two malignant tumours
were removed from his pelvic region. The secrecy surrounding Chàvez's cancer and the fact that Chàvez, who rarely goes a few days without
speaking directly to his people, enters radio silence during his trips to
Cuba have fueled rumors of his declining health. Several times already these
have ballooned into claims that the Venezuelan president had died.
The latest twist in the Chàvez
cancer drama came from venerated journalist Dan Rather, the former CBS anchor
who now hosts and directs Dan Rather Reports, a weekly news television show on HDNet. In a report he labeled as "exclusive," Rather
revealed on May 30 that he had been told that Chàvez
is suffering from metastatic rhabdomyosarcoma, a
rare and aggressive cancer that has "entered the end stage." Rather
said the information came from a highly respected source who
is close to Chàvez and in a position to know
his medical condition and history. This source says the prognosis is dire and
that Chàvez is not expected to live
"more than a couple of months at most."
This is not the first time rumors of Chàvez's pending death have surfaced. However,
with his treatment having dragged on for a year already, with his
uncharacteristic disappearances to Cuba growing longer and more frequent, and
with Rather's reputation for accuracy lending
credence to this new information, it is time to ponder Venezuela – and
South America – without Hugo Chàvez.
Chàvez would be incredibly difficult to replace. His
rags-to-riches story line, bold governing style, and idiosyncratic mannerisms
have earned adoration from the Venezuelan population, especially the poor and
working class masses who constitute his prime electoral base. He also enjoys
broad support from Venezuela's military members.
This is a president who announces executive orders
between readings of poetry, regularly draws families around their televisions
to listen to his lengthy and often fiery speeches, and sings Venezuelan folk
songs on a weekly show called Hello President. There are few people in
the world who could match his charisma and earn such
allegiance from a national population. That is why, even though others from Chàvez's inner circle bear similar political
views, most observers think any Chàvez
successor would have a very difficult time maintaining the Chavista movement.
So when Chàvez dies,
what might become of Venezuela? In the immediate aftermath, Vice President Elías Jaua would take
power, according to the Constitution. In fact, Chàvez
recently formed a nine-member State Council headed by Jaua
to assist him with executive duties, a move many interpreted as a preparation
for his impending demise.
In the longer term, Venezuelan political observers see
five potential successors within Chàvez's
Socialist Party. All hold similar views, but none enjoy anything close to Chàvez's recognition and support. The Party would
have to hope that Chàvez's reputation can
carry one of these candidates to the presidency, but such a succession is far
If Chàvez dies before
the October presidential election, opposition candidate Henrique Capriles would suddenly see his odds of winning jump
dramatically. Polls show Capriles currently lagging
behind Chàvez by roughly 5%, but the same
polls found that Capriles would win the race by
double-digit margins if he were to face a Chàvez
successor instead of facing Hugo himself... unless, of course, the Socialists
rig the election. Given that Chàvez has
proven that a high regard for democracy is not a required characteristic for
someone holding the Venezuelan presidency, this is not unlikely.
Capriles is a veteran politician, having previously served as
governor of the state of Miranda despite being just 39 years old. He is a
center-left politician who has cleverly focused on issues close to the
day-to-day lives of Venezuelans: crime, corruption, declining services,
inflation, and jobs. Capriles' petroleum policies
are less clear, but his rare comments on the matter indicate he would keep
PDVSA as a national entity while allowing the company to engage in investment
partnerships with foreign firms, much like the Brazilian national oil firm Petrobras.
If Chàvez is healthy
enough to run, he will almost certainly win the election in October. If he is
not, we see two possible paths. The first is that Capriles
finds himself president of Venezuela, and South America loses its resource
nationalization ringleader. However, a desire to change how Venezuela's oil
sector operates is very different from the actual ability to do so. The
biggest obstacle to change: those domestic oil subsidies. If Capriles wants to revitalize PDVSA – indeed, if he
simply wants to give PDVSA a chance at economic survival – he would
have to significantly reduce the domestic oil subsidies, and likely also
reduce social spending to free up some oil revenues for reinvestment into the
country's oil fields. And that would cause riots. We have seen it before,
most recently in Nigeria: populations that are accustomed to having access to
cheap oil are highly unwilling to let go of that benefit and will riot, often
violently and for extended periods, at the mere suggestion that gas prices
need to increase.
Oil-related riots in one of the world's top-ten
oil-producing nations would undoubtedly push global oil prices higher.
The other potential path for a post-Chàvez
Venezuela is that his successor within the Socialist Party wins the
presidency, legitimately or with the aid of electoral fraud. This Chàvez clone would then be stuck trying to fill
Hugo's shoes, a near-impossible task in which he would only have a chance at
success by promising even more in the way of social spending. These expensive
programs would put even greater strain on Venezuela's budget, which is funded
in large part by revenues from PDVSA. There would continue to be no money
available to finance PDVSA's spending needs, and production would continue to
Guess what? This scenario – of continued
production decline in a major world supplier – would also push global
oil prices higher. The bottom line is that Chàvez
has created a lose-lose scenario for Venezuelan oil.
The country has become reliant on a one-way flow of money and cheap oil from
PDVSA to society, but after a decade of neglect PDVSA is withering away and
the flows are drying up. Even if Chàvez dies
and a left-leaning leader like Capriles comes to
power, Venezuela will have to convulse through many ugly years before a
functional relationship can be reestablished between its oil riches and its
social demands. In the meantime, Venezuelans and the world will have to do
with only limited access to Venezuelan oil.
So, for those of us positioned to gain from a long-term
rising oil price, it's heads we win, tails we win.