Bolívar Distorted: The Effects of Exchange Controls on the ...

other goods. A more effective manner <strong>of</strong> repatriating oil wealth would be to sell oil on the
domestic market at the world price and distribute pr<strong>of</strong>its among the citizens. This would
eliminate substitution distortions and allow consumers to maximize their individual utilities (and
would probably reduce traffic in Caracas).
Additionally, oil is a very investment-intensive industry. Unlike textiles, where a factory
can be set up and run for a number <strong>of</strong> years with moderate upkeep and repairs, oil machinery
requires almost continual replacement. Production capacity in oil wells and refineries naturally
drops 20 to 25% per year, more in older wells. As the resource itself is depleted, declining
pressure in older wells causes an additional decrease in production. Venezuela also suffers from
the curse <strong>of</strong> a very heavy crude oil, meaning that any lapse in production, from malfunction to
strike, lets the crude harden in the wells, rendering them ineffective. As a result, new investment
is continually needed to maintain production, much more to expand it. <strong>The</strong> crude also requires
specific refinery equipment which is expensive to buy and maintain. 35
Venezuela’s dependency on oil for government revenue also created a political problem
in December <strong>of</strong> 2002. Following the failed coup attempt in April, the opposition decided to call
for a general strike or a paro led by oil workers. Chaos ensued as the strike dragged on for
almost two months and Chávez refused to step down. Without oil revenues bringing in foreign
exchange and investors becoming more and more nervous about the political situation,
international reserves dropped dramatically as individuals and companies pulled more and more
money <strong>of</strong> out the country, prompting Chávez to enact exchange controls and fire 18,000 PDVSA
employees, another political disaster.
International Reserves and the FIEM
35 Erin Fletcher. “Cleaning up the Act.” 2003.
16