The story of Venezuela’s rise to wealth and its now near collapse is a cautionary tale for countries rich in natural resources. The 1914 discovery of crude oil in the Maracaibo Basin sent the then impoverished agricultural backwater of Venezuela on a tumultuous journey, which at its peak saw the country become one of the world’s largest oil exporters, Latin America’s richest country and then ultimately a failed state. While commentators exclusively blame Hugo Chavez’s socialist Bolivarian revolution and Nicolás Maduro’s malfeasance for the destruction of South America’s wealthiest and most vibrant economy, the reality is far more complex. Arguably, it is Venezuela’s tremendous oil wealth which is truly responsible. The oil curse is a complex economic dysfunction that triggers considerable political, economic and societal fallout that can destroy nations. It emerges when a country, like Venezuela, becomes overly dependent on crude oil to create wealth and drive economic growth. It is this curse which precipitated the massive humanitarian, economic and environmental disaster now being played out. The post-World War Two economic boom spurred on an insatiable global demand for fossil fuels which caused the Latin American country’s oil exports to soar, fueling further investment in exploration and production. By 1950, Venezuela was pumping on average around 1.5 million barrels of crude oil daily generating immense wealth and external income for the petroleum rich country. During the early 1950s, at a time when many countries were still recovering from the devastation of the Second World War, Venezuela emerged as the world’s fourth richest country by GDP per capita. By the end of that decade the Latin American country had democratized, and its oil output had almost doubled with it pumping on average just under 3 million barrels daily. Petroleum production was still growing, ultimately peaking at 3.8 million barrels daily during 1970. The massive wealth and export income generated by crude oil drove a massive economic expansion, funded government nationwide social programs focused on health and education and sparked a colossal building boom. By the mid-1970s, when many Latin American nations were caught in paroxysms of violence and in the thrall of military democracies, Venezuela was christened as the region’s most stable democracy. Between 1950 and 1979, Venezuela’s GDP had grown more than fivefold finishing the decade at over $287 billion. This saw the South American country rapidly develop and urbanize, a hallmark of economic and social development. The capital, Caracas, became a thriving business and cultural hub where oil fueled the architectural development of a city once described as the jewel of South America. Caracas’ glamourous tree lined streets were filled with architecturally imposing apartment buildings, museums, theatres and galleries.
The formation of the OPEC oil cartel in September 1960, a Venezuelan government initiative, allowed major petroleum producing nations to control production and the price of crude oil. This led to the 1970s oil shocks which caused prices to soar. That triggered a tremendous economic and revenue windfall for Venezuela. The central government in Caracas, in a move aimed at maximizing oil rents, nationalized Venezuela’s oil industry founding the state oil company PDVSA in 1976. The Latin American country’s newly nationalized oil industry became an important tool for maximizing oil revenues and driver of economic growth. It was the growing dependence on crude oil which was responsible for the petroleum-rich country’s rapid development from the end of World War Two until the late-1970s and the source of its spectacular implosion. By early 1980, after the 1970s oil shocks caused world energy prices to soar, a global oil supply glut emerged precipitating a sharp price crash. This profoundly impacted Venezuela’s petroleum dependent economy, causing GDP growth and government revenues to collapse almost overnight causing budget deficits to soar. The impact of sharply weaker oil prices on Venezuela’s petroleum economy was amplified by the 1980 global recession which lasted three years. By 1989, Venezuela’s economy had contracted considerably with annual GDP a worrying 10% lower than a decade earlier.
The national government attempted to arrest the acute economic decline through increased fiscal spending funded by an ever-growing mountain of debt. Caracas was anticipating 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 oil price rally never occurred. By 1989 debt had ballooned out to a crippling $33 billion, the fourth largest in the developing world, with roughly two-thirds owed to private banks. President Carlos Andres Perez, who commenced his second term in February 1989, implemented broad austerity measures and neoliberal economic reforms to return Venezuela’s economic base. This included a policy of broadening the economic base and reducing the economy’s over-dependence on petroleum, which was responsible for Venezuela’s economic crisis. The magnitude of the economic crisis was aggravated by soaring inflation. During the 1970s, the peak of Venezuela’s golden age, inflation averaged 6.6% annually but spiraled out of control during the 1980s. By 1989 it peaked at a whopping 81% and averaged 21.4% annually over the decade. This magnified the hardships faced by everyday Venezuelans, particularly the working poor. Related: Will Biden Seal The Fate Of The U.S. Shale Patch?
Ultimately, the situation became so dire that Perez’s administration was forced to turn to the IMF for assistance, receiving a $4.6 billion loan in 1989. In accordance with IMF requirements Caracas implemented austerity measures and neoliberal economic reforms, which while returning the economy to growth saw wages remain low and unemployment to stay high. Corruption, poverty and hardship kept growing in what had been one of the world’s wealthiest nations. As Caracas slashed spending, notably for social programs including health and education, and axed fuel subsidies popular discontent grew. Rapidly spreading civil unrest coalesced in the eruption of the 1989 Caracazo where violent anti-government protests swept across Caracas and Venezuela’s major cities resulting in up to 1,000 deaths. As economic, social and political fissures widened radical opposition to the existing two-party political system, which was perceived to be corrupt, inequitable and out of touch, soared. By the mid-1990s, after staging a short-lived recovery earlier in the decade, Venezuela’s economy had returned to crisis. Those conditions were the ideal incubator for radical political ideas and movements, notably in Venezuela’s military, which culminated in the 1992 coup attempt against the presidency of Carlos Perez by a young military officer Hugo Chavez. While that was unsuccessful the succession of events eventually caused the political system to fracture, culminating in Chavez’s 1998 electoral victory and the start of his socialist Bolivarian revolution. Chavez despite his popular socialist leanings followed in the footsteps of his predecessors, aggressively bolstering petroleum production to fund lavish social programs. By 2015, only two years after Chavez’s death, crude oil comprised 96% of Venezuela’s exports, eventually reaching 99% by 2019, and was responsible for generating over 60% of government revenues. That left the oil rich Latin American country overly exposed to the late-2014 oil price crash which eventually saw the international Brent benchmark plunge below $10 per barrel in late-April 2020 as the COVID-19 pandemic hit, while Moscow and Riyadh traded shots over launching a new oil price war.
It was these developments, coupled with Venezuela’s over-reliance on crude oil to drive economic growth and generate fiscal revenues, which laid the foundation for the country’s collapse and the disastrous humanitarian crisis now unfolding. The severity of this is underscored by the disintegration of Venezuela’s once celebrated oil industry and the failure of the state to provide basic social goods including law and order which saw Caracas named the world’s murder capital in 2016 and 2017. The extreme hardships faced by many Venezuelans has seen almost five million flee the country since 2015, with almost half estimated to have sought refuge in Colombia. Venezuela’s calamitous economic collapse, the worst ever witnessed during peacetime, and near failure of the state serves as a cautionary tale for petroleum rich states and the dangers of falling into the extractive trap where reliance upon oil becomes the primary economic engine.
By Matthew Smith for Oilprice.com
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