Oil sector in Venezuela and Mexico Essay

Nowadays 77% of world’s oil reserve is controlled by national oil companies with no private equity. Thus, oil sector in Mexico has been nationalized in 1930s. Within the first decade of current century the privatization of oil producing company PEMEX was the object of hot debates in Mexican parliament. Both the advocates and opponents of oil producing company privatization appealed to example of Venezuela. In May 2007 Venezuelan president Hugo Chavez made a decision to nationalize oil. This decision transformed economy of Venezuela but failed to raise the level of life.
The objective of this paper is to collect arguments for and against privatization of PEMEX; to analyze the consequences of Venezuela’s nationalization of oil; to explain why it would be better for both Mexico and Venezuela to keep oil-producing sector private; and to argue why Mexico should privatize its state-owned oil company PEMEX.
Resource curse: common problem of oil-producing countries
“It may seem paradoxical, but finding a hole in the ground that spouts money can be one of the worst things to happen to a country.”(Rosenberg, 2007) This sentence from Tina Rosenberg’s article briefly describes the phenomenon known as “recourse curse”. Speaking about “resource” people usually means “oil”, though sometimes other resources can play the same role in country’s economics. Historically it is proved that oil-producing countries are more politically unstable, despotic, and riots-vulnerable. Economic development in oil-producing countries is usually slowly than in countries not so rich with natural resources. As a rule, corrupted government distributes oil-trade profits in the narrow group of people and companies. At the same time infrastructure, education, health care and other social services in oil producing countries stay poor developed. Without the sufficient stimulus there are no reasons to develop the manufacturing sector of economy in the country. In the case of recourse depletion the economy of resource-dependent country can collapse.
Unfortunately both Mexican and Venezuelan economics have the obvious signs of “resource curse” – poorly developed infrastructure and social services, social inequality, the lack of manufacturing industries in economies, and so on. However, Mexican oil-producing sector is now on the path from national industry to privatization; just the opposite, oil production in Venezuela recently turned to national industry from private sector.
Venezuelan oil nationalization and its consequences
The countries of Latin America are usually considered as the “Third World countries”. It means that the role of these countries on the global market is mere suppliers of raw materials. Particular, oil-producing countries, which are historically poorly governed, suffer from poverty despite the oil prices growth. Nowadays one more problem added to the common troubles of oil producers. The development of oil production in this region reached its peak in 1970s. Pipelines and drilling equipment is outdated and suffer from leakage. (It is worth mentioning that oil leakage can not only cause the economic losses but also lead to environmental disaster, as it was in Mexican Gulf). Oil-producing companies have to invest in infrastructure just to keep the production steady; the increase of oil production demands even more investments. As a rule, only private investors can provide the solution to this problem. However, Hugo Chavez chose another path. He has asserted his control over Venezuela’s state oil company, Pdvsa, and made private producers accept state control of their operations. (Rosenberg, 2007) He also subsidized a part of oil to Venezuelan allies, in particular to Cuba. Generally, after oil production nationalization main flow of revenues was directed on social programs in the country. Chavez called his new policy as “oil socialism”. The results of Pdvsa nationalization can be analyzed just now for some reasons. First, three years after nationalization is too short period to evaluate the consequences. Second, global economic recession influenced of Venezuelan economics as well, and oil production on 2010 decreased. Third, the lack of government financing transparency prevents exact analysis ( nowadays Venezuela takes 162 position among 170 countries in the rate of government expenses transparency (Alvarez, Hanson, 2009) At last, oil producing sector always has a conflict between short-term and long-term reward. Pdvsa now fifth oil producing company in the world, it has significant potential of oil production in future, but it needs serious investments, and some analytics think Venezuela doesn’t invest a lot in oil producing infrastructure development. Tina Rosenberg provides some financial data in her article proving the negative impact of nationalization:
“Paradoxically, nationalization brought the government less money and less control. When Venezuela’s oil was still in private hands, the government collected 80 cents of every dollar of oil exported. With nationalization the figure dropped, and by the early 1990s, the government was collecting roughly half that amount.” (Rosenberg, 2007)
It is possible to conclude the following: nationalization of oil production, especially of main state oil producing company Pdvsa, had to develop new type of socialism in Venezuela. However, global financial recession, government corruption, large quantity of subsidized customers, and insufficient short-term reward prevented the fast economic growth and life level increase.
Mexican oil sector: problems and perspectives
As was stated above, oil producing sector in Mexico was nationalized in 1930th. However, the country suffered from “recourse curse” for decades. Small group of people and companies controlled (and they still do) the distribution of oil revenues in the country. Together with other typical Mexican problems (illegal migration to USA, drug production and trafficking, other types of contraband) oil trade made Mexico one of the most poor, corrupted and politically unstable countries in the world. It is just enough to mention the recent civil war against drug barons. However, this situation couldn’t last forever. The outdated production capacities could not provide the steady oil production. Geri Smith from Newsweek wrote in 2008: “At the Cantarell field, the country’s main source of oil, production is declining 15% annually. Pemex pumped 2.85 million barrels a day in March, down from 3.18 million a year ago, and proven reserves have fallen from 25 billion barrels in 1999 to just 14 billion today.” (Smith, 2008) The main problem with further development of oil production is the development of new field. Most of them are located in the Gulf of Mexico. It can take approximately ten years to start the full-volume production in new field. Mexican government cannot invest in such projects and needs foreign investments. Otherwise the country can face new collapse of economy at the nearest future. Besides, corrupted deputies and government members together with their supporters oppose the oil sector privatization. Thus, Interior Minister Juan Camilo Mouriсo acted in the interests of his family and his father oil-baron (Roig-Franzia, 2008). It can be said that those who claim “Oil is ours!” in the contemporary Mexico tell the truth. The oil is really theirs, and they do not want to share their revenues with state budget.
Nevertheless, in 2008 Mexican state oil company Pemex was opened to private investment and first investments were already done (Gonsalez, Rodriguez, 2008). Unfortunately, it is too early to discuss the impact of this step on Mexican economy, but it is clear that fast economic growth and life level increase are impossible in the nearest future.
Conclusion
The comparison of Venezuelan and Mexican oil sectors depicts the common problems: corrupted government, need for large investments and infrastructure renewal, close connection of political and financial interest, extraordinary importance of oil production for economy. In fact, these problems exist independently on property form. It can be used the example of successful oil exporter as Norway to support the privatization of oil sector. However, without the strong control and transparent financing neither privatization, nor nationalization can influence positively on country’s economy.