The oil sector is at the heart of the
current political crisis in Venezuela in which President Chavez was first
ousted by a coup on April 12, 2002 and then reinstated by a counter-coup,
only two days later.
Venezuela is the fourth largest oil exporter in the world. The critical
importance of the oil sector for the national economy is underscored by
the fact that oil generates nearly 75% of Venezuela's export revenue and
50% of its tax income. Additionally, Venezuela is an important overseas
source of oil for the US, accounting for 13% of its fuel imports.
Incidentally, one of the key policy measures adopted by Chávez
when he first came to power in a landslide election victory in 1998 was
to improve Venezuela's compliance record among OPEC countries. This implied
that Venezuela would assiduously conform to the production quotas agreed
upon by the OPEC constituents to avoid overproduction and a downward pressure
on prices. The policy had two effects.
On the external front, it acted as a stabilizing influence on international
oil prices thereby earning him the goodwill of a section of the OPEC member
countries. While this insulated him from external political pressures,
it also meant that he could use his newfound influence to manipulate OPEC
policy on prices to suit Venezuela's needs. For example, he engineered
a price hike in 2001 by aggressively lobbying to cut production quotas
leaving his government with a windfall that was used to increase social
spending - a key component of his domestic policy. In fact, the trade
surplus helped the country to maintain a strong currency and a low inflation
rate, which endeared him to the country's poor, who comprise nearly 80%
of the population.
However, those gains have fast dissipated. A combination of weaker oil
prices – in February 2002, the price of a barrel of oil sank to
$ 15.50, below the $18.50 assumed in the budget – and an output
cut threatens to drag the entire economy into recession. Although, oil
prices have surged upwards by nearly 40% in the last couple of months
owing to a rise in the geopolitical risk premium, the threat of a recession
looms large. The unemployment rate in the economy is currently as high
as 15%, raising apprehensions of escalated anti-social violence in Caracas,
already one of the most crime-infested cities of Latin America.
Not surprisingly, jittery investors have been siphoning capital out of
the country at record rates fearing enhanced exchange-controls. The resultant
outflow of capital to the tune of nearly $ 2 billion this year has meant
that foreign exchange reserves with the Central bank are at dangerously
low levels.
In a bid to shore up reserves, Chávez abandoned the country's five-year-old
crawling band exchange rate mechanism and allowed the bolivar, the local
currency, to float. The underlying expectation was that the bolivar, which
was estimated to have been overvalued by almost 35%, would depreciate
under market pressures, facilitating renewed reserve-accumulation through
competitive exports.
At the same time, he also announced a fiscal adjustment package aimed
at controlling government expenditures. The new package outlined a cut
in government expenditure by 7 % to help close a yawning fiscal deficit
estimated by investment banks to come in as high as 7 % of gross domestic
product. Additionally he announced a change in the management of the state-owned
Petroleos de Venezuela, the oil company that controls oil production in
Venezuela. The changeover, he felt, would enable the government to seek
greater tax dividends from the PDVSA as the existing management, backed
by powerful business interests, was blocking rate hikes. Also, the management
was no longer in a mood to abide by the OPEC production quotas, the cornerstone
of the government's foreign policy.
The move, however, alienated the trade unions of the company who were
threatened on two counts. On the one hand, a depreciating currency would
necessarily entail inflationary pressures in the long run that would squeeze
wages. On the other hand, the management changeover signaled the prospects
of fresh taxation of wages.
On April 7,2002, workers at the PDVSA started partial strike action to
protest against management changes. By April 10, the partial strike had
fanned out into a 48-hour strike called jointly by trade unions and business
groups, to be extended indefinitely. In the demonstrations that followed,
10 people died, allegedly killed by the President's supporters. Soon,
as inevitable fallout of the President's organic relationship with the
army, the latter was dragged into the conflict. On April 12, 2002, under
pressure from a section of the army who blamed him for the deaths during
the opposition demonstrations, Chávez resigned. The coup brought
Pedro Carmona, a business leader, to power as interim President.
To complicate matters there were indications that the Pentagon had tacitly
backed the coup leaders. Unlike his predecessors, who had been content
with assured cuts from the country's oil revenues, Chávez had been
actively using Venezuela's oil resource as an instrument to carve out
a foreign policy free of US influence. Towards that end, he fostered a
close relationship with the Cuban dictator, Fidel Castro and is said to
have agreed to supply oil to Cuba under generous conditions including
a payment holiday and soft credit terms. On the same lines, he tried to
increase his clout with the OPEC by visiting Iraq's Sadam Hussain and
Libya's Mohammar Khaddafi, both dreaded by the US. Also, as if to underscore
his provocative policies, he publicly declared his sympathies for left-wing
guerillas in Columbia.
The White House openly blamed Chávez for his fall from power, and
pointedly declined to voice any regret about his downfall. The cat finally
slipped out of the bag when the Administration refused to comment on the
unconstitutional nature of Chávez's removal from office.
However, the broad support for Carmona from unions, opposition parties
and sectors of the armed forces collapsed within hours after he decreed
the dissolution of the legislature and the Supreme Court, suggesting the
coup had itself been "hijacked" by a hard core of far-right
military figures. A counter-coup was engineered by battalion commanders
close to Chávez, reinstating him in power.
Meanwhile in Washington, asked whether the administration now recognizes
Chávez as Venezuela's legitimate president, one administration
official replied, "He was democratically elected," then added,
"Legitimacy is something that is conferred not just by a majority
of the voters, however.