Venezuela's Oil Reform and Chavismo

This piece was published in the July/August 2002 issue of the NACLA Report

Few things happen in Venezuela that don’t have to do with oil, either directly or indirectly. The country is one of the world’s main producers of petroleum products, and it plays a crucial role in the international energy market. It has long been one of the principal sources of supply for the United States, and other countries in the hemisphere. Above all, it is one of the founding members of the Organization of Petroleum Exporting Countries (OPEC), and hence has frequently been at odds with U.S. oil policies. One must keep all this in mind as we evaluate the impact that oil may have had in the April 11 failed coup attempt.

Since Hugo Chávez took office in February 1999, he began to reform the oil policy that had dominated the last decade, the so-called "Oil Opening."[1] In the early 1990s, the state oil company, Petróleos de Venezuela (PDVSA), invited transnational oil companies to invest in the industry arguing that it would help to offset the costly and technologically challenging processes of new exploration and drilling. Under the Opening, control over the industry has been ambiguous, and to guarantee profitability to the transnationals, the state’s fiscal sovereignty—its ability to tax the transnationals—has largely been sacrificed.

Despite Venezuela’s critical need for foreign capital, the Opening conflicts with the country’s desire to exercise sovereignty over its principal natural resource. This conflict is illustrated by the power struggle over oil policy that has ensued between the state, through the Ministry of Energy and Mines (MEM), and privatized interests within PDVSA.

It is in this heated context that Chávez’s nationalist reform policy recovers essential aspects of Venezuela’s long oil tradition of holding the industry accountable to the nation.[2] The Chávez administration took very early steps to regain OPEC’s role as regulator of the international market. When Chávez took office, international oil prices were the lowest they had been in years. For that month, the average price of Venezuela’s holdings of crude and derivatives had fallen to $8.43 per barrel. As a result of the new government’s leading role in the enforcement of production quotas, prices immediately began to rise and OPEC began to strengthen. In September 2000, in recognition of Venezuela’s active role in this process, OPEC members chose Caracas as the host city for the second conference of heads of state of the organization’s member countries. In addition, Chávez’s first Minister of Energy and Mines, Alí Rodríguez, was designated president of OPEC and then the organization’s secretary general.

There are four basic characteristics of Chávez’s oil reform that we want to highlight in this essay.[3] First, through the Energy Ministry (MEM), the reform seeks to recover the leading role for the executive branch in the design and implementation of public policies relating to the industry. Before nationalization, the minister of the sector had progressively increased MEM’s technical capacity and policies of supervision and control over the transnational energy corporations that operated in the country. Beginning with nationalization in 1976, however, and with more force than even under the Oil Opening of the 1990s, the directors of PDVSA have succeeded in displacing MEM in carrying out the crucial role of political leadership of the sector.

Second, the oil reform seeks to reach appropriate fiscal levels of income from oil. The reform privileges royalties on sales over taxes on profits for this reason. Collecting royalties is much simpler than charging taxes and is more transparent. The total collected through royalties depends on the volume produced and on international prices, while assessments of taxes have to go through complicated accounting processes. The reform aims to reverse a process that had been developing in the context of economic liberalization: There has been a consistent and alarming decline of fiscal income from oil as that income began taking the form of taxes rather than royalties. It should be noted that government oil income is the way in which non-oil sectors of the economy benefit from the main natural resource of the country.

Thirdly, the reform also aims to strengthen OPEC and commits Venezuela to respect agreements freely made with that organization. This is a key point for favorably positioning Venezuela in the current globalization process. Fourthly, the reform puts the brakes on the trend towards privatization of PDVSA that had been developing in the previous years, without blocking private investment in the sector. These last two points are a source of friction with the U.S. government.

The Chávez government has designed and defined this reform with clarity and coherence but there have been more than few errors in its implementation. The two legal pillars of the reform, the Law of Gaseous Hydrocarbons and the Law of Liquid Hydrocarbons, passed in 1999 and 2001 respectively, were approved by Chávez after the legislature granted him the authority to do so. This procedure removed the content of the bills, and the reform itself, from public debate. This made it difficult for the common citizen to identify the competing interests involved. Further, during the three years of his administration, President Chávez has designated five different presidents of PDVSA, including the one named in mid-April. So the directors of the company feel insecure, unstable and ill-at-ease, and with some reason. When Chávez named a new board of directors, headed by professor Gastón Parra last February, a significant part of PDVSA’s management entered into direct confrontation with the government.

Sectors of the upper-echelons of management led the conflict. Arguing that the traditional criteria for naming the members of PDVSA’s board of directors had been violated by not respecting "meritocracy," they instigated the April strike that was backed by the federations of labor (CTV) and business (Fedecámeras). Nevertheless, other conflicts lie behind the conflict over appointments. The top management is reticent to renounce the share of power they had acquired during the Opening. PDVSA managers do not seem inclined to accept that MEM has been handed back the leading role in public oil policy. As many have pointed out, the company has become a "state within a state" and the reform explicitly seeks to reverse this. Nor does management seem open to transparency in its accounting. The company has also been called a "black box" for being difficult to audit and having systematically denied its owner, the Venezuelan state, knowledge of how its finances are administered. The company’s productive costs have also steadily increased in the last few years.[4]

The conflict within PDVSA served as a platform from which to launch the 24-hour, then 48-hour, then indefinite national strike in April that led to Chávez’s brief ousting from office. Oil issues, then, had a major place on the agenda of the ephemeral de facto government established by the coup. "President" Pedro Carmona was able to announce very few appointments and never even got to complete his cabinet. But among the de facto president’s few appointments was Guacaipuro Lameda as president of PDVSA. Chávez had fired Lameda last February for opposing the just-decreed Organic Law of Hydrocarbons. On being appointed, Lameda announced that he would initiate an aggresive recovery of markets, something that any petroleum sector analyst would view as leading to an inexorable confrontation with OPEC, an inevitable weakening of that organization and a drop in oil prices. For their part, the PDVSA executives who met on April 12, in the midst of a festive climate that celebrated the prospect of the company regaining its leadership over Venezuela’s oil policy, announced there would not even be "one more barrel of oil for Cuba," a violation of Venezuela’s international agreements. They also proceeded to make appointments within the company, misappropriating the powers of the President of the Republic and the legal consituency of PDVSA’s board of directors.

The U.S. government’s position regarding the oil reform underway in Venezuela has been, at best, contradictory. Venezuela has never stopped being a reliable and stable supplier to the United States, and this is where the interests of both countries perfectly coincide. Venezuelan oil would be hard for the United States to replace and the U.S. market would be equally hard for Venezuela to replace. Also, the Venezuelan policy that aims to stabilize prices within OPEC’s established range also benefits the United States as a producer of hydrocarbons. Oil production in the United States is more costly than in other regions of the world, and if prices dropped too low, many of its reserves would be uncompetitive. Further, it’s no secret to anyone that the interests of the oil industry are well represented in the Bush government, and it doesn’t appear that Washington will push for policies aimed at dramatically lowering prices. This is not the area where major tensions exist between the two countries.

On the other hand, the U.S. government’s relations with the executive board of PDVSA have been far more cordial than with Chávez government officials. The directors of PDVSA have always prioritized the interests of the company over those of the nation, and the leading promoter of the so-called Oil Opening, ex-PDVSA president Luis Giusti, is today one of the oil advisors to the Bush administration.

Further, the Chávez government’s categorical commitment to OPEC has become a divisive issue between the two countries. The major importance of this organization and its re-emergence on the world scene has to undoubtedly be credited to Chávez and his oil policy. It has not only achieved the recovery of oil prices on the world market but it has also strengthened OPEC and its member countries. The political buttressing of OPEC and its members can only be a cause of concern for the U.S. government. After all, countries the United States considers its "enemies," Iraq, Libya, and Iran, form part of OPEC. A U.S. attack on Iraq would require the reliable supply of Venezuelan oil. The cordial relations between Venezuela and Iraq do not go down well with the Bush government. In the context of the "war against terrorism," the U.S. government was quick to applaud the short-lived military coup of April.

Upon his return to the presidency, Chávez accepted the resignation of the board of directors of PDVSA that had been installed by the April 11 coup. He did not, however, reinstate the controversial board he had named in February. A week after his return to power, he named a new board, making important changes. Alí Rodríguez, the current secretary general of OPEC, now heads the board. Another director, Hugo Hernández Rafalli, was the former president of the Venezuelan Oil Chamber, the institution that represents private business interests in the sector. These changes have been publicly accepted, for now, by the management of the industry. While these changes confirm the return of "meritocracy" to oil executives, we must remember that PDVSA’s new president, Alí Rodríguez has been, and continues to be, one of the leading promoters and protagonists of the reform that they have opposed.

The oil reform is a key part of President Chávez’s political project. With all its shortcomings and ambiguities, improvisations, indefinitions and for all its concern that there not be any radical ruptures in the industry, it is a project that aims to construct an alternative to the models prescribed under neoliberal globalization. It is understood as such by both the U.S. government and international capital. The day after the coup, the International Monetary Fund swiftly recognized the de facto government and world oil prices fell, precipitating a weakening of OPEC.5 Latin America and the world’s progessive sectors continue to follow the situation attentively. The world’s most powerful nation, however, can only view the current state of affairs unfavorably.

Luis E. Lander is a researcher at the Economics and Social Science Faculty of the Central University of Venezuela.

Margarita López -Maya is a historian at the Center for Development Studies of the Central University of Venezuela. They are frequent contributors to NACLA. Translated from Spanish by NACLA.

1.Luis E. Lander, "Venezuela’s Balancing Act," NACLA Report, XXXIV No. 4 Jan/Feb 2001. Available at
2. For an analysis of oil policy before the Chávez governmen,t see Luis E. Lander "La Apertura Petrolera en Venezuela: de la nacionalización a la privatización," Revista Venezolana de Economía y Ciencias Sociales, Vol. 4, No. 1, January-March 1998, pp. 153-182.
3. Revista Venezolana de Economía y Ciencias Sociales publishes its second edition of this year (May-August 2002), which focuses on the Chávez government’s oil reform.
4. In his column in the weekly Quinto Día, the current Finance Minister, economist Tobías Nóbrega, has written repeatedly on this issue.
5. El Universal (Caracas), April 13, 2002 and El Nacional Caracas), April 13, 2002.

Tags: Venezuela, Hugo Chavez, oil, nationalization, PDVSA, populism

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