Overview: Petroleum has been the mainstay of the Venezuelan economy since the 1920s and accounts for between one-quarter and one-third of gross domestic product (GDP), about 80 percent of export earnings, and as much as one-half of the central government’s operating revenue. Venezuelan Petroleum is one of the world’s largest oil companies and Venezuela’s leading employer, although it fired 18,000 of its 48,000 employees after the strike of 2002–3. The company’s revenues in 2004 were an estimated US$32 billion. Venezuela was the world’s fifth largest oil producer until the end of the 1990s, when it was overtaken by Mexico. Since the government reopened the oil sector to private capital in the 1990s and modified oil taxation, the government’s share of oil revenue from Venezuelan Petroleum has been falling and amounted to only US$0.39 per US$1 by 2000, as compared with US$0.71 per US$1 in 1981. Dependence on oil-export revenue makes Venezuela particularly vulnerable to fluctuations in the global economy. Although Venezuela benefited from the increase in petroleum prices beginning in the early 1970s, it suffered from oil price declines in 1986, 1998, and 2001. Oil prices started to recover again in March 2002. Despite a massive windfall in oil revenue resulting from rising world prices since late 2002, Venezuela has been running a sizable central government deficit, largely as a result of fiscal profligacy.
After Hugo Chávez was reelected president in July 2000, capital flight escalated and has intensified since then as political tensions have increased. Domestic political instability culminated in a disastrous two-month national oil strike from December 2002 to February 2003, temporarily halting economic activity and leading to an unprecedented collapse of GDP in 2002–3. However, the economy, aided by high oil prices, recovered in 2004.
Gross Domestic Product (GDP): Average real incomes fell sharply as a result of GDP growth averaging only 1 percent per year during the 1985–2003 period. The two-month general strike that began in December 2002 was a key factor in the collapse of real GDP in 2002 (–8.9 percent) and 2003 (–9.2 percent). Total GDP in 2002 was only US$95.4 billion, as compared with US$126.2 billion in 2001. In 2004, with the surge in oil prices, the economy rebounded from the crisis of 2002–3. Venezuela's GDP grew by 17.3 percent in 2004 to US$109 billion, with the oil sector growing by 8.7 percent and non-oil activities up 17.8 percent. According to the Central Bank, the recovery in the GDP in 2004 also resulted from an increase in the demand for consumer goods and an increase in investment, along with declining inflation, unemployment, and interest rates. Real GDP growth is expected to reach 5 percent in 2005 but slow to 3.5 percent in 2006. GDP composition by sector in 2004 was estimated as follows: agriculture, 5 percent; industry, 50 percent; and services, 45 percent. The informal sector has grown rapidly since 1989.
GOVERNMENT Budget: Since 1999 the Chávez government’s public financing has been aided by increases in the price of petroleum. Nevertheless, greatly increased oil revenues have been offset by sizable increases in public spending. Budget revenues in 2004 totaled an estimated US$19.3 billion, and expenditures an estimated US$24.3 billion, including capital expenditures of US$2.6 billion. With increased oil and non-oil revenue, the government intends to reduce its deficit from an estimated 4.3 percent of gross domestic product (GDP) in 2003 and 3.3 percent of GDP in 2004 to 2.8 percent of GDP in 2005 and 0.6 percent of GDP in 2007. The total public debt constituted an estimated 38.8 percent of GDP in 2004, as compared with 27.8 percent of GDP in 1999. In March 2003, the Venezuelan Workers Confederation, which is the main trade union entity, estimated the public-sector labor debts (unpaid government liabilities owed to active and retired public-sector workers) at US$11 billion.
Inflation: Historically, inflation in Venezuela was low, averaging below 3 percent during 1958–73. However, since the bolívar was floated in February 2002, persistently high rates of inflation have been a problem. The inflation rate (consumer prices) in 2004 was 21.7 percent, down from 27.1 percent in 2003; it is projected to be 19.4 percent in 2005 and 18.7 percent in 2006.
Agriculture: Prior to the 1950s and the initiation of large-scale oil exports, agriculture, fishing, and forestry were central to the Venezuelan economy, producing more than half the gross domestic product (GDP). As the petrochemical industry expanded rapidly in the 1970s and 1980s, however, the proportion of the labor force in agriculture dropped from one-fifth to about one-tenth. Agriculture has continued to decline, accounting for about 5 percent of GDP and 10 percent of employment in 2004. Gross agricultural production growth declined 0.3 percent in 2003 but is estimated to grow by 3 percent in 2004 and 0.5 percent in 2005. The country imports most of its food, mainly from Colombia and the United States. Agricultural products include bananas, beef, coffee, corn, eggs, fish, milk, pork, rice, sorghum, sugarcane, and vegetables.
Venezuela’s present-day agriculture is characterized by inefficiency and low investment, with 70 percent of agricultural land owned by 3 percent of agricultural proprietors (one of the highest levels of land concentration in Latin America). According to the Land and Agricultural Reform Law of 2001, public and private land deemed to be illegally held or unproductive is to be redistributed. In December 2004, the government announced plans to accelerate the law’s application.
Forestry: Timber from natural forests makes the greatest economic contribution to forest production, constituting more than 90 percent since 1993. The country’s area of natural forests is shrinking at an average annual rate of 218,000 hectares, largely as a result of cutting to provide pasturage for cattle. Approximately 10 million hectares of forest have been allocated for timber production. Timber extraction in Venezuela is under government control. In 2001, 14 concession-holding companies were active, carrying out forest-management plans on 1,206,000 hectares. Firewood, mainly for household use and to a lesser extent for cottage industries, represents 50 percent of total wood consumption in Venezuela. Little information is available on the production and use of other forest products. Venezuela’s total annual timber consumption is approximately 525,000 cubic meters, 90 percent of it from domestic sources. The sawmill industry included 300 mills in 2001, mostly small and medium-sized.
Fishing: The fishing industry has expanded rapidly since the 1990s. In 2000 the fishing fleet consisted of approximately 15,000 vessels, 94 percent of which were directed to the small-scale artisanal fisheries, 2 percent to mid-water fisheries, and 4 percent to the deep-sea industrial fisheries. The tuna fleet consisted of 31 purse seiners with a transport capacity of greater than 900 tons; 25 operated in the East Pacific ocean. The small-scale fishing fleet consisted of about 16,300 vessels, of which 64 percent operated in the coastal zone and 36 percent in river bays. The mid-water fleet consisted of about 400 shrimp trawlers and 260 vessels for capturing snappers and dusky groupers. The deep-sea fleet had 230 vessels. In 1998 the by-catches production totaled 515,917 tons, of which 89 percent were marine species and 9 percent, river species; exports totaled approximately 120,189 tons.
Mining and Minerals: Venezuela is a major producer and exporter of minerals, notably bauxite, coal, gold, iron ore, and oil, and the state controls most of the country’s vast mineral reserves. In 2003 estimated reserves of bauxite totaled 5.2 million tons. The third largest producer of coal in Latin America, after Colombia and Brazil, Venezuela produced 5.8 million short tons (1 short ton=2,000 pounds) in 2002, as compared with 9.3 million short tons in 2000, and exported most of it to other countries in the region, the eastern United States, and Europe. Known reserves for coal total 10.2 billion tons, of which approximately 528 million short tons are recoverable bituminous coal. The main coalfields are located in the western state of Zulia, on the border with Colombia. Other known reserves include natural bitumen (42 billion tons). Exploitable gold reserves, located mostly in the southeast, total an estimated 10,000 tons. In 2003 production totaled 20 million grams (or 20 tons), including 6 million grams attributed to unofficial mining activities, marking a sharp increase from 1999, when only 5.9 million grams were produced. In 2003 Venezuela’s estimated reserves of iron ore totaled 14.6 million tons. Proven reserves total 4.1 billion tons, of which 1.7 billion tons are high-grade. Production has been increasing and totaled a record 19.2 million tons in 2003, two-thirds of which were exported. Iron-ore reserves are concentrated in the southeast.
With 77.8 billion barrels of proven oil reserves in 2004, Venezuela has the largest proven oil reserves in South America and the sixth largest in the world—more than Canada, Mexico, and the United States combined. Venezuela’s 2002 production of 2.8 million barrels per day (bbl/d) of crude was a drop of 8.3 percent over 2001 and the country’s lowest production figure since 1994. In 2003, a year in which production was halted for a couple of months by a general strike and further disrupted by the firing of nearly half of the state oil company’s work force, Venezuela's total oil production was an estimated 2.6 million bbl/d. In 2004 oil production totaled about 3 million bbl/d, according to the government’s estimate. Prior to President Chávez's December 1998 election, Venezuela regularly exceeded its Organization of the Petroleum Exporting Countries (OPEC)-agreed oil production targets. Chávez has maintained a policy of strict adherence to OPEC quotas and has played a leading role in shifting OPEC from a volume-oriented strategy to one of controlling prices. With planned investments of US$26 billion in oil and natural gas exploration and production between 2004 and 2009, Venezuelan Petroleum expects oil production to reach 5 million bbl/d by 2009.
Industry and Manufacturing: The manufacturing sector is dominated by small- and medium-sized industries oriented toward consumer goods and the domestic market. Industries include petroleum, iron ore mining, construction materials, food processing, textiles, steel, aluminum, and motor vehicle assembly. Manufacturing gross domestic product (GDP) increased by 2.1 percent in 2000, but declined by 8 percent in 2001. Since the late 1990s, the construction industry has been depressed, and its output at the end of 2003 was less than half its level of 1993. The industrial production growth rate in 2004 was an estimated –15.4 percent.
Energy: According to official Venezuelan estimates, oil production in 2004 totaled 3.2 million barrels per day (bbl/d), as compared with 2.6 million bbl/d in 2003. However, independent estimates put the 2004 figure at around 2.6 million bbl/d. According to the Organization of the Petroleum Exporting Countries (OPEC), Venezuelan production, including conventional crude and the upgraded, extra-heavy oil called Syncrude (for synthetic crude), totaled 2.7 million bbl/d as of December 2004. Four joint-venture projects at the José refinery complex on Venezuela’s northern coast are converting the extra-heavy crude from approximately 9° API (American Petroleum Institute) crude to lighter Syncrude. Oil consumption in 2003 was between 350,000 and 400,000 bbl/d. Proven oil reserves totaled 77.8 billion barrels in 2004. Untapped natural gas reserves total 148 trillion cubic feet, according to one estimate, or 4.202 trillion cubic meters, according to another. The country’s estimated 31.7 billion cubic meters of natural gas production in 2001 was all consumed domestically (60 percent by the oil industry, 11 percent for power generation, 6 percent in petrochemical production, and the remainder by industrial or commercial customers in large cities). However, legislation passed in 1999 opened the natural gas sector to foreign participants, and Venezuela plans to begin exporting liquefied natural gas by 2008.
With 90.3 percent of its population on the national grid, Venezuela has the highest level of electricity provision in Latin America. Venezuelans also consume the most electricity per head in South America, with the help of state subsidies that keep prices low. Electricity consumption in 2001 totaled 81.47 billion kWh. Electricity production in 2001 totaled 87.6 billion kWh. The Raúl Leoni Dam, which is part of the Guri hydroelectric complex, the second or third largest hydroelectric plant in the world, provides about 68 percent of Venezuela’s electric power. Smaller plants on the Caroní provide most of the remainder. Despite Venezuela’s highly developed hydropower resources, electric-power facilities have strained in recent years to keep up with burgeoning demand for electricity. Aggravating this problem is an estimated 26 percent of electricity consumption that is lost through theft, especially from state-owned generators operating in rural and semi-rural areas.
Services: The services sector accounted for 45 percent of gross domestic product (GDP) and 64 percent of labor in 2004. Financial services contributed 26 percent of GDP in 2003, with eight banks accounting for 73 percent of total assets. The country’s 52 banks serve primarily the domestic market.
Despite the country’s abundant natural attractions, including the world’s highest waterfall, South America’s largest lake, and many national parks, the tourism industry remains undeveloped, with the exception of Margarita Island, which is visited by 90 percent of tourists to Venezuela. Poor-quality services and political instability in the country have been disincentives for tourists. The hotel industry suffered a sharp drop in occupancy rates in 2002–3. Nevertheless, with its tropical climate and diverse landscape Venezuela has become a popular destination for visitors from Belgium, Britain, Canada, Germany, and Holland. As a result, the numbers of tour operators and travel agents within the country are increasing rapidly. An estimated 12,000 U.S. tourists visit Venezuela annually.
Labor: The labor force totaled an estimated 11.4 million workers in 2004. The labor force by occupation in 1997 was estimated as follows: agriculture, 13 percent; industry, 23 percent; and services, 64 percent. Updated figures were unavailable in early 2005, with the exception of agriculture, which declined to 10 percent in 2003. The unemployment rate in 2004 fell to 10.9 percent, as compared with 14.9 percent in 1999. Employment in the informal sector has grown rapidly during the Chávez years, but may be slowing down. The informal economy employed 51.2 percent of the labor force in 2002, 52.4 percent in 2003, and only 48.7 percent in 2004.
Foreign Economic Relations: The United States traditionally has been Venezuela’s principal market for oil exports and the main supplier of imports. In 2002 the United States absorbed 59 percent of Venezuela’s exports and supplied 41 percent of its imports. In 2003 the United States supplied only about one-third of Venezuela’s imports. Nevertheless, Venezuela remains the United States’ third-largest export market in Latin America, purchasing U.S. machinery, transportation equipment, agricultural commodities, and auto parts. In 2003 up to two-thirds of Venezuelan exports went to the United States. As much as 60 percent of Venezuela’s crude oil exports go to the United States, not including other petroleum refined in the Caribbean before being shipped to the United States. Venezuela’s share of U.S. imports of petroleum has been decreasing since 1997; actual imports from Venezuela have declined from 1.8 million bbl/d to about 1.5 million bbl/d. In 2004 Venezuela was the fourth largest supplier of crude oil to the United States. Nevertheless, Venezuela’s importance to the U.S. oil supply and Venezuela’s oil export revenues are likely to remain of paramount importance to both countries.
Other export partners in 2003 included the Netherlands Antilles, the European Union (EU), Brazil, the Dominican Republic, Colombia, Canada, and Cuba. Other import sources in 2003 included the EU, Colombia, Brazil, and Mexico. Trade between Brazil and Venezuela doubled to US$1.6 billion in 2004 from 2003 and was expected to reach US$3 billion in 2005. President Chávez’s protectionist policies and foreign-exchange controls reduced bilateral commerce with Colombia by nearly 50 percent in 2002–3. After Venezuela relaxed its trade restrictions in the second half of 2004, Colombian exports to Venezuela jumped, and bilateral trade between the two neighbors exceeded US$2 billion in 2004. However, in response to the capture in Caracas of a Colombian guerrilla leader by agents of Colombia's government in December 2004, Venezuela suspended commercial links with Colombia on January 15, 2005.
The Chávez government’s trade policy is to reduce Venezuela’s commercial dependence on the United States by expanding its trade relations with China and Russia and diversifying the country’s trading partners. It also has signed bilateral accords with Iran and Cuba. As a result of an oil-supply agreement, Venezuela became Cuba’s main trading partner in 2000. Since October 2000, Cuba has received 53,000 barrels per day of oil and derivatives from Venezuela on easy, long-term credit terms, with the exception of a five-month period following the April 2002 coup attempt, when this arrangement was suspended. In December 2004, President Chávez visited Cuba and signed a series of agreements covering trade and Venezuelan investment rights in Cuba, energy, education, and medical cooperation.
The Chávez government also has maintained a critical stance toward the proposed Free Trade Area of the Americas and has promoted instead a “Bolivarian” alternative model of integration that excludes the United States. Venezuela has partial free-trade agreements with Chile, countries of Central America, and the Caribbean Economic Community (Caricom). Despite President Chávez’s anti-U.S. government rhetoric and his efforts to reduce his country’s trade dependence on the United States, U.S.-Venezuelan commercial ties remain close, and the United States is expected to remain Venezuela’s dominant trading partner for the foreseeable future.
Imports: Imports of goods free on board (f.o.b.) totaled US$10.3 billion in 2003, US$17.3 billion in 2004, and a projected US$19.7 billion in 2005. In 2003 the United States accounted for 33.7 percent of Venezuela’s imports; the European Community, 21.6 percent (including Italy, 10 percent; and Germany, 7 percent); Japan, 12.8 percent; Colombia, 8.5 percent; Brazil, 6.6 percent; and Mexico, 5.0 percent. Venezuela’s total imports by main commodity group in 2003 were agricultural products, 19.3 percent; mining products, 3.6 percent; and manufactures, including machinery, transportation equipment, and semi-manufactured goods, 76.9 percent.
Exports: Exports of goods free on board (f.o.b.) totaled US$26.9 billion in 2003, US$39.4 billion in 2004, and a projected US$41.5 billion in 2005. About 80 percent of the country’s export revenue is derived from oil earnings (US$20.8 billion in 2003). Export destinations in 2003 included the United States, 44.3 percent to 67 percent, depending on the source; the Netherlands Antilles, 16.6 percent; the European Union (EU), 12.6 percent; Brazil, 3.7 percent; the Dominican Republic, 3.0 percent; Colombia, 2.6 percent; and Cuba, 2.6 percent. Other than petroleum, the most important exports include agricultural products, aluminum, basic manufactures, bauxite, cement, chemicals, fruit, iron ore, paper products, petrochemicals, plastics, seafood, steel, and tobacco. Of these products, aluminum and steel are particularly important. In 2003 Venezuela’s total exports by main commodity group were mining products, 77.0 percent; manufactures, 12.3 percent; and agricultural products, 1.2 percent.
Trade Balance: Venezuela improved its trade balance in 2004 to about US$22 billion, with exports totaling US$39.4 billion and imports, US$17.3 billion.
Balance of Payments: Venezuela’s oil revenue often allows the country to run a large surplus on its current-account balance. The current account surplus expanded from US$11.5 billion in 2003 to a record US$14.6 billion in 2004, mainly as a result of high oil prices. As a percentage of gross domestic product (GDP), the current-account balance was 13.5 in 2003, 13.9 in 2004, and an estimated 3.5 in 2005 and 2.5 in 2006. Deficits on the capital and financing account rose sharply in 1999–2004 and totaled US$3.2 billion in 2003 and US$12.7 billion in 2004.
External Debt: The foreign debt totaled an estimated US$32.5 billion in 2004, a figure that generally has been stable in recent years. Reserves of foreign exchange and gold totaled an estimated US$20.7 billion 2004.
Foreign Investment: Foreign direct investment (FDI) has averaged about US$450 million a year since 1992, when it was only US$150 million. In 2000 FDI reached US$4.7 billion but declined to US$3.7 billion in 2001 and US$0.8 billion in 2002, rising to US$1.3 billion in 2003 and 2004. The downturn in Venezuela’s FDI in 2002–3 has been attributed to political and financial instability. Venezuela’s FDI has been declining in most non-oil sectors since 1998, with the main exception of telecommunications. FDI as a percentage of the gross domestic product (GDP) in 2001 amounted to 2.8 percent. Gross fixed investment in 2004 was an estimated 3.7 percent of GDP. In order to maintain oil revenue, the Chávez government has been focusing its FDI efforts on the country’s abundant energy reserves. However, Venezuela’s 2001 Hydrocarbons Law, which became effective in January 2002, is expected to discourage foreign investment in the Venezuelan oil industry by raising royalties paid by private companies to between 20 percent and 30 percent, as compared with the previous 1 percent to 16.7 percent. At the same time, the law guarantees the state oil company at least a 51-percent stake in any project regarding exploration, production, transportation, and initial storage of oil. The government’s investment laws and regulations also have discouraged most FDI in the non-oil sectors. Moreover, the government intends to review current mining investments in order to strengthen investment commitments and improve the terms of current agreements.
Foreign Aid: Because of its abundant natural resources, Venezuela did not need to turn to foreign aid until it was hit by an economic crisis in 1989. From 1994 to 2002, the European Union (EU) committed €130 million. European aid is focusing on technical and financial co-operation projects in the areas of education, health, prison conditions, regional development, environment, and the fight against drugs. A total of €63.8 million has been earmarked for Venezuela for the period 2000–2006 for technical and financial co-operation and rehabilitation and reconstruction.
Venezuela currently is not receiving any major foreign aid from the United States. In response to heavy rains, landslides and persistent flooding in the north-central region of Venezuela that began on February 7, 2005, the U.S. Agency for International Development’s Office of Foreign Disaster Assistance provided US$50,000 through the U.S. Embassy in Caracas to the Venezuelan Red Cross for the purchase and distribution of emergency relief items.
Currency and Exchange Rate: Venezuela’s currency is the bolívar (Bs1=100 céntimos). During the July 1996 to January 2002 period, the bolívar moved in a sliding band, and as a result it became increasingly overvalued in real terms. In February 2002, prompted by spiraling capital flight, falling reserves (under US$10 billion), and a deepening fiscal crisis, the government floated the bolívar. In response to continuing rampant capital flight and dwindling international reserves, the government and the Central Bank imposed draconian foreign-exchange controls on January 23, 2003, and created, on February 5, the Currency Administration Commission to administer and implement foreign-exchange controls. The average exchange rate in 2004 was Bs1,891.3=US$1. The official exchange rate was devalued by 10.8 percent in March 2005 to US$1=Bs2,150.0.