Venezuela’s economic decline: A primer

Venezuela, the country with the biggest oil reserves in the world, is now undergoing an economic crisis, with its main oil company, Petroleos de Venezuela, S.A., on the verge of bankruptcy.

According to a report by Rystad Energy, an energy research company, Venezuela’s production could fall to 700,000 barrels per day by 2020, about one-fifth the number of barrels it produced per day in the late 1990s. Because the country’s economy relies on oil, the decline in production and prices has led to crisis.

Venezuela has relied on a single product since its beginnings, first as a coffee-exporting nation and, after it found its first oil well during the 1920s, an oil-industry economy.

In 1996 PDVSA was ranked as one of the largest oil companies in Latin America by Fortune Magazine and its CEO of the time, Luis Giusti, was named 1998’s “Oil Executive of the Year” in an Oil & Gas convention in London. But after Hugo Chavez was sworn in as president in 1999, Giusti, who dissented with the government, decided to step down as CEO and PDVSA started having drastic changes in management.

Chávez rose to power with populist rhetoric. Later on in his administration, in 2003, he introduced Socialism of the 21st Century as the rightful path Venezuela needed to prosper and declared the United States an enemy of the state.

Venezuela’s relationship with the United States was always crucial given that the U.S. was one of Venezuela’s biggest oil buyers.

“The orientation [of Venezuela] was to provide for the North American oil market,” said Gilberto Morillo in Spanish, current coordinator of civic group Gente del Petróleo and former PDVSA employee.

Venezuela bought several oil refineries in the U.S., such as Citgo in 1986, to process their oil. That kept the two countries bound together economically.

When Chávez started taking control of PDVSA, he often claimed the U.S. was stealing from Venezuela. He started selling U.S. based refineries, claiming on national broadcast that companies like Exxon Mobil were world mobs.

According to Jose Sifontes, former Functional Finance Manager of PDVSA, there were dramatic changes in the oil company’s board of directors.

“They [the government] were assigning positions to people from the military,” he said in Spanish. “People who weren’t prepared for this type of exposure.”

In 2002, Chávez took his first step to take control of PDVSA by firing about 23,000 out of 45,000 of the most qualified workers. Some were fired during a national broadcast of his TV show “Aló Presidente” and the rest of the names were published in the press.

Chávez broke up PDVSA’s meritocracy by hiring people who were affiliated to his political party, regardless of their qualifications. Years of corruption in the company followed.

“He wanted to take advantage of the oil revenues to fund his political agenda,” said Horacio Medina in Spanish, the former manager of Operational Agreements and New Business of PDVSA, who was fired in December 2002 and became a political refugee of Chávez’ administration, escaping from Venezuela in 2005.

“They [the Venezuelan government] created socialist programs which made people dependent on the state,” added Medina.

During the late 1990s PDVSA was producing 3.4 million oil barrels per day. Nowadays, its production is at 1.1 million barrels per day, according to OPEC’s latest report. This is due to the lack of investment in machinery and personnel.

“During Chávez’ administration PDVSA’s function was distorted,” said Sifontes. “Which should be no more than produce, refine and sell oil.”

Sifontes said PDVSA’s income should be reinvested in the company first, and later directed into the national fund. “If the money is being diverted into other objectives, there’s not going to be enough money to sustain production,” he said.

PDVSA’s income was being used to finance Chávez’ international political agenda by giving money to Argentina, Cuba, Bolivia and Ecuador as well as his socialist programs in Venezuela.

In 2008, oil prices were at $140 per barrel. This is the highest Venezuela has ever seen. “These prices helped hide from the public the inefficiencies that were arising within the oil sector,” said political refugee Juan Fernandez in Spanish, former corporate manager of financial planning for the international sector of PDVSA and co-founder of the civic organization Gente Del Petroleo.

PDVSA was not producing oil in abundance, but the $140 per barrel price gave the Venezuelan government enough funds to import the products the Venezuelan economy needed. When oil prices fell during the government of Chávez’ successor, Nicolas Maduro, production wasn’t able to sustain itself.

“These people [Chávez’ administration] bankrupt PDVSA,” said Rafael Gallegos in Spanish, a petroleum engineer who worked for more than twenty years in PDVSA until he was fired by Chávez.

“They used the oil revenue to end the private sector and provide for communism in other countries and to [economically] support Cuba,” he said. “The country is absolutely bankrupt.”

Gallegos said the strategy was mirroring the Cuban model. “This type of government is not interested in a country that can produce 6 million oil barrels a day,” he said. “It leads to wealth, social mobility and promotes democracy.”

The substantial plummet of national production caused Venezuela to import gas to supply its domestic market. Also, by neglecting other productive sectors, such as agriculture, fishing and forestry, has led to an economic crisis that translates into food, medicine, water and electricity shortages.

“Venezuela’s oil industry has lost its significant role,” said Fernandez.

Interim President Juan Guaidó proposed “Plan País,” a plan that includes the restoration of the oil and private sector while also encouraging international entities to invest in the country.

On Feb. 16, Guaido held a forum in the Instituto de Estudios Superiores de Administración at Caracas where several panelists, including Rafael Gallegos and Gilberto Morillo, were discussing the next steps to restore the oil industry.

“The decline in oil prices and production in Venezuela are the main factors for the economic crisis we live in,” said Fernandez. “Given the economy is ultra dependent of the oil industry income.”