Current Events Economics - General

The Perils of Petrocracy

Can a state run petroleum company be as efficient as a private sector company? The answer is a resounding, “yes but…” It is possible that state-run petroleum companies can be efficient as long as they stick to the business of producing oil. Yet Tina Rosenberg’s “The Perils of Petrocracy” article in the N.Y. Times Sunday Magazine examines what has happened in the case of Hugo Chávez and Venezuela.

Chávez has siphoned off millions of dollars from Venezuela’s oil company, Petróleos de Venezuela S.A. (Pdvsa), for his own political uses. Much of the money has gone towards funding schools, medical clinics, and misiones for Venezuela’s poor. While this providing health and educational infrastructure for Venezuela’s poor is a laudable goal, it is unclear that conditions in Venezuela have improved.

“…the percentage of those living without running water and living in inadequate housing, as well as the number of young children not attending school, has scarcely budged in the last 10 years.”

Chávez heavy handed tactics have led to Pdvsa hirings based on political affiliation, not merit. Investment in oil rigs, maintenance, and other operational necessities has diminished during the Chávez era and it is likely that long-run oil production will steadily decrease. Pdvsa not longer published clear, S.E.C.-style financial reports regarding where funds are spent. Also, other governmental policies have lead to high inflation rates, leading to decreased investment in Venezuela. The cult of personality surrounding Chávez is growing and even spawning Chávez-emulating governors in Carabobo (see “An Imitator of Chávez“).

How is health care in Venezuela? While the Cuban physician-staffed misiones are providing more primary care to poor citizens, disinvestment in other forms of medical care has meant that Venezuela’s hospitals are “falling apart.”

What is the solution? While not as politically attractive as nationalization and spouting slogans such as “El Petróleo Es Nuestro,” privatizing the oil sector and extracting heavy taxes or royalties seems to be a much better solution. The tax revenue can be used to pay for social programs and the long run viability of oil production will remain high. One complication with privatization is that firms may bribe politicians in order to pay low taxes or reduce payments for mining rights below their fair-market value. Nevertheless, privatization is better than Chávez’s corrupt cronyism.