Trouble Ahead
May 12, 2008
CARACAS—The lines outside the distribution centers of Mercal, the state-run company that distributes basic foodstuffs to low-income Venezuelans, are as long as they were on January 1. Any near-term prospects for alleviating this consumer calamity are weak and uncertain because the Venezuelan economy, where the government plays a fundamental role, depends in large part on the economic health of PDVSA, the public enterprise that explores, extracts, and takes, to market the country’s oil. And PDVSA is in trouble—real trouble.
After the oil stoppage of late 2002 to early 2003, Chávez decided to fire no fewer than 18,000 of PDVSA’s employees—almost a quarter of the total staff. Not only did he openly violate all labor laws, but he lacked the most basic common sense any business owner must possess. The dismissal left the company’s activities in complete disarray, especially because the majority of the dismissed employees were technical, scientific, and managerial workers—the backbone of the industry.
As a result of the firing, as well as decreased investment in exploration and technology, PDVSA dropped its production from by about 500,000 barrels a day, from 3 million to about 2.4 million. Of that amount, which did not increase in the subsequent years, PDVSA sells about 1.2 million barrels to the United States.
These are heavy oils that not every refinery in the world can process, so the company could not immediately find buyers on the world market, not even by dropping its prices. Quite simply, most of the refineries could do nothing with Venezuelan oil without first modifying their machinery and facilities, a process which could take an average of one or two years. So as a vendor, Chávez is in a bad situation because half of his production is practically tied to his traditional buyers in the United States.
The limitations this fact imposes on Chávez—limitations some Venezuelan officials have already acknowledged—are magnified when we analyze the rest of Venezuela’s production placement. More than half of the remaining 1.2 million barrels are sold to the local market, where incredibly subsidized prices encourage consumption. In addition, about 300,000 barrels are practically given away to the Cuban government and other, smaller allies.
Thus PDVSA is left without any room to maneuver and has no possibility of restructuring its markets to obtain greater profits. Its only chance would be if Chávez decided to do what is currently impossible: raise the price of gasoline in Venezuela ten- or twenty-fold and simultaneously abandon his Cuban allies.
While PDVSA faces a delicate legal situation worsened by the huge debt the company has incurred in recent years (it rose swiftly from $5 billion to $16 billion), the domestic situation in Venezuela has become increasingly complicated. Artificial prices produce a sharp reduction in the supply of staple goods—scarce and available only sporadically. Meanwhile, strict control of currency exchanges and continuous threats of expropriation hurled at food producers have reduced investments to zero and forced the government to spend an increasing amount of hard currency to import everyday foodstuffs.
Discontent is rising throughout the land, and Chávez’s popularity is in free fall. The president, who is more and more erratic and contradictory, has fewer resources to spend on remedying the situation and faces a unified opposition. Let’s hope that the country’s democratic forces can resolve what is a very tough situation for the government and put an end to a regime that has created nothing but unnecessary conflicts and greater poverty for almost everyone.
