The crisis in Venezuela: a warning for oil-producing countries
The story of Venezuela’s rising wealth and its now approaching collapse is an uplifting tale for countries rich in natural resources. The 1914 discovery of crude oil in the Maracaibo Basin sent Venezuela’s then impoverished agricultural pools on a tumultuous journey, which in its heyday saw the country become one of the world’s largest oil exporters, the country the richest in Latin America and ultimately a Failed state. While commentators exclusively blame the socialist Bolivarian revolution of Hugo Chavez and the misdeeds of Nicolás Maduro for the destruction of South America’s richest and most dynamic economy, the reality is far more complex. Arguably, it is Venezuela’s enormous oil wealth that is really responsible. The Oil Curse is a complex economic dysfunction that triggers massive political, economic and societal fallout that can destroy nations. It appears when a country, like Venezuela, becomes too dependent on crude oil to create wealth and stimulate economic growth. It was this curse that precipitated the enormous humanitarian, economic and ecological disaster playing itself. The post-World War II economic boom spurred an insatiable global demand for fossil fuels that skyrocketed the Latin American country’s oil exports, fueling new investment in exploration and production. In 1950, Venezuela was pumping an average of about 1.5 million barrels of crude oil per day, generating immense wealth and external income for the oil-rich country. In the early 1950s, at a time when many countries were still recovering from the ravages of World War II, Venezuela became the fourth richest country in the world in terms of GDP per capita. By the end of that decade, the Latin American country had democratized and its oil production had nearly doubled, pumping an average of just under 3 million barrels per day. Oil production was still growing, finally peaking at 3.8 million barrels per day in 1970. The massive wealth and export revenues generated by crude oil led to massive economic expansion, funded nationally focused social programs. on health and education and sparked a colossal construction boom. In the mid-1970s, when many countries in Latin America were caught in paroxysms of violence and in the grip of military democracies, Venezuela was dubbed as the most stable democracy in the region. Between 1950 and 1979, Venezuela’s GDP had more than quintupled, ending the decade at over $ 287 billion. This has seen the country of South America develop and urbanize rapidly, a hallmark of economic and social development. The capital, Caracas, has become a thriving commercial and cultural center where oil fueled the architectural development of a city once described as the jewel from South America. The glamorous tree-lined streets of Caracas were filled with architecturally imposing apartment buildings, museums, theaters and galleries.
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The formation of the OPEC oil cartel in September 1960, an initiative of the Venezuelan government, allowed major oil-producing countries to control the production and price of crude oil. This led to the oil shocks of the 1970s which caused prices to skyrocket. This triggered a huge economic and revenue windfall for Venezuela. The central government of Caracas, in an effort to maximize oil rents, nationalized the Venezuelan oil industry by founding the state oil company PDVSA in 1976. The Latin American country’s newly nationalized oil industry has become a tool important for maximizing oil revenues and an engine of economic growth. It was the growing dependence on crude oil that was behind the rapid development of the oil-rich country from the end of World War II until the end of the 1970s and the cause of its spectacular implosion. In the early 1980s, after the oil shocks of the 1970s spiked world energy prices, a glut in the world oil supply emerged, precipitating a sharp drop in prices. It has deeply affected the Venezuelan oil-dependent economy, causing GDP growth and government revenue to collapse almost overnight, causing budget deficits to skyrocket. The impact of the sharp decline in oil prices on Venezuela’s oil economy was magnified by the 1980 global recession which lasted for three years. By 1989, the Venezuelan economy had contracted considerably with Annual GDP a worrying 10% drop from a decade earlier.
The national government attempted to halt the sharp economic decline by increasing budget spending funded by an ever-growing mountain of debt. Caracas predicted that an eventual rebound in oil prices would provide a fiscal windfall that would allow the government to reduce its sovereign debt to manageable levels, but the long-awaited rise in oil prices never took place. In 1989, the debt had inflated to a crippling $ 33 billion, the fourth largest in the developing world, of which about two-thirds is owed to private banks. President Carlos Andres Perez, who began his second term in February 1989, implemented sweeping austerity measures and neoliberal economic reforms to restore Venezuela’s economic base. This included a policy of broadening the economic base and reducing the economy’s over-dependence on oil, which was responsible for Venezuela’s economic crisis. The scale of the economic crisis has been compounded by soaring inflation. During the 1970s, the height of Venezuela’s golden age, inflation averaged 6.6% per year, but got out of hand during the 1980s. In 1989, it peaked to a huge 81% and on average 21.4% per year over the decade. This has magnified the hardships faced by everyday Venezuelans, especially the working poor. Related: Will Biden Seal the Fate of the American Shale Patch?
In the end, the situation became so dire that Perez’s administration was forced to turn to the IMF. help, receiving a loan of 4.6 billion dollars in 1989. In accordance with IMF demands, Caracas implemented austerity measures and neoliberal economic reforms which, while bringing the economy back to growth, saw the wages remain low and unemployment remain high. Corruption, poverty and misery continued to increase in what had been one of the richest nations in the world. As Caracas cut spending, especially on social programs, including health and education, and removed fuel subsidies, popular discontent grew. Rapidly spreading civil unrest has regrouped the rash of Caracazo in 1989 where violent anti-government demonstrations swept through Caracas and the main cities of Venezuela, killing up to 1,000 people. As economic, social and political rifts widened, radical opposition to the existing two-party political system, which was seen as corrupt, inequitable and out of touch, soared. In the mid-1990s, after experiencing a short-lived recovery at the start of the decade, the Venezuelan economy had back to the crisis. These conditions were the perfect incubator for radical political ideas and movements, especially in the Venezuelan military, which culminated in the 1992 coup attempt against the presidency of Carlos Perez by a young military officer Hugo Chavez. Although this failed, the succession of events ultimately caused the fracture of the political system, culminating in Chavez’s electoral victory in 1998 and the start of his Bolivarian socialist revolution. Chavez, despite his popular socialist tendencies, followed in the footsteps of his predecessors, aggressively ramping up oil production to fund lavish social programs. In 2015, just two years after Chavez’s death, compound crude oil 96% of Venezuela’s exports, eventually reaching 99% in 2019, and was responsible for generating over 60% of government revenue. This left the oil-rich Latin American country too exposed to the drop in oil prices in late 2014 which ultimately saw the international benchmark Brent dip below $ 10 a barrel in late April 2020 as the pandemic of COVID-19 was hitting, while Moscow and Riyadh exchanged gunfire. launch a new oil price war.
It is these developments, coupled with Venezuela’s over-reliance on crude oil to spur economic growth and generate tax revenue, that laid the groundwork for the country’s collapse and the dire humanitarian crisis that is unfolding now. The gravity of this situation is underscored by the disintegration of once famous Venezuela Oil industry and the state’s failure to provide basic social goods, including law and order, which made Caracas the murder capital of the world in 2016 and 2017. The extreme hardships many Venezuelans face have seen almost five million fleeing the country since 2015, with almost half believed to have sought refuge in Colombia. Venezuela’s calamitous economic collapse, the worst ever in peacetime, and near state failure serve as a warning to oil-rich states of the dangers of falling into the mining trap where dependence on oil becomes the main economic driver.
By Matthew Smith for Oil Octobers
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