Venezuela's Oil: Crucial in World War II

World War II was the bloodiest armed conflict in the history of mankind. More than 60 million people died. As the world commemorates the 70th anniversary of the defeat of Nazi Germany, it is worth recognizing the role Venezuela played in securing the oil needs of the Allied Nations.

Venezuela, a traditionally pacifist nation, played a crucial part in supplying the energy requirements of the Allies – a role that earned its recognition as a secure and reliable supplier of oil to world markets.

With an output of 563,000 barrels per day, Venezuela was the world's top oil exporter and third largest producer in 1939, after the United States and Soviet Union.

The notable role Venezuela played in the defeat of Nazism and fascism, however, was not limited to the increase of oil production during the war. Venezuela continued augmenting its crude output during the postwar period to support the Marshall Plan, thus helping Europe to recover from the devastation of war.

The Democratic Transition of Venezuela (1935-48)

Venezuela made its contribution to the Allied victory while carrying out a difficult process aimed at establishing a democratic system of government.

On Dec. 17, 1935, the 27-year-long dictatorship of Gen. Juan Vicente Gómez ended with his death. The world was suffering from the distressing effect of the Great Crash of 1929. Raw material prices collapsed. The gross domestic product of industrialized nations dropped 20 percent and unemployment rates exceeded 25 percent.

The Great Depression of the 1930s was the main underlying cause of the ascension of Nazism to power in Germany, largely because it raised doubts about the benefits of liberal democracy and free enterprise. The Marxist theory of social justice in a classless society and the egalitarian proposals of National Socialism attracted intellectual elites and masses of workers.

However, the strategic vision of U.S. President Franklin D. Roosevelt, through audacious social reforms, was key to the re-establishment of confidence in democratic values and in restoring economic prosperity.

Venezuela was tempted neither by real socialism nor by the German's concept of National Socialism. Rather, the country chose to follow a transition toward democracy within its own model of a mixed market economy.

Under the leadership of two democratically minded generals, Eleazar López Contreras (1935-41) and Isaías Medina Angarita (1941-45), a comprehensive set of substantive political, economic and social reforms was introduced. These reforms included the founding of the Central Bank of Venezuela (1939) and of the Supreme Electoral Council (1936) and the enactment of the first labor law (1936).

Venezuela advanced its individual and civil liberties under President Medina.

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World War II was the bloodiest armed conflict in the history of mankind. More than 60 million people died. As the world commemorates the 70th anniversary of the defeat of Nazi Germany, it is worth recognizing the role Venezuela played in securing the oil needs of the Allied Nations.

Venezuela, a traditionally pacifist nation, played a crucial part in supplying the energy requirements of the Allies – a role that earned its recognition as a secure and reliable supplier of oil to world markets.

With an output of 563,000 barrels per day, Venezuela was the world's top oil exporter and third largest producer in 1939, after the United States and Soviet Union.

The notable role Venezuela played in the defeat of Nazism and fascism, however, was not limited to the increase of oil production during the war. Venezuela continued augmenting its crude output during the postwar period to support the Marshall Plan, thus helping Europe to recover from the devastation of war.

The Democratic Transition of Venezuela (1935-48)

Venezuela made its contribution to the Allied victory while carrying out a difficult process aimed at establishing a democratic system of government.

On Dec. 17, 1935, the 27-year-long dictatorship of Gen. Juan Vicente Gómez ended with his death. The world was suffering from the distressing effect of the Great Crash of 1929. Raw material prices collapsed. The gross domestic product of industrialized nations dropped 20 percent and unemployment rates exceeded 25 percent.

The Great Depression of the 1930s was the main underlying cause of the ascension of Nazism to power in Germany, largely because it raised doubts about the benefits of liberal democracy and free enterprise. The Marxist theory of social justice in a classless society and the egalitarian proposals of National Socialism attracted intellectual elites and masses of workers.

However, the strategic vision of U.S. President Franklin D. Roosevelt, through audacious social reforms, was key to the re-establishment of confidence in democratic values and in restoring economic prosperity.

Venezuela was tempted neither by real socialism nor by the German's concept of National Socialism. Rather, the country chose to follow a transition toward democracy within its own model of a mixed market economy.

Under the leadership of two democratically minded generals, Eleazar López Contreras (1935-41) and Isaías Medina Angarita (1941-45), a comprehensive set of substantive political, economic and social reforms was introduced. These reforms included the founding of the Central Bank of Venezuela (1939) and of the Supreme Electoral Council (1936) and the enactment of the first labor law (1936).

Venezuela advanced its individual and civil liberties under President Medina.

The president and the members of Congress, however, were not elected through universal suffrage – a right that would be introduced during the presidency of Romulo Betancourt (1945-48), when a Constitutional Assembly (1947) instituted, for the first time, the popular and direct election of the head of state. Venezuelan novelist Romulo Gallegos was the first democratically elected president of Venezuela.

The Petroleum Reform

The reforms endeavored by presidents López and Medina encompassed the petroleum industry. The arduous struggle for democracy in 20th century Venezuela is closely linked to the emergence of petroleum as the cornerstone of the country's economy.

Since 1926, the hydrocarbons industry, operated by the international oil companies (IOCs) under the concessionary regime, had surpassed agriculture as the principal component of the GDP and of the fiscal and foreign exchange revenues.

Venezuela's support of the titanic effort of western democracies and the Soviet Union to defeat the Nazis can best be appreciated in the context of its democratic transition process. Venezuela needed to expand its oil output to help the cause of freedom; but, likewise, the country had to foster its nascent democracy and its economic development, while increasing its fiscal revenues (which accrued mainly to the IOCs).

In 1938, Mexican President Lázaro Cárdenas nationalized the oil industry; but Venezuela's President López, even though he suspended oil concessions, decided otherwise. Venezuela opted for a moderate model of "resource nationalism" through a progressive strategy of increasing state control over the administration of its non-renewable natural resource.

The nationalistic reforms undertaken by López comprised, among others, the founding of the National Confederation of Workers and the Labor Union of the Oil Workers of Cabimas, and the passage of the first labor law. The Hydrocarbons Law was amended, too, while the Institute of Geology was founded, which later became the geology department of the Universidad Central de Venezuela (UCV).

On Nov. 6, 1939, the United States and Venezuela signed the Treaty of Trade Reciprocity, two months after the beginning of WWII. The United States was Venezuela's first trading partner. The treaty mandated a 50 percent reduction in the levies charged by U.S. Customs to the imports of crude oil from Venezuela, while the United States eliminated quantitative restrictions to 90 percent of the country's exports.

When Medina took office on May 5, 1941, he announced what he described as "the Petroleum Reform."

The purpose of the reform was to increase fiscal income, promote the refining industry in Venezuela, expand employment, improve the value of hydrocarbons and unify the concessionary regime while respecting the lawful rights of the IOCs.

Medina sent the attorney general of Venezuela, Gustavo Manrique-Pacanins, to inform Roosevelt and his top aides about the scope of the petroleum reform.

In a letter to the American president, Medina pointed out:

"The Venezuelan nation … recognizing and respecting, at all times, the legal rights (of the IOCs), as established in our juridical system, endeavors to rectify illegitimate situations, illicit and unlawful, with the purpose of obtaining for Venezuela a fair return for the exploitation of its subsoil wealth."

Roosevelt fully understood Venezuela's position. He indicated that his country did not seek any special treatment for the American companies beyond those applied to all international oil companies under the law. He asked for the continuous support of Venezuela toward the efforts of the allied nations to defeat the Berlin-Rome-Tokyo axis by guaranteeing the supply of petroleum from Venezuela.

In January 1944, Medina made an official visit to the United States, held talks with Roosevelt and addressed a joint session of Congress.

In early 1943, Medina appointed a presidential commission empowered to draft a new piece of hydrocarbons legislation. The new hydrocarbons law, passed by Congress that year after a heated public debate, became one of the most stable legislative frameworks in the history of Venezuela. It encouraged a substantial surge in foreign direct investment by strengthening legal security and guaranteeing contractual stability to the concession holders.

The hydrocarbons law gained such credibility that the next president (and Medina´s fierce opponent), Romulo Betancourt, and his minister of development, Juan Pablo Pérez-Alfonzo (notwithstanding the fact that as a congressman he had abstained from voting in favor of the new law two years earlier), ratified it in 1945. The IOCs complied with the new legislation, new oil concessions were granted, and Venezuela received significant quantities of foreign investment, which allowed the country to substantially raise oil output during (and after) WWII.

Oil Defeats Nazism

Like most Latin American countries, Venezuela declared its neutrality through a decree signed by President López on Sept. 13, 1939, 13 days after the invasion of Poland. Remember, the United States did not enter the war until after the Japanese attack on Pearl Harbor on Dec. 7, 1941, and the Soviet Union did it only after Hitler's invasion of its territory on June 22, 1942. Nevertheless, Venezuela acted in solidarity with the Allied nations.

Venezuela had been increasing its oil output since the 1920s, reaching a level of 539,000 barrels per day in 1939. That year, the United States produced 3,650,000 barrels per day. The start of the military conflict affected Venezuela's production in 1940, when it dropped to 504,000 barrels per day.

On Dec. 9, 1941, two days after the attack on Pearl Harbor, Medina abandoned the country's neutrality and made public his solidarity with the United States and the Allies. On Dec. 12, Venezuela froze the assets of foreign nationals from Axis countries. He also wrote a letter to Roosevelt, repudiating Japan's aggression and expressing his solidarity with the United States. That year, Venezuela's output reached a new historic height of 622,000 barrels per day.

On Dec. 31, Venezuela broke diplomatic relations with Germany, Italy and Japan and installed armored defenses to its oil installations. Intelligence reports pointed to preparations by Nazi Germany to invade the American continent, starting with Venezuela, in order to take control of its strategic petroleum industry.

The hostilities expanded to the coasts of Venezuela.

On Feb. 14-16, 1942, German submarines torpedoed seven oil tankers that plied the shipping lanes between Lake Maracaibo and Aruba, as well as Lake Maracaibo and Curaçao. Two tankers were sunk (the Monagas and the Pedernales).

Medina reaffirmed his commitment to guarantee the supply of Venezuela´s oil for the war effort and strengthened cooperation with the Allied nations. The U.S. Army and the Navy were allowed temporarily to use Venezuelan military bases. Nevertheless, output fell in 1942 to 402,000 barrels per day.

In April 1942, high-range defense batteries were mounted in Puerto La Cruz, Carirubana and other oil locations. On June 15, Congress granted Medina special powers to protect the petroleum facilities, and a system of convoys began to escort Venezuela's oil tankers.

On July 17, 1942, the first income tax law was enacted and it was applied to the IOCs. Until then, concession holders only paid royalty and other minor levies. On Aug. 3, the Venezuelan head of state sent a new letter to Roosevelt, informing him of the scope of the new hydrocarbons legislation, underscoring that the aim of the new law was to increase the nation´s benefits from the hydrocarbons industry while guaranteeing the legitimate rights of the IOCs.

On March 13, 1943, Congress passed the new hydrocarbons law. It raised the royalty rate to 16.67 percent and stipulated that the IOCs should refine at least 10 percent of its crude output in the country. The country recovered its output level in 1943, to 490,000 barrels per day.

Oil production continued to climb, reaching 704,000 barrels per day in 1944 and 885,000 barrels per day in 1945, when the Allies acheived victory.

Between 1939 and 1945, Venezuela's oil production rose 64 percent (or 120 percent from the low point in 1942).

The Marshall Plan

Venezuela's oil output continued to rise during the postwar period, backing the energy requirements of the Marshall Plan.

Production broke a new record in 1946, reaching 1,063,000 barrels per day. Four years later, in 1950, output climbed to 1,496,000 barrels per day. In summary, between 1940 and 1950, Venezuela tripled its petroleum production.

Venezuela not only contributed considerably to the victory of the free and democratic nations over the totalitarian dictatorships led by Nazi Germany. The country also designed and executed its petroleum strategy with such ability and prudence that it was able to apply nationalistic public policies successfully, while at the same time stimulating investments from the IOCs, consolidating the juridical security of the nation and increasing both its output and its fiscal revenues for the benefit of its people.