VENEZUELA, ONCE THE LARGEST OIL PRODUCER, IS REEKING OF POVERTY

Venezuela’s descent into economic and political chaos in recent years is a cautionary tale of the dangerous influence that resource wealth can have on developing countries.

Venezuela, home to the world’s largest oil reserves, is a case study in the perils of becoming a petrostate. Since it was discovered in the country in the 1920s, oil has taken Venezuela on an exhilarating but dangerous boom-and-bust ride that offers lessons for other resource-rich states. Decades of poor governance have driven what was once one of Latin America’s most prosperous countries to economic and political ruin.

Figure-1

Venezuela is often called a failed petrostate. Because being oil the single most dominant factor in the country’s fortunes a rapid fall in oil prices is hard to manage and the country’s economy spins out of control. Venezuela’s oil prices fell from USD 100 a barrel in 2014 to USD 30 a barrel in early 2016 triggering an economic collapse with output shrinking by three quarters and hyperinflation leading to scarcity of basic goods.

What is a petrostate. A petrostate is a nation where the government is highly dependent on fossil fuel income. Power is often concentrated inviting widespread corruption. Petrostates are vulnerable to Dutch Disease (a term coined in the 1970’s after the Netherlands discovered natural gas in the North Sea), where a government develops an unhealthy dependence on natural resource exports.

Let us Study Venezuela’s economy in a bit more detail. Venezuela’s gross domestic product shrank precariously between 2014 and 2021 (Figure-1)spelling doom to this oil rich nation which once was dominating oil supplies across the world!

What is Gross Domestic Product. GDP is the total of all value added created in an economy. The value added means the value of goods and services that have been produced minus the value of the goods and services needed to produce them, which is called intermediate consumption.

Negative GDP. If a country’s gross domestic product declines it is indicative of a recession in the business. Negative growth rates are often accompanied by declining real income, increasing unemployment and reduced production.

History of Venezuela’s Riches to Rags Story. In 1922 Royal Dutch Shell geologists at La Rosa Maracaibo Basin struck oil which blew out to a mind boggling one hundred thousand barrels per day!! It further exploded to 137 million barrels under dictator General Juan Vicente Gomez. Then Dutch Disease set in and the Hydrocarbons Law was established.

By 1940 Venezuela was the third largest producer of crude oil in the world with more than 27 million tonnes per year - just slightly less than the production in the USSR. In 1941, Isaias Angarita, a former army general, was indirectly elected president. One of his most important reforms during his tenure was the enactment of the new Hydrocarbons Law of 1943. This new law was the first major political step taken toward gaining more government control over its oil industry. Under the new law, the government took 50% of profits. Once passed, this piece of legislation basically remained unchanged until 1976, the year of nationalization, with only two partial revisions being made in 1955 and 1967.

In 1944, the Venezuelan government granted several new concessions encouraging the discovery of even more oil fields. This was mostly attributed to an increase in oil demand caused by an ongoing World War II, and by 1945, Venezuela was producing close to 1 million barrels per day.

Being an avid supplier of petroleum to the Allies, Venezuela had increased its production by 42 percent from 1943 to 1944 alone. Even after the war, oil demand continued to rise due to the fact that there was an increase from twenty-six million to forty million cars in service in the United States from 1945 to 1950.

The mobilisation of oil profits into the state was further strengthened through Punto Fijo Pact where there was an effort to distribute riches democratically. Also, as a positive step Venezuela joined OPEC (Organisation of Petroleum Exporting Countries) along with Iran, Iraq, Kuwait and Saudi Arabia. In time Qatar, Indonesia, Libya, UAE, Algeria, Nigeria, Ecuador, Gabon, Angola, Equatorial Guinea and the Republic of Congo joined OPEC. It gave them to fix oil prices and buy assets and increased oil companies’ income tax to 65% of profits.

The Boom Happened. In 1973 OPEC embargo to countries backing Israel in the Yom Kippur War spiralled prices to an extent Venezuela found its per capita income amongst the highest in Latin America.

And then the Doom. Sadly, the global oil prices plummeted in the 1980’s, economy contracted and inflation soared. In order to mobilise funds Venezuela knocked the doors of International Monetary Fund (IMF).

The popular era, the Chavez era. Venezuela was redeemed to some extent by populist leader Hugo Chavez when he was elected president in 1998. He did good work but lasted only till 2013. And by that time petroleum reserves dwindled and government debt more than doubled.

People of Venezuela became Disappointed and Restless. Seeing the catastrophic decline in quality of life people started fleeing the country as inflation soared to unexpected levels. To assuage the oil price decline which began back in 2014, President Maduro printed more currency, resulting in inflation as high as 700%. The normal day to day offerings were hard to come by and the nation was literally starving!

What is inflation. In simple terms inflation is an increase in the general price levels of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services – inflation corresponds to a reduction of purchasing power of money. The common measure of inflation is the inflation rate, the annual percentage change in general price index.

For example, goods which can be purchased in India at 100 indian rupee would cost 355071 Venezuelan bolivar fuerte!

Figure-2

Migration. Since 2014 6 million Venezuelan refugees have fled to neighbouring countries and beyond, where some governments have granted them temporary residency. Maximum exodus had been to Peru, Colombia, the USA and Spain (Figure-2). Though during pandemic, as they lost their jobs, some refugees came back to Venezuela.

The woes continued as oil prices tumbled again. In mid-2014 global oil prices went down once again and Venezuela’s economy went into free fall. Chavez had died of cancer and the new leader Maduro was corrupt and he resorted to manipulation, censorship. He won election through unfair means in 2018, among widespread opposition of sixty countries including USA Maduro was discarded and Juan Guaido was recognised. But he was a weak leader and Maduro overpowered him.

Sanctions. USA imposed sweeping sanctions against Caracas and oil was barred from Venezuela crippling its economy, though support from China, Cuba, Iran, Russia and Turkey kept it afloat.

Lifeline, the Ukraine War. In November 2022 in order to offset rising global energy prices USA allowed oil giant Chevron to resume limited operations in Venezuela and Maduro was warned to behave to the liking of Washington.

How Venezuela compares with India and USA in the same era. In the graph (Figure-3) the GDP figures of Venezuela has been plotted from 2008 through 2021 along with two economically established nations – India and the USA. The figure sums up the mismanagement and short sightedness of the leadership of Venezuela – which never bordered on brilliance and never eschewed of getting wild and sketchy after owning so much of wealth, a future escaped their foresight – resulting in catastrophe and cacophony.

Can anyone believe that Venezuela boasted a GDP in 2008 higher than that of India and the USA!!

GDP nosedive. In 2020 Venezuela’s GDP nosedived to a cruel (-)30%. Thanks to intervention from USA and other countries we expect Venezuela’s GDP would again rise to comfortable levels and would most likely show 7% in 2023 (Figure-1).

Figure-3

World Economic Forum comments on Macroeconomic Stability of Venezuela. The Macroeconomic Stability describes a country’s efforts to curb inflation and successfully manage its public debt load.

Venezuela receives an overall progress score of (0) in this category out of a possible 100. That in turn translates into a rank of 141st out of the 141 countries included in the study. Venezuela’s performance in specific areas of the Macroeconomic Stability shows the greatest room for improvement in terms of inflation rate, where it has a progress score (ranging from a poor mark of zero to a top mark of hundred) of zero, resulting in a rank of 141st out of 141 countries and in terms of debt dynamics where it has a progress score of zero that results in a rank of 140th out of 140 countries.

This is horrendous by any stretch of imagination!!

But there is still hope. Just as ocean approaches the pebbles to take some of them away – no matter the shining stones dart up refusing to bulge – by cajoling how it takes some of them; we all wait with bated breath for Venezuela to stand on its feet shining and running – refusing the ocean of notoriety to wash this great nation away into oblivion. In time there would be no inverted boats with fishermen having nothing to fish but stare at the future – what it beholds – how the days would go, what food they have to feed their families, what clothes would they purchase for their daughter’s birthday, what earnings would they have to pay off their rented houses.

What would happen to the hospital bills of Alberto!

All worries would go one day, so we believe and so we pray.

Will Venezuela bounce back in the next decade?

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  0%yeaah !! Ofcourse
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  0%Nahhhhh !!!!!

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