The Venezuelan Oil Curse
The country of Venezuela has one of the largest oil reserves in the world. The amount of oil they have surpasses Saudi Arabia, Iran and Iraq. With this much oil, Venezuela should be thriving socially and economically, but they aren't. Instead, 90% of Venezuelan citizens are living in hunger and poverty (Reuters par. 1). How is this possible? How could a country this plentiful in oil be this destitute? Venezuela should be thriving like Canada and Saudi Arabia. Instead, they struggle to import basic food and medicines to keep their citizens from starvation and sickness. The poor economic model created by former president Hugo Chavez left Venezuela fully dependent on the price of oil per barrel to sustain their economy and social programs. The economy boomed when oil prices were high, but in 2013, oil prices began to fall along with the economy of Venezuela. In this paper, I will argue that the poor economic plan and mismanagement of the oil industry by the Venezuelan government lead the country into the resource curse, dooming their potential for sustained economic success.
Plentiful oil reserves can prove to be a great economic benefit to a country when managed properly. With rising oil prices, an economy can soar and prosper for years to come. According to the Royal Economic Society, countries should use the revenue from oil sales to increase wages for lower income citizens as well as “boost private and public sector investment and so bring forward economic development.” By doing this, countries are able to give back oil revenue to benefit the poorer citizens, therefore strengthening the country's economy. Countries should also consider setting up a sovereign wealth fund according to the Royal Economic Society. Usually countries who are already in solid economic standing would consider this path, however, developing countries with no money set aside should also consider a fund to keep extra money for when the oil industry is in a lull. Some of this extra money should be invested in to the current generation to ensure the prosperity of the future. By raising wages and employing more citizens, the economy will benefit greatly. This surplus of oil has the potential to jumpstart the country's economic circle.
Unfortunately, former President Hugo Chavez of Venezuela didn’t follow these steps so closely. When the oil prices began to decline in 2013, Venezuela had no money saved to keep their economy afloat. This sent the entire country into a recession that is still worsening today. Inflation rates are expected to hit 1,000,000% by the end of 2018 (Nelson par. 1). Citizens can barely buy bars of soap because Venezuela doesn’t have the money to import goods anymore. If they had set aside money for this possibility, the country wouldn’t be in the state it is now. Their economy depends too desperately on oil prices, and neither Chavez nor current president Nicolas Maduro helped the country move away from this toxic dependence. Instead, Chavez worsened the state of the oil industry and when Maduro came into power, he ignored to effects all together. Both of their actions worsened the oil curse for Venezuela.
Venezuela is a tragic example of the effects of the oil curse. “The oil curse is a concept that economists, political scientists and sociologists use to explain the deleterious economic effects caused by over reliance on revenue from a single natural resource.” (Wald par. 2) Venezuela saw their oil abundance as winning the lottery. As explained by columnist for Center for Global Development, Todd Moss, money is what helps the poor back up on their feet, but the mismanagement of this money can dig them into a deeper hole than they were in in the first place. The oil seemed as if it would be the answer to Venezuela’s calls for help, however, the production and revenue were sorely mismanaged. If Chavez had acknowledged the possibilities of the oil curse on his country, they would’ve been able to thrive off of the oil, instead of be completely destroyed by its existence. Venezuela was hugely burdened by their “lottery win” because of the painful mismanagement of the revenue.
The Venezuelan economy was solely dependent on the export of oil. 95% of Venezuela's exports were oil and 25% of the country’s GDP was oil dependent (Renwick par. 8). This all happened because Chavez had no comprehensive economic plan for the country. He was adamant on giving oil money back to the poor, but he went about in a way that ended up detrimentally impacting Venezuela’s economy for years to come. He took out billions of dollars to put into social programs, never saving any money for when oil prices would nosedive. This mismanagement is what hurt Venezuela the most. While oil prices were high, it seemed that nothing could bring their economy down. However, their economy was much more fragile than it seemed. Now, the country is in the worst recession the western hemisphere has seen. 90% of citizens live in poverty (Reuters par. 1). This isn't at all what Venezuelans had in mind when Chavez came into power with the promise of economic reform.
The first main mistake was the nationalization of the oil industry in 1976 by former president Carlos Andres Perez. He created the state-run oil monopoly Petróleos de Venezuela or PDVSA. In the beginning “PDVSA had a lean workforce, an efficient cost structure, and a global outlook” (Johnson par. 8). It worked as a well oiled machine for many years, but still couldn’t withstand the depression of oil prices in the mid-1980s. This sent Venezuela into a minor recession until the mid-1990s when they decided to reopen the oil industry to international firms. The international firms helped Venezuela tap into crude oil reserves that they didn’t having the funding to tap into otherwise. But still again, the prices dropped in 1998 and again the Venezuelan economy took a major hit. This should’ve been a sign to lessen dependence on the oil market, but no one seemed to be listening.
Hugo Chavez was elected as president in 1999 with promises of redistributing oil wealth to the poorer people of Venezuela. The lower class loved him and his plans because they were finally given the opportunity to move up on the socioeconomic ladder. They trusted he was the leader that would bring them back on their feet once again. Chavez’s goal was to maximize the revenue of PDVSA and use that money to fund his new social programs (Johnson par.13). He had the right intentions to bring the lower class back to a functioning part of the economic circle. This plan would’ve worked if Chavez had prior knowledge of how to manage an oil industry, however, Chavez simply saw the oil as a cash cow for his social programs. He didn’t know to properly manage the oil production facilities, dooming the prosperity of Venezuela’s economy. His lack of knowledge was detrimental to the success of the Venezuelan oil industry.
In 2001, Chavez passed an energy law that increased the tax foreign firms would pay the Venezuelan government. He did this to try and lessen the amount of foreign oil firms in Venezuela, giving the PDVSA complete control again. Then in 2002, Chavez fired the PDVSA president and replaced him with a leftist economist who opposed all private investment. Chavez did this with the intention to strengthen PDVSA and get rid of any possible foreign oil firms. He also fired many PDVSA managers, filling their spots with replacements that knew next to nothing about oil production. These feelings caused major protests and sent Chavez’s popularity into a major decline. However, this didn't stop him from then firing more than 18,000 oil plant workers (Johnson par. 20). This proved to be a huge mistake on his part as accidents and spills began to occur regularly at oil sites. His plan to completely nationalize the oil industry backfired on him, leaving the industry worse off than it started.
Virtually no one in the oil industry knew what they were doing. Chavez had wiped out almost every skilled oil worker and manager. He had effectively dismembered the once thriving PDVSA to gain its full support. Now, no one knew how to manage an oil dependent economy or the oil production facilities. Few people knew how to run the one industry that was keeping the country's head above water. Chavez was ignorant of the chaos he had created within the oil industry. He continued to siphon billions of dollars in oil revenue to support his social welfare programs. In the short term, these actions paid of politically. He regained the trust and support of many Venezuelans, but his actions were about to face some major consequences.
Although Chavez began creating many social programs to benefit the lower class, they all depended on the sustained high prices of oil per barrel. In 2008, oil prices were surging above $150 per barrel (Johnson par. 26). At the time, the country seemed to be thriving. But behind the scenes, the Venezuelan government was mismanaging this newfound fortune. As the oil prices went up, Venezuela spent all of the generated income. They didn’t set aside any money for when oil could no longer support the economy. They also didn’t effectively invest the money back into the people. Once the oil prices plummeted, the social programs could no longer function because there was no more funding. After Chavez's death in 2013, oil prices rapidly declined, leaving the mess of an economy to his chosen successor Nicolas Maduro.
The fall of oil prices sent the government into severe debt. Foreign oil firms pulled out of Venezuela because of market uncertainty, resulting in an overall decline in oil production across the country. On top of the loss of foreign oil firms, Venezuela racked up an insurmountable debt. In 2013, Venezuela owed $10 billion in loans to China and Russia as well as a financial debt to the US of $39.2 billion (Wikipedia par. 5). Chavez has been described as someone who would “borrow money as if it were going out of fashion” (Al Jazeera). This overborrowing and overspending further worsened Venezuela’s economic standing. This left Maduro with almost no foreign reserves to purchase basic foods and medicines when he came to power. As a result, Maduro printed more bolivar to try and continue to fund the social programs but only ended up causing inflation rates to skyrocket. This sent Venezuela into a downward spiral with high inflation and low levels of essential goods.
Now, Venezuela will reach an inflation rate of 1,000,000% by the end of 2018. This is considered one of the worst hyperinflationary cases to be recorded. While poverty rates declined under Chavez, by 2013 poverty rates were up 28% and were up 48% in 2016 (Wikipedia par. 4). The inflation rates mixed with rising poverty have had dramatic effects on Venezuelan citizens. Venezuela doesn’t have the money to import food or medicine. This has caused major shortages in milk, meat, coffee, rice, oil, precooked flour, butter, toilet paper, personal hygiene products and medicines (Wikipedia par. 2). And it seems as if there is no end in sight. The shortages and inflation caused prices to go up on all basic goods. With 90% of the population in poverty (Reuters par. 1) and most Venezuelans out of work, it’s almost impossible to purchase any food, hygiene products or medicine.
The shortages in food and medicine have also majorly impacted the health and wellness of Venezuelans. Because a week’s wages can barely pay for enough food for a family for a day, health has declined rapidly. In 2016, 73% of Venezuelans said they had lost 19 lbs of body weight and 64% said they had lost 25 lbs in 2017 (Wikipedia par. 4). Many people have turned to eating food scraps out of the garbage just to stay satiated. The inflation rates have also driven many citizens out of the country. The shortages have caused one of the “largest refugee crises ever recorded in the Americas” (Wikipedia par. 1). 3.8 million people have left the country since 2016 (Nelson par. 4). There have also been millions of normally avoidable deaths due to the medicine shortages. Many people don’t have the access to the medication they need for their everyday lives. Many people with transplants are dying because they don’t have access to the medications they need to keep them from rejecting the transplants. Venezuelans are living in a world with no saving grace. There is no medicine to cure them of their sicknesses or their country’s for that matter.
This domino effect of misfortune and suffering could have been easily avoided if Chavez had a plan for Venezuela’s economy. His unplanned actions and mismanagement of the oil industry made Venezuela a prime example of the effects of the oil curse. His overborrowing and overspending left Venezuela with an incurable debt. The debt lead to import shortages of essential foods and medicines. These shortages lead to a refugee crisis, starvation and ultimately death. A country with once great potential has been utterly destroyed by the one thing promised to make them rich. Oil has been at the crux of every issue the country has faced. The debt, the shortages and the sickness have all stemmed from the conflict surrounding the oil industry. If the oil had been properly managed and Venezuela had set aside funds to keep them afloat when times got tough, they would have lessened the blow of the fall of oil prices. Instead, they ran the risk of losing it all, and they did.