Venezuela, Oil Industry Essay
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The economy of Venezuela is highly dependent on revenues from the oil industry. The export of oil represent 95% of the total export of the country, 40% of the budget revenues and 12% of the GDP (CIA The World Factbook, 2012). Venezuela is one of the founding countries of OPEC and is one of the fifth largest memberс. In the past, from 1950s to 1980s, the country’s economy was steadily growing, and during that time period, the country prospered and attracted many immigrants.
Thanks to the oil industry Venezuela’s citizens enjoyed the highest living standard in Latin America. In early 1980s the oil prices collapsed and the country’s economy contracted.
Today, Venezuela is one of the countries with highest inflation rate in the world, and it is averaging 26,1% in 2011 (US Department of State, 2012). From 2010, announced by Venezuelan president Hugo Chavez, started the use of fixed dual exchange rate system for their currency, Bolivar. The system has one lower exchange rate for imports of essential goods, and other higher exchange rate for other products. The country was strongly affected by the Global economic crisis, and according to International Monetary Fund (IMF) report from 2010, the economy recovery is qualified as weak and delayed in comparison with other countries in the region.
History of oil Industry in Venezuela
As the most important industry in the country, Oil industry in Venezuela is older than 100 years. The first production of oil was recorded in 1908, and throughout the years this industry went through a lot of turmoil. In 1961, Venezuela along with Iran, Iraq, Kuwait, and Saudi Arabia founded the Organization of the Petroleum Exporting Countries (OPEC), with main purpose of control over the price of oil. Later in history, this organization will have serious impact over the world prices of oil. From 1976, under the leadership of the president Carlos Andrés Pérez, the industry entered the process of Nationalization. The private companies were nationalized and new government owned company was established Petróleos de Venezuela S.A. (PDVSA). The excavation of natural gas was banned and was allowed only for the state owned companies. This law was changed by the current president Hugo Chavez in 2001, and now 49% ownership is allowed for foreign investors in joint ventures for downstream activities (Jones, 1986).
Correlation between Venezuela’s oil industry and International trade theories In order to understand the current International trade strategy used in oil industry in Venezuela, and to make comparison of the industry with the existing trade theories, the last ten years from the history of this industry will be elaborated, or more specific what was happening with the industry under the ruling of the president Hugo Chavez. Hugo Chavez was elected in 1999, the time when this industry recorded lowest price of the oil. Since the export of oil is 40% of the budgets revenue, he saw that the budget of the country can be filed by increasing the price of oil. In order to do that he took effort to strengthen the role of OPEC, which at that time was virtually not functioning, because none of the member countries did not oblige the export quotas. In 2000 he organized the summit of the heads-of-state of OPEC countries. Shortly after this summit, the world prices of oil started to grow on record levels. Although, the summit was not the only reason for increased price of oil in the world (some of them were attacks on US in 2001, increased demand from China etc.) but certainly was one of the most important. After his election, Chavez, immediately build tensions with PDVSA.
He enlisted quotas like 10% of the company’s revenue to be spent on social programs, and changed tax policies and the oil revenue collection process in order to transfer more money from the company into the budget. The management of PDVSA were not so happy with this measures, and started three months long strike in 2002 and 2003, which resulted with laying off 19,000 employees and their replacement with people loyal to Chavez regime. This lay-off increased the country’s unemployment rate by 5%. After this strike Chavez gained control of the industry, and from then on, his goal was to increase the efficiency of PDVSA in context of distributing more money to the government. In 2006, the government held share of the company was 40%, and they announced increase of additional 20%. In that manner, Chavez decided to diversify the scope of the company, and opened subsidiaries in shipbuilding, agriculture, construction and industry.
In 2007 PDVSA both the electric company Electricidad de Caracas, company from AES Corporation as part of a renationalization program. The company is producing 2.2 million barrels per day solely in Venezuela (Oil Market Report, 2012). After gaining firm control over the company, Chavez enacted another low, and forced the foreign companies to restructure and to give majority control to PDVSA. ExxonMobil and Conoco Phillips did not obliged this law, and their assets were expropriated in 2007, while many other foreign companies like Total, Chevron BP etc, retain their minority interests.
In 2010, PDVSA announced strategic plan for increase of the production up to 5 million barrels per day for 2015, and 6,5 million barrel per day for 2020 (Janssens, Nyquist & Roelofsen, 2011). Many experts are skeptical about the reality of these goals, because of Chavez’s policies, which do not allow private investment. Giving the changes in industry, it is hard to determine which of the international trade theories can be applied, but by my opinion the most factors are connecting the industry with Hecksher-Ohlin theory.
The Hecksher-Ohlin theory argued that comparative advantage arises in national factor endowments. The factor endowment of Venezuela that could make comparative advantage on this industry is the very large amount of natural resources (crude oil) that are abundant in the country. Following the Venezuela’s patterns of trade can be seen that is exporting crude oil, that they have in abundance, and is importing other goods like agricultural products, livestock, raw materials, machinery and equipment, transport equipment, construction materials, medical equipment, pharmaceuticals, chemicals, iron and steel products (CIA The World Factbook, 2012). From here we can see that the international trade is beneficial to the country. The country is exporting crude oil that is making intensive use of the endowment factors, and on the other hand is importing those goods which require intensive use of goods that are locally scarce.
Porters diamond is giving answers of the question: why a nation achieves international success in a particular industry. In our case the question would be: why Venezuela is successful in oil industry, and what are the reasons that are giving Venezuela National competitive advantage. Porter’s diagram is taking into consideration four attributes: factor endowments, demand conditions, relating supporting industry, and industry strategy, structure, and rivalry (Hill, 2012). Since the oil industry in Venezuela is represented through one company PDVAS, it would not be wrong if the oil industry in Venezuela is considered through the PDVAS.
Factor endowments are divided in two group of factors basic factors such as: natural resources, climate, location and demographics and advanced factors such as communication infrastructure, skilled labor, research facilities, technological know-how etc. Venezuela is very reach in natural reserves of extra heavy crude oil and bitumen deposits (US Energy Information Administration, 2012). Most of these resources are located in Orinoco belt in central Venezuela. According to some studies of US Geological Survey, it is estimated that in there are 513 billion barrels of crude oil in this region. So the basic factors are in favor of Venezuela. More than100 year old tradition in oil industry is good reason to believe that Venezuela (PDVSA) have knowledge and skilled labor in this industry, but in the great purge in 2003, the industry lost 19,000 skilled workers.
This can bear doubts about the quality of the knowledge and know-how that the industry is possessing at the moment. In addition to this many foreign reports that are saying that the Venezuela’s infrastructure is in very bad situation and it is falling apart (The Economist, 2011). From here can be drawn conclusion that the big reserves of oil can support National Competitive advantage in this industry, but there must be improvements in the country’s infrastructure and in the condition of the high skilled labor, which must be isolated from government political issues.
According porter, the domestic demand plays significant role in upgrading competitive advantage. In the case of Venezuela, is relatively small market
of approximately 29 million people. So from here the domestic market is not actually giving significant impact over the competitive advantage of the industry. However, the country is exporting its oil almost everywhere around the globe, and the demand of oil in the world is constantly increasing. Driven by the urge of increasing the revenues, PDVSA is trying to find ways of increasing the production and becoming more competitive, especially on the Chinese market.
Relating and supporting industries
The third attribute according Porter is the Relating and support industries. The research did not showed sufficient information for the Venezuela’s ways of supplying drilling machines, but few commercials from the biggest Chinese manufacturers of drilling equipment are showing that they sold drilling equipment to Venezuela. Another, supporting industry is the transportation of oil from Venezuela worldwide. There are only four oil ports in the country that are connected with pipelines from the rigs. The number of ports and the president’s approach, wanting to nationalize the ports, are not reaching full potential, and are not fully supporting the countries oil industry (Barillas, 2009). From here, can be concluded that related and supporting industries are not sufficiently developed to ensure National Competitive Advantage
Firm strategy, structure, and rivalry
According to Porter the fourth attribute of national competitive advantage, is the strategy, structure and domestic competition. PVDSA is state owned monopoly, which from 2006 is employing only party colleagues from the party of red, leaded by Hugo Chavez. There is not firm prove that these employed workers are skilled and risen to the challenges in the industry. The Monopoly position is giving the company dominant role in the production of oil, and practically they do not have competition. The foreign companies do not have dominant position in any project in Venezuela, so from here there is not domestic competition. The strategy of the company is to double the production by the end of this decade, but with the government policy of preventing the foreign capital to freely enter the industry, this projections are fairly unreachable. All three components of this attribute are not in favor of the industry in the country.
Oil industry in Venezuela is the most important industry in the country. The political turmoil and the politics of the president Hugo Chavez are not in favor of the industry. Nationalization of the oil drilling activities and the attempt of establishing control over the oil ports, are preventing the industry of acquiring national competitive advantage. If we evaluate the porters diagram, we’ll see that instead of getting all four attributes, the industry have only one partial attribute and that is the natural resources. The government is influencing directly two of three attributes, but in negative content. With establishing monopoly over oil drilling, the government destroyed the competition, and with employing only red party colleagues, and with such action is decreasing the capacity of the company. So regarding porters diagram, the industry is not reaching its full potential, and reaching National Competitive advantage is highly unlikely. The oil industry of Venezuela has huge potential, and is up to the government whether the industry will rise or fall.
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