Perseverance paying off in Venezuela (page 1 of 2)

While record high international oil prices are playing a role in Venezuela's economic rebound, the restructuring of the country's state-owned oil company, Petroleos de Venezuela (PdVSA,) is equally important to growth. In addition to greater government control over PdVSA, this restructuring is dramatically increasing cash flow into Venezuela's economy, laying the foundation for sustained, robust economic growth.

After his inauguration in 1999, President Chavez's first policy priority was reunifying a divided OPEC struggling with over-production and plunging international oil prices. Chavez sent Minister of Mines and Energy Ali Rodriguez on a tour of OPEC nations, a tour Chavez repeated in 2000. These tours produced an OPEC summit in Caracas and secured Rodriguez's position as the organization's Secretary General.

Rodriguez successfully convinced OPEC members to reduce oil production. He also implemented the cartel's first-ever target band for oil prices. The efforts of Chavez and Rodriguez to unite OPEC behind strict production quotas immediately pushed international oil prices higher, raising the ire of Washington and threatening the energy security policy of the Bush administration.

What began as a conflict between Caracas and Washington over oil supplies and prices quickly spread to other facets of the Chavez government's foreign policy. The Bush administration lost no opportunity to express its displeasure with Venezuela's close relations with Cuba and growing influence over its neighbors in South America. This influence helped produce unified opposition to U.S. policy positions in the World Trade Organization and in negotiations over the moribund Free Trade Area of the Americas.

Chavez's domestic policies drew even greater rebuke from Washington. Simultaneous to his growing influence in South America and OPEC, Chavez began consolidating his political position at home. In a series of plebiscites in 1999, the Chavez government succeeded in rewriting Venezuela's constitution.

General elections held in 2000, as legislated by the new constitution, kept President Chavez in power. Despite strict observance of Venezuela law during all the polls between 1998 and 2000, top officials in the Bush administration repeatedly labeled Chavez as undemocratic and authoritarian.

The new constitution elevated the importance of social development in Venezuela. While going great lengths to protect private property, it also emphasized the preeminent role of the state in the economy and subordinated the role of foreign investors, especially in the crucial oil sector. The new constitution abruptly changed Venezuela's existing economic order, which had been molded by the Washington Consensus and administered by the IMF.

Central to the heightened role of the state in the economy has been the reassertion of government control over Venezuela's largest company, PdVSA. Including its indirect impact on the economy, PdVSA accounts for 40 percent of Venezuela's production-based gross domestic product. It also produces over 80 percent of the country's export receipts and over 50 percent of fiscal revenue.

The management of state-owned PdVSA enjoyed, for many years, considerable autonomy from the government. Using this autonomy, management focused on keeping company assets and revenue offshore to avoid mandated tax and royalty payments to the government. Unfavorable transfer pricing and huge economically questionable investments in offshore downstream operations, including refineries and gas stations in the U.S., siphoned enormous resources out of Venezuela.