Venezuela, Oil Industry

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Venezuela, Oil Industry
Assignment 8-1

Prepared for
Prof. Wendell Seaborne
MBA 727
Fall 2012

Prepared by
Gjorgji Janakiev

December 25, 2012

Introduction
The economy of Venezuela is highly dependent on revenues from the oil industry. The export of oil represent 95% of the total export of the country, 40% of the budget revenues and 12% of the GDP (CIA The World Factbook, 2012). Venezuela is one of the founding countries of OPEC and is one of the fifth largest memberс. In the past, from 1950s to 1980s, the country's economy was steadily growing, and during that time period, the country prospered and attracted many immigrants. Thanks to the oil industry Venezuela's citizens enjoyed the highest living standard in Latin America. In early 1980s the oil prices collapsed and the country's economy contracted. Today, Venezuela is one of the countries with highest inflation rate in the world, and it is averaging 26,1% in 2011 (US Department of State, 2012). From 2010, announced by Venezuelan president Hugo Chavez, started the use of fixed dual exchange rate system for their currency, Bolivar. The system has one lower exchange rate for imports of essential goods, and other higher exchange rate for other products. The country was strongly affected by the Global economic crisis, and according to International Monetary Fund (IMF) report from 2010, the economy recovery is qualified as weak and delayed in comparison with other countries in the region. History of oil Industry in Venezuela

As the most important industry in the country, Oil industry in Venezuela is older than 100 years. The first production of oil was recorded in 1908, and throughout the years this industry went through a lot of turmoil. In 1961, Venezuela along with  Iran, Iraq, Kuwait, and Saudi Arabia founded the Organization of the Petroleum Exporting Countries (OPEC), with main purpose of control over the price of oil. Later in history, this organization will have serious impact over the world prices of oil. From 1976, under the leadership of the president Carlos Andrés Pérez, the industry entered the process of Nationalization. The private companies were nationalized and new government owned company was established  Petróleos de Venezuela S.A. (PDVSA). The excavation of natural gas was banned and was allowed only for the state owned companies. This law was changed by the current president Hugo Chavez in 2001, and now 49% ownership is allowed for foreign investors in joint ventures for downstream activities (Jones, 1986). Correlation between Venezuela's oil industry and International trade theories In order to understand the current International trade strategy used in oil industry in Venezuela, and to make comparison of the industry with the existing trade theories, the last ten years from the history of this industry will be elaborated, or more specific what was happening with the industry under the ruling of the president Hugo Chavez. Hugo Chavez was elected in 1999, the time when this industry recorded lowest price of the oil. Since the export of oil is 40% of the budgets revenue, he saw that the budget of the country can be filed by increasing the price of oil. In order to do that he took effort to strengthen the role of OPEC, which at that time was virtually not functioning, because none of the member countries did not oblige the export quotas. In 2000 he organized the summit of the heads-of-state of OPEC countries. Shortly after this summit, the world prices of oil started to grow on record levels. Although, the summit was not the only reason for increased price of oil in the world (some of them were attacks on US in 2001, increased demand from China etc.) but certainly was one of the most important. After his election, Chavez, immediately build tensions with PDVSA. He enlisted quotas like 10% of the company's revenue to be spent on social programs, and changed tax policies and the oil revenue collection process in order to transfer more money...
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