ISSUE BRIEF 02.05.18 ’s Oil Mythologies Have Hindered Its Development

Luis A. Pacheco, Ph.D., Nonresident Fellow, Center for Energy Studies

The myths exist in an environment INTRODUCTION where conversations about the oil industry— The question of why Venezuela, after more which, paradoxically, are uncommon in than 90 years of oil exploration and countless spite of the fact that Venezuela has revolved flirtations with modernity, is still far from around it for nearly a century—are usually real and sustainable economic and social framed in a combination of two or more of development is very difficult to answer— the following ideas: perhaps as difficult and elusive as the creation • Oil destroyed the agricultural economy. of a viable development strategy itself. (Alberto R. Adriani1) One could speculate, and indeed many • We must “sow” oil revenues to ensure have, about the economic, political, and even future wealth. (Arturo Uslar Pietri2) climatic causes of this curious phenomenon • We must save oil for future generations. in Venezuela; without a doubt some sort of (Celestino Armas3) coherent explanation could be structured, • Oil is the devil’s excrement. but so far none have gained widespread (Pérez Alfonzo4) acceptance. As author Henry L. Mencken • We must break away from OPEC. once said, “For every complex problem there (Sosa Pietri5) is a simple, clear, and wrong solution.” • PDVSA’s6 autonomous dealings are The idea that Furthermore, in exploring this question, hidden in a metaphorical black box.7 Venezuela’s oil bounty one is liable to encounter half-truths, ill- • It is preferable for PDVSA to invest oil is magical has been intentioned chroniclers, and stubborn rents than for politicians to waste it. defenders of well-established dogmas. (PDVSA and others). reinforced by “miracles” In many of the explanations experts and • Now, oil is truly ours. (Rómulo throughout history pundits have put forward, the perverse Betancourt, Pérez Rodríguez, Chávez in which fortuitous, 8 effects of oil rent are the most often Frías, and others. ) external events identified culprits behind Venezuela’s stagnant development. However, even It would be easy to disregard these triggered a demand though it is an attractive argument, it is statements, either because they do not for oil, rescuing the at best an oversimplification, as this paper conform to one’s personal vision, or because national economy seeks to demonstrate. they are superficial claims or simply mistaken. from the abyss. What I surmise in this brief is that However, the fact that these themes cultural myths (which will be described or versions of them have been repeated later)—and by extension, the suppositions throughout Venezuela’s history should make they inspire—have played a major role in us reconsider. We could even venture that shaping Venezuela’s relationship with and they are the ready arguments that swaths management of oil resources throughout of Venezuela’s society have subconsciously much of the last 100 years. accepted as valid explanations for RICE UNIVERSITY’S BAKER INSTITUTE FOR PUBLIC POLICY // ISSUE BRIEF // 02.05.18

their notorious dissatisfaction with the blowout of the Barrosos 2 well on December management of the country’s bountiful oil 14, 1922, on the coast of Lake Maracaibo wealth. Playwright Ibsen Martinez pointed in western Venezuela, that the country out in an interview following the opening began to feel the transformative effects of his play “Los petroleros suicidas” (“The of oil exploitation. This event was not only suicidal oilmen”) that “There is a collective the milestone that marked the beginning of schizophrenia ... and yes, we know we are an the country’s oil era; it also created, in my oil country, but we cannot understand why view, some of the archetypes and myths on Earth we are not rich.”9 that remain to this day. Oil is no doubt Venezuela’s primary The stories and legends that have been industry—but it has not seemed to capture woven around the Barrosos 2 well and its the dedication or prolonged interest of impact on Venezuela at the beginning of the the country’s writers. As historian Manuel 20th century serve to identify three of the Caballero once wrote, “Oil is a minotaur archetypes that characterize Venezuela’s oil without Homer.” However, one only has to mythology: consider Venezuela’s gallery of oil-related 1. The miraculous fact events to understand that, whether we 2. The wealthy enclave like it or not, oil has shaped the country’s 3. The black box contemporary history. Oil transformed Venezuela’s landscape, The Miraculous Fact notably in rural areas devastated by poverty and desperation at the beginning of the 20th The Barrosos 2 well, located on the outskirts century. Oil represented a dream of progress, of Cabimas, flowed out of control for more as described by author Miguel Otero Silva in than 10 days, reportedly spilling more than his novel Casas Muertas (1955): 1 million barrels of oil. According to legend, neighbors afraid of the deafening noise of “They came from the most diverse regions, the blowout—and of the unstoppable rain from the Andean villages, from the of oil that gushed from the bowels of the haciendas of Carabobo and Aragua, from Earth—prayed to the local saint, San Benito, the suburbs of , from the fishing to intercede, and they sang his virtues when villages of the coast ... They all went in nature finally surrendered. search of the oil that had appeared in the Today's engineers, rational and East, strong and black blood that flowed prosaic, would argue that the well caved from the savannahs, far beyond those in and stopped flowing. Although this is villages in rubble that they now crossed, undoubtedly the best explanation, the from that skinny cattle, from those true heirs of the neighbors of Cabimas miserable crops. The oil was shrillness have chosen to relate to the oil drama of machines, canned food, money, liquor, as a miracle. something completely different. Some This magical outlook, perhaps inherited were moved by hope, others by greed, from Venezuela’s agricultural tradition and 10 the majority by necessity.” a deep-rooted belief in the supernatural, has been reinforced by other “miracles” This dream is still pursued, though many find throughout the country’s history. From time it to be an unattainable chimera. to time, in an extraordinary coincidence with some internal crisis in the country, a THE OIL MYTHS fortuitous external event has triggered a demand for oil or a price change, rescuing Although hydrocarbons appear very early the national economy from the abyss it in Venezuelan history—according to the faced: the Second World War, the Yom oil historian Aníbal Martínez, the first oil Kippur War, the fall of the Shah of Iran, the officially exported from Venezuela was a Gulf War, the emergence of the Chinese barrel shipped to Spain in 1539 to treat economy, and other events took Venezuela King Charles I’s gout—it was not until the from miracle to miracle. 2 VENEZUELA’S OIL MYTHOLOGIES HAVE HINDERED ITS DEVELOPMENT

The Wealthy Enclave in the legitimacy of the State, reaped the In his novel Mene, author Ramón Díaz benefits of the mining bonanza that the Sánchez documents for history the foreigners produced and the locals little animosity that oil promoted between enjoyed. Is it any wonder, then, that many the foreigners living in gated, private Venezuelans imagined oil as dark and communities and the Venezuelans who corrupt, an enigma hidden in a black box? lived beyond the wall: After the nationalization act in 1975, Venezuela’s oil industry was subjected to Houses of resplendent wood, on pilasters state scrutiny as never before. However, the with insulating roofs. Gardens planted myth of the black box survived, because with a strong air of foreignness. A whole that is what good legends are: lasting and new and exclusive town, isolated from the indestructible. surrounding world with a large iron gate Nothing can erase the positive and ... White predominates there, a net white, negative effects of oil in the abandoned, aggressive like that of modern hospitals rural areas of Venezuela in the early 20th and hairdressing salons. The comfort of century. “Oil underpinned the tyranny [of those chalets suggests a certain idea of Gen. Gómez’s regime], but it also created a Carthusian monastery, with everything the conditions for its dissolution,”14 11 necessary to not lack anything. observed sociologist Emilio Pacheco. What is difficult to understand, and should make It is not mere coincidence that this novel one pause, is that 100 years after the first was published in 1936, during the year commercial discovery in the Lake Maracaibo of the first oil strike—the so-called “cold basin, Venezuelans’ perception of oil—and 12 water” strike —which was symptomatic of hence, of oil policy—tend to still revolve the tension created between the isolated around beliefs that originated in a reality Venezuela must identify 13 “musiues” from the oil companies and and a society that no longer exist but that the next economic and the Venezuelan blue-collar workers. It is endure in their worldview: the idea that technological revolution interesting to point out that Venezuela’s Venezuela's oil wealth is miraculous; the and act on it; only trade unions have roots in this strike. tension between oil companies and the rest Some 80 years after Mene was written, of Venezuela; and the perception of a dark then can the country the enclave still survives, physically and and secretive oil industry. rise to the levels of mentally, in the relatively affluent oil camps development required surrounded by the “real Venezuela,” as well as in the manner in which they are viewed A RICH COUNTRY to reduce poverty. in the corridors of political power. Venezuela's remarkable economic growth The Black Box during a large part of the 20th century, especially after the Second World War, and Along with the enclave came the myth of its transformation from a rural country the “dishonest secret,” which after the to one with all the external signs of nationalization of the country’s oil industry development, have led most of its citizens to became known as “the black box.” think, not without reason, that their destiny Imagine for a moment the Venezuelans was to be rich because the country has oil living in the first third of the 20th century, and other resources in abundance.15 opposed to the tyranny of the de facto A review of the income generated by ruler of the country, General Juan Vicente oil over the last few decades reveals some Gomez. They observed foreign oil workers of the facts that gave Venezuelans grounds speaking an unknown language, armed to think that they were rich—and some of with strange machines, opening holes in the the events that resulted from this belief. earth, extracting a black viscous liquid, and For example, a major event that seemed to transporting it beyond the seas. point to a long future of oil riches unfolded Meanwhile, the political masters, behind in the 1970s, when geopolitical turmoil the backs of the governed and shrouded in the Middle East brought an oil bonanza 3 RICE UNIVERSITY’S BAKER INSTITUTE FOR PUBLIC POLICY // ISSUE BRIEF // 02.05.18

to Venezuela—with oil revenues of more a hard lesson that Venezuelans would do than $3,000 per capita. This happenstance well to learn. advanced (among other measures) oil reversion legislation, and accelerated The Consequences of the Enclave (amid nationalistic euphoria) Venezuela’s If Venezuela’s national oil industry, in decision to nationalize its oil industry, particular the PDVSA pre-Chávez, failed at a move that had been in the minds of anything, it was its inability to understand politicians since the 1940s. that its entrepreneurial, technical, and Although such decisions can be second- human resource development—the product guessed today, it must not be forgotten that of its corporate DNA and its vision to become the consensus of experts at the time was that a major player in competitive global energy the country would profit from an unstoppable market—were at odds with the vision that rise in the price of oil and an unlimited the rest of the country, in particular the windfall. But the illusion was short-lived and, political class, maintained and still maintains as history shows, Venezuela and its OPEC on the subject of oil: that is, that oil is partners, in a failed attempt to keep prices primarily a source of rent to be used for artificially high, mismanaged their production something else, such as social programs for levels and lost significant market share. the country's poor or safer streets. Venezuela reduced its export capacity The management of the nationalized by almost 2 million barrels per day in the oil industry, absorbed in what were its span of a decade—a sacrifice that did undeniable business achievements, did not not, however, stop the irremediable fall in detect in time the widening gap between oil prices. When the strategy was finally the visions of various stakeholders in reconsidered, it took Venezuela more than the energy sector. What in the past was two decades to substantially recover its tension, often destructive, between PDVSA production and export capacity. and international oil companies or foreign In the first 15 years of the 21st century, a governments (as well as Venezuelan similar situation has developed: a temporary communities) was replaced by tensions oil bonanza has been followed by the between PDVSA and actors inside the systematic manipulation of production country: industrialists, local governments, levels and the loss of market share, this and the state bureaucracy at large, which time due to the politicization of the state- felt rightly or wrongly that PDVSA only acted owned company and a lack of technical in its own interest, without much thought to wherewithal to successfully capitalize on the the rest of the country. country’s oil. In 2003, the administration In addition, as the State assumed the of President Hugo Chavez fired more than role of investor/owner in the oil industry, 20,000 employees from PDVSA in response conditions were created for competition to a strike by workers and managers against between the energy industry and other state the president’s policies. The dream again sectors that required government funds: turned into a nightmare. infrastructure, hospitals, defense, debt Today, Venezuela’s energy industry service, etc. In this competition, which was has been sacrificed on the altar of an difficult to balance, fundamental conflicts ideology that calls for state ownership of arose, reinforcing the notion of an oil sector all oil production and the use of revenues disconnected from the needs of the rest of to buy political favors. Although such a the country. strategy has not achieved progress, it is impermeable to reason. At the same time, The False Start the populace—still blinded by the false hope of easy riches provided by higher oil In the early 1990s, Venezuela half- prices—is looking for someone to blame heartedly shifted its oil strategy from one now that the oil wealth, and their dreams, that maintained a state monopoly with have again faded away. This, in essence, restricted growth to one that expanded repeats the mistakes of the 1970s, and is production capacity based on the 4 VENEZUELA’S OIL MYTHOLOGIES HAVE HINDERED ITS DEVELOPMENT

country’s comparative advantages, such paradox when considering the nationalistic as the size of its reserves as well as its and jingoistic discourse of the current market opportunities and fiscal needs. administration. Not surprisingly, heated arguments arose between those who endorsed the state’s The Way Forward monopolistic control of oil and the oil Looking ahead, there is no doubt that quotas, and those who saw in expansion the oil and gas industry still represents an opportunity to use the oil industry as Venezuela’s greatest opportunity and lever an economic engine, with the eventual for development. However, in order to realize participation of the private sector. this potential, a great national consensus is This Manichaean, or black-and-white, necessary, one that recognizes the obvious discussion was ultimately moot. Closing the but neglected fact that economic growth oil industry to private investment was not is the only way to reduce poverty. History only unfeasible—as it would destroy much has shown that ideology can move hearts, of the sector and its growth potential—but but it does not fill stomachs or provide it also ignored the significant investment shelter from the elements, at least not in a the country needed to promote its broader sustainable way. economic growth. The Venezuelan society that has been In the end, a pro-investment strategy, built around the oil “mine”—oil booms The challenge of or the so-called “apertura petrolera” (oil and busts, ghost towns, enclaves of rich preserving Venezuela opening), was implemented in 1995, foreigners—has cultural values that must attracting not only large amounts of calls for the eradication be questioned if the country is to improve of the old beliefs that private capital to the prolific Venezuelan its poor economic performance and oil basin but also the return of foreign oil thereby achieve the necessary growth have kept the country companies. The strategy resulted in new to lift itself out of poverty. However, the anchored in the past. production from traditional areas as well mining archetypes described here, and as the development of a new frontier: the the beliefs that surround it, continue to Orinoco Belt. However, the oil opening left shape present-day society’s expectation unresolved the economic tensions between of entitlements. And Venezuelan leaders much of the nation and the oil industry; they continue to invest time and effort in would resurface sooner than expected. identifying new and fairer ways to The fall of oil prices in the late 1990s distribute wealth through entitlements provided a perfect excuse for an incoming that, as a general rule, citizens have not nationalistic administration to review the worked to obtain. strategy and try to roll back the “apertura.” Converting natural resources into This was not without fallout, but the wealth requires financial, technological, and subsequent rebound of oil prices gave organizational effort. There should be no credence to the revisionist strategy of doubt, then, that the necessary economic cutting back production and compensated development is only possible if all economic for the resulting collapse of production actors are involved: public and private, capacity and its negative effects on the national and foreign. Moreover, the necessary economy. Lamentably—and importantly— levels of growth cannot be achieved only checks and balances within the government through oil, much less by the State’s (an indispensable requirement for monopolistic control of it. This has been an establishing a transparent and level playing objective reality for more than two decades, field) notably waned in this period. but governments and society at large have In spite of the apparent change in chosen to ignore it. One could argue that direction of the Venezuelan government and Venezuela’s current political and economic the expropriation of certain assets, due to crisis is the direct result of its inability to the government’s pragmatism 50 percent develop the wealth generation mechanisms of Venezuela’s oil production in 2017 was necessary to maintain a harmonious society. carried out by companies through private Unfortunately, there is not a single participation—which is somewhat of a new narrative that can replace the existing 5 RICE UNIVERSITY’S BAKER INSTITUTE FOR PUBLIC POLICY // ISSUE BRIEF // 02.05.18

beliefs of the many stakeholders in this of the financial and human capital base, dialogue—the political sector, academia, which will encourage private participation. communities, the military, industrialists, oil Not only is it necessary to modify companies, etc. All have different interests the governance of the sector as well as and beliefs, and it is essential to identify the legislation that regulates it, we must them, create the necessary dialogues and, also understand that only through the in time, reach agreements on the way implementation of the correct incentives forward. If this is not done, Venezuela and clear and fair rules will it be possible to is bound to repeat the unmanageable promote the creation of a true Venezuelan positions of the past. hydrocarbons industry—one that is more efficient and effective than the current version that brought the country to its FUTURE PERSPECTIVES present state of disrepair. Hydrocarbons, in particular oil, were the engine of the world economy in the 20th CONCLUSION century, as well as the fuel for much of Venezuela’s development. These The challenge of preserving Venezuela calls resources will undoubtedly continue to be for the eradication of the old beliefs that a comparative and competitive advantage have kept the country anchored in the past. that should not be undervalued, and We need to move away from an adversarial which should be promoted as an important discussion about oil and establish a new productive activity and indispensable approach that is more attuned to current factor in the recovery and growth of the times, understanding that there are no nation’s economy. easy solutions. This advantage, however, will only take Whatever its form, the new design Venezuela forward part of the way. Signs must be sustainable in order to be effective. point toward the decline of the fossil fuel era. Creating a new narrative for the oil industry Venezuela must identify the next economic does not mean recycling the remains of and technological revolution and act on it; the old; the country must seek to innovate. only then can the country rise to the levels The need for a cultural change should not of development required to reduce poverty. be underestimated, and although social Oil and gas are but the asphalt on the road engineering is always a pedantic exercise to that inevitable future. and without a doubt dangerous, Venezuela Meanwhile, we would sin by neglect must begin to cast aside its outdated if we do not focus on developing the mining mentality. advantages that the hydrocarbons industry Oil does not have to be managed offers. For this, Venezuela must transform by the government. Oil is not magical or the structure of the sector, and define the miraculous, and a black box should not roles and responsibilities of the state as represent the industry’s alleged secrets. well as those of other national and foreign The real miracle lies in the productive force economic actors. The country’s leaders must of society and in the inviolable right of each safeguard the collective rights of the nation citizen to have a voice in the direction his or but, at the same time, the country must her country takes. encourage all actors, in the broadest way possible, to participate before oil becomes a geological curiosity. ENDNOTES Today, Venezuela’s oil sector is full of 1. Alberto Romulo Adriani Mazzei untapped opportunities due to insufficient (1898–1936) was minister of agriculture and financial or technological resources and finance in 1936. He is credited with coining legal limitations. A properly structured the phrase “Sembrar el Petroleo” (sowing hydrocarbons industry can establish a solid the oil). In his writings, he first identified base for growth. This requires the expansion what we now call “Dutch disease”—the 6 VENEZUELA’S OIL MYTHOLOGIES HAVE HINDERED ITS DEVELOPMENT

influx of foreign currency that is purported the unconstrained independence, and to make the rest of economy uncompetitive seemingly hidden dealings, of the PDVSA. as the overvaluation of the national currency 8. Every administration in contemporary incentivizes an import economy. history has claimed for itself the merit of 2. (1906-2001) was achieving oil sovereignty. a writer, politician, and TV personality. In 9. “Petroleros Suicidas lleva a las tablas 1936, he wrote an op-ed titled “Sembrar la vida íntima petrolera de Venezuela,” El el Petróleo”–sowing the oil. The phrase Universal, August 13, 2011. had been used earlier by Adriani, but later 10. Miguel Otero Silva, Casas Muertas became best associated with Uslar’s view (Los Libros de , 2nd edition, 2010). that oil revenues should be used to create Text translated to English by the author with alternative sources of wealth for a time the help of Google Translate. when the oil runs out. 11. Ramon Diaz Sanchez, Mene (Círculo 3. Celestino Armas (1935-2011) was de Lectores: Barcelona, 1969). Text an engineer and politician who served as translated to English by the author with the minister of energy and mines from 1989 help of Google Translate. to 1992. He was an early advocate of the 12. Oil workers went on strike asking for, so-called opening of the oil industry to among other things, the right to have cold foreign and private investors. water at work sites on Maracaibo Lake. The 4. Juan Pablo Perez Alfonzo (1903-1979) area has a notoriously hot and humid climate. was a lawyer and politician who is credited 13. Misiues is Venezuelan slang for as a founding father of the Organization of “foreigners”—a distortion of the French Petroleum Exporting Countries (OPEC). In his monsieur. later years, he became convinced that great 14. Emilio Pacheco, De Castro a López quantities of oil had troublesome effects, Contreras: proceso social de la Venezuela and identified the symptoms of what is now contemporánea: contribución a su estudio known as the “resource curse”—the paradox en los años 1900-1941 (Caracas: Editorial that countries with abundant natural Domingo Fuentes, 1984). See more issue briefs at: resources tend to have less economic 15. Venezuelans are familiar with the www.bakerinstitute.org/issue-briefs growth and development than countries story of a conversation between Saint Peter This publication was written by a with fewer natural resources. and God at the moment of creation. When researcher (or researchers) who 5. Andrés Sosa Pietri (1943-present) is a San Pedro complains that Venezuela had been participated in a Baker Institute project. lawyer and industrialist who was president given too many resources and too much Wherever feasible, this research is of PDVSA, Venezuela’s state-owned oil and wealth, God answers that there is no need to reviewed by outside experts before it is natural gas company, from 1990 to 1992. worry because, to balance it out, he would released. However, the views expressed herein are those of the individual During his tenure at PDVSA, he advocated create this or that other political party. author(s), and do not necessarily for an expansionist strategy and questioned represent the views of Rice University’s the OPEC quota system. Sosa brought to the Baker Institute for Public Policy. PDVSA’s management team the idea that the AUTHOR stop-and-go behavior of production quotas © 2018 Rice University’s Baker Institute Luis A. Pacheco, Ph.D., is a nonresident for Public Policy unduly harmed Venezuela’s economy, in fellow at the Baker Institute Center for spite of temporary gains in oil price. In Energy Studies. He has more than 35 This material may be quoted or addition, it was argued that quotas hindered years of experience in the energy industry, reproduced without prior permission, Venezuela’s efforts to expand its market provided appropriate credit is given to including 17 years at Venezuela’s national oil share to a level commensurate with its the author and Rice University’s Baker company PDVSA, where he held a number abundant reserves. Institute for Public Policy. of senior positions, such as CEO of BITOR, 6. PDVSA is Petroleos de Venezuela S.A., PDVSA’s heavy oil affiliate, and executive Cite as: the stated-owned company created in 1976 director of corporate planning. Pacheco, Luis. 2018. Venezuela’s after the nationalization of the oil industry. Oil Mythologies Have Hindered Its 7. “La Caja Negra” or “the black box” is a Development. Issue brief no. 02.05.18. phrase Venezuelan politicians have used since Rice University’s Baker Institute for Public Policy, Houston, Texas. the 1990s to describe what they regard as

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