Venezuelan Oil-Based Economy
Venezuela has the world’s largest oil reserves. Oil represents 95% of Venezuela’s exports and 33% of those exports go to the United States (US). Venezuela, the 3rd largest supplier of oil to the US behind Canada and Saudi Arabia, represents 10% of US oil imports. Venezuelan oil is heavy and thick and the country must import light crude oil from the US to mix with it, so it can be pumped through its oil pipelines. Venezuelan oil is the major supplier to US Gulf Coast refineries owned by CITGO, Valero, and Phillips 66. These refineries are designed specifically to handle the thick, heavy Venezuelan oil. CITGO is fully owned by the Venezuelan state-run oil company (PDVSA) and has about 400 refineries and 1400 independent retailers in the US. Just like all oil exports, Venezuelan oil is subject to global boom and bust cycles.
Venezuelan Political Economy
One of the keys to understanding Venezuelan (and much of Latin America) politics is through institutional and informal patron-client relationships. The Punto Fijo Pact in 1958 ended a bloody civil war and sent the military back to its barracks. The Pact was a power sharing arrangement among 3-elite led parties, the Democratic Action (AD), Christian Democrats (COPEI), and the Democratic Republican Union (URD). The pact had the blessing of the traditional land-owners and the Roman Catholic Church. The AD and COPEI were the two primary elite-led parties. Both were elite-led clientelistic parties controlling the labor federations, peasant associations, and professional associations. State run industries were subsidized and protected via import substitution programs. Subsidies for staple foods were common and part of the clientelistic networks to the urban poor.
Oil revenues during the global boom of the 60s and 70s provided cash for elite parties (AD and COPEI) to maintain their clientelistic networks over labor federations, peasant association, professional associations, and to keep the country stable. Even more cash was available in the 70s as Venezuela nationalized foreign oil companies. Corruption became an everyday part of the political system. Declining oil revenues during the global bust of the early to mid 80s through most of the 90s led to an unraveling of the Punto-Fijo Pact and the inability of the elite-led parties to maintain their clientelistic networks. State run industries went broke or were sold to the private sector. Military funding contracted severely while it should be noted that the AD and COPEI had appointed loyalists into the officer rank hierarchies. Unemployment was above 60%. Debt issues appeared. Corruption increased and the parties began to lose legitimacy among their clientelistic groups. Austerity programs under the IMF led to riots in the streets of Caracas with hundreds dead. Social programs were cut. The Punto-Fijo Pact lost legitimacy as neo-liberal reforms (austerity) became common through the 90s. Mid-level military officers attempted a golpe (coup) in 1992 led by Lt. Col. Hugo Chavez who was later pardoned. Chavez, a traditional populist, gave voice to the lower middle class, the working class, urban poor, and peasants and organized them into a political force, the Socialist Party of Venezuela PSUV, against any attempt to restore the Punto-Fijo Pact, the elite power sharing agreement. In 1998, Chavez and the PSUV were elected to power. For the first time the lower classes had achieved power in Venezuela.
Oil Boom Cycle and Chavismo
In 1998, Venezuelan oil sold for $10 per barrel and 8 years later for $125 per barrel. Chavez used this vast oil wealth to create clientelistic networks via the PSUV with tremendous resources going to the working class, urban poor, and peasants (healthcare – preventative medicine and neighborhood clinics similar to Cuba, social security, free education, staple foods subsidized). A new constitution was drafted giving the president greater budgetary powers and Chavez began to develop strong ties to Cuba. Chavez was re-elected in 2006 and the constitution was amended to allow unlimited terms for the President. He began to move in a more authoritarian direction over the next few years galvanizing the opposition (traditional oligarchs, middle class, professional classes, students, Roman Catholic Church). Chavez retained his popularity due to his ability to meet the needs of the poor and working class through his clientelistic networks.
Oil Bust Cycle and Chavismo
Chavez died of cancer in March 2013 and was succeeded by Nicolas Maduro. Maduro was elected to the presidency in 2014 and began moving in an even more authoritarian direction by controlling the courts and the national assembly. He placed loyalists among the military officer corp and the PDVSA. Oil prices began to decline with the beginning of a global oil bust cycle. The US, producing more oil within its own borders, was importing less oil from Venezuela. The Venezuelan economy has since collapsed with imports, such as food, down 70% since 2014. Maduro and the PSUV was unable to support its vast clientelistic network and Venezuela faced a debt crisis. As the elite-led, yet fragmented opposition took to the streets, Maduro continued to move in a more authoritarian direction.
Recent Events
Protests against Maduro were met with violence. In 2017, the US imposed selective sanctions on the Maduro family and other government leaders. Argentina, Canada, Chile, Colombia, Paraguay, and Peru referred the situation in Venezuela to the International Criminal Court in September. The EU introduced financial sanctions and an arms embargo. In May of 2018, the economy was facing runaway inflation and shortages of food and medicine. Maduro was “re-elected” by 67% of the vote. No international observers were present, the opposition boycotted the election, and the US and EU rejected the outcome. More than 14 countries withdrew diplomatic personnel. Since then more than 3 million people have fled the country, most going to Colombia and Peru. The UN Human Rights Commission cited evidence of extra-judicial killings, torture, and arbitrary detention of political opponents. The only Caribbean terminals that accept Venezuelan oil are in Cuba. Oil exports to the US are down by more than one-half million barrels a day. US oil producer ConocoPhillips seized overseas assets of PDVSA to collect on overdue payments. Venezuela is technically in in arrears on its international debts.
How has the US Responded?
Currently the US has imposed selective or smart sanctions consisting of freezing the assets of leading members of the government, blocking the sale of Venezuelan debt in the global financial system, continued use of the IMF and World Bank to limit international financing, blocking US companies from future projects in Venezuela, and limiting the amount of light crude exported to Venezuela. The US has contacted several groups within the military. Some in the US have suggested a complete oil embargo but as of today this has been rejected. It would hurt US refineries in Texas and Louisiana, those designed specifically to refine the heavy Venezuelan oil. US consumers would face higher gasoline prices. The free or discounted heating oil that the PDVSA provides to low income communities in several states and tribal reservations would disappear. Finally, it would hurt the poorest Venezuelans and Maduro would be able to blame the US for his economic problems.
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