Hugo Chavez Oil Revenue Helped Venezuela's Poor — But It May Soon Disappear


Hugo Chavez signed Decree No. 1501, the Hydrocarbons Organic Law, on November 2, 2001, three years after his election.  The law affirmed government ownership of all hydrocarbons in Venezuela, and called for the state to retain 30% by volume of what was extracted. In the Orinoco Basin, which is harder to exploit, this share could be reduced to 20% - still a sharp departure from the previous 1% figure. Despite the hard bargain, which drove many foreign companies from the market, countries such as China were willing to invest billions. Oil production decreased only slightly over a decade, from 3.4 million barrels to 3 million barrels, with stricter accordance to the OPEC quota.

The state eventually took over the holdings of many companies unwilling to accept the new rules. Protests of expropriation gained little traction in international arbitration: the International Chamber of Commerce awarded Exxon $908 million, less than 10% of the $10 billion it had demanded. Despite the 30% tax and required PVDSA majority ownership, Venezuela continued to auction oil leases to international investors, including Chevron, as recently as 2011.

As a result of his oil policy and his fight with the PDVSA, Chavez was nearly deposed by the April 11, 2002 coup attempt, which was used many times in the following eleven years to justify a host of human rights violations. Those should not be minimized. The coup declared Venezuelan Federation of Chambers of Commerce president Pedro Carmona to be interim replacement for Chavez.

Carmona had visited the Bush White House several times and met with with diplomatic official Otto Reich. Even the U.S. Inspector General had reported that U.S. agencies had "provided training, institution building, and other support to individuals and organizations understood to be actively involved in" the coup, but claimed no evidence that the support "directly contributed, or was intended to contribute" to the incident. The coup was a pivotal point in the worsening of U.S.-Venezuela relations.

Compared to Chavez's Venezuela, the U.S. offers much softer terms for oil and gas drillers. It has historically collected oil and gas royalties of 12.5-16.7% for drilling on public lands though royalties on up to $10 billion of oil from the Gulf of Mexico were lost via an "oversight," and other royalties lost to under-reporting were uncovered only through third-party lawsuits. Environmentalists have protested sales of oil royalties on prime California land for $2.50 an acre.

For newly discovered gas under private lands in Pennsylvania, landowners can negotiate leases with a legally guaranteed minimum of 12.5% royalty but also with substantial inconvenience and environmental concern. Rewards can be substantially more, as much as 20%, when large groups of local property owners unite to get a better deal. But in other cases, drillers can get at the gas under a property without a lease using the "Rule of Capture," which permits horizontal drilling adjacent to a property line to remove the natural gas from beneath it.

For Pennsylvanians who do not own gas-bearing lands, the state collects only a 3% "environmental impact fee," enacted grudgingly in a bill that overrode measures that counties had begun to pass to collect additional revenue. As a result, the state continues to suffer a massive $163 million deficit despite recent cuts to education and social programs while sitting on nearly a trillion dollars worth of natural gas and producing 2 trillion cubic feet (very roughly $8 billion worth) in 2012.

In Venezuela, the policies of Hugo Chavez used the country's oil wealth to fund the Bolivarian Missions, a large set of social programs using nearly half the country's budget (obtained largely from oil royalties) to benefit low-income citizens. The country's GINI coefficient, a measure of social inequality, plummeted by nearly a full ten points, from 48.8 to 39.0. Among youth, illiteracy has been reduced to under 2%. Though for various reasons many in the middle class do not see benefits from Chavez' regime, these social programs provided him with a large, loyal base of supporters among the poor.

Opposition candidate Henrique Capriles Radonski has promised to "revise every deal" for oil exploitation, and seems generally to be regarded as more friendly to Western business interests. It is clear that during the last two years of Chavez' life, a paralysis of the Venezuelan government caused capital investment and oil production to deteriorate, including a critical $233 billion development now far behind schedule due to lack of pipelines.  PVDSA is now deep in debt, and production has fallen to 2.4 million barrels daily.

Clearly Venezuela's next leader must rally the investment and talent to reverse this decline. It remains to be seen whether this revision will also mean the Venezuelan people will lose access to the extra portion of oil revenues that Chavez took hold of. If so, will his supporters be willing to return to poverty so that a few international companies can recover the control of the nation's natural resources to which they feel entitled?