http://www.nytimes.com/2007/11/04/magazine/04oil-t.htmlNew York Times Magazine
November 4, 2007
The Perils of Petrocracy
By TINA ROSENBERG
I.
Who holds the world's oil? You might assume it's
in the hands of big private oil companies like
ExxonMobil. But in fact, 77 percent of the
world's oil reserves are held by national oil
companies with no private equity, and there are
13 state-owned oil companies with more reserves
than ExxonMobil, the largest multinational oil
company. The popular perception in the United
States is that if leaders of oil countries
nationalize their oil, they are bucking a global
trend toward privatization. In reality,
nationalized oil is the trend. And the percentage
of oil controlled by state-owned companies is
likely to continue rising, mainly because of the
demographics of oil. Deposits are being exhausted
in wealthy countries — the ones that exploited
their oil first and generally have the most
private oil — and are being found largely in
developing countries, where oil tends to belong to the state.
Nationalization is also a political trend in some
regions, mainly Latin America, where the populist
presidents of Bolivia and Ecuador have made it
part of their discourse. They are led, of course,
by Hugo Chávez of Venezuela. He has made private
producers accept state control of their
operations. When they wouldn't, as in the case of
ExxonMobil and ConocoPhillips, he simply
nationalized their holdings. Chávez has also
asserted his control over Venezuela's state oil
company, which before him operated very much like
a private, profit-driven enterprise.
Chávez is a prophet in search of disciples. He
seeks to present Venezuela as a more moral world
power, uniting Latin America and poor countries
everywhere in a socialist alliance. He 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." His is a
gospel greased by oil, which is financing his
transformation of Venezuela. Chávez is a genius
of a politician: charming, folksy, flirtatious. I
first met him in New York in 1999, the year he
became president. I sat next to him at an
interview, very pregnant. He embraced me — "But
you should come have the baby in Venezuela!" he enthused.
The appeal of his message transcends the charisma
of the messenger. To other countries — especially
the oil and gas nations in Latin America that
watch Chávez with particular interest — the
appeal is simple to understand. Oil- and
gas-dependent countries are historically ill
governed. Today their people are in rebellion
against globalization, which promised much but
has brought them little. They have been told
their countries are rich, but they see they are
poor. So someone must be stealing the profits.
Most often, nationalization is a reaction to the
idea that the thief is a foreign company. For
populist leftists, El Petroleo es Nuestro! — the
oil is ours — is an alluring slogan. Now as the
record high price of oil has made exploitation
worthwhile even in places that are remote or
geologically complicated (Chad comes to mind),
more underdeveloped countries have to choose what
to do with their oil. Those that have long held
oil must decide how to spend the incomprehensible
amounts of money oil is now bringing them.
Historically, almost every country dependent on
the export of oil has answered this question in
the same way: badly. It may seem paradoxical, but
finding a hole in the ground that spouts money
can be one of the worst things to happen to a
nation. With one or two exceptions, oil-dependent
countries are poorer, more conflict-ridden and
despotic. OPEC's own studies show the perils of
relying on oil. Between 1965 and 1998, the
economies of OPEC members contracted by 1.3
percent a year. Oil-dependent nations do
especially badly by their poor: infant survival,
nutrition, life expectancy, literacy, schooling —
all are worse in oil-producing countries. The
history of oil-dependent countries has produced
what Terry Lynn Karl, a Stanford University
professor, calls the paradox of plenty.
Oil not only creates very few jobs, it also
destroys jobs in other sectors. By pushing up a
country's exchange rate, the export of oil
distorts the economy. "Oil rents drive out any
other productive activity," Karl says. "Why would
you bother to produce your own food if you could
buy it? Why would you bother to develop any kind
of export industry if oil makes your money worth
more and that hurts all your other exports?" The
most successful societies develop a middle class
through manufacturing; oil makes this extremely difficult.
Oil concentrates a country's wealth in the state,
creating a culture where money is made by
soliciting politicians and bureaucrats rather
than by making things and selling them. Oil
states also ask their citizens for little in
taxes, and where citizens pay little in taxes,
they demand little in accountability. Those in
power distribute oil money to stay in power. Thus
oil states tend to be highly corrupt.
II.
Venezuela is a typical victim of the oil curse.
It has become a rich country of poor people.
Teodoro Petkoff has seen Venezuela through booms
and busts. Once a daring leftist guerrilla who in
2006 was briefly a candidate against Chávez, he
publishes a newspaper, Tal Cual, that criticizes
both Chávez and the opposition. "The state is
booty," Petkoff said when I met him in his small
office in Caracas. "The state is hypertrophic
here, a monster complex on top of society, heavy
and corrupt. It has been the great contractor,
the great buyer, the great provider, the great
receiver. To win government is to get access to a
source of personal enrichment. Money has to pass
through the state. Oil has weakened our
collective morality. It obliges you to be
corrupt. You can't do business if you are not
corrupt. We are waiting for the easy deal, big winnings."
Chávez has promised to break this curse, to
finally use Venezuela's oil to benefit its
people. Oil is everything in Venezuela; it pays
for at least half the government's expenditures
and 90 percent of its foreign exchange, according
Orlando Ochoa, a prominent economist. Now "zero
misery" is one of the government's slogans, and
the vehicle to get there is oil. Chávez's oil
company, Petróleos de Venezuela S.A., or Pdvsa
(pronounced peh-deh-VEH-sah — S.A. stands for
"sociedad anónima," or incorporated), is proudly
inefficient, proudly political. Chávez has called
his revolution "oil socialism."
"We are doing what the old regimes didn't do,"
Bernardo Álvarez, Venezuela's ambassador to
Washington and a former vice minister of
hydrocarbons in the Ministry of Energy, said to
me. "We are putting oil into a sustained process
of development. Our first priority is a fight against poverty and exclusion."
To that end, Pdvsa is investing the company's
profits in helping dropouts finish high school
and not just in drilling wells. "Perhaps it was
better run before Chávez," says Roger Tissot, a
Latin America analyst based in British Columbia
who works for PFC Energy. "But it wasn't
efficient in meeting the needs of the
shareholders — the people of Venezuela. Today
perhaps it is less efficient but better at meeting social goals."
Whether this is the right decision turns on
whether this policy is sustainable. In the 1990s,
Venezuela's state oil company was a sleek
machine, an excellent exploiter of oil, well fed
on its own profits. It floated above society,
unmoored from the problems of the average
citizen. Today, oil money feeds and educates poor
neighborhoods. The purpose of the national oil
company is not to produce more oil, but to
produce Bolivarian socialism. These are two very
different ways to handle a nation's oil resource.
Can either model show poor countries how to
convert natural resources into sustained wealth?
Few questions in economic policy are more important today.
III.
Many nationalized oil companies are poorly
managed — on average, national companies are 65
percent as efficient as private ones, according
to one study. Still, it is possible to have a
stellar national oil company, efficient in the
classic sense, one that can compete favorably
with any Western major. Saudi Aramco and
Petrobras, in Brazil, are two examples. But
perhaps the best-run national oil company that
ever existed was in Venezuela. It was Pdvsa.
"On Dec. 31, 1975, I went to sleep as an Exxon
employee, and I woke up on Jan. 1, 1976, as an
employee of Pdvsa," Antonio Szabo told me. Szabo
now runs a software company in Houston, but until
1983, he was a high-level executive at Pdvsa. "I
went to the same office, same everything. It was
a brilliantly executed nationalization process.
What became different the next morning? Except
for the destination of the revenues, nothing.
Literally nothing. That was the whole point — to
continue to produce money for the country without disruption."
President Carlos Andrés Pérez nationalized
Venezuela's oil because in the early 1970s there
was an oil boom, with a barrel reaching $12 in
1974 (about $50 in today's dollars), having
quadrupled from the $3 a barrel fetched in 1973.
Venezuelans demanded that the profits stay at
home. The expropriation of Exxon, Shell and Gulf
was negotiated and seamless, the lack of acrimony
stemming from the fact that the foreign
companies' concessions had been designed from the
start to be temporary, and were to expire in
1983. "I believe that everybody realized Pdvsa
was the goose that laid the golden egg," Szabo
says. "To keep it healthy you must leave it
alone. Every president believed this was sound policy — until Chávez."
Paradoxically, nationalization brought the
government less money and less control. When
Venezuela's oil was still in private hands, the
government collected 80 cents of every dollar of
oil exported. With nationalization the figure
dropped, and by the early 1990s, the government
was collecting roughly half that amount. This low
return to the country's coffers was partly a
result of that age-old conflict between short-
and long-term reward. Because wells run dry and
machinery ages, oil companies everywhere must
invest lots of money just to keep production
steady, and to grow, they need even more. Without
new investment, Pdvsa would lose 25 percent of
its oil production every year. Its officials were
convinced that Venezuela benefited more if
Pdvsa's profits went to producing more oil, not
more government. "Social revenue has always
overshadowed investing in the industry," said
Ramón Espinasa, who was chief economist of Pdvsa
from 1992 to 1999. "But I think the priority has
to be to maintain oil. If you have one dollar
left, it should be invested in keeping capacity.
Otherwise next time around you will not have a single dollar to distribute."
Espinasa, now 55, lives in Washington and works
as an energy consultant to the Inter-American
Development Bank. As chief economist for Pdvsa,
he was a persuasive voice for the strategy of
"oil first." During the early '90s, the company
had an extraordinary need for investment. The
bulk of Venezuela's oil lies under a
4,500-square-mile savanna called the Orinoco
Belt. The reserves are enormous, but 20 years ago
it was not clear that they would be commercially
viable. The oil was heavy and extra-heavy crude,
thick as Play-Doh. It required expensive
technology and expertise to extract, and even
then only a small percentage of the oil could be
recovered. This crude also needed a special
refining process and would most likely sell at a discount.
To ensure there would be a market for Orinoco
crude, in 1982 Pdvsa began to buy refineries
overseas able to process it. Among its purchases
was Citgo, the American refining and distribution
network. By the end of the 1990s, Pdvsa was among
the top three oil refiners in the U.S. "With
heavy oil, if you don't own a refinery, your
production does not have a home," Szabo says. "If
you own a refinery, you have market share." And
Pdvsa in the 1990s was focused on maximizing its
market share in the United States.
Pdvsa executives also decided they didn't want to
take on the debt and risk of developing the
Orinoco, so in 1989 they began to open it to
private participation. Pdvsa lowered the normal
royalty rate of 16 percent to a mere 1 percent to
attract investment to this capital-intensive
project. The royalty was meant to jump to 16
percent once the private company had recouped a
certain percentage of its investment.
In hindsight, these were brilliant business
decisions. Pdvsa's refineries overseas are making
record profits, and the United States is the
company's biggest customer. But back then, the
gathering of adequate revenue for the Venezuelan
state did not figure highly among the company's
priorities. The Orinoco contract, for example,
was so generous that in 2004, with oil at $46 a
barrel, the private oil companies were still
paying royalties of 1 percent. (That year Chávez
raised royalties to 16 percent by decree.)
In fact, some of Pdvsa's shrewd business
decisions seem to have been made with an eye to
shielding its gains from the government. Pdvsa
bought its first shares in an overseas oil
refinery after the government seized its
multibillion-dollar investment fund to help solve
a financial crisis. Economists on the left who
are critical of the old Pdvsa argue that the
foreign holdings allowed the company to play with
costs and profits. It could sell oil to its
refineries at less than market price — thus incurring lower taxes.
Pdvsa attracted the cream of Venezuela's
professional class. Espinasa, who was educated at
Cambridge, had an office full of young (and very
well paid) Ivy League- and Oxbridge-educated
Venezuelans. Pdvsa's resources and talent
outshone that of the Energy Ministry, which was
supposed to be overseeing it. "In the 1990s most
oil policy and macroeconomic policy for Venezuela
was done inside Pdvsa," one Venezuelan economist
told me. "When the I.M.F. came to Venezuela, the
meetings were done in the office of Espinasa. The
figures they used came from Pdvsa and the Central
Bank rather than the Finance Ministry."
Ambassador Álvarez was one of those trying to
keep control over Pdvsa, first as head of the
energy and mines committee in Congress, and later
as vice minister of energy for hydrocarbons. "At
the ministry," Álvarez says, "we had gone from
200 engineers to 25. Pdvsa was the only one that
had cars, people. One energy minister used to call it 'the Empire.' "
Pdvsa won virtually every argument. But many
people, not just Chavistas, would argue that
Venezuela lost. By 1998, real wages in Venezuela
were less than 40 percent what they had been in
1980. A third of the country was living in
extreme poverty — up from 11 percent in 1984. "It
was normal for people working for Pdvsa to be
very proud — it was recognized as one of the best
oil companies," says Tissot, the oil analyst. "In
contrast, the politicians were making a mess
managing the rest of the country. Pdvsa was
working, but Venezuela was not working."
I asked Espinasa to respond to the charge that
his Pdvsa didn't do much for the average Venezuelan.
"It shouldn't have," he replied. "It was an oil company."
IV.
Ten years later, Pdvsa is no longer an oil
company, at least by Espinasa's standards. It now
exists to finance Chávez's transformation of
Venezuela. The integration is illustrated by the
fact that Rafael Ramírez, the minister of energy
and petroleum, is also president of Pdvsa. "The
Pdvsa that neglected the people and indifferently
watched the misery and poverty in the communities
surrounding the company premises is over,"
Ramírez has said. "Now the oil industry takes
concrete actions to deepen the revolutionary
distributions of the revenues among the people."
If the Pdvsa of the 1990s thought it was Exxon,
today's Pdvsa amounts to the president's $35 billion petty-cash drawer.
Chávez travels a lot. Foreign presidents who
receive him may enjoy receiving his customary
gift — a replica of the sword of Bolívar. But
they probably appreciate even more the oil that
sometimes comes with it. Chávez provides
discounted or free oil to Central American and
Caribbean countries, sending nearly 100,000
barrels a day to Cuba in exchange for doctors and
Cuban expertise on state security. He has given
millions in non-oil aid to various Latin American
countries, much of it in the form of energy
projects. Citgo says it gave $80 million in
heating oil to poor residents of the South Bronx last winter.
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.
The more celebrated of Pdvsa's projects is a
network of social programs, called misiones.
These missions bring health clinics and
classrooms directly into poor neighborhoods. They
are financed and in some cases run directly by
Pdvsa. "If Pérez wanted money from his oil boom,
he had to wait for Pdvsa to pay taxes, and he had
to go to Congress and approve extraordinary
spending," one Venezuelan economist told me.
"Today, the president gets on the phone with
Ramírez and in an hour can get $200 million."
To finance all these ambitious projects, Pdvsa
must produce oil. Theoretically this should not
be a problem. When Chávez was elected, Venezuelan
crude went for about $9 a barrel (about $11
today). At press time it was about $78.
(Venezuela crude trades at slightly under the
average OPEC crude price.) Chávez is the
beneficiary of the greatest oil windfall the
world has seen, one based in part on political
upheaval in Iran, Iraq and Nigeria but also on a
surge in demand from China and India that is
unlikely to end soon. So, for the foreseeable
future, there should be money for everything.
Yet Pdvsa is in trouble.
V.
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.
VI.
Pdvsa's administrative troubles can be traced
back to one of the biggest threats to Chávez's
presidency. In December 2002, Pdvsa's managers,
fed up with Chávez's attempts to control them,
locked out the workers and shut down Venezuela's
oil production for two months. The goal was
either to take back control of Pdvsa or to topple
Chávez. The economy collapsed, but ultimately
Chávez triumphed over the "oil sabotage," as his
government called it, cementing his hold on power.
In the aftermath of the 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.
VII.
Pdvsa is now dedicated to creating a new oil
product: it is turning petroleum directly into
math problems. I watched this alchemy one night
in the living room of Félix Caraballo. Caraballo,
who is 32, lives in the El Encanto section of La
Vega, a slum on the side of one of the steep
mountains around Caracas. Caraballo has been
working in La Vega on community projects since he
was 14, when police officers killed a friend of
his during the 1989 protests over the
government's attempt to reduce gasoline
subsidies. He is a committed Chavista and a
committed socialist. "Money should serve people
and not the other way around," he told me.
The night I visited, the couches in his living
room were pushed to one side to make a classroom.
Yulimar Medina, a 25-year-old college student,
stood at a whiteboard with a marker and walked
the students through an equation. There were 11
adults, some with young children, in the room,
studying the addition and multiplication of
fractions. The students — known in the program as
vencedores, or triumphers — all had workbooks,
and they had already watched a 45-minute video of a math lesson.
This was an eighth-grade class of Misión Ribas, a
program that brings grades 6 through 12 to
barrios around the country. This class meets from
6 p.m. to 9 p.m. every weeknight in Caraballo's
house. The videos come from Cuba, and
facilitators like Medina lead the class in
discussion and exercises afterward. The
vencedores study math, Spanish, history,
geography, science and English, and must work
together to do a community project, like building
a staircase or planting a vegetable garden —
that's the part Caraballo guides. Not only is
school free but most of the students also receive
stipends of $85 a month to attend. The students
themselves choose who gets the stipends, based on need and dedication.
Ribas is one of an ever-growing list of Chávez's
missions. One teaches people to read. Another has
imported thousands of Cuban doctors and
dispatched them to poor neighborhoods around the
country. Another set up stores in barrios that
carry basic foodstuffs and medicines at highly
subsidized prices. Another provides identity
cards to undocumented citizens. While I was in
Venezuela in September, Chávez announced another
mission, to expand universities. The vast
majority of the financing comes straight from Pdvsa.
The missions are popular and have benefited more
than half of Venezuela's poorest sector.
Venezuela's millions of poor take them as a sign
of Chávez's commitment to them and to the
government's slogan of "zero misery." When I
visited another Ribas class in an even more
remote corner of La Vega, I asked the students
what they valued most about the mission. "It
comes to our barrio," one student said. "It
doesn't exclude anyone," another said.
Spending oil money on schooling and doctors for
the poor seems, intuitively, like the right thing
to do. "This is an investment in human capital,"
argues Mark Weisbrot, co-director of the Center
for Economic and Policy Research, a left-leaning
Washington policy group. "You've had a focus on
food and health care and education. It doesn't
cost that much, and it's reaching a lot of people."
The Venezuelan who finishes high school with
Misión Ribas may not have the same education she
would get in a formal school. But without Ribas,
she would have no high-school education at all.
Chávez cares about reaching zero misery,
something that can be said of few governments
with oil. But no one really knows if the missions
are actually moving Venezuela toward zero misery;
the programs have no visible internal evaluation.
Increasingly, the missions are replacing their
formal counterparts. It is wonderful for poor
neighborhoods to have health clinics staffed with
Cuban doctors — wonderful, unless you happen to
need the services of one of Venezuela's hospitals, which are falling apart.
Political and ideological training, Ribas
officials told me, is the top qualification for a
facilitator. I attended a session for new Ribas
students in Las Torres, a La Vega barrio near the
top of the mountain. After Ribas officials told
students how to register for classes and what
would be expected of them, María Teresa Curvelo,
the district coordinator, began a 90-minute talk
about a referendum of great importance to the
government. The referendum, to be held on Dec. 2,
proposes changing the constitution to remove
Chávez's term limits and increase his power among
other things. She urged students to attend
marches and street demonstrations supporting
Chávez. "Chávez is someone who comes along every
100 years," she told them. Afterward we rode down
the mountain in a truck. When she got out, I
thanked her. "Fatherland, Socialism or Death!" she replied.
VIII.
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.
Whatever success the missions have at helping the
poor may be dwarfed by the grotesque distortions
in the economy as a whole. Inflation is
officially at 16 percent but is most likely
higher, according to Orlando Ochoa, the
economist, who is usually critical of Chávez. He
says that in the basket of goods and services
used to measure inflation, just under half the
items are sold at government-controlled prices.
Many goods simply can't be bought at those
prices, and consumers must pay double the price
in a street market. Or the goods can't be found
at all, their producers forced out of business by
price controls. Beans and sugar were hard to find
cheaply when I visited Caracas in September;
fresh milk and eggs hard to find at all.
Recently, people had to line up for five hours to
get a liter of milk. One proposal in Chávez's
constitutional referendum could increase
inflation much further by abolishing the autonomy
of the Central Bank and giving the president
power over Venezuela's international reserves.
The proposal would also essentially allow Chávez to print money.
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.
This is classic oil curse, and Venezuela has seen
it before. In 1973, and in 1981, Venezuela spent
oil money wildly, without controls. Each time a
boom ended, it left Venezuela worse off than
before it began — per capita income in 1999 was
the same as in 1960. Chávez has quite likely
intensified these cycles, and the country is less
able to produce anything other than oil.
Venezuela's adventures in oil nationalization
have produced two very different models. At a
time when oil prices were low and the country in
dire need of social spending, the old Pdvsa's
focus on reinvesting in oil production was
undemocratic and unfair to the Venezuelan people.
But the new way has produced something arguably
worse — economic failure despite a boom in oil
prices, and it is unfair to future generations.
IX.
Nationalization is often a response to the
failure of privatized oil to respond to the
people's needs. Even in the United States, where
there is a good chance of getting caught, oil
companies have inflated their costs or illegally
deducted costs and engaged in other machinations
to minimize payouts. For poor countries, the
risks of getting a raw deal from private oil
companies are much greater. History is littered
with contracts that give Big Oil obviously unfair
advantages — Shell in Nigeria, Mobil in
Kazakhstan and Texaco in Ecuador to name a few.
Oil can also be an irresistible seduction to a
country's ruling class. Where democratic
institutions — or even merely transparent
processes — don't exist, the lure to corruption
is powerful. Oil in Russia, for example, was sold
off not for maximum profit to the country but
maximum profit to the officials who oversaw
privatization. In Equatorial Guinea, ExxonMobil,
Amerada Hess, Marathon and others made payments
to President Teodoro Obiang or his family for
land, security and other services, according to a
Senate investigation of money-laundering
involving Riggs Bank, where some of those payments ended up.
Nationalization, however, doesn't cure these
ills, and it can deprive a nation of its rightful
take of its natural wealth in other ways. One is
simply lack of know-how. One reason President Evo
Morales of Bolivia pulled back from his threats
to radically nationalize the country's gas
industry is that Bolivian officials realize they
cannot manage the business themselves. Morales
has focused on raising royalties on fields with
known reserves, fields where companies
essentially are guaranteed a return on
investment. The royalty had been at 18 percent.
Under pressure from popular protests, the
previous government raised the rate to 50
percent, and last year Morales raised it to 82
percent in some cases. While foreign investment
in Bolivia's natural-gas industry has fallen,
every analyst I talked to said it was not because
of the royalty hike. Morales's nationalization
rhetoric, not royalty rates, made private
companies skittish. "There's a big difference for
an investor when there's a worry about
nationalization," said Amy Myers Jaffe, a fellow
at the nonpartisan James A. Baker III Institute
for Public Policy, at Rice University in Houston.
"There are intangible factors I can't control,
and it's creating all this political risk." Roger
Tissot of PFC Energy adds: "Companies don't have
a problem paying more rent and taxes. They do
have a problem giving up control."
So perhaps the best strategy for resource-rich
countries is to keep the oil private, watch it
carefully and tax the hell out of it. Better yet,
raise royalties, which are more straightforward
and easier to collect. "If your objective is to
maximize rent, then the best way is to have
companies compete with one another in open
bidding for access," Tissot says. "Angola and
Libya have done this very successfully. Libya
invited private companies to come back and is
squeezing 90 percent of the profits out of them."
As a slogan, "Negotiate a Better Royalty Rate!"
doesn't have the ring of "The Oil Is Ours!";
nationalization of natural resources can bolster
a country's psyche even if the management of
those resources is a failure. The urge to
nationalize is, at its core, a political one.
Chávez seized Pdvsa not so it would produce more
but so he could directly control the money. When
governments give into this urge, they tend to be
susceptible to the temptations of using oil for short-term gain.
But not always. Nationalized oil production
doesn't necessarily lead to political corruption
or shortsightedness. If the old Pdvsa were
operating in today's booming oil market, there
might be plenty of money for investment in oil
and social programs. But it would be the
government's job to watch the company closely to
make sure the state got its fair share — in other
words, to ensure oil does what it should do:
produce maximum sustainable money for the state.
It's also the government's job to use the money
wisely. That is a more important and difficult
problem than the dilemma of whether to
nationalize, and the solution does not depend on
whether production is nationalized or privatized.
It is not even an oil problem at all.
All oil production ends up at some point in the
realm of politics — whose interests will the
bounty serve? The only way to mitigate the
political influence is transparency for
state-owned and private companies alike. "There
should be a law that a national oil company has
to publish its corporate figures, matching an
S.E.C. filing," says Jaffe, the Baker Institute
fellow. "We recommend that there be a regulator
in Parliament that requires full reporting. And
it should be open to the public. It's easy to say and hard to do."
Private companies do release credible annual
reports — but many of them never reveal what they
pay host governments. Several new nongovernmental
campaigns, like Publish What You Pay and the
Extractive Industries Transparency Initiative,
are trying to shame companies and governments
into bringing the books out into the open. So far
they have had limited success.
"The problem isn't who owns the resources, it's
what you get from the proceeds," says David
Mares, a professor of political science at the
University of California, San Diego, who studies
energy in Latin America. "If you waste it in
corruption and unsustainable programs, it's as
bad as if you have international corporations
dominating, who pay very few taxes."
Nationalization won't keep oil from being stolen.
Good oversight, accountability and management of
the funds will, no matter who owns the oil. "On
Jan. 1, 1976, the day of nationalization, Pérez
gave his speech with a banner behind him that
read 'El Petróleo Es Nuestro,' " Antonio Szabo
says. "Guess what? It was nuestro all along."
Tina Rosenberg is a contributing writer for the magazine.
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