Venezuelan President Hugo Chavez effectively got his wish to nationalize the country’s oil industry completely when his rubber stamp legislative assembly voted to pass a bill putting the wholesale oil trading into the hands of the state.
Under the newly passed bill, the wholesaler oil distributors are mandated to turn over their businesses to Petroleos de Venezuela S.A. (PDVSA), the state oil company within 60 days or face forcible expropriation.
The order covers the local subsidiaries of oil giants including Chevron, Exxon Mobil and BP as well as those of local retailers big or small, and allows PDVSA monopoly control of wholesale fuel distribution. PDVSA becomes the sole oil supplier of two-thirds of Venezuela’s privately-owned retail gas stations.
Apparently, Chavez was emboldened to take further steps to nationalize the whole oil industry when Exxon Mobil lost to Venezuela in March when a London court ordered the lifting of an earlier freeze order on US$12 billion in assets of Venezuela’s state oil monopoly firm.
The freeze order was granted to Exxon by a court in January so cash would be available should it wins in an arbitration case involving compensation when Chavez nationalized an oil project in the Orinoco basin in which Exxon was involved. Other companies including Chevron, Total SA, BP and StatoilHydro ASA had negotiated deals to continue as minority partners in the nationalized projects rather than fight it out in courts.
Venezuela’s latest antics signal a return to state control and a tightening grip of basic industries in that country. Already, control of its telephone system has gone back to state hands.
Venezuela ranks fifth largest oil exporting country and oil accounts for 90% of its exports revenues. At $0.18 a gallon for premium fuel, Venezuela's highly-subsidized pump prices are among the lowest in the world
In the short term, Chavez would endear himself to the poor masses, but in the long term, it would be ruinous to the economy in general, as the government coffers would accumulate deficits over time.
The slide to perdition won’t be felt immediately as long as its oil fields—now in government hands—continue gushing crude to pay for Chavez’ populist policies.
LEST OUR LEADERS start to entertain parallel ideas, let us remind them that we have been there, done that.
We have had an oil price stabilization fund which for a time tamed the oil price spikes in the 70s and 80s, but the country ended with a yawning fiscal deficit.
We tried creating a national oil company to counter a perceived oil monopoly by select multinationals, but market forces were simply too strong to resist. The country was simply helpless against oil prices dictated by world events.
We have already learned bitter lessons about the folly of state control over businesses. Let us hope we won’t be backsliding into that rut.
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