Embattled Chavez taps oil cash in a social, political experiment

From: Rakesh Bhandari (rakeshb@STANFORD.EDU)
Date: Wed Jun 23 2004 - 11:52:51 EDT


Washington Post     Friday, June 18, 2004; Page A19

Embattled Chavez taps oil cash in a social, political experiment

By Kevin Sullivan

Caracas, Venezuela, June 17 -- Miguel Antonio Castillo, 60, never finished
high school. His dreams of being an engineer walked out the door with his
father all those years ago, so he raised his 11 children on his wages as a
day laborer.

But now he spends three hours every day in a classroom, puzzling out the
riddles of math and reading. By sometime next year he'll have a diploma and
pride he has never known -- all paid for by Venezuela's state-run oil

"Our president is giving me a chance to make my dream a reality," said
Castillo, one of thousands of Venezuelans who receive schooling, and a
monthly cash payment of $50 to $100, from Petroleos de Venezuela as part of
a multibillion-dollar social and political experiment being conducted by
President Hugo Chavez that has provoked a storm of criticism.

Chavez's government plans to spend at least $1.7 billion -- and perhaps
twice that -- in oil revenue this year on social programs ranging from
subsidized food to classes on literacy, farming, hair-styling and auto
mechanics. Chavez has said his goal is a "social transformation" that will
"redistribute national income" into the hands of the millions of poor people
who have long been denied access to this country's vast oil riches.

But critics say Chavez is pandering to the poor to save his political career
and gambling irresponsibly with the long-term fiscal health of a state
company that provides half the country's revenue.

"He is killing the goose that laid the golden egg," said Ramon Espinasa, an
oil industry consultant at the Inter-American Development Bank who was the
oil company's chief economist from 1992 to 1999. Espinasa said Chavez was
spending money that the oil company needs to invest in maintenance and
modernization to keep its production from falling off.

Chavez's spending program is accelerating two months before a national
referendum on whether to recall a president who has become a lightning rod
for criticism across Latin America and in Washington. With his fiery,
class-driven rhetoric and now his plans to spread oil wealth in Venezuela's
poorest neighborhoods, Chavez has enflamed this country's already
contentious schism between the wealthy, who generally oppose him, and his
millions of impoverished supporters.

After trying to force Chavez from office with a military-led coup in 2002,
then a two-month strike at the oil company that began late last year and
cost Venezuela billions of dollars in revenue, his opponents succeeded in
collecting enough signatures to force a recall referendum, scheduled for
Aug. 15. Both sides are preparing for a bruising campaign: Opponents claim
that Chavez's government has fired workers who supported the recall, while
Chavez this week called his adversaries "crazy."

A defeat for Chavez would delight the Bush administration, which has been at
odds with him since he was elected in 1998 professing admiration for Cuba's
Fidel Castro and disgust with the U.S.-style market economics that now
dominate the region. When Chavez was briefly ousted in the 2002 coup, the
U.S. government quickly moved to endorse the new government, only to see
Chavez regain power a few days later.

It remains unclear whether a defeat in the recall would mean Chavez would
leave the political scene. The Supreme Court ruled this week that if Chavez
were ousted in the referendum, he could run again in the next regularly
scheduled elections in 2006. The court did not clarify whether Chavez could
run in elections to choose an interim president to serve until 2006 -- that
is, whether he could run to replace himself.

A Spike in Social Spending

Chavez, a former army colonel, is leading an aggressive effort to win the
referendum in this country of 24 million people, about twice the area of
California. He began his high-profile spending last year, building housing
and wells, turning oil company offices into classrooms and starting a
national literacy campaign.

Most of the programs are directly funded and administered by the oil
company. It has budgeted $1.7 billion for social projects this year, up from
just a few million in past years. And Chavez recently said that he would
funnel another $2 billion of company revenue into a social spending account.
This week, Chavez announced that from now on, he would refer to the company
as "Petroleos del Pueblo de Venezuela," the oil company of the "people of

At the same time, Chavez has unsuccessfully pressured the autonomous central
bank to hand over $1 billion from the country's $24 billion in foreign
reserves, which come mostly from oil revenue.

"Historically, petroleum income was distributed so that most of it went to
the privileged elite," said Willian Lara, a key Chavez ally in the National
Assembly. "Since Chavez became president, he has begun distributing
petroleum income for economic development. The Venezuelan people are the
owners of petroleum, so it is logical that the owners of the petroleum
should get the benefit." Lara said criticism that the social programs would
harm the oil company were "nothing more than propaganda to make the Chavez
government look bad."

But Alfredo Keller, a pollster and political analyst, said Chavez was trying
to "buy loyalty to maintain power" and "using the oil industry as a
political weapon."

Keller said Chavez was playing on the fears of a nation where 67 percent of
the people live in poverty, 35 percent live in extreme poverty,
three-quarters of the population is either unemployed or works in the
informal sector, and there have been 43,000 homicides in the past five

Keller said Chavez, who has about 37 percent support in recent opinion
polls, has calculated that winning votes before the recall election is more
important than the long-term damage his social spending could cause the oil

To achieve his goals, Chavez is using a $40 billion-a-year company with
which he has had tortured relations. Many of its top managers at the time
were responsible for a strike that began in December 2002 and lasted until
February 2003. The strike virtually halted production, and cost billions of
dollars in revenue to the company and to foreign oil companies that operate
here, including ChevronTexaco Corp., ConocoPhillips and Exxon Mobil Corp.

Chavez fired about half of the company's nearly 40,000 workers, mainly those
involved in important planning, financial and engineering departments. While
government officials have said that oil production has returned to prestrike
levels of at least 3.1 million barrels a day, analysts across the industry
estimate that the true levels are about 2.5 or 2.6 million barrels. They
said that the company's loss of experienced managers, combined with Chavez's
decision to funnel profits into social programs instead of maintenance and
improvements, have left the company struggling to recover.

"You don't get rid of your key technical staff and lose your most precious
human capital -- that's not a political policy, it's stupidity," said
Orlando Ochoa, an economics professor at Catholic University in Caracas.
"There have been excesses of power in the past, but this is a Guinness

Prices Up, Investment Down

Venezuela has the largest oil reserves outside the Middle East, with proven
reserves of nearly 78 billion barrels.

It is among the top four suppliers of oil to the United States, behind
Canada and Mexico and just ahead of Saudi Arabia, and it sells its products
through Citgo, its Tulsa-based retail arm. Venezuela exports about 1.34
million barrels of oil a day to the United States, 13 percent of U.S.
imports, according to March statistics.

Espinasa said the company needs to reinvest at least $6 billion a year in
revenue just to maintain current production levels. He said the company
reinvested about $7 billion in 1997, the year before Chavez's election, but
only $2.5 billion last year. Chavez's social spending, he said, would make
it impossible for the company to maintain its current production, let alone
meet its publicly stated goal of increasing production to 5 million barrels
a day within five years.

"Their plan says one thing, but the reality says otherwise," Espinasa said.
"This is all lip service."

Venezuela and other oil-producing countries have been swimming in cash this
year as oil prices have hit their highest prices in more than a decade.
Analysts said Venezuelan oil has averaged just over $30 a barrel in 2004, up
from about $25 last year.

Espinasa said the higher revenue is providing a temporary "disguise" for
Chavez's spending. He said that with the extra money currently in the
coffers, Chavez can spend without drawing attention to the long-term damage
it could cause in an economy in which GDP dropped 8.9 percent in 2002 then
another 9.4 percent last year, in part because of the strike.

At the Caracas school where Castillo was studying for his high school
diploma, every one of the 30 or so students, ranging in age from 19 to 78,
said they planned to vote for Chavez in the referendum. Belkis Carrillo
Ibarra, 33, who wants to become a nurse, said she was so grateful for the
opportunity that she planned to register to vote for the first time in her

"With Chavez, finally someone is helping the poor," she said. "This will be
my first vote, and I will vote for him."

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