Venezuela's new president

International oil and gas companies should see Hugo Chavez, the rebel Venezuelans elected president Dec. 6, as more symptom than problem.

The election chilled foreign investors, including oil companies participating in the reopening of Venezuelan exploration and development ventures to international capital. They naturally fear the worst: that Chavez will act on campaign statements and thwart foreign investment.

Importance of oil

But he won't do that if he wants to have an economically viable country to lead. The Venezuelan economy depends on oil, which accounts for 75-80% of total exports. Oil exports depend on production and refining, which require continuous input of capital. Petroleos de Venezuela SA, the state oil company, can't meet the need. Taxes and subsidies dissipate its profits, low now due to the oil price slump. Pdvsa simply can't generate enough capital to support all of Venezuela's oil projects.

If Venezuela is to sustain the oil exports vital to its economy, therefore, it must have capital from abroad. It was in recognition of that need that the government in 1992 began reopening exploration and production to foreign investment. And it will be in recognition of the same need that even a charismatic populist, if he cares about his country's economic future, will leave deals with foreigners in place-and seek others like them.

He seems to get the picture. The day after his election, Chavez held a news conference in which he assured foreign investors of their welcome in Venezuela and outlined a government program more moderate than his campaign rhetoric.

But will Venezuelans tolerate moderation in their new president? They obviously want reform. They elected a former political prisoner who belongs to neither of two political parties that have dominated politics through 40 years of Venezuelan democracy.

That they lost patience with the status quo is no surprise. Poverty remains widespread in Venezuela despite the country's abundance of amply developed natural resources. Wealth from oil seems confined to a select few. The political system has obvious flaws.

One flaw is corruption, which Chavez promises to fight. Corruption hurts both the economy and popular confidence in government. Oil and gas companies should support the new president's effort.

But corruption doesn't explain all of the dislocation of Venezuela's wealth. Populist creed explains the rest as failure of the political system to distribute the benefits of oil throughout the population. The populist remedy: Commandeer the means of oil extraction and processing and "give them back to the people."

The creed is wrong, the remedy self-destructive. Venezuelans have in fact participated in their country's oil wealth. But the participation has occurred through heavy subsidies of gasoline and diesel fuel, prices for which in Venezuela remain among the world's lowest. Consequences are manifest in the traffic congestion of Caracas and other large cities as well as some of Pdvsa's financial woes.

The unsustainability of those subsidies has long been apparent to the government. But so has the political difficulty of removing them. An early effort to raise gasoline prices caused riots in 1989. Legislation passed last September attempting to end Pdvsa's monopoly over retail fuel sales contained an amendment preserving government control of prices.

Classic juncture

An economy no longer able to give away its bounty thus confronts a political system lubricated by the largess. It's a classic, inevitable, and hazardous juncture.

The election of Chavez is a symptom of conflict between popular desire for obviously needed change and reluctance to sacrifice anything to the process. To steer past the jam the new president must quickly reject the myth that Venezuelans haven't participated in their country's oil wealth. The method of their participation is one reason so little wealth remains to share.

Copyright 1998 Oil & Gas Journal. All Rights Reserved.