Venezuela - Oil Dependence and Its Consequences

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Table of Contents
1. Historical Background to Venezuela’s Oil
1.1. Before the discovery of oil
1.2. Oil is found
1.3. Oil as a major government issue
1.4. Where is the oil-revenue spent to?
2. Consequences of Oil Dependency on the Economy
2.1. Introduction
2.2. Oil dependence and the Economy
2.2.1. Oil Price
2.2.2. Currency
2.2.3. Other Sectors of the Economy & Overall Economic Growth 2.2.4. Impact on Society
3. Effects of Oil Dependence on Importing Countries
4. Solutions

1. Historical Background to Venezuela’s Oil

1.1. Before the discovery of oil

To begin with, it should be pointed out, that, before the discovery of oil in Venezuela, the country was never as important for the Spanish empire as its other colonies. Colombia was an indispensable element of the economy due to its coffee production, Peru was known to be an occupant of gold and Bolivia was of great importance because of its silver mines. During the period of the 17th century, Venezuela’s only important commercial product was Cocoa, which was exploited by using slaves from Africa and some of the indigenous people. After the devastation of the economy during the “War of Independence” lasting from 1811 to 1821, Venezuela started producing coffee in the middle of the 19th century, which did not show any significant economic development as Venezuela maintained “mono-production”.

1.2. Oil is found

Indigenous people as well as the Spanish always knew about the existence of oil in the country of Venezuela, but first in 1914, Venezuela was opened the world energy market through the discovery of the Mene Grande field in Lake Maracaibo’s east coast. Serious exploitation then began only to take place after 1917. When exploitation was regulated by 1904, the president had the authority to make concessions in order to encourage oil companies. This process was executed through a fixed tax rate of 25 % as a gift to the oil companies, well accepted by the British companies which were controlling the petrol production at this time. At the end of 1919, when bigger concessions were granted to US companies, even the US state recognized Venezuela’s high importance for the production of petrol, mainly because of its geographical location and its larges reserves of this rich commodity. In 1960 the state created the “Corporacion Venezolana del Petroleo” and there was great direct participation of national private capital in production activities. Since 1975, petroleum constitutes the most dynamic, determinant and decisive element in the political, economic and social transformation experience by the country. Venezuela became another nation, with a mining mentality and an economy dependent on oil exploitation. With the oil sector as a major part of Venezuela’s economy, the country’s general economic growth shows highs and lows, which will be discussed after a short review of the government procedures in the past.

1.3. Oil as a major government issue

Some important steps in the oil history of Venezuela were determined by main politicians who tried to manage the oil resources effectively. Rómulo Gallegos, who served as the country’s president for some three months during 1948 and who was a member of the “Partido Acción Democrática”, wanted to control the oil production by introducing a 50 % contribution of profits, payable by companies in order to support the state. This attempt was no success as the economic benefit from the higher tax was not distributed to the most oppressed layers. From 1952 to 1958, when Pérez Jiménez acted in a dictatorship, a flood in oil income and a massive public works programme led to a sense of “progress”, but nevertheless ended up with workers not being allowed to use their rights. In the period 1958 to 1998, “democracy” was installed in Venezuela, which corresponded to the needs of the big economic interests and US imperialism. Due to the sale of oil during these 40 years,...
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