The history of Venezuela exploiting and exporting oil can be traced back to early 1910s. With very rapid development, Venezuela soon became the second largest oil producer in the world and the largest oil exporter. The boom of the oil industry promoted the country’s economy but also the government’s revenue. To maintain more of this income, decrees were published to protect the oil industry. After two rounds of nationalization of PDVSA, Venezuela successfully controlled the whole oil industry, with a full monopoly oil regulatory system along with a series of other related laws.
The government believed oil had made the promise that prosperity is in sight with oil in hand. And oil did, but only when its price was high. After the first monopoly of PDVSA in 1976, the oil price reached over $100/bbl but then plunged to < $20/bbl until 2000. The government’s over-optimistic attitude brought Venezuela into troubles. The sluggish economy because of the fall in the oil price led to commodity price shocks, local currency devaluation, and necessities in short supply, which created serious unrest and unease among society.
Base on the research of Wilpert (2003), Ding (2005) and Cerny and Filer (2007), the main sources of Venezuela’s management entropy increase could be categorized as below.
In a system, structure describes the relations between elements and the way they cooperate against the external environment. And it determines the system’s functionality, properties, and stability. As one of the most important factors, structure must be function dominant, low coupling, and high cohesion.
Before 1973, the first oil crisis, Venezuela’s structure problem was not that significant. During the first crisis, the oil price almost quadrupled. Stunned by the sudden rush of oil money, the president Carlos Andrés Perez believed Venezuela’s prosperity was in sight. The best known sayings were “La Gran Venezuela,” Venezuelans “sow the oil” to fight poverty. And to guarantee this, nationalization of Venezuela’s oil industry seemed natural. Since 1976, the oil industry has been fully nationalized, with the creation of Petroleos de Venezuela (PDVSA). Ever since then, the whole country has taken “control” over their oil industry.
After President Hugo Chávez took office in 1998, the “Bolivarian Revolution” was promoted. Laws were amended to support the projects of the revolution. With more social expenditure from oil revenues, PDVSA was nationalized again to assure revenues.
Obviously, oil has made the illusion to every government that via massive infrastructure projects, the prosperity of Venezuela is within reach, and all they need to do is to protect the oil revenue and nationalize PDVSA.
The Venezuela government is actually doing this. After rounds of nationalization, the country has become an oil-centric assembly in which oil has taken the dominant role to affect every prospect of the country. The oil-oriented structure has shaped this. To a country’s economy, rich resources may be an advantage especially when the resource price is high. Yet to put the whole economy fully on it seems not that wise. As including the fluctuation of resource price into the system will result in the instability of it. With other factors (industries) weakening, oil seems to be the last chip Venezuela has.
Till now, Venezuela has kept a very high percentage of GDP leaning to oil (Fig. 2), which makes the system very vulnerable to changes both from internal and external systems. The oil price has been varying violently since the crises. To make matters worse, in over 40 years Venezuela has stumbled in this illusion that oil has made, yet no tendency to change this dilemma is ever revealed in any regulatory system in the country.
Devastated by Dutch disease, the Venezuela industries are in very bad shape. With most other industries withering, strengthening the oil industry to support the others seems the last choice. But will this contribute to decrease the system’s entropy? In theory, the most profitable strategy is always “all in” yet ironically, the one with most losses seems to be the same one. Total dependence on oil makes no difference with “all in,” but Venezuela fails to close its hands immediately and make transitions. Optimistic expectations result in the current conditions.
This paper means no prejudice on this oil-oriented economy structure or else. That is because when talking about one structure is superior to others, specific situations must be taken into account. What is worth questioning in this paper is that whether it is still appropriate for Venezuela to use this structure under the current scenario. As entropy, or more directly, the disorderliness increases, it is really worth reconsideration.
Considering the importance of a system’s structure, the contents to define it need to be more specific and inviolable and the power to enforce and defend it must be more strong and equitable. Regulatory structures, or principles according to which such structures are built, create legal restrictions and allocate contractual responsibilities in a nation. It secures the nation’s structural efficiency and stability which require orderliness, while that mostly can only regulations give. Moreover, as the level of institutions determines that of the regulatory system, a high level of democratic accountability is essential to the authority of legislation and enforcement.
Research about investment risks in Latin American countries (Mendes et al. 2014; Rubio and Folchi 2012; Zamora 2014; Ngoasong 2014; Recalde 2011) has pointed out the political risk is usually the most uncertain factor in analyzing and evaluating the Latin investment environment, especially frequent changes and strict rules on oil companies.
To most international oil companies (IOCs), Venezuela’s subtle regulatory system is too discouraging. Starting from the 1943 Hydrocarbons Act, IOCs’ profits were strictly limited to less than they invested in Venezuela. Meanwhile, the act stipulated oil taxes should be based on income from mining while previous ones mostly on common customs. In 1998, President Chavez nationalized the entire Venezuelan oil industry and canceled all the PDVSA’s international strategies; Venezuela’s oil industry fully relied on the guidance of President Chavez.
Besides, Venezuela’s long criticized monetary policy should bear some responsibility for Venezuela’s current situations. For a long period, the country has kept its fixed exchange rate policy. Though having an advantage of reducing the uncertainties during normal economic activities, this will directly expose the country to the oil price volatility. When oil price hit bottom, too much money rushed into Venezuela’s economy system. To make matters worse, because there are no other industries that can match the impacts of oil industry in Venezuela, the government has to publish more local currency to offset the foreign inflow cash, which resulted in the over-supply of currency. The consequences are Venezuela experienced its historical highest inflation rate along with the expansion of the “Black Market” due to the lack of effective management.
Empirical results (Brunnschweiler and Bulte 2008; Shao and Yang 2010; Kolstad and Wiig 2009) have suggested that resource countries with different level of institutions usually fall into completely different situations. It seems that the negative impacts of resources only happen in low-democratic level countries while those with high levels, like Norway and Botswana, do not. This can be easily understood as the evolutionary history of human civilization is tantamount to the conversion process of “rule by man” to “rule by law” and to “rule by good law.”
During his administration, President Hugo ChavezFootnote 2 drafted and revised the constitution several times to merge the bicameral parliament into a unicameral one and grant the president the right to dissolve the parliament. At 2009, he again made amendment to cancel the limit of two consecutive terms; thus, his reelection could be achieved. While the separation of power has been running through the entire history of Western development, Venezuela is developing a path to centralized power, omnipotent government, and a man-governed society.
Supported by a variety of scientific disciplines, evolution by natural selection, originated from Darwin’s theory of evolution, clarified the survival of the fittest. But when this comes to the fields of management, it seems not that obvious.
A management system, deliberately or not, is actually an artificial system, which means all its frame, structure, and other factors are designed by man. Limited by human cognition, any system built by man is only to fit the present or even the past, not the future. That is because laws and rules must be clear and stable (static) to exercise its effectiveness yet the environment need not be stable. And a functionality delay is produced.
This means a management system can maintain its highest performance at the very beginning, consistent with the description of the second law of thermodynamics. As the environment develops, the system will gradually lose its efficiency, which directly results in a high entropy increase. Therefore, considering the truth that the long-term future is unpredictable, further amendments are always needed.
As for Venezuela, the volatility of oil price is probably the most vital threat to the country. The over-reliance on oil indicates that any price fluctuation will trigger a series of economic chain reactions. Meanwhile, the Venezuela government’s over-optimistic attitude toward oil price worsened the case that almost all the regulations are designed to defend, and of course spend the country’s excessive benefits. With no alternative programs for a low oil price case, the government spent every coin of their fiscal budget in the good years. Amounts of social projects like increasing employment or income were launched to accelerate the process toward a developed country regardless of whether these over-spending programs would become a burden if oil price went down. What’s worse, not having enough money to support the projects will not only delay the process of development, but also cause unrest among society. With oil price dropping to 47 $/bbl, Venezuela has suffered serious inflation and currency devaluations. The heavy debt Venezuela government is bearing has made agencies lower the sovereign rating of Venezuela to CCC+.
Another thing worth noting is that recent researchers have turned to clean energy areas like solar, wind, or nuclear from the traditional fossil fuels. A decreasing demand for oil in the future is foreseeable. Thus, this demand decrease is more noteworthy though the production increase from non-OPEC countries might be blamed for the low oil price. In short, under the background of a declining demand of oil and rising production from other countries, an entire change from the state level is needed.