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Example research essay topic: World Trade Organization Free Trade Area - 2,291 words

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Venezuela's Petroleum Policy Serious economic problems in recent years, including the major banking crisis in 1994, have resulted in a loss of momentum in Venezuela's trade and economic reforms. Venezuela's efforts to liberalize its economy were spurred by lower prices in the world oil market. The petroleum industry has a dominant position in Venezuela's economy and oil accounts for the lions share of the countrys exports. Venezuela has a long history of oil production, with the discovery of oil in 1917 in the Maracaibo Basin making the country one of oldest petroleum producing countries in the world. It has four major sedimentary basins: Maracaibo; Falcon; Apure; and Oriental.

The crude oil held in these fields makes Venezuela's conventional crude oil heavy by international standards. During the 2004 - 2009 the government plans to increase production at the country's existing oil wells, as well as to develop new non-conventional extra heavy crude oil and natural gas resources. The oil sector has been a mainstay of Venezuela's economy for nearly 90 years, and fossil fuel production in the country is set to continue well into the future. Science the late 1980 s Venezuela has entered into numerous bilateral and regional trading arrangements with its neighbors or with other countries in Central and South America. It is also involved in longer term, regional trade projects such as the free trade area for the Americas and the Latin America Integration Association. The 1989 reform program undertaken in responses to a deteriorating trade balance and major foreign exchange problems, entailed fiscal adjustments, tightening of monetary policy and a lifting of controls on prices and interest rates.

In 1991 the stringency of the fiscal measures contributed to a serious political crisis. The economy also suffered a series of setback, including a major banking crisis the decay of real GDP and inflation. Between 1990 and 1992, despite political difficulties that led to an unstable social climate and the global economic crisis that was mainly reflected in lower prices for Venezuela's major exports (petroleum, aluminum), the structural adjustment program and the economic reforms implemented since 1989 were intensified in order to move ahead with economic development. Fuels and other mining products made up 76 per cent of exports of goods and services in 1993, down from 94 per cents in 1980. The United States is Venezuela's most important trade partner; the European Union is the second largest partner. Venezuela's trade relations with North America have been important historically.

For many years, the United States has been the main market for Venezuela's exports and is potentially the major recipient of Venezuelan products. Since the Summit of the Americas held in Miami in December 1994, Venezuela has played an active role in the whole initial negotiating process with the aim of supporting action that it is hoped will lead to the establishment of the Free Trade Area for the Americas by the year 2005. The initiatives taken to establish a Free Trade Area of the Americas (FTAA) by the year 2005 are consistent with Venezuela's integration objectives. This relationship, together with Venezuela's approach and trade links with the Caribbean, Central America and Latin America, is an essential part of its foreign trade policy. Venezuela, however, has no basic trade law; trade measures are based mainly on a series of laws, implemented through decrees and regulations. New legislation is under preparation in areas such as customs valuation, export credit insurance, the free-zones regime and the protection of industrial property rights.

Petroleum is a cornerstone of the Venezuelan economy and the key to major economic developments in the last 20 years. Petroleum also supplies inexpensive energy to domestic industries and represents a large source of government revenues to support the extensive state involvement in the economy. Economic liberalization was accompanied by a significant opening of the trade regime. This process was complemented by the security of access and improved transparency resulting from Venezuela's accession to the GATT in 1990 and by its subsequent membership in the World Trade Organization. Venezuela nationalized its oil industry in 1975 - 1976, creating Pd VSA, the country's state-run oil and natural gas companies.

Along with being Venezuela's largest employer, Pd VSA accounts for about one-third of the countrys GDP, 50 % of the governments revenue and 80 % of Venezuela's exports earnings. After a period of modest economic growth in 2000 and 2001, the Venezuelan economy entered into recession in 2002. Political conflict, particularly a nationwide strike beginning early in December 2002, further compounded the deteriorating situation of the country's economy. On December 2, 2002, opponents of President Chavez organized a nationwide strike to call for an early referendum on the President's rule. Venezuela's state-owned oil company Petroleum de Venezuela S. A. (Pd VSA) also joined the strike, shutting down a large portion of the country's oil industry and drastically reducing the production of Venezuelan oil and its delivery to internal and external markets.

In 2003, the strike, along with the implementation of currency controls, severely impacted Venezuela's economy. In recent years, under the influence of President Chavez, Pdvsa's previous autonomy has been reduced and the rules regulating the countrys hydrocarbons sector amended. The privatization of Pd VSA is banned under Venezuela's 1999 constitution. After a strike current oil production levels in Venezuela are a bit uncertain.

Since then, there has been substantive progress in restoring production, refining operations and exports, although there remains disagreement regarding the degree to which this has occurred. Venezuela's trade policies changed direction in 1989, when an import-substitution policy began to be replaced by a more open regime, whose objective was to reduce anti-export bias and integrate the Venezuelan economy more closely into world markets. Mining and petroleum, which receive little import protection, are most likely negatively affected by the present regime. The current thrust of industrial policies is the promotion of selected industrial groups and domestic value added, mainly through tariff escalation. Some sub-sectors, such as petroleum refineries, iron and steel and aluminum, are major exporters. Low efficiency has been compensated in part by State subsidies through inexpensive inputs, especially under-priced fuels and other refined petroleum products.

Assistance has more recently been provided through government-supported debt rescheduling and recapitalization's. Venezuela is a country endowed with great natural wealth; its vast petroleum, mineral, hydroelectric and other resources have made it a power in the energy sector in the Americas. The present world economic situation, characterized by globalization and internationalization of economies, has obliged Venezuela to reorient production activity and redefine its trade policy. Since early 1989, it has been extremely active in the area of trade policy, including in particular full participation in the multilateral trading system through its accession to GATT in 1990 and subsequent membership of the World Trade Organization (WTO) in January 1995. During the next few years, Venezuela will pursue its policy of negotiation and opening up of trade so as to establish a broader economic area that will enhance the competitiveness of its economy internationally. One of the priorities of Venezuela's trade strategy is to foster awareness at all levels within the country both of the commitments undertaken by Venezuela in each of the agreements, so as to prevent any possible non-compliance, as well as of the rights under the agreements so as to benefit from them.

Venezuela's strategy will focus on adequate preparation for the program of future negotiations. The establishment of trade links and agreements with countries and groups of countries in Latin America is also a priority for Venezuela. It intends to intensify intra-regional cooperation not only in trade but also in other areas according to its geographical, economic and cultural affinities. It also supports the definition of geopolitical and geo-economic as based on common identity features. More critical to restoration of Venezuela's oil sector is the countrys ability to attract foreign investment. The investment decision should be placed in its complex context which takes into account the logistics of the oil industry, historical developments of the oil market and local political factor of the oil producing nations and how these interact with each other.

Ignoring the factual context can lead to seriously misleading policy decisions. Investment in oil production has long lead times and does not respond instantaneously to current market developments as the frictionless model would like them to do. Global market conditions combine with local factors to determine the length of the lead in each country. The new focus of economic policy was mainly on opening up the economy to the outside, promoting greater diversification of exports and private investment in order to stimulate increased production, and redefining the State's role.

The state is still a key player in mining, manufacturing and services. However, steps are being taken to allow the participation of private capital, for example, through join ventures and operational agreements in petroleum. The privatization policy is a key instrument of economic policy and focuses mainly on the promotion of investment so as to revitalize the production of goods and services in a number of State-owned companies. It is expected that gross domestic product will increase, mainly as a result of activity in the oil sector. Further liberalization, and a sustained attack on anti-export bias, would imply moving away from the current policy of promoting selected industrial groups and eliminating inter-sectoral distortions to a more neutral trade regime. Such an approach would also be assisted by eliminating distortions provided through inexpensive inputs, especially under-priced fuels and other refined petroleum products.

Greater reliance on market prices and reductions in the State's role in the economy, accompanied by changes to the investment regime, would go a long way to generating a more resilient economy and solid export base. Nowadays much should be done to implement principles of investigation, privatization and establishment of trade links to the policy. All the obstacles should be taken into consideration. Because of the uncertainties engulfing the oil market, the option to wait and not to invest has become very valuable. This implies that oil producing countries and international oil companies may decide to delay their investments.

If demand continues to grow as many observers nowadays predict, this will produce a worst possible scenario for both oil producers and consumers. The dominant underlying model for analyzing investment is a frictionless one where lags between planning, investment and production are assumed away. This underlying frictionless model forms the basis of many analysts calls to increase investment in oil production to relieve the current tightness of the market. Despite robust oil prices in the past few years, why have so many oil producing countries and international oil companies been hesitant to increase their investments in oil production? To understand how the structure and the logistics of the oil industry influence the investment decision regarding oil production, it is useful to highlight the following observations. First, the so called under-investment problem does not apply to crude oil production but is more general to include shortages of refining capacity, pipeline systems and storage facilities.

Second, the current bottlenecks and low spare capacity should not be viewed as the product of inefficiency and irrational decision by oil producing countries to under-invest in the oil sector. Third, it was widespread demand pessimism. This tends of oil demand pessimism continued until very recently. The 1998 and early 1999 price collapse threw the industry into a deep recession and reduced the incentive to invest and the attractiveness of existing investment plans. Fourth, in the last years or so, oil prices have been highly volatile and unpredictable. And the decision to wait and not to increase production is much more profitable then to invest and increase production in face of falling demand.

The problem of poor prediction is amplified by the fact that any investment should not only look at incremental demand and its sources, but also should look at maintaining existing capacity determined by the natural decline of oil fields. Finally, geopolitics can also prevent capacity expansion in many oil producing countries. For example, political strife in Venezuela may prevent this country from undertaking the necessary investment in its oil sectors restricting oil supplies. What is important to note is that the capital budget is usually not determined according to availability of investment opportunities in the oil sector, but is the subject to general government budgetary requirements. This implies that the capital budget for national companies is quite tight most of the times preventing them from undertaking all profitable investment projects.

The investment problem is compounded by the inefficient relationship between national oil companies and international oil companies. The relationship is also subject to serious tensions that may affect investment and it is timing. Even if a decision is made to allow international oil companies in upstream oil production, disagreement is likely to arise on the purpose and the form of foreign presence. While Venezuela's most pressing need is to overcome its macro-economic problems, it also needs to carry forward the reform of its trade and related polices. This is a condition for achieving greater adaptability in the domestic economy to respond to the challenges and opportunities presented by the implementation of the results of the Uruguay Round. Thus, there is a need to extend the process of liberalization initiated in 1989 and to ensure that the application of foreign exchange controls does not adversely affect the interests of Venezuela's trading partners.

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