Publish in Perspectives - Wednesday, September 18, 2013
After receiving an income of about $1.5 trillion in the last 15 years, the country currently has liquid international reserves for only two months of imports. the author says. Here PDVSA's headquarters. (Photo: PDVSA)
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.