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Management of Venezuelan Oil Revenue Stirs Controversy - 2004-08-19

World oil markets reacted favorably to the victory of President Hugo Chavez in a recall election held Sunday, but petroleum prices remain at record levels. The Venezuelan leader has used the bonanza from high oil prices to fund part of his social-spending program. But, some experts think Venezuela's oil sector could face some long-term problems.

Markets worldwide reacted with favor to the Chavez victory this week, because traders feared instability and possible oil production disruptions if the opposition won the vote to recall him. Venezuela is the fifth largest oil producer, and has the largest reserves outside the Persian Gulf region.

President Chavez often rants against capitalism, and attacks the policies of the United States, Venezuela's biggest customer. But most industry insiders see this as nothing more than political rhetoric aimed at his domestic supporters. Venezuela provides 15 percent of the oil used in the United States and operates a distribution system through Citgo, a company that is wholly owned by the state-owned oil company, Petroleos de Venezuela (PDVSA). Industry analysts say Venezuela and the United States need each other, no matter how strained relations might be between Washington and Caracas.

President Chavez made clear that he sees oil revenue as a key part of his plan to undo the inequities of the past.

He said that a small group of people took most of the benefits from Venezuela's wealth in the past, leaving the majority of people in poverty. His plan, he said, is to use the nation's wealth for the benefit of the people.

But Chavez critics, and there are many of them in Venezuela, accuse the president of misspending the oil-derived revenues and politicizing the state-owned oil company. A former director of the company, Jose Toro Hardy, says the markets are too focused on maintaining Venezuela's current production at the expense of augmenting long-term output.

"With Mr. Chavez, they can be sure that Venezuela will continue to produce 2.5 million barrels of oil per day, but with Mr. Chavez it will be very difficult to increase oil production because of his oil policies," said Mr. Hardy.

Mr. Toro Hardy says PDVSA needs foreign investment and a larger share of its own revenue to develop new technology for exploiting what he says are the largest oil reserves in the world. He says the oil company could nearly double its output, if it had this investment.

But the Chavez government sees redistribution of Venezuela's wealth as the top priority.

In announcements run continually on the state-run television station, PDVSA champions the use of oil and gas revenue for literacy, health and education programs.

This year, the government has provided $1.7 billion to such programs. President Chavez is also planning to spend $2 billion for big infrastructure projects that are designed to bolster economic growth. With oil prices above $45 a barrel in recent months, there has been plenty of money available to support this spending.

The high price for oil on the world market has helped the Chavez government carry out these plans. Much of the reason for the recent spike in oil prices is the increased demand for energy in developing nations like China and India, as well as turmoil in the Middle East. Venezuela, a founding member of the Organization of Petroleum Exporting Countries, or OPEC, has argued for maintaining higher prices.

Mr. Toro Hardy, the former oil company director, disagrees with this policy.

"Since we started this policy of cutting production to get higher oil prices, the only thing that has grown in Venezuela is the size of the government," he said. "With higher oil prices, the government gets easier incomes. The effect on the rest of the economy depends on how efficient government expenditures are, and since they have not been effective at all, what you can see is that, for instance, in the last five years, having the highest oil revenues our country ever had, what has happened? First, unemployment has grown by more than 100 percent. GDP [Gross Domestic Product] per capita went down by 26 percent, so, on average, every Venezuelan is one third poorer than he was five years ago."

Mr. Chavez and his supporters deny that money is being misspent. They argue that social programs supported by the oil revenues are an investment in the country's future. As for the needs of PDVSA, Chavez supporters note that the biggest setback in the nation's oil sector was a nationwide strike called by the opposition in 2002 that all but shutdown oil production. Some of the damage to oil wells caused by that strike may never be undone.

Before Mr. Chavez came to power, Venezuela had begun to open its oil sector to private investment and to some foreign oil companies, working under license arrangements. While critics say Mr. Chavez has narrowed that opening, foreign companies continue to operate in Venezuela, and major oil and gas companies like Chevron-Texaco have developed new contracts here.

Over the past decade, foreign oil companies have invested around $25 billion in Venezuela and another $14 billion is expected to be invested before the end of this decade. The critics may be right in saying that Venezuela could provide much more petroleum for an energy-starved world, but many foreign oil companies and oil service contractors express satisfaction with current operations.