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Our feature this week is a historical account of the development of the oil industry in Venezuela compiled from Peter Odell's recently published study, "Oil and World Power", as well as some other news sources. Most US attention has been focused on the Middle East as a source of petroleum. However, Venezuela has been and continues to be an important supplier of oil. In 1971, 566 million barrels were exported to the United States. 

Recently, such exports have been dropping, but energy shortages in this country may eventually bring about changes, such as increased exploration for oil in Venezuela and surrounding areas. If so, it should be interesting to observe how various South American governments respond to this. 

The history of Venezuela parallels that of the Middle East in that national governments have taken a more active role in recent years. This trend, of course, reached its climax in the Arab oil reductions during the recent war in the Middle East. The question of sovereignty over natural resources will probably become more and more important, since minerals crucial to industrial growth are finite and seem to be concentrated in underdeveloped countries. 

This is one reason why it is interesting to review the evolution of relationships between the Venezuelan government, the oil companies, and the US government. 

Venezuela was the first nation to undergo a meteoric rise to significance as a major producer and exporter of oil. After 20 years of halfhearted exploration there, the big oil companies were finally galvanized into an urgent flurry of activity by their expropriation and expulsion from Mexico, where the oil industry was brought under national ownership in 1938. 

For 28 years, a succession of governments in Mexico had always seen such action as the ultimate outcome of the conflict between the state and companies, but since it had been avoided for so long, the companies had come to believe it would never happen. 

The promising prospects for oil exploitation in the Maracaibo Basin and in other parts of Venezuela now benefited from the company's need to find or quickly to replace the 15 million tons or so per year they had been lifting from their Mexican fields, mainly for sale overseas. This important stimulus to Venezuelan oil development was soon supplemented by a second, even more important one, the petroleum needs of a rapidly expanding wartime US economy. 

These wartime demands proved too great a strain on the US domestic oil industry and gave companies still greater incentives to seek new resources in Venezuela. 

As a result, oil production there rose rapidly from only 20 million tons in 1937 to some 30 million tons in 1941 and to over 90 million tons by 1946, by which time the country was the world's most important petroleum-producing nation outside the United States. Since almost all the oil was exported in contrast with the mainly domestic use of American oil, Venezuela became the world's most important oil exporter, a position which it has just held on to in 1970, but which it lost to Iran and Saudi Arabia in 1971. 

In the post-war world, which had an energy shortage as a result of dislocations in many of the most important coal-producing areas, the demand for energy from other sources grew rapidly. The political economic environment was also highly favorable to foreign investment in Venezuelan oil because the dictatorial regime there welcomed such investment as a means of amassing private fortunes for those individuals close to the regime. 

These two factors ensured the continuation of the growth of Venezuelan oil production throughout the rest of the 1940s and up to 1957. 

This 20-year period of growth was marked by only one short interlude of restraint. The few months in 1948 when a government came to power under the leadership of a political party, Acción Democrática, whose electoral manifesto called for the nationalization of the country's oil resources and whose leaders in exile had lived mainly in Mexico, where oil was already nationalized. The reaction of the oil companies to this new government was immediate and very blatant. 

Investment virtually ceased, development came to a halt and production was stabilized, while the managers of the companies concerned attempted to decide how far they would be able to work within the framework of the policies likely to be adopted by the new regime. As it turned out, their fears were short-lived. For after a short period of democratic rule, the country reverted to a military dictatorship, a reversion which was almost certainly only made possible with the active help of at least some of the oil companies concerned. 

In 1958, the conflict between the government and the oil companies seemed inevitable, as Acción Democrática still had proposals for the nationalization of the industry in its manifesto and took early action increasing taxes on the industry and giving its support to the oil unions pressure for greatly increased wages and fringe benefits, which seemed to indicate that a head-on clash was but a matter of time, but after 1958, Acción Democrática did not treat its nationalization commitments seriously, and certainly made no move in this direction. 

In fact, by this later date, Venezuela was so completely dependent economically on the oil industry that no government, and certainly not one as anxious as Acción Democrática to achieve its country's economic progress, could afford to think of action which would essentially close down the oil sector of the economy. 

No other sector could avoid repercussions from such action, and the consequent unemployment and distress would certainly undermine the government's political strength. The government's freedom of action in economic terms was thus heavily constrained, and even in political terms, there was little to be said for action which, no matter how immediately popular, seemed likely to create such stresses and strains in the system that the instigators of it were unlikely to survive. 

But if by 1958, the government's ability to act out its basic philosophical beliefs was constrained, then so was that of the oil companies. By now, they were under pressure from the US State Department to achieve an agreement with the Venezuelan government, which was believed by the United States to be the government which provided the key to the stability of the whole Caribbean area, but stability in Venezuela, particularly in the period following Fidel Castro's success in Cuba, demanded an expanding economy. 

This in turn depended upon the continuing development of the country's oil industry, which accounted for something like 25% of the country's gross national product, provided the government will over 60% of all its revenues and accounted for over 90% of the nation's total exports. 

The companies, therefore, though powerful in the Venezuelan context, had to reorientate their attitudes and policies to the even more powerful force of the foreign policy of the United States, which required that the oil industry make it possible for Venezuela to achieve its objectives of continued economic advance. 

This demanded their willing cooperation with a government which they certainly disliked and probably distrusted, but for which there was no acceptable alternative and which, therefore, they could certainly not think of overthrowing, as they had in 1948. 

Economic and political necessity, therefore, as interpreted by the United States, produced a situation in which the international oil companies, dedicated to the idea of as little government intervention in industry as possible and a government devoted in theory at least to socialist planning, had to work together. 

This development, concludes, Odell, unusual, for its time has since been paralleled in both oil-producing and oil consuming nations, as the companies have been obliged to recognize the validity and permanence of governmental concern over oil and oil policies. 

The expansion in Venezuelan oil production since 1958, states Odell, has by no means been as rapid as in the earlier post-war period, but advances have taken place and some investment has continued. Government revenues from oil have been increased, all in spite of the fact that over the period since 1958, Venezuelan oil has become increasingly uncompetitive in many markets of the world as a result of rapidly expanding lower-cost oil output from countries in the Middle East and, more recently, in North and West Africa. 

Moreover, falling costs of transporting oil across the oceans, as larger and larger tankers were brought into use, helped to eliminate 10 as well as competitive edge in markets in close geographical proximity to it than to other main producing areas. This was particularly important with respect to the US market, which had hitherto been considered the particular preserve of Venezuelan oil, but to which Middle Eastern and other oil was now attracted. 

From the interplay of all these economic and political forces, says Odell, Venezuela has since 1958 achieved an average annual growth rate in oil production of less than 3%, compared with 10% per year achieved over the previous 15 years, in spite of the fact that the closure of the Suez Canal since mid-1967 has given Venezuela oil a temporary boost in markets west of Suez, particularly in the United States. 

Though the Cuban crisis and resultant pressures by the United States Department can be seen as the main factors which have saved the Venezuelan oil industry from a serious decline in the last 10 years or so, one must also note the impact of the growing professionalism of the Venezuelan government in dealing with the companies. In earlier days, the expertise was all on the side of the oil companies, which had to respond only to the political pressure of the government. 

Since 1958, the Ministry of Mines and Hydrocarbons in Venezuela has built up a team able to urge, in technical and economic terms, with advice as to exactly how much pressure should be put on the companies to make concessions, particularly as regards taxation arrangements. 

Thus, the government has been able to increase its share of total profits on several occasions and to collect taxes in arrears the liability for which the company's challenged. This has had the effect of increasing the revenues which the country collects on every barrel of oil that is exported. This is now more than $7 per barrel, compared with less than one-tenth this amount when Acción Democrática came to power. 

By virtue of these actions, government revenues from oil have continued to grow at a rate high enough to finance requirements of the economic and social development program, the main short-term aim of the government in its oil policy. 

The government does not accept the idea of the concession system as a means of producing the nation's natural resources, except as a short-term expedient for ensuring the continued flow of oil, and in the light of external pressures, to allow the existing concessions to work their agreed areas. Since 1958, therefore, there have been no new concessions and, as a result, Venezuela's proved oil reserves will be used up in about 13 years at the current rate of production. 

If this situation continues, Venezuelan oil output must soon start to decline, and by the time the concessions are legally relinquished in 1983, it seems likely that Venezuela would be little more than a minor producer. 

In line with its philosophy, Acción Democrática has sought to resolve this issue through the establishment of a state oil company which has been given responsibilities for working any concession areas which might be relinquished by private companies and for negotiating joint arrangements to work as yet unexplored areas of Venezuela with oil potential. 

It now has producing capacity amounting to about 9 million tons per year, and in 1969 accepted offers from a dozen or so petroleum companies for joint operations in the southern part of Lake Maracaibo. 

Whether it will enable Venezuela to exercise more influence in the development of the world oil market is doubtful unless consuming countries also decide to put the oil industry under national control and then conduct their negotiations for supplies directly with other state entities in producing countries. This account of the development of the oil industry in Venezuela was compiled from Peter Odell's recently published study, "Oil and World Power", as well as some new sources.