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Foreign Policy.
No. 18, Spring 1975
Each year we,
the countries which produce coffee, meat, tin, copper, iron or
petroleum, have been handing over a larger amount of our products in
order to obtain imports of machinery and other manufactured goods, and
this has resulted in a constant and growing outflow of capital and an
impoverishment of our countries.... To cite the particular case of
Venezuela, petroleum prices showed a steady decline for many years,
while our country was obliged to purchase goods from the United States
at ever higher prices, which, day after day, restricted even further the
possibilities of development and well-being for Venezuelans. The
establishment of the Organization of Petroleum Exporting Countries
(OPEC) was a direct consequence of the developed countries' use of a
policy of outrageously low prices for our raw materials as a weapon of
economic oppression.
--President Carlos Andrés Pérez of Venezuela, September 24, 1974.
With these words in an open letter to President Ford, published as a
full-page advertisement in The New York Times last fall. the new
President of America's leading foreign supplier of oil hurled a now
familiar challenge to the United States. But the nation was not in the
Middle East: the Israeli question was not remotely a consideration: and
the nation in question. Venezuela, has traditionally been regarded by
the U.S. and Latin-American Left as a strategically vital province of
U.S. imperialism.
Within a few months, Venezuelans are expected to nationalize their oil
industry. How successfully they do it --the exact details and the nature
of the relationships which come into being after nationalization--may
help decide the degree of future U.S. dependence on Middle East oil, the
structure of the international petroleum industry, and the prospects for
democracy in Latin America. For years, Venezuela has played an important
role in the formation and growth of the oil cartel, OPEC. As an
outsider, Venezuela was to play a leading role in unifying the
squabbling states of the Middle East. Despite her backwardness in other
respects, Venezuela had a far more sophisticated and progressive
political leadership that the other states that formed OPEC.
A "Devilishly Difficult" Problem
It is one of the many ironies of the present oil panic that OPEC might
never have come into being if the United States had protected Venezuela
from the economic hardship resulting from the oil import quotas imposed
by the Eisenhower Administration in 1959 to protect domestic producers
and the oil majors against the flood of low-cost Middle East crude then
glutting the world market. Venezuela was then emerging from a decade of
military dictatorship in an economic slump that grew out of the U.S.
recession of the late 1950's, aggravated by a loss of oil revenues due
to the price-cutting in the Middle East. In this atmosphere Venezuela
spent much of the 1960's pleading with Washington for "hemispheric
preferences" for access to the U.S. market along lines similar to those
given Canada. Indeed, at one point, President R6mulo Betancourt
(1959-1964) thought that he and John F. Kennedy had worked things out.
Kennedy "promised me that this Venezuelan aspiration for preferred entry
to the U.S. market would be satisfied before the end of his mandate and
mine," Betancourt recalled. "He told me the problem was 'devilishly
difficult' because of the special interests involved. But he assured me
that justice would be done to Venezuela." The gunshots of Dallas left
this explicit promise unfulfilled.
To the credit of Venezuela's young democracy, never has the public
debate over nationalization of a great extractive industry taken place
in a more open and peaceful political climate. The possibility of
nationalization, distantly contemplated for about 1984 when most of the
concessions were due to expire, became an imminent reality with the
October 1973 war. The discussion intensified greatly after the war and
the landslide election, two months later, of Carlos Andr6s P6rez as
President of Venezuela. Since then, Venezuela has moved to nationalize
its oil and iron industries and take a leading role in hemispheric
politics.
The main question is no longer whether Venezuela will nationalize, but
what the future modus operandi of the oil industry will be. The central
issue of the nationalization debate is whether at least some of the 16
foreign companies--Exxon and Shell subsidiaries alone account for more
than 80 per cent of Venezuelan production--will be allowed to remain in
Venezuela as operating or marketing contractors to the new state holding
company, Petroleos de Venezuela, in return for some share of future
production, or whether the government will try to run the industry
itself. Some companies have been quietly trying to play upon the
percolating fears of mismanagement and to promote jobs for their
employees in the future state marketing organization. This would give
the present concessionaries more leverage in the future production of a
nationalized industry. Expecting some kind of amicable dissolution of
the old concessions, companies seem less interested in indemnification
for installations already heavily amortized and depreciated than in some
role in the Venezuelan industry's future.
At stake is the most important source of non-Arab oil for the United
States, a source that becomes all the more critical during periods of
threatened or actual embargo. And, as in the past, developments in
Venezuela may affect events elsewhere.
Democratic Solidarity
Venezuela became the world's leading oil exporter in 1929, and held this
position for the next four decades. Since the end of the long
dictatorship of Juan Vicente G6mez (1908-1935), oil and democracy have
been closely linked in their development. The flow of oil money into the
cities has generated such enormous urban-rural income differentials that
the countryside has been depopulated in one of the most intense internal
migrations of this century, transforming Venezuela from a nation that
was nearly 80 per cent rural in 1920 to one 80 per cent urban today.
Meanwhile, Venezuela has moved fitfully toward creation of a complex and
broadly based social democracy, with the economic leavening of oil
revenues.
Venezuela received especially gentle and considerate attention in
Washington after Mexico kicked out the foreign oil companies in 1938.
Venezuela became a primary target for the Good Neighbor policy, and the
State Department put heavy pressure on the oil companies to make their
policies and personnel less offensive to Venezuelans, as well as to give
in to Venezuela's demands for more oil money in order to avoid a
repetition of the Mexican nationalization. By the 1960's, democratic
solidarity had developed to the point where the Kennedy Administration
viewed Venezuela as a test of its own hopes for the Alliance for
Progress, and, later, as its only clear success in promoting reform,
counterinsurgency, and private investment in Latin America.
When Betancourt became the first popularly-elected ruler in Venezuela's
150-year republican history to finish his constitutional term of office,
it was a triumph of his own tenacity and of the people's awakening
democratic vocation. To do this, Betancourt had to survive armed
insurrections from the Left and the Right. He put down an outbreak of
guerrilla warfare far more sustained and bitterly fought than Fidel
Castro's Cuban insurrection. Two of his aides were killed and his own
hand mangled in a 1960 assassination attempt by henchmen of Dominican
dictator Rafael Trujillo, who rolled a car full of explosives into
Betancourt's motorcade. This attempt was one of the considerations that
led Washington to allow the CIA to supply arms to the men who killed
Trujillo in May 1961.
As Venezuela's internal violence escalated, Betancourt's Minister of
Mines and Hydrocarbons, Juan Pablo Perez Alfonzo, was traveling in 1960
among the capitals of the Middle East to persuade the rulers of the
oil-producing nations to form OPEC to de- fend their economies against
the price-slashing being carried on by the companies and to find markets
for the low-cost crude that was flooding the international oil trade in
ever-increasing quantities. Perez Alfonzo knew that only control of
supply would enable Venezuela to influence price levels. If the
oil-producing countries could unite, then the power of the integrated
majors could be curbed. Later, a bargain could be struck with the United
States and Canada to parcel out the hemispheric oil trade, giving
Venezuela more security of access to its main markets.
When Betancourt and his Acción Democrática (AD) party first ruled
Venezuela in a reformist regime in the 1945-1948 period. the imaginative
P6rez Alfonzo already had achieved much toward reversing the tendency of
the oil companies to enrich rulers rather than governments. Under his
leadership, Venezuela in 1947 pioneered establishment of the 50-50
principle of profit sharing between companies and governments. AD
governments in the 1940's and again in 1959 were the first among the
oil-producing countries to formulate a policy of "no more concessions"
to foreign companies. Trying to prevent her higher tax-paid costs from
making her oil uncompetitive in world markets, Venezuela, in the late
1940's, began explaining to Middle East governments the terms of her new
50-50 deal with the companies, which led to the establishment of the
50-50 principle there as well. G By then, Venezuela had become so
important to Jersey Standard (now Exxon) that half of its worldwide
profits in 1948 were generated by Creole Petroleum, its Venezuelan
subsidiary and the world's largest producing company, which supplied the
crude for half of its worldwide refining capacity. The financial
concessions that were wrung from the major companies by the host
governments in the 1940's and 1950's, under Venezuela's leadership, did
not disrupt the majors' cartel-like marketing arrangements, but only
began a continuing escalation of the producing countries' share of the
companies' profits. The next major mutation in the system came in 1960
with the formation of OPEC in response to the price erosion of the late
1950's. The U.S. import restrictions bad created such an oil glut on the
world market that British Petroleum (BP), with an oversupply of crude
and relatively few marketing outlets of its own, unilaterally cut prices
in 1959 for Iran, Kuwait, and Qatar production. Since the British
government was then the majority share-holder in BP, the Venezuelan
government addressed a memorandum on the price cuts to the British
Embassy in Caracas, arguing:
BP, the largest producer in the Middle East, has by this action brought
prices below the 1955 level. Since that year, all the factors affecting
production cost have increased substantially and the general level of
prices in international trade has also risen. In the United States, the
largest world producer, not only did costs rise, but the country also
failed to discover sufficient oil in the past two years to replace the
production of that period. The United States appears to have reached the
depletion curve within a relatively short time, and other important
producing centers of this irreplaceable natural resource will also reach
a similar situation. In general, the costs of exploration and drilling
are increasing throughout the world and the more widely dispersed the
search to find new reserves for human needs, the more each new barrel
will cost .., the additional lowering of prices, by encouraging
consumption, could very soon bring oil to the historic cycle of
scarcity. This would force consumers to pay much higher prices to
finance the exploration and discovery of new areas. It is evident that
for the good of mankind, a stable situation would much better guarantee
the interests of all concerned.
Perez and Oil
Since then, despite recurrent political crises, Venezuela has gone far
toward consolidating her constitutional democracy. Today, flush with oil
money and votes, President Carlos Andrés Perez has embarked on a series
of popular domestic reforms, including general wage increases, under
special powers given him by his AD majority in Congress. A tough Andean
politician who, as Betancourt's Interior Minister, had taken the lead in
crushing the Castroite guerrilla insurrection of the 1960's, P~rez
became a prime mover behind the efforts to end the Organization of
American States' diplomatic sanctions against Cuba last November.
Failing to marshal the two-thirds majority needed to lift the sanctions,
Venezuela then established diplomatic relations with Cuba, and, in other
actions, championed higher prices for Latin-American primary products.
Venezuela is also trying to use her excess oil income to finance more
rapid economic development in Latin America. After the tripling of her
oil revenues between 1973 and 1974, Venezuela is recycling abroad more
than one-third of her trade surplus, or about one-tenth of her whole
GNP, in $500 million loans to both the World Bank and the Inter-American
Development Bank, and in another $125 million distributed among the
Andean, Central-American, and Caribbean development banks. Another $500
million was lent to the International Monetary Fund's oil recycling
facility. Discussions are being held for lesser projects like financing
a paper factory in Honduras, and an oil refinery in Costa Rica. This is
more public money than the United States ever committed to the Alliance
for Progress. In December, President P6rez met with the six
Central-American presidents in the Venezuelan iron and steel center of
Puerto Ordaz to announce that Venezuela would pay up to $80 million to
Central-American coffee producers to enable them to withhold part of
their crops from the market in an effort to support declining prices.
P6rez announced that the six republics would only have to pay $6 of the
$12 selling price of Venezuelan oil in dollars. The rest could be paid
in local currencies into counterpart funds for soft loans such as those
the United States made for decades to countries like India and Bolivia
in the Food for Peace program.
In this way, Venezuela was able to advance her long-cherished ambitions
for influence in Central America, and project her image throughout the
Caribbean. A leading Dominican economist wrote recently that "1974
probably represents the close of a period that began in 1961, of great
dependence of our country on the United States, and un fortunately the
beginning of another period of economic dependence on Venezuela and
other nearby oil producers.'' Venezuela's oil power gave President Perez
center stage in Lima, at the December celebration of the 150th
anniversary of the Battle of Ayacucho that won independence from Spain,
where he urged the assembled military dictators of Bolivia, Panama, and
Peru, and envoys of other Andean nations to stop squabbling in
ideological and border disputes. It also helped him in seeking to
transform Venezuela into a democratic counterpoise to the influence of
Brazil's military regime in Latin America and into a champion of
economic justice for all underdeveloped countries.
Crisis of Democracy
But P6rez's trendy Third World rhetoric and some policy initiatives of
his first year disguise much Venezuelan discomfort about how the oil
revenues of the past two decades were wasted. How can they now absorb
the much greater flood of oil money into what is essentially a rentier
economy--some $ I 0 billion in 1974, which is triple normal budgetary
needs? Venezuela entered the 1973 election campaign in a mood of crisis
due to the erosion of public faith in the parties that have run the
country since the overthrow of dictator Marcos Perez Jim6nez (
1948-1958) . The two big parties, AD and the Social Christian COPEI
party of President Rafael Caldera (1969-1974), were able to dominate the
election only through lavish advertising and by changing the
constitution a few months before the balloting to rule out a possible
presidential candidacy of the ex-dictator, who had made a sensational
political comeback in the five years since his release from jail for
stealing public funds. The Yore Kippur war and the overthrow of Chilean
democracy occurred within three weeks of each other at the height of
Venezuela's election campaign, providing at once the economic impetus
for oil nationalization and concern among Venezuelan leaders for the
consequences of mismanagement of nationalized industries as under
Allende. Many responsible Venezuelan politicians realize that their
democracy could be washed overboard by incompetent handling of the
nationalized oil industry or the tidal wave of oil money now pouring
into the country. As Perez himself said in a speech in Maracaibo three
weeks after sending his public message to Ford:
We have immense economic resources that the economy cannot absorb. We
have the traditional and insatiable voracity of public spending, and the
negligence with which the public and private sectors have used oil
income. We are either at the beginning of an ascent toward consolidation
of our nationality, or at a precipice that could leave us, not in
catastrophe, but at a point back where we would have to start our
development all over again.
In the same speech, Perez attacked mismanagement of the state
petrochemical industry, in which Venezuelan governments over the past
two decades have invested roughly $2 billion, much of which has been
squandered because of corruption and political interference. The new
President said that, in its first six months of operation, the huge El
Tablazo petrochemical complex near Maracaibo had some 50 breakdowns
"from deficiencies in diligence and supervision." Previously, audits of
the costs of building the $92 million El Tablazo complex found
suppliers' and contractors' overcharges variously estimated at $20
million and $35 million. A few days after Perez's speech, the head of
the state petrochemical industry was fired amid charges of price-rigging
that allegedly cost the Venezuelan government $3 million in a deal with
a U.S. firm.
Venezuela's difficulties in developing her state petrochemical industry,
and in managing other state enterprises, have led to considerable
self-doubt as she develops plans to nationalize oil, which before 1973
produced 90 per cent of her foreign exchange earnings and two-thirds of
her government income, and today produces much more of both. While
Venezuelan politicians have been talking for nearly four decades now
about "sowing the petroleum" to diversify the economy, and despite
widely publicized investments in modern infrastructure, heavy industry,
agricultural development, and social programs, Venezuela has become more
rather than less dependent on her oil revenues. The decision to
immediately nationalize the oil and iron industries came in the weeks
before and after the December 1973 elections, when the Arab oil boycott
stimulated leaps in the posted price of Venezuelan crude to $14.08 per
barrel, compared with the January 1973 price of $3.10. Although
Venezuela's two big parties, AD and COPEI, had quietly agreed not to
debate oil issues in the election, all but one of the 14 presidential
candidates in the race had vaguely backed an "early reversion" of the
industry to the state before the scheduled expiration of the
concessions.
Doubts about Nationalization
Perez began fulfilling this promise in May by appointing a 36-man
Presidential Commission on Oil Reversion, representing the full range of
political parties, professional associations, universities, and business
and labor groups concerned with nationalization. As it was working on a
draft nationalization bill last November, one member, Carlos Alberto
Pifierua, president of the oil workers' union FEDEPETROL, expressed the
growing nervousness of both politicians and the public over
nationalization when he told me: "This is a kind of forced
nationalization because of what is happening in the Middle East. Without
the rise in oil prices, Venezuela would not have moved so swiftly. The
oil companies have started a campaign to frighten workers about the
future. There is much more fear among the engineers and white-collar
people than the workers, who want to conserve their social benefits, as
well as technology and markets for Venezuelan oil production." Perez
will be under great pressure to articulate policies in line with the
conservative nature of his electoral mandate, with the feeling that
Venezuela's rentier economy depends on one commodity that Venezuelans,
lacking sufficient organizational and technological capacity, know they
cannot produce and market alone. Many politicians privately say that the
movement to nationalize comes not from any public clamor, but from
pressures from within the smaller community of politicians, and from
recent dramatic changes in the oil industry outside Venezuela.
Alternative to Middle East Oil?
One of the stakes is the degree of future U.S. dependence on Middle East
oil. While Venezuela was overtaken in the ranking of oil exports by Iran
in 1970 and Saudi Arabia in 1971, she remains the leading oil supplier
to the United States. In 1973, Venezuela produced 35 per cent of net
U.S. imports, mainly as heavy fuels for heating and electric utilities
along the Eastern Seaboard. However, Venezuelan production peaked at 3.7
million barrels daily (MBD) in 1971 and, according to both government
and company projections, is expected to decline to below 2.0 MDD by 1984
from presently existing fields, mainly around Lake Maracaibo, many of
which have been operating continuously for more than 50 years. This
process of natural decline of the traditional producing areas has been
temporarily obscured in 1974 by the conservationist production cutbacks
of about 11 per cent of a government swimming in oil revenues it cannot
use. These cuts were made at the suggestion of the companies, which told
the government that world demand had declined at the 1974 price.
If current predictions of rapid decline in Venezuelan oil production
come true, then the United States will have to search elsewhere for
supplies of heavy oil for her largest energy market, the Eastern
Seaboard, or revert to greater use of coal, If the controversial
conversion to coal is not made immediately, and the United States
continues to rely on oil imports for its needs, then the international
rivalries for access to Middle East oil may intensify. While world oil
consumption continued its rapid rise over the past decade at an annual
rate of 7.7 per cent, the volume of oil moving in world trade during the
1963-1973 period rose even faster, at 10.8 per cent annually. Because of
steep rises in domestic demand, the role of U.S. oil imports since 1970
in world oil trade expanded even more dramatically, at more than twice
the rate of international oil sales in the rest of the world.
Between 1972 and 1973, U.S. imports rose by nearly one-third--to 6.2 MBD---while
the volume of imports from Arab countries nearly doubled. The relative
immunity of the United States from the economic consequences of
political convulsions in the Middle East has been based largely on U.S.
domestic production and Venezuelan oil, both of which were taken for
granted. 3ust as in the U.S. domestic oil industry, supplies from
Venezuela are imperiled by the exhaustion of the reservoirs that have
been producing now for several decades. Moreover, the anticipated
production declines in Venezuela could be greatly accelerated by
mismanagement of politicization of the nationalized industry. On the
other hand, productivity could remain high if certain conditions are
created. These are efficient management of the industry, and effective
short-term investments in secondary recovery--gas and water reinjection
systems to maintain underground pressure in the older wells. These
investments in high-cost recovery techniques have become more attractive
after the tripling of Venezuela's oil prices during 1973. Moreover, any
major exploration program probably could enable Venezuela to remain an
important exporter at least for the rest of this century. To develop
these new production possibilities soon, new tradeoffs will have to be
devised to provide incentives for Venezuela, already overflowing with
oil revenues, to at least maintain present production levels.
The strategic value of Venezuelan oil to the United States was again
illustrated during the 1973 Arab oil boycott. Exxon's worldwide
production of 6.3 MBD was c u t by 20 per cent between the third and
fourth quarters, but her 48 per cent share of Venezuela's 3.5 MBD
production flowed normally to the United States. According to Exxon's
1973 annual report: "Supplies of heavy fuel oil… were not affected as
seriously by the Arab embargo. Virtually all of Exxon USA's heavy fuel
oil supplies are imported from refineries in Venezuela and the
Netherlands Antilles operated by Exxon's affiliates.... Venezuelan crude
supplies utilized in these refineries were maintained at normal levels."
On the other hand, the tripling of the price of Venezuelan heavy fuel
oil has had a major economic impact on the Eastern Seaboard.
Geologically speaking, there are promising prospects offshore in the
Caribbean, in the 150-mile-wide delta of the Orinoco River, and in the
Gulf of Venezuela, which is practically contiguous---separated only by a
strait and some sandbars -to the great oil-producing basin of Lake
Maracaibo. Apart from these conventional oil prospects, Venezuela
contains one of the world's largest petroleum reserves in the Orinoco
Tar Belt, estimated by geologists to contain 700 billion barrels of
heavy oil. If only 10 per cent of the volume were recoverable, Venezuela
could produce, from this basin alone, five times her present reserves.
Because this heavy Orinoco oil contains large amounts of nickel and
vanadium, new technologies will have to be developed for large-scale
lifting and re- fining operations by the 1990's. However, though the
problems may be formidable, they may be less costly than producing oil
from Colorado shale or Canada's Athabasca tar sands--the other major
prospective sources of non-conventional oil in the Western Hemisphere.
The Future of the Majors
Beyond its role in determining the degree of future U.S. dependence on
Middle East oil, the Venezuelan oil nationalization also may help shape
the way the major oil companies will operate over the next few decades.
Last November I talked with the government's chief economic negotiator,
Manuel Perez Guerrero, a soft-spoken, fragile-looking former Minister of
Mines, who was one of OPEC's leaders in the mid-1960's. He said: We want
this nationalization to be acceptable as an act of sovereignty within
the law. Our greatest political problem is management capacity. We will
need help from foreign technologies, but the reins of the business must
be in our hands. We are not nationalizing buns and cakes, but important
strategic commodities that cannot be left entirely in the baker's hands.
We will be the owners and must make the basic decisions ourselves. We
feel an obligation not to bring about any upheavals, nationally or
internationally.... Under these new conditions, the major companies will
be reduced to the role of traders, intermediaries, refiners, and
providers of technical services. This is no small thing, but much less
than before, when they had what seemed unlimited supplies of crude under
their exclusive control. We must force the majors to be more aboveboard
than secretive, and this will be good for the industry and the world. In
the worldwide wave of oil nationalizations that began in 1971 and is
expected to reach its climax this year, two-thirds of the production of
the seven major oil companies outside North America, or an amount
roughly equivalent to more than half of the 34.1 MDD that moved in world
trade in 1973, will be taken from the proprietary control of these
companies with the end of the old concession system. Although much of
this oil will continue to move through the majors' marketing network as
a result of new production and purchase agreements with the exporting
countries, the security of abundant and low-cost supply that was the
basis of an integrated industry now may be a thing of the past. Saudi
Arabia, Venezuela, and the Persian Gulf sheikdoms, with a combined 1973
production of 15.8 MDD, are expected to announce the terms of their
state takeovers this year. With the old structure of the international
industry badly shaken, today's high prices and the insecurity of future
supplies have made the oil contingencies less of a question of
entrepreneurship and more of a question of state• The stresses caused by
oil payments and supplies have led the governments of consuming as well
as producing countries to consider taking a stronger hand in the
management of the industry, just as the British government did on the
eve of World War I, when Winston Churchill, First Lord of the Admiralty,
told the House of Commons in 1914:
Nobody cares in wartime how much they pay for a vital commodity, but in
peace.
• price is rather an important matter.
• I cannot feel that we are not justified
• …in considering how in years of peace, and in a long period of peace,
we may acquire proper bargaining power and facilities with regard to the
purchase of oil.
The price of oil does not depend wholly, or even mainly, on the ordinary
workings of supply and demand.
The occasion was the British government's purchase of a 51 per cent
share of the Anglo-Persian Oil Company (now British Petroleum) as her
navy's warships were converting from coal to liquid fuel. Today,
consuming governments are pressed more urgently to reconcile the dual
character of oil as both a strategic resource and a commodity traded
throughout the world.
Through tax policies, Washington favored the oil companies with
depletion allowances and credits for taxes paid governments of producing
countries, and indirectly stimulated consumption by using a gasoline tax
to finance the building of an interstate superhighway system. Now other
tax policies are being discussed to limit oil imports. Going beyond this
kind of fiscal improvisation, Walter J. Levy observed recently that "the
problems of oil have become matters that in many key respects can only
by handled directly between governments," adding that oil prices must
remain high so as not to endanger the economic viability of expensive
alternatives, such as development of tar sands, shale, and coal
gasification as energy sources.
Levy wrote that "avoiding dependence on foreign oil dictates public
support and a substantial measure of price guarantees by individual
countries, notably the United States… acting … in coordination." During
the Arab boycott another leading oil analyst, Edith Penrose, saw the
possibility of the companies becoming "public utilities with appropriate
public regulation," arguing that "it will no longer be possible for the
governments of the oil-importing countries to leave the international
companies as free a hand in the industry as they have had in the past in
view of the fact that the governments of the exporting countries will be
deciding the major issues affecting the terms on which oil is sold."
A U.S. Government Share in Big Oil?
These arguments seem to provide strong reasons for U.S. government
purchase of large minority stockholdings in one or more of the major
American oil companies. First, the capital accumulation and reduced
levels of consumption that will soon be needed in the energy field to
lower oil imports and develop alternative sources of energy will require
a strong public guarantee that the oil industry's "obscene profits" will
actually fulfill the stated purpose of energy investment and not be
diverted into unrelated activities (such as Mobil's attempted purchase
last year of Montgomery Ward, as part of its efforts at corporate
diversification, to relieve its dependence on an increasingly regulated
yet unstable industry). Second, with the oil companies losing their
control of foreign supplies of crude, their self-advertised role as
buffers and intermediaries between producing and consuming governments
has become less meaningful. What do remain important are their
managerial and technological skills. Third, such direct government
leverage in the industry would facilitate long-term
government-to-government arrangements on price and supply that
repeatedly have been urged by producing countries, especially Venezuela.
In the coming months, Venezuela will be faced with a choice between two
kinds of nationalization: the Latin-American tradition of the operating
state oil company, such as PEMEX of Mexico and PETROBRAS of Brazil, or
the developing Middle East pattern, now working in Iran, by which the
state owns the industry but foreign companies continue to operate under
varying degrees of government control. The Iran formula may soon be
applied, with modifications, in Saudi Arabia and the Persian Gulf
sheikdoms, and the major concessionaries in Venezuela have expressed
hope that they will be able to remain on similar terms. The Middle East
formula is a variant of the "service contract" concept first formulated
in Venezuela in 1959 but not applied there until 1970. In its 1973
annual report, Exxon said it was "optimistic that whatever changes may
take place and whatever relationships may evolve, there will be a basis
for continuing operations" in Venezuela.
While the state oil company has been the dominant operating entity in
Chile, Argentina, Uruguay, Bolivia, Peru, and Colombia as well as Mexico
and Brazil, none of these countries has a major export industry like
Venezuela's. Moreover, some repeatedly have called in foreign companies
to find oil that their state enterprises have lacked the financial and
technical resources to discover. While the producing countries agree
that the technical and organizational services of the majors and large
contractors will be needed for at least the near future, the Middle East
formula remains an anathema to many Venezuelan nationalists.
In Venezuela, the draft law approved by the nationalization commission
prohibits "creating mixed enterprises or participation in profits for
activities reserved to the State." However, toward the end of 1974, the
AD government showed many signs of moving away from this restricted
definition of nationalization to allow itself much more flexibility in
running the industry. In the final months of the commission's
deliberations, the AD party and government representatives pointedly
stayed away from the sessions to allow President Perez and his advisers
more room for maneuvering before presenting the final version of the
nationalization bill to Congress. Perez's attack on the management of
the petrochemical industry has been seen as an effort to reinforce the
public's fears that the government cannot directly manage the oil
industry and that some deal with the companies should be made. Moreover,
in December, when he announced the negotiated nationalization of the
iron mining operations of U.S. Steel and Bethlehem Steel, Perez called
it "a magnificent solution that opens very favorable prospects for the
more difficult and complex situation that will arise with the expiration
of the oil concessions that will occur by Venezuela's sovereign decision
in coming months."
The iron nationalization arrangement calls for the companies to run the
mines during a transition period of one year, in exchange for a
continuing supply of ore to U.S. steel mills, and leaves the way open
for future technical assistance in mining and joint ventures in
intermediate stages of processing. Significantly, all the opposition
parties refused to support the iron nationalization deal in Congress,
arguing that it was too generous to the companies, and only AD's
parliamentary majority and a small party sympathetic to ex-dictator
Perez Jimenez voted for approval. Since there were persistent rumors of
oil company support for AD in the election campaign, the debate over oil
nationalization may prove to be even more bitter if a formula is
presented that would enable the companies to continue operating the
industry.
Once nationalization is approved, difficulties are anticipated by
conservatives and Jacobins alike. For one thing, automation and a sharp
decline in exploratory drilling since Venezuela's "no more concessions"
policy was announced in 1959 have resulted in a halving of the
industry's work force over the past 15 years to 21,000, or less than 1
per cent of all persons employed in the country. The fact that so small
a proportion of the labor force is employed in the capital- intensive
industry on which the country is so dependent has permitted a pervasive
ignorance of the oil business among even educated Venezuelans.
Scared Workers and Scarce Technicians
Automation and attrition have left the oil industry with a work force
composed largely of middle-aged men (averaging 45 years old and 19 years
on the job) who are economically privileged, politically conservative,
and, on the whole, deeply worried about their future. Said a Marxist
union leader, "both the iron and oil workers are against
nationalization. They're afraid of what will happen to social benefits
like company medical care and their retirement plans. The iron workers
want all of their retirement payoff now, but if they were to get it
they'd all leave the iron mines and never come back." The government has
promtsed to place the retirement money of the oil and iron workers in a
special fund in the Central Bank. But unrest in the industry is likely
to continue until the government provides strong proof that the
nationalized industry will be effectively managed in the interests of
both the workers and the country. Otherwise, both the iron and oil work
forces will become hosts to agitation by opposition political parties
that will make the transition to state ownership much more difficult.
While Venezuela proportionately has more of her own professionals in the
oil industry than any other OPEC nation, she is still short of
technicians to run the nationalized industry without outside help.
Although the companies have made an effort in recent decades to put
Venezuelans in high-level jobs, there are still 635 foreigners in key
technical and executive positions. While many of these foreigners, if
encouraged. would stay on after nationalization, many middle-level
Venezuelans already have taken early retirement from the companies with
the approach of a state take-over. High Venezuelan officials have said
many times that, after nationalization, they will maintain intact the
organizations of the four largest concessionaires---Exxon, Shell, Gulf,
and Mobil--and will gradually consolidate the operations of the smaller
companies into larger production units. But there will be a continuing
need for something like the
logistical and technical support that always has been provided by the
majors to their overseas subsidiaries. Moreover, most of Venezuela's oil
has been sold abroad by the majors' marketing organizations outside
Venezuela. While some of these limitations can be overcome with time,
any attempt by Venezuelans to overreach these limitations now could
prejudice their nationalized industry.
Curiously, some of the most important nationalizations since World War
IP'--Iranian oil in 1951, Bolivian tin in 1952, and Chilean copper in
1969-1971--seem to have occurred when world prices for the commodity
have peaked and begun to decline. Instabilities in the supply of oil can
be anticipated from the wave of nationalizations now taking place
throughout the world and from possible political conflict in the
producing areas. Because of new oil from non-OPEC countries that
probably will be available for marketing in the late 1970's, just as
consumption restraints in the industrialized nations begin to take hold,
it may be reasonable to expect dramatic fluctuations in the price and
supply of oil for the rest of this decade. Despite their recent success
in driving up oil prices, the OPEC countries have a long history of
bickering among themselves, and, until 1974, have been especially
unsuccessful in limiting production, as any cartel must, to protect
prices. With most big producers now operating below capacity because of
consumer response to high oil prices and the spreading world recession,
coordinated production cuts by OPEC may be needed in the near future.
Mexico's recent decision against joining OPEC indicates that new
oil-producing areas may not be easily absorbed into the cartel. Not that
OPEC, of itself, is a bad thing.
One of the most ardent advocates for primacy of the majors has argued
persuasively that, in an inherently unstable industry given to boom and
bust cycles and to gluts and scarcities of supply, "the oil industry, to
exist at all, calls for concerted effort and, however often a
cooperative structure may have been disturbed or broken up, it will soon
begin to form again." The problem is that OPEC has attempted to justify
its 1974 price levels as being below competing sources of energy. This
is a fallacious argument because, in the short term, there are no
competing sources of energy, and OPEC could just as well charge $40 or
$50 per barrel as $10 or $12.
But many oil analysts in the consuming countries now believe it would be
more tragic for humanity than for the OPEC countries for the price of a
barrel of oil to fall back to the pre-1970 price of $2, thus stimulating
a return to wanton consumption that would hasten the exhaustion of the
world's limited petroleum reserves. A return to low oil prices also
would undermine the shaky financial structure supporting worldwide oil
exploration, into which consuming countries poured upward of $10 billion
in 1974.
Given future market uncertainties, now may be a good time for Washington
to enter into long-term price and supply arrangements with Venezuela,
which could thus continue as a pioneer in developing new relations
between producing and consuming countries. While Venezuela's
unsuccessful quest for hemispheric preferences has been forgotten in the
upward surge of prices over the past few years, such favored access to
the U.S. market, coupled with price guarantees, could be extremely
helpful to her should oil prices again become unstable. Extending
preferences and guarantees to Venezuela, which could be done
unilaterally by Washington, would be in the U.S. interest in that they
would stimulate Venezuela to expand her oil production capacity despite
worldwide economic uncertainty, and to remain an extremely valuable
supplier. In addition, price and market guarantees could be coupled with
technical and educational support to the nationalized oil industry to
give Venezuela more economic autonomy and stability over the long term.
This kind of cooperation is certainly not going to be achieved through
economically meaningless and politically counterproductive reprisals
such as the denial to OPEC members of most-favored nation status under
the new U.S. foreign trade statute, a provision that has led Venezuela
and Ecuador, the two Latin-American OPEC members, to force cancellation
of the Buenos Aires hemispheric foreign ministers' conference in March.
In the end, the United States must meet the challenge posed by President
Perez's letter to President Ford. If not for reasons of sympathy or
justice, then a decent respect for the future price and supply of a wide
range of raw materials should dictate a new departure in U.S. policy
toward nationalized industries. This would mean a reversal in U.S.
economic diplomacy, since these industries traditionally have been
treated as pariahs by international aid agencies. However, the stability
of supplies of oil, copper, tin, iron, bauxite, and even bananas will
depend, to a considerable degree, on the performance of nationalized
industries in Latin America.
To ensure a rational flow of these products into world markets, it may
be in the self-interest of consuming countries to provide facilities in
Latin America for the training of people from these nationalized
enterprises in such varied skills as management, marketing, cost
accounting, and specialized engineering operations. If the United States
could provide continual training for more than a decade for police and
counterinsurgency operatives in Latin America, then Washington surely
could support, along with other industrialized countries, a public
sector manpower raining program implemented by some international
agency. Beyond this kind of training, it may be advisable to provide
design, engineering, and capital assistance to these industries to
expand their capacities, especially in the processing of raw materials,
and reduce the polarization between producing and consuming countries
that is at the heart of the oil crisis. In this connection, perhaps as
counterpoint if not refutation of former President Nixon's public
expressions of support for the military dictatorship in Brazil, it might
not be amiss for Ford to voice solidarity with Venezuela's democratic
institutions and with her economic defense of the hemisphere's more
vulnerable republics.
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