The oil curse and hyper-corruption: the case of Venezuela.

BY GUSTAVO CORONEL

Dutch disease is the name given to a severe economic distortion suffered by a country having a single export commodity.  The discovery of hydrocarbons in the North Sea threatened Dutch economic stability but the country managed to recover. Petrostates, such as Nigeria and Venezuela, have not recovered. Particularly in Venezuela the combination of the Dutch disease and government hyper-corruption has led to economic ruin. 

 The negative impact of corruption on a national economy is like the loss of a limb to an individual, invalidating but not fatal.  But when corruption destroys the single motor of the national economy the disease can be fatal and this is the case of Venezuela.

 It is difficult to believe that, after receiving an income of about U.S. $1.5 trillion in the last 15 years, the country currently has liquid international reserves for only two months of imports.  Anyone will be surprised to know that, after such a huge income, the national debt of Venezuela has sextupled during the same period, representing about 60 percent of our GDP. It is hard to understand that, while Norway has an oil fund of $720 billion after producing some 20 billion barrels of oil since 1971, the Venezuelan regime has produced 15 billion barrels of oil during the last 15 years but has spent all the money and the Oil Fund is no longer in existence.

What has happened?

Venezuela should be awash in money, since oil prices have never been higher, with the price of oil fluctuating between U.S. $70 and U.S. $105 a barrel during the last 10 years. However, this is not the case. The so-called “Bolivarian Revolution” has generated a perfect economic and political storm, due to a combination of (1), total dependence on oil exports and (2), a dramatic increase in the level of corruption in government, particularly in the management of the Venezuelan petroleum industry.

1.     Total Venezuelan dependence on oil exports

Today oil represents 96 percent of all Venezuelan exports. As a result of this total dependence only half of the industries active 15 years ago are still active today. The oil industry employs about 115,000 people while a parasitic government bureaucracy of over 2.3 million lives off oil income. The country is not working, simply sitting down, waiting for a rent.

2.     Extreme Corruption in the management of the petroleum industry

The other component of the perfect storm is the high level of corruption, both in the management of the government-controlled Venezuelan petroleum industry and within the government. And I mean not only financial corruption but also political corruption. This is due to two main factors:

(a) Oil income that should legally flow into the Venezuelan Central Bank has been diverted to parallel funds without transparency or accountability and to a so-called Development Bank (BANDES). The bank and funds are controlled by the president of the country, the minister of Finance, the minister of Planning and the president of the state-owned company, Petroleos de Venezuela. This bureaucrat wrote in a memo to the president:  “fortunately we do not have to report the use of this money to anyone”. They are largely used for partisan political purposes, including the financing of presidential campaigns in ideological sister countries such as Bolivia, Argentina, Ecuador and Nicaragua, as well as to support the Castro regime in Cuba.  About $30 billion from the Development Fund are unaccounted for, while several managers of the Bank are in prison in the U.S. indicted of a $70 million fraud.

(b)) The company has been redefined as a socialist enterprise and ordered to do work totally unrelated to oil production, including food imports and its distribution at subsidized prices, building houses and running centers for ideological indoctrination. Investing and maintenance in the oil company have been curtailed in order to undertake these other activities. As a result the company is producing about 500,000 barrels per day less than 15 years ago and the company has had to resort to mortgaging its future oil production, mainly to China, in order to keep operating.

Examples of corruption in the oil industry

I will mention just four cases of corruption related to the oil industry, to illustrate the dimensions of the Venezuelan tragedy:  

(1)   The case of the drilling barge Aban Pearl, rented by the oil company in 2009 to a ghost company incorporated in Singapore by friends of the company’s management. The rental fee agreed with this ghost company was twice as large as the one passed on to the owner of the barge. The barge sank in 2010, but if the contract had run its course the size of the illegal payments to the ghost company would have been in the order of $100 million per year for several years. No investigation has taken place.

(2)   The case of 144,000 tons of food imported by the company at a value of some $2 billion in 2009 and 2010, some of it near or beyond the expiry date, basically to obtain commissions on the acquisitions.  Only 14 percent of this food was actually distributed while the rest went to rot and was buried or hidden in deposits. Members of the Board of the oil company, as well as a Cuban advisor were identified as the culprits but no real action was taken. 

(3)   The case of a $75 million contract to rent drilling rigs given to a ghost company having only three employees. Director Luis Vierma admitted the impropriety of this contract but blamed the Board of the company for the decision. No one was ever punished.

(4)   The recent legal action taken in the U.S. against a PDVSA contractor that obtained about  $1 billion worth of contracts by paying  kickbacks to PDVSA employees, including  the president of the company.

The oil industry and the country are in ruins. Is there a way out for Venezuela?

As a result of this fatal combination of corruption and dependence on oil exports the country is in economic ruin. The national debt amounts to some $170 billion and is growing. The currency has been devalued about eight times in the last 15 years and black exchange rates for the dollar are now five times higher than the official exchange rate. The government has printed about $30 billion, much of it going to the oil company to pay for local operating expenses. As dollars dwindle, food and other essential household items become increasingly scarce. The combination of the Dutch disease and hyper-corruption has proven fatal for Venezuela. This is a situation that can only be solved by applying a three-prong strategy:  (a), In the short term, the punishment of the main culprits; (2), In the medium term, an all-out attack on the system that has allowed such a widespread extent of corruption, and, (3), in the long term, a national policy of civic education to transform people into citizens and to eliminate the obsolete ideologies that have kept the country, for so long,  in the hands of the inept.   

In particular a new model for the Venezuelan petroleum industry will be needed where maximum participation of the private sector should be encouraged and state intervention kept to a minimum. The only basic industries in any country should be education and health.   

These changes can only be brought about by a new government.

Gustavo Coronel, a 32-year oil industry veteran, was a member of the first board of directors of Petroleos de Venezuela (PDVSA) and is the author of several books. This column is based on a speech he held on September 7, 2013 at XXXI Cambridge International Symposium on Economic Crime.