From Oil to Exodus: How Venezuela Squandered its Oil Wealth
Awash in Oil Reserves
The South American country of Venezuela holds more oil reserves beneath its soil than any other nation on the planet. However, after years of mismanagement and corruption by the country’s policymakers and leaders within its fossil fuel industry, the Venezuelan economy has collapsed into ruin. After formerly being one of the world’s leading oil exporters, energy experts agree that it appears unlikely that Venezuela is on the path to revitalize its oil industry – even if the country’s leaders were to start fixing its industry today.
As of geological assessments conducted in 2016, energy analysts have projected that Venezuela holds over 300 billion barrels of crude oil in reserves, which make up the biggest known supply of oil reserves in the world – even larger than Saudi Arabia’s stockpile (Cohen, 2019). As recently as 2018, Venezuela ranked second to Canada and Saudi Arabia in terms of the total volume of oil that was imported by the United States (Rapier, 2019). Although, as the economy has continued to falter, the country’s oil production has experienced a simultaneous decline. Venezuelan oil production has collapsed by over 50 percent from the 2.3 million barrels per day in January 2016, to a little less than 1.1 million barrels per day by January 2019 (Verrastro, 2019).
U.S. Economic Sanctions
As the U.S. intensified new financial sanctions against Venezuela in 2019, the country’s oil industry was hit with even further declines, with some estimates showing that less than one million barrels are now produced per day. The Trump administration slapped strict economic sanctions aimed at the country’s oil industry after Venezuelan President Nicolás Maduro attempted to rewrite the country’s constitution to support his own dictatorship. President Trump’s oil sanctions further damaged the Venezuelan oil industry, which was the country’s primary source of revenue. In fact, income from the oil industry makes up approximately 95 percent of Venezuela’s export revenues and finances nearly all of the Maduro regime’s operations (Kassai et al, 2018).
The U.S. sanctions have severely hindered Venezuela’s ability to export oil and have banned U.S. companies from making deals with the country’s state-run oil company, Petróleos de Venezuela (PVDSA). While the American sanctions against the oil industry have pushed Venezuela into further economic decline, the beginning of the downfall of Venezuela’s oil industry started many years ago under Maduro’s predecessor, Hugo Chavez. While the political and economic situation in Venezuela has continued to become more dire in recent years, the strengthening of U.S. and international pressure has appeared to make the transition of power in the once thriving South American country an increasingly likely outcome, though the process and timing remains highly ambiguous.
From Democracy to Decline
In the early 2000s, Venezuela was viewed as a reasonably stable democracy with one of the most rapidly growing economies in Latin America. The success of Venezuela’s fossil fuel industry has propelled the country to be able to spend a vast amount of revenue on popular social programs that were created by the late President Hugo Chavez, who had served as the country’s president from 1999 until his death in 2013. At one point, Venezuela’s socialist government even provided $100 million worth free heating oil to more than 200,000 impoverished Americans, during a time when oil prices were taking a toll on low-income residents (Kebede, 2007). High global oil prices had helped the Chavez administration contribute over a trillion dollars into the country’s treasury during his time as president (Aleem, 2007).
The History of Venezuela’s Oil Industry
To better understand where things went wrong for Venezuela, it’s important to evaluate the history of its oil industry. Oil was first discovered in Venezuela around 1922 by Royal Dutch Shell geologists, when the Maracaibo basin in the western portion of the country started to yield gushing reserves that were able to produce around 100,000 barrels of oil per day. Following the discovery of oil, the country’s leader, General Juan Vicente Gomez, invited over 100 international oil companies to Venezuela. By 1928, with assistance from foreign oil companies, Venezuela was able to be transformed into the world’s second largest oil producer. By the end of the 1920s, the country was producing around 137 million barrels of oil annually, behind only the U.S. in total annual output (Labrador, 2019). The massive influx of oil revenue fueled economic growth for decades. Following that development of the Hydrocarbons Law that was enacted in 1943, which required international oil firms to contribute half of all profits back to Venezuela, the country soon became awash in oil revenue. This revenue financed the development of new urbanized areas and helped to lift the country’s citizens out of poverty.
In 1958, following a series of brutal military dictatorships, Venezuela elected President Rómulo Betancourt. Betancourt helped to usher in a period of relative democratic stability and led to the development of policies that meant oil profits would be concentrated back to the government. Shortly after in 1960, Venezuela joined Iraq, Iran, Kuwait, and Saudi Arabia as one of the founding members of the Organization of the Petroleum Exporting Countries (OPEC). Through the founding of OPEC, Venezuela was able to work with the world’s largest producers to coordinate on opportunities that would safeguard the profitability of the global oil industry for years to come. During the same year that Venezuela helped to establish OPEC, the country also established its first state oil company, which increased oil company income tax to 65 percent of all profits (Labrador, 2019).
Oil Price Volatility
During the 1970s, the price of oil jumped significantly during the Arab Oil Embargo. When oil prices quadrupled, Venezuela achieved among the highest per-capita income in Latin America. Oil production also reached an all-time high in 1970, as Venezuela was able to pump out 3.8 million barrels of oil per day (Rapier, 2019). However, as incomes were rising, so were instances of wealth mismanagement and corruption. Between 1972 and 1997, economic analysts estimate that over $100 billion in state oil wealth was embezzled (Coronel, 2008).
By the 1980s, global oil prices had dropped dramatically, which is when fiscal inflation first started to soar in Venezuela. Moreover, the nation also started to accumulate a significant level of foreign debt after leaders decided to purchase foreign oil refineries. Although, by the early 1990s, Venezuelan oil production returned to its prime by raising production levels back to 3.5 million barrels of oil per day (Verrastro, 2019). When Hugo Chavez was first elected president in 1998, the Venezuela oil industry was at its peak. Miguel Tinker Salas, a prominent Venezuelan historian and professor at Pomona College in California, says that Chavez used oil revenue to embark on a major social spending spree. “To finance educational, health, food, and housing programs for a population of over 30 million, the government redirected oil profits to address pressing social inequality,” Salas explained. While the Chavez era dramatically reduced poverty, dependence on oil increased.
The Political Reign of Hugo Chavez
Following the election of Chavez, the decline of oil prices, massive levels of social spending, and economic mismanagement led the Venezuelan economy to collapse. During the first decade of the Chavez administration, Venezuela’s national debt increased from $20 billion to $70 billion, even with the massive state revenue from the oil industry (Coronel, 2008). Social spending and corruption were the chief contributors to Venezuela’s economic blunder. Three main spheres of corruption surfaced during the Chavez presidency: grand corruption, stemming from unfortunate policy decisions made by Chavez; bureaucratic corruption, which resulted from increasing levels of government bureaucracy; and systemic corruption, which took place between the private sector and government officials (Coronel, 2008). The flow of oil money without proper oversite contributed to the disastrous socioeconomic climate that is currently experienced in Venezuela.
While many developed nations have formed sovereign wealth funds to better manage the investment of revenues from natural resource extraction, Venezuela has fallen victim to the classic petrostate problems. Strong democracies, such as Norway, have been able to judiciously invest oil revenue into funds and long-term growth initiatives to effectively curtail instances of corruption and mismanagement. As a result of Venezuela’s mismanagement, the country’s economy went into a free fall after oil prices collapsed in mid-2014. By the end of 2014, the GDP had collapsed even more than the U.S. during the Great Depression. Less than a year later, over 32 million Venezuelans became unable to buy food, while resource-starved hospitals couldn’t even afford to purchase soap or antibiotics (Kiger, 2019).
Downward Economic Tailspin
As the Venezuelan economy has collapsed, the country has entered into a downward tailspin, with little revenue to keep even the most basic amenities up and running. With no revenue, the country has been unable to increase oil industry profits, since the industry needs funding to continue drilling operations, maintain oil rigs, and hire workers. Because the fossil fuel industry was the country’s only real source of income, the near-term picture continues to look bleak for Venezuela, as economists predict that it is not technically feasible for the oil industry to regain enough strength to achieve profitability. In the meantime, millions of Venezuelans are leaving the country in a desperate attempt to survive. The United Nations has estimated that there are at least three million Venezuelans that have fled internationally, with another 2.4 million spread across the Caribbean and Latin America (Aleem, 2017).
A potential turnaround for Venezuela and its oil industry is highly dependent on a variety of political factors. While the Trump administration has continued to pressure the Maduro regime, Venezuela is finding support from Russia and China. Russia has been working diligently with Venezuela to reroute oil exports through China, which would have originally been sent through the United States. However, even with support from Russia, the country’s oil exports have fallen by over 35 percent, which continues to restrict Venezuela’s cash flow (Kurmanaev, 2019). In addition to support with oil exports, Russia’s state-run oil company, Rosneft, has pumped $9 billion into Venezuelan oil production since 2010 alone, in an attempt to revitalize the industry (Lowe & Sagdiev, 2019). While foreign policy analysts say that Russia is losing billions of dollars through attempts to revive Venezuela’s oil industry, the country has continued to provide financial support for its South American ally.
Looking for Solutions
Today, even though Venezuela still sits on the world’s largest reserves of oil, the country’s oil refineries are running at less and a quarter of their operating capacity (Kassai et al, 2018). As a result of this decline in oil operations, the country with the biggest oil reserves is ironically experiencing intense periods of fuel shortages, particularly within its rural communities. Moreover, with hyperinflation, residents have been unable to buy anything within Venezuelan currency. The International Monetary Fund estimated that inflation is currently at nearly ten million percent, which is worse than anywhere on the planet (Kassai et al, 2018). With this level of inflation, and with the country in complete economic ruin, it’s hard to imagine that a change in governance alone would be able to solve Venezuela’s problems. Instead, it will take a collaborative international community to work jointly to revive the country and its oil industry.
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