An Exploding Refinery and Imploding Economy in Venezuela

Agenda-Setting Financial Insight.
Aug. 27 2012 6:27 PM

An Exploding Refinery and Imploding Economy in Venezuela

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Venezuela’s Amuay refinery explosion is emblematic of the Hugo Chavez curse.

Photo by JUAN BARRETO/AFP/GettyImages

Venezuela’s Amuay refinery explosion is emblematic of the Hugo Chavez curse. The blast hobbled PDVSA’s largest oil processor - as well as killing 39 people. The Venezuelan leader’s policy of placing loyalty before commercial prowess may not have caused the accident. But it has warped the nation’s business ethos. The way he has meddled in the state-owned oil company offers an apt example.

A decade ago Chavez purged PDVSA of 19,000 employees he considered enemies and now rewards political allegiance over anything else. Employees must now devote as much time to political proselytizing as they do to pumping and refining oil. Top jobs typically go to true-blue Chavistas.

As a result, PDVSA is no stranger to maintenance issues from wellhead blowups to oil spills and unplanned shutdowns. And now, at some 2.7 million barrels a day, oil output is almost a fifth below the level when he took office in 1999.

Recent moves make matters worse. Last week Chavez vowed to strip PDVSA of a seventh of its 70 percent stake in a key oil venture to hand it to another government-controlled enterprise -mining operation CVG. It’s a great deal for the latter. CVG companies consistently lose money, so getting a 10 percent share in 150,000-barrel-a-day Petropiar oil venture will bolster its finances. And it may also help win over CVG’s 9,940 steel workers ahead of the presidential election in October.

But it does nothing for PDVSA aside from saddle it with a weak partner. Perhaps Chavez hopes the deal might prompt the oil company to use CVG to supply it with the steel pipes it needs. But CVG lacks the operational capacity to do so.

It’s not the only recent example of mind-bending politicking, either. On August 22 Chavez approved a plan to finance unpaid benefits for government workers with petroleum-backed bonds. Workers cannot cash them in for a year, however, and the 18 percent coupon they pay is less than the 19.4 percent inflation rate. But after years of waiting, this transparent play for votes must seem better than nothing to thousands of active and retired public servants.

It’s all more evidence of the dangers of the president’s easy-money mentality. It might only take days to get Amuay running again. But fixing the nation’s economy will take far longer.

Raul Gallegos is the Latin America financial columnist for Reuters Breakingviews. Raul has more than a decade of experience covering the region’s business, finance and economics.

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