Venezula History
The earliest record of the use of oil in Venezuela dated backed to the pre-Colombian times. Indigenous people used oil for medicine, illumination, and the caulking of canoes.[1] It was until the early twentieth century that petroleum production had begun in Venezuela. In 1912, the Royal Dutch Shell and Rockefeller’s Standard Oil companies had become one of the biggest producers of oil in the country.[2] Venezuela had become the world’s largest market of petroleum in 1929 and contained 10% of the world’s oil production. At this time the country’s economy was controlled by foreign interests. Companies such as Shell, EXXON and Gulf had become the most dominate enterprises in Venezuela[3].
Subsequently, under president Isaías Medina Angarita, the Hydrocarbons Act was enacted in 1943, which gave the state larger control on the extraction of oil. Under the newly passed act the government gained the right to 50% of all oil profits. As a result, foreign companies could not create greater profits. For the most part the oil sector was the main source of income of the state during this time[4]. The second World War also increased the income of Venezuela as the allies heavily relied on petroleum for combat. However, the demand of oil decreased in the 1950s due to the oversupply of petroleum. Factors such as the increased oil production in the middle east and the import quotas the United States placed contributed to the lower price of oil[5]. Thus, by 1960 Iran, , Venezuela, Saudi Arabia, Kuwait and Iraq formed the Organization of Petroleum Exporting Countries (OPEC). OPEC was used as a measure to stabilize international oil prices and maintain export quotas in order to prevent the overproduction of oil[6].
During the early 1970s the Middle East placed an oil embargo on countries that were supporting Israel. Oil prices and Venezuelan government revenues, increased 70% from 1972 to 1974. Granted, the sudden increase in state revenue allowed for president,Carlos Andrés Perez, to enact “La Gran Venezuela” and nationalize the oil industry through import substitution in 1976 [7]. Therefore, the Petróleos de Venezuela S.A. (PDVSA) became the Venezuelan state-owned petroleum company. All the foreign companies that once did business in Venezuela were replaced by Venezuelan companies. Consequently, this move cause Venezuela to suffer from high inflation and debt[8].
Hugo Chavez won the presidency in 1998 with the promise to end corruption and distribute Venezuela’s resources equally. His regime began spending its oil revenue on programs for the poor in education, housing, health and food. He also supported Fidel Castro by giving Cuba petroleum at cut-rate prices.There was a reduction in the PDVSA and lowered its quotas for oil production. By 2002, the workers protested against Chavez. Nevertheless, Chavez fired 20,000 workers and replaced them with employees who were loyal to the government[9]. Throughout the early 2000s the PDVSA had become an integral part of the Venezuelan government as its revenue allowed for the continuance of social programs. Nevertheless, mismanagement and clientelism caused for the PDVSA’s oil production to decline and the oil reserves became unusable. When the Chávez’s presidency begun to decline in the early 2010s, the economic actions of the last decade such as performed by such as overspending and price controls became unsustainable. Venezuela’s economy faltered while poverty, inflation and shortages increased[10].
Canada Oil History
Canada’s petroleum industry began in 1851 when Charles N. Tripp of Woodstock created the International Mining and Manufacturing Company. Tripp’s goal for the company was to extract the asphalt beds and oil springs in Enniskillen Township in Lambton County. By 1855. In that same year, Tripp sold his company to James Miller Williams. As 1858 approached, Williams company produced a significant amount of crude oil[11]. At the end of the 19th century southwestern Ontario was deemed as a significant oil production area. Many of the oil products were transported by wagon, railway and pipeline. There were many refineries in the market and it had cause several booms and bust cycles. As a protective measure, sixteen refineries merged together to form imperial oil. John D. Rockefeller’s Standard Oil had acquired control of Imperial Oil for $350 000 in 1898. When American authorities split up the Rockefeller’s monopoly in 1911, Imperial had transferred to the Standard of New Jersey, later renamed Exxon. As of today, Exxon still owns 69% of Imperial.[12]
Domestic wells only supported 10% of Canada’s total oil consumption. There was a high dependency on oil imports. Imperial Oil discovered the major oil field at Leduc, Alberta in 1947 in which became the catalyst for the modern era of western Canadian oil production[13]. Development in western Canada paved the way for economic growth to crude oil and natural gas producing areas. Many Jobs were created in the drilling , pipelining and refining businesses. From Sarnia to Vancouver pipelines were constructed in order to provide a stable markets for oil production. Large volumes of oil were flowing into new markets by 1953 and it became Canada’s largest source of energy[14].
At the same time foreign ownership had been a growing concern of many Canadians. Companies such as Exxon, Royal Dutch Shell, British Petroleum, Mobil, Texaco, Gulf and Standard Oil of California had a 90% ownership of Canadian oil revenue. In 1959 the Canadian government created the National Energy Board to control imports, exports, pipelines of oil and gas in Canada. Provincial entities such as the Alberta Energy Resources Conservation Board regulated the oil sector. Restriction of foreign ownership was only enacted in 1973 during the Arab oil embargo when there was a quadrupling of oil prices[15]. The Foreign Investment Review Act of 1974 and the creation of Petro-Canada were the first steps in reducing the influence of foreign oil entities. Thus throughout the 70s to mid-80s , the federal government implemented price control measures on gas , in order to keep them below the international oil price. Incidentally, tax breaks allowed investors to write off major expenditures in oil and gas drilling. This all lead to a big boom in western Canada during the late 1970s[16]. The measures gave short-term price relief to Canadian consumers, but delayed the efficiency gains that world market prices prompted in other countries.
Following the Iranian revolution, the National Energy Program (NEP) became stricter on the price fixing policy. Large production revenues were lost due to the introduction of new taxes, and frontier exploration incentives to were only paid to Canadian owned companies. The end result saw companies move into the United States. A severe recession and very high interest rates in the early 1980s caused financial disaster for Canada. When Brian Mulroney came to power in 1985 the NEP was dismantled , crude oil prices were deregulated, taxes lowered and Petro Canada privatized. The improved commodity prices and more efficient operations, the oil sector prospered again by 1995.[17] As of today, Canada is still deemed as an open and prosperous economy.
Causes of instability in Venezuela
This section explains the instability in Venezuela within political and economic dimensions. The major problems Venezuela had with its resource sector was Dutch disease, Hugo Chavez and poor economic policies.
Dutch Disease
Dutch Disease occurred in states that are heavily reliant in a specific commodity’s export such as oil. A state’s local currency increased from the high demand for a resource and caused other sectors such as agriculture and manufacturing to become less competitive on the global scale[18]. If the dominant sector had higher wages than the domestic industries workers were drawn to work in that sector instead of creating their own business. In retrospect in other sectors there would be large layoffs, less entrepreneurial activity and innovation[19]. Ultimately, Dutch disease creates a natural resource monoculture.
In the case of Venezuela their oil activities were very lucrative, and it caused many entrepreneurs to abandon their trade and look for jobs in the petroleum sector. Furthermore, the government’s decision to cancel all agricultural debt in the 1970s caused a lot of farmers to sell their land and look at oil ventures in urban cities. Venezuelans were reliant on oil to pay for imports such as food , medical and industrial goods due to it’s the domestic sectors were small and expensive to buy[20]. Dutch disease had resulted in the Venezuelan government to control all economic activity in both the public and private sector for imports.
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Role of Hugo Chavez
The Chavez Administration was described a hybrid regime where the government undermined the opposition and civic institutions for clientelism. There are no checks or balances in the republic[21]. Oil revenues allowed for the rise in corruption. Throughout Chavez’s tenure as president there was a steep decline in transparency. The revenue obtained by the directly went to the president, his allies and to the masses who were politically loyal. The opposition were ousted from natural resource jobs or social programs[22]. The political culture in Venezuela was based on personal power and economic benefit rather than democratic gains. Venezula’s oil-funded government was not financed by taxes on their citizens, but by the sale of state-owned oil assets. When the governments is funded through taxes, they become accountable to the people; when funded by oil, they become less susceptible to public pressure.
Poor economic policies
Throughout 2004 to 2011 there were booming oil prices but the country remained economically weak. As the state company of PDVSA declined, the country’s worries increased. Poor hiring practices through clientelism caused for the stagnation of the company[23]. PDVSA’s influenced also decline as most of its revenues went to social programs rather than investing in its own ventures. 23 billion dollars of PDVSA’s revenue were invested in social programs during the Chavez era. Accordingly, obligatory blackouts on electricity had forced PDVSA to shut down its refineries frequently and the company became more stagnant. Another economic hinderance to PDVSA is Oil trade policy between Venezuela and other Latin American countries[24]. As of 2012 10 percent of total oil production, was sold to Caribbean and Central American nations for six cents per gallon. These discounts secured the socialist government political backing[25]. Huge debt and inefficiency decreased the production of oil from 2.85 million barrels of oil a day to 2.47 barrels of oil[26]. Currently, PDVSA’s decline has crippled the economy during and with oil not being a strong commodity now the country has had little to fall back on.
Canada’s Oil Stability
Canada has avoided oil instability and Dutch disease through a diversified economy. Canada’s ability to process resources efficiently led to a increase share of raw materials through imports and at the same time it boosted the profits of Canadian manufacturers who refine them.
[1] Anibal Martinez (1969). Chronology of Venezuelan Oil, 5.
[2] Tugwell, Franklin (1975) The Politics of Oil in Venezuela. Stanford University Press, p.182.
[3] Bye, V. (1979). Nationalization of Oil in Venezuela. Journal of Peace Research, 16(1),59.
[4] Ibid,p.59.
[5] Tugwell, Franklin (1975) The Politics of Oil in Venezuela. Stanford University Press, p.183.
[6] Bye, V. (1979). Nationalization of Oil in Venezuela. Journal of Peace Research, 16(1),59
[7] Ibid,60.
[8] Terry Lynn Karl, 1997, The Paradox of Plenty: Oil Booms and Petro States, p 95.
[9] Hetland, G. (2016). From System Collapse to Chavista Hegemony. Latin American Perspectives, 44(1), 5. doi:10.1177/0094582×16666018
[10] Ibid,13.
[11] Evolution Of Canada’s oil and gas industry,p15.
- [12] Bott, Robert D., “Petroleum Industries”. In The Canadian Encyclopedia. Historica Canada. Article published April 07, 2009; last modified January 07, 2016. https://www.thecanadianencyclopedia.ca/en/article/petroleum-industries
[13] Ibid.
[14] Evolution Of Canada’s oil and gas industry,p 29.
- [15] Bott, Robert D., “Petroleum Industries”. In The Canadian Encyclopedia. Historica Canada. Article published April 07, 2009; last modified January 07, 2016. https://www.thecanadianencyclopedia.ca/en/article/petroleum-industries
[16] Ibid
[17] Evolution Of Canada’s oil and gas industry,p 45.
[18] Kott, A. (2012). Assessing Whether Oil Dependency in Venezuela Contributes to National Instability. Journal of Strategic Security, 5(3), 71.
[19] Jeffrey Sachs, and Andrew M. Warner, “Natural Resources and Economic Development: The Curse of Natural Resources,” Rep. European Economic Review (2001):10.
[20] Rossi, C. A. 2011. Oil wealth and the resource curse in Venezuela. International Association for Energy Economics (IAEE) Energy Forum, Third Quarter, 13.
[21] Kott, A. (2012). Assessing Whether Oil Dependency in Venezuela Contributes to National Instability. Journal of Strategic Security, 5(3),71.
[22]Ibid,71.
[23] Ibid,75.
[24] Corrales, Javier, and Michael Penfold. Dragon in the Tropics: Hugo Chavez and the Political Economy of Revolution in Venezuela (Washington, D.C.: Brookings Institution Press, 2011), 86.
[25] Ibid,87.
[26] Kott, 80.
