Venezuela

By: Tim Kraski

General Situation of Venezuela:

Venezuela is the biggest oil producer in Central and South-America and third on the American continent. With a production of 154,7 million tonnes in 2006, Venezuela is the seventh largest oil producer worldwide.

Venezuela has 79,7 billion barrels of proven conventional oil reserves, the largest of any country outside the Middle East. With an estimated reserve of 1.2 trillion barrels, Venezuela’s Orinoco Oil belt represents one of the major non-conventional oil-reservoirs of the world.

The oil production industry of Venezuela, a founding member of OPEC, dates back to the 1920s, when oil was discovered for the first time. Since then, Venezuela has developed into one of the world’s top-ten oil producers and oil has always been one of the major growth factors of the Venezuelan economy.

At the current level of production and provided that the estimation of reserves is correct, Venezuela’s conventional oil reserves will last for about 70 years.

In 2006, oil accounted for nearly 90% of export earnings and nearly half of government revenues came from oil. Both Venezuela’s economic growth and the development measures imposed by president Chavez rely on oil revenues to a large extent.

In-depth analysis:

The idea of using oil revenues to diversify production became an important concept soon after the discovery of oil in Venezuela. After a phase of small-scale industrialization, Venezuela pushed the development of heavy industries from the early 1970s on. At the same time the Venezuelan political climate became increasingly factionalized and the democratic government tried to maintain political stability through populist policies which undermined efforts at economic restructuring and lead to a general lack of continuity in policy-making.

Consequently, non-oil and manufacturing growth rates stagnated from 1980 to 1998. After the economic liberalization in 1989 the total number of Venezuelan companies dropped, a fact that illustrates the inefficiency of state policies in the years from 1971 to 1988.

The decline in economic growth and the increase in poverty facilitated the emergence of ‘outsider’ politicians running on anti-established political party platforms and in 1999, Hugo Chavez was elected president of Venezuela. He started to reshape the country’s economic and political structure under the name of the Bolivarian Revolution, a movement with socialist orientation that tries to assert Venezuela’s political and economic sovereignty. While Chavez focused on social measures, he disregarded a coherent production or export strategy and during his presidency, Venezuela’s oil dependency has not reduced notably.

In the long term, the government plans to use oil revenues to develop non-traditional sectors of the economy like agriculture, small and medium enterprises and local co-operative ventures. This strategy makes Venezuela more dependent on oil and more vulnerable to price fluctuations in the energy market. Compared to other Latin American oil-producing countries like, for example, Mexico, Venezuela’s economy is less diversified and less open to foreign investment. However, Venezuela’s oil-fuelled growth opens up investment opportunities. Especially car manufacturing, construction, hydroelectric power generation, plastic production, machinery for oil and gas production and the telecommunications market offer growth prospects in a mid-term perspective.

To become more independent from oil, Venezuela should decrease its dependency of the petroleum-based heavy industry, develop a coherent economic strategy and reduce legal and political uncertainties which hinder foreign investment.

Beyond oil preparations:

During the past years, the government transferred 27 billion US$ to Venezuela’s National Development Fund, the so-called Fonden. Until now, the main objective of this fund is to promote the areas of infrastructure, housing, education, energy and petroleum projects as well as public health and defence.

So far, precautions for the beyond oil age have not been of major importance in the government’s development plans. The high oil price and Venezuela’s large oil reserves seem to allow the government to continue its hitherto policy.

Beyond oil summary:

Due to the current economic framework and political and legal uncertainties of the past years, Venezuela ranks relatively low in the beyond oil index. Its economy is largely focused on traditional heavy industries and economic growth largely depends on oil revenues. There has not been much focus on preparing the economy for the beyond oil age.