[lbo-talk] Rosenberg: Chavez and Oil Socialism vs. The Oil Curse

Yoshie Furuhashi critical.montages at gmail.com
Mon Nov 5 08:05:39 PST 2007


On 11/3/07, Michael Pollak <mpollak at panix.com> wrote:
>
> A surprisingly interesting article in this weeks NYT Magazine:
>
> http://www.nytimes.com/2007/11/04/magazine/04oil-t.html
>
> with by far the most sympathetic view of Chavez I think we'll ever see in
> that paper. It's long, but has lots of fascinating detail. (I think
> perhaps she got a little ravelled up in the end trying to come to a
> conclusion too fast -- company transparency can't solve the Dutch disease,

Tina Rosenberg sums up the ideology of Bolivarian socialism thus: "He [Hugo Chavez] 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'" ("The Perils of Petrocracy," 4 November 2007, <http://www.nytimes.com/2007/11/04/magazine/04oil-t.html>).

Yes, that's the winning strategy on the ideological front in the age of socialism as democracy, republicanism, and resource populism. In the MENA region it should be "a little Marx, a little Mahdi, a little anti-imperialism." In that region, however, it will be difficult to add a little flirtatiousness that Rosenberg finds adorable in Chavez, the genius of all Latin socialists who attain political prominence, to this mix (all they manage is something like this: <http://www.nytimes.com/2007/05/06/weekinreview/06vitello.html>).

But on the economic front Bolivarian socialism appears to be on the fragile foundations according to Rosenberg's report.* It raises two questions for the Left: can Bolivarian socialism cultivate its own technocrats with requisite expertise and professionalism without eventually creating its own gravediggers? Will there be money left for investment in the oil industry, let alone any other, after it is spent on immediate consumption to win hearts and minds not only at home but also abroad?

One problem that does not occur to Rosenberg to consider is this: the opposite strategy, piling up surpluses in dollar reserves like Brazil and Nigeria rather than spending them down, has created a macroeconomic distortion -- by subsidizing debt-financed asset bubbles and consumption far beyond savings in the USA -- at the international level, whose consequences are just now beginning to be felt, from which Asia is unlikely to escape: Stephen S. Roach, "The Great Meltdown? A Subprime Outlook for Asia and the Global Economy," 24 October 2007, <http://japanfocus.org/products/details/2556>.

* <http://www.nytimes.com/2007/11/04/magazine/04oil-t.html>

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.

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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.

. . . . . . . . . . . . . . . . . . . .

In the aftermath of the [December 2002] 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.

. . . . . . . . . . . . . . . . . . . .

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.

. . . . . . . . . . . . . . . . . . . .

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. -- Yoshie <http://montages.blogspot.com/>



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