Citgoing Nowhere

About the only thing keeping Venezuela’s economy afloat nowadays is oil. The country’s huge oil reserves are the last hope for any kind of wealth or cash infusion thanks to Venezuelan President Hugo Chavez’s destructive economic and social policies. But even in the realm of energy policy, Chavez appears to be bound and determined to ruin his country’s hopes for prosperity. Through his management of a state-owned oil company, Chavez has allowed corruption, incompetence and utter disorganization to endanger Venezuela’s hopes of properly using its abundance of oil to enrich its economy. And through headline-grabbing propaganda gestures, Chavez has turned his back on the needs of his own people, all in search of a favorable headline or two from the media.

Consider Citgo Petroleum, which is a subsidiary of the state-owned Petroleos de Venezuela S.A. (PDVSA) and whose gas stations dot the American landscape. As this story notes, because PDVSA is state-owned, it only has one shareholder: Hugo Chavez, a data point that should have alarm bells going off in the heads of those concerned about corporate governance. State-owned enterprises are notoriously inefficient, incompetent and oftentimes corrupt. A major reason behind the inefficiency, incompetence and corruption of state-owned enterprises is the fact that they are not responsive to a large number of shareholders, and instead only need to cater to the whims of one or a few government officials. Better to privatize industry and make it accountable to a large number of shareholders than to have it run by the state and thus have incompetence and corruption protected by a state-sponsored monopoly.

But since Hugo Chavez is the only shareholder, he gets to run PDVSA as his own personal fiefdom. He doesn’t have to worry about catering to the needs and interests of a large number of shareholders and thanks to the dictatorial powers with which he has been given, he doesn’t even have to worry about catering to the needs of his nation. Thanks to Chavez and the state-owned nature of PDVSA and Citgo, Venezuela’s oil riches stand a good chance of being wasted on unnecessary projects that fulfill the short-term propaganda needs of the Chavez regime while impoverishing Venezuela in the long run.

Chavez’s exercise of control over Citgo has been documented and has prompted low morale and managerial anarchy in the company. Citgo has trouble keeping up with competitors with better management structures and corporate environments — competitors who are blessed with the relative absence of Hugo Chavez’s bungling leadership in their lives. Because Venezuela’s energy fortunes rise and fall with Citgo — and through Citgo, PDVSA — the turmoil the company is suffering thanks to Chavez’s heavy-handed interference puts Venezuela at risk of missing out on the riches it could gain thanks to its large oil reserves.

As if all of this is not enough to disconcert those interested in the welfare of the Venezuelan people, Chavez, through Citgo, has decided to use Venezuela’s oil riches for propaganda purposes. Seizing on high energy prices and the headlines they have caused in the United States, Chavez grandly announced in the fall of 2005 that he would provide free heating oil for low-income residents in American cities. The grandstanding prompted near-fawning media coverage. And why not? Wasn’t this gesture just remarkably generous of the Venezuelan President, especially given his incendiary rhetoric about the United States and its leadership?

Well . . . no, it wasn’t. It turns out that in purportedly lending a helping hand to lower-income Americans, Chavez was in fact impoverishing his own people. I can’t put matters better than economics professor and blogger Russell Roberts did:

Yes, the people of Venezuela are lucky to have [Hugo Chavez]. He’s selling oil at a 40% discount to people in a country whose per-capita income is over SIX TIMES that of Venezuela’s. That’s a man who really knows how to take care of the little guy.

The more one looks at the evidence, the more it becomes clear that Hugo Chavez has the reverse Midas touch when it comes to leading Venezuela. Instead of working to privatize and diversify Venezuela’s energy industry, he has decided to concentrate massive amounts of power and resources into one state-owned enterprise. Through his actions, he has turned that state-owned enterprise into a bureaucratic nightmare, filled with instances of corruption and ineptitude. And instead of using Venezuela’s oil wealth to empower and enrich his country, Hugo Chavez uses it for propaganda purposes to the long-run detriment of the Venezuelan people.

In short, things are very bad with the Venezuelan oil industry and the Venezuelan economy in general. And just imagine how much worse things will get if oil prices fall and Venezuela loses the one golden goose that separates it from complete economic disaster.