“Oil is a geopolitical weapon and these imbeciles who govern us don’t realize they have as an oil-producing country.”[1]
(Hugo Chavez, presidential candidate of 1998)
Discovery of oil and subsequent production of oil is heart of Venezuelan modern history, politics and economics. Moreover, oil as a resource acts a determinant in United States-Venezuelan relations and Venezuelan foreign relations as a whole. The article traces the history of discovery of Venezuelan oil, production, political and economic policies towards oil and current management of the resource.
Past management of oil in pre-Chavez era
“Mummy, where is Daddy? Daddy is in Venezuela”
(Assignment: Venezuela -50s promotion working in oil industry in Venezuela)
From 1958 to 1998, the oil resource contributed $300 billion to Venezuelan economy and according to Kozloff, the amount is worth equivalent of 20 Marshall Plans (the plan to reconstruct Europe in post World War Two era)1. Yet, Venezuela seems not to achieve its fullest potential of First World country and only to be decimated in the 90s. To examine what happened over the years, I shall discuss discovery of oil and its impact on Venezuela and vice versa till 1998.
Oil discovery and policies till 1976 nationalization
Oil before 1900s
Venezuelan oil history largely started just before World War Two. However, a further study would conclude oil has been used by Venezuelan indigenous community prior to the European exploration[2]. The indigenous community has used oil for illumination, medicinal and as materials for canoes and sails (Alvarez & Friorito, 2005). With the arrival of Spanish rule, Spanish rulers learnt the indigenous usage of oil and all mines placed under Spanish King’s ownership (Alvarez & Friorito, 2005). With independence in 1811, all mines were placed under national control (accordance to late Bolivar’s decree) and by 1878, an oil company was founded to explore oil in Venezuelan Andes (by 1880, a drilling rig was imported from US for well drilling) (Alvarez & Friorito, 2005). Since independence, first ‘caudillos’ and later presidents used the military to control the population while Venezuela continued its colonial-era mono production economy (coffee being the main product)[3]. The mono production system (economies based on one primary product) still plagues Venezuela till today, with oil replacing coffee. An article states that pre-Venezuelan ‘oil era’ witnessed greater internal instability but thereafter, oil development lessened violent conflicts in Venezuela[4]. Since 1880, foreign companies and small entrepreneurs were give concession to explore asphalt in Zulia and other regions (Alvarez & Friorito, 2005). New oil explorers found harsh terrain around the eastern side of Lake Maracaibo (Largest Lake in South America surrounded by state of Zulia), confronted tropical diseases and resistance from indigenous communities[5].
Oil industry under Military Rule (1900s-1945)
Juan Vicente Gomez (U.S. supported military dictator) seized power in 1908 and ruled for next 27 years (Alvarez & Friorito, 2005). In 1909, Gomez awarded John Tregelles (British company representative) the right to explore vast area in Venezuela but the concession was revoked as the low royalties Gomez received (Alvarez & Friorito, 2005). Soon, similar concession was given to Rafael Valladers to explore oil and asphalt in Lake Maracaibo but by 1913, Royal Dutch Shell took over the concession (Alvarez & Friorito, 2005). The president, with his total power, granted concession to woo in foreign companies and placed fix tax rate, 25% to oil companies which accepted the rate (British oil companies has dominated Venezuelan petroleum scene)[6]. Soon, American oil companies such Jersey Standard began to join the exploration and production race in Venezuela[7]. After World War I, United States became the dominant power in the oil industry[8]. Soon, Royal Dutch Shell and Rockefeller’s Standard Oil became dominant producer of Venezuelan oil[9]. From 1924 to 1929, share of U.S. oil companies in Venezuelan production increased from 5% to more than 50%[10]. However, Gomez found invasion plot to overthrow him foiled by Holland and England in 1921 (Ships for the plot, sponsored by American oil interests, were denied to leave)[11]. It turned out that certain American oil companies resent Gomez’s legal decisions favouring British companies over the American ones and local officials were concerned that their workers could be manipulated for political ends[12]. Gomez’s regime welcomed U.S. companies but denied them having the opportunity to monopolize the industry[13]. In 1918, Gomez’s regime allowed oil companies to draft a petroleum legislation that favours them (it became the law in 1921)[14]. U.S. oil companies placed a great significance to Venezuela, supporting Gomez while Gomez responding to oil companies complaints, dismissed a nationalist minister in the 20s[15]. Favourable attitude towards oil companies and Lake Maracaibo oil deposits transformed Venezuela into the second largest oil producer in world (after in U.S.) in 1928/9[16][17].The share of Venezuelan oil production for Royal Dutch Shell, for example, increased nearly ten folds from 1923 to 1936 (3.7% to 30.8%)[18]. This oil industry allowed funding for road construction (large scale project since 1910), railway expansion, and higher wages for Venezuelans and health and education expansion[19][20].
However, despite the oil discovery and its immense benefits, the same industry propped Gomez’s dictatorship and Venezuelans did not fully reap the benefits. From 1920 to 1935, share of oil exports in Venezuela from 1.9% to 91.2% and in which Venezuela experienced Dutch Disease (increase exploitation of natural resource at expense of manufacturing/ industrialization growth)[21]. Agriculture and stock raising declined; food imports shot up, prices increased (while wages stagnated) and living standards were still low[22]. Venezuelan oil workers faced racism form their foreign counterparts (foreigners paid in dollars), wages were not keeping up with living cost[23][24]. An increased American presence thanks to the oil industry created resentments among Venezuelans whether in working condition (Venezuelans excluded from foreign clubs) or cultural (American films portraying Anglo-Saxons superiority)[25].
The oil companies paid little attention to the environmental costs of this industry[26].Below here are some environmental incidents[27]:
a) In 1922, there was an oil blow-out (Cabimas, east of Lake Maracaibo) released 900 000 barrels of oil in nine days and river of oil manage to reach Maracaibo city (35 kilometres away)
b) In 1928, Lagunillas was nearly destroyed by fires caused ‘open-hearth fire’ that set fire oil spill (from leaky drill). Only 125 out 700 houses remained after fire
c) In 1929, Lagunillas was blazed in which residents were forced to move to Ciudad Ojeda (24km north)
d) Lagunillas residents asides threat of fires, regularly complained about lack of clean water (due to oil pollution) and violation of communal lands[28]
However, Gomez ensured the oil companies to pay better respects to Venezuelan workers’ condition and complaints of Lagunillas[29].Oil revenue funded Gomez’s repression apparatus while Gomez, his family, cronies and military enriched themselves in the process[30]. Gomez, though facing much opposition, eventually died in 1935.
Resentment against Gomez flared up upon Gomez’s death and Venezuelans threatened to fire the oil wells, storage camps and camps in Lake Maracaibo (families of foreign oil workers were rushed to lake tankers for safety and Maracaibo descended in chaos)[31]. General Eleazar Lopez Contreras, assuming Gomez’s position quickly crushed dissent and ruled by decree briefly till order was restored[32]. Later in mid 30s, Contreras relaxed the political atmosphere and granting greater labour rights which opened the floodgates demands of political reforms by Venezuelans[33]. With new labour law (1936), oil workers conducted massive strike on 14th December 1936 after their demands with the companies were not fulfilled (in which 20 000 left the job to surprise of everyone)[34]. With the strike, government was no longer receiving royalties and was forced to concede with small pay rise (at the same time decreeing end of strike in January 1937)[35]. After the strike, Contreras regime clamped down on union leaders and communist/leftist politicians, dissolved Trade Union Congress and banned political parties[36].
Meantime, realizing the need to develop and diversify the country, Contreras regime began ‘sow the oil’ by investing agriculture, infrastructure projects, social programs tourism and immigration promotion in late 30s[37]. New fields in Llanos and Maracaibo expansion boosted Venezuelan oil production (and revenues) by 25% in first four years of Contreras regime (there was dent during World War II)[38]. In 1938, a new oil law ‘revised the operating terms’ which could increased Government’s profit share but all too ignored by the oil companies then[39]. By the time Contreras regime came to an end, the various investments in social and economic programs failed to bear fruits, corruption was rampant and government received the same oil revenues share under Gomez[40]. Though his ‘mild economic nationalism’ which frightened oil companies (1938 law), these companies were grateful to Contreras on clamping down on labour movements[41].Contreras, through his dominated legislature, appointed General Isaias Medina Angarita as his successor in 1941[42].
General Medina envisioned great infrastructure and agriculture development in 1942 but World War II damaged the Venezuelan economy[43]. After Pearl Harbour, German submarines torpedoed Venezuelan oil tankers and there was shortage of Allied tankers to export Venezuelan oil[44]. Venezuelan oil production fell (200 million barrels (end of Lopez’s regime) to 142 million barrels annually in 1942); revenues went down, unemployment increased and Venezuelans demanded better oil profit shares[45]. On 13th March 1943, a new oil law (Hydrocarbons Act) was passed which unified previous legislations in which[46][47]:
a) Increases in royalties and taxes
b) Companies need to increase refining capacity in Venezuela
c) Government oil revenues are expected to equal with industry profits
d) Companies will convert their oil titles under the new law (Medina gave them extra 40 year lease and dropping lawsuits against them)
e) Governments in previous oil law receive revenues through concessions and customs. This Act meant government receive income through taxes of mining
In 1944, with easing of German attacks on tankers, Allies demand on oil went up and this in turn increased production and revenues in Venezuela[48]. With 1943 law and new concessions, increased revenues initiated a record level of infrastructure projects (e.g. airport, schools, hospital, and new Central University campus)[49]. However, AD party (founded by Romulo Betancourt in 30s) criticized the 1943 oil law as inadequate and the law was based low oil market prices in late 30s for fixing payments from companies[50]. AD also criticized Medina’s government doing little to stimulate agriculture and betterment of people in terms of infrastructure and social indicators[51]. AD began to assert its control over labour movement and Medina, in turn decided to crack down on unions due to political connections (in 1944, unions were dissolved by Medina)[52]. With a threat petroleum workers strike in November 1944, Medina conceded unsatisfactorily to increase the wages of the workers (2 bolivars daily increments)[53]. Under Medina, more political liberalization moves were conducted and through his dominated state and national level legislature, his newly created party began to groom a new successor to Medina[54]. Medina was able to balance the aspirations of Venezuelans while not challenging U.S. hegemony in oilfields[55]. However, since 1944, a section of Venezuelan military decided to overthrow Medina and they reached out to Betancourt and his party for the 1945 revolution[56]. On October 1945, AD and the military rebels bloodily overthrew Medina’s government in which seven man junta selected by Betancourt to oversee the upcoming political reforms[57].
(This Essay is under construction, please be reminded not to quote anything from the essay until full reference list. I, as the authot fully acknowledge all the sources for the publication)
[1] Kozloff, Pg.7
[2] Alvarez & Friorito, 2005
[3] Brito & Calfullan, 2004, ‘Oil Wealth, Capitalist Plunder and Resistance’, CWI, viewed on 28th March 2012, http://www.socialistworld.net/doc/1282
[4] Mahler, 2011, Pg.593
[5] Kozloff, Pg.14
[6] Brito & Calfullan, 2004, ‘Oil Wealth, Capitalist Plunder and Resistance’, CWI, viewed on 30th March 2012, http://www.socialistworld.net/doc/1282
[7] Kozloff, Pg.14
[8] Ewell,1996,pg.133
[9] Wilpert, 2003, ‘Economics, Culture and Politics of Oil’, viewed on 30th March 2012, http://venezuelanalysis.com/analysis/74
[10] Ewell, 1991, Pg.133-134
[11] Kozloff, Pg.14
[12] Ibid. Pg. 15
[13] Ewell,1996, pg.134
[14] Lieuwen, 1961 Pg.48
[15] Ewell, 1996, Pg.120,125-126
[16] Lieuwen, 1961, Pg.48,
[17] Wilpert, 2003, ‘Economics, Culture and Politics of Oil’, viewed on 5th April 2012, http://venezuelanalysis.com/analysis/74
[18] McBeth, 2008, Pg.44
[19] Lieuwen, 1961, Pg. 48
[20] McBeth, 2008, Pg.17
[21] Wilpert, 2003, ‘Economics, Culture and Politics of Oil’, viewed on 5th April 2012, http://venezuelanalysis.com/analysis/74
[22] Lieuwen, 1961, Pg.49
[23] Kozloff, 2007, Pg.15
[24] Ewell, 1996, Pg.140
[25] Ibid. Pg.1401-141
[26] Ibid., Pg.136
[27] Kozloff, 2007. Pg.15-16
[28] Ewell, 1996, Pg.136
[29] Ibid. Pg.136
[30] Lieuwen,1961, Pg.49-50
[31] Ibid. Pg.51
[32] Ibid. Pg.51
[33] Ibid. Pg.51-52
[34] Ibid. Pg.52
[35] Ibid. Pg.53
[36] Ibid. Pg.54
[37] Ibid. Pg.54-55
[38] Ibid. Pg.55
[39] Ibid. Pg.55
[40] Ibid. Pg.55-56
[41] Ewell, 1996, Pg.147
[42] Lieuwen, 1961. Pg.56
[43] Lieuwen, 1961. Pg.57-58
[44] Ibid. Pg. 58
[45] Ibid. Pg.58
[46] Ibid. Pg.58-59
[47] Wilpert, 2003, ‘The Economics, Culture and Politics of Oil in Venezuela’, http://venezuelanalysis.com/analysis/74 viewed on 19th April 2012.
[48] Lieuwen, 1961, Pg.59
[49] Ibid. Pg.59
[50] Ibid. Pg.65-66
[51] Ibid. Pg.66
[52] Ibid. Pg.67
[53] Ibid. Pg.67
[54] Ibid. Pg.61-62
[55] Ewell, 1961, Pg.148
[56] Lieuwen, 1961. Pg.69-70
[57] Ibid. Pg.70
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