Once Latin America’s richest country, Venezuela’s economy is in a death spiral resembling that of a failed state. The International Monetary Fund reports Venezuela is having the world’s worst real GDP growth with -7.4 annual percent change, and the largest inflation rate in the world with 720.5 percent. The question is no longer why Venezuela is in chaos, but how did they get there?
The reason is how the country has prioritized its number one commodity, oil, and how they managed the flow of its currency since 2002.
Oil production, or the lack thereof
The biggest issues facing national oil companies (NOC) is underinvestment, corruption, and political interference which results in stagnation of production. During the 1970s, Venezuela nationalized its oil industry, and Petróleos de Venezuela (PDVSA) became Venezuela’s nationalized petroleum company. However, they took measures to assure those potential disruptions didn’t occur, and became a “state within a state.” They decided foreign enterprises become free standing entities of PDVSA. This led PDVSA to develop a reputation for professionalism that few NOCs had.
It is important to note that Venezuela’s oil reserves are not like every oil reserves in the world. Venezuelan oil fields require consistent maintenance for optimized production. According to the Economist, Venezuela produces a more “viscous and acidic” oil than normal. This requires constant injections of water or gas to keep the harvest flowing. To keep output stable, Venezuela would need to produce 400,000 barrels per day (b/d) of annual production capacity.
This is not an inexpensive venture by any means. For context purposes, Venezuelan wells produce about 180 b/d compared to some Persian Gulf wells that produce about 7,000 b/d.
As difficult as it may seem, during the 1990s PDVSA was hopeful to raise the output to 6.5m b/d by increasing its output and providing marginal fields to foreign agencies. By 1998, PDVSA reached 2.9m b/d but with elections around the corner its investment budget would take a hit, and has never recovered since.
In 1999 former President Hugo Chavez took office for the first time, and like most NOCs, political interference occurred. PDVSA would undergo massive makeover, and the once “state within a state” entity now gradually became a tool for Chavez’s political agenda. By 2000, PDVSA lost 2.5 billion in its investment budget. Along with the budget cuts, Chavez placed aggressive leaders in power that drove employees of PDVSA towards a general strike. Oil production took a major blow because of the two-and-a-half-month-long strike.
Venezuela recovered quickly because of a global surge in crude oil prices. This is when Venezuela underwent major economic growth. By 2007, Venezuela was at 8.8 percent of real GDP growth according to the IMF.
Oil accounts for 95 percent of export earnings in Venezuela, and instead of taking this economic boom and maintaining its most important commodity, Chavez decided to promote socialism in Latin America. PDVSA was forced to become a contributor in social programs in Venezuela, Chavez invested heavily in the development of allied Latin American countries, and provided subsidized oil prices to the likes of Cuba in exchange for sending doctors and military advisors.
This was all well until the oil bust occurred, Chavez died, and Maduro became the de facto leader of Venezuela.
Its decision early on not to invest in and maintain their oil fields, now left Venezuela failing to fulfill exports of oil to China and Russia, as well as losing a credit line of more than $5 billion.
Printing money & the black market
The early 2000s were important years for Venezuela. Chavez is elected to a six-year term, an oil strike damages production, a failed coup d’etat against Chavez occurs, and Chavez puts in place a strict hold on currency exchange to fight capital flight.
Along with the mismanagement of Venezuela’s oil, the manipulation of its currency and exchange rate have been the driving force behind the plummeting country’s economy. To exchange the bolivar to dollars you need approval from the government, but limits have been placed on ordinary citizens.
The government has also never been honest on the worth of the bolivar on the global stage, and as a result, the black market exploded with dealing dollars in exchange for bolivars. During the oil boom this wasn’t an issue, but soon would be a major issue.
In 2014, the U.S. dollar was worth 6.30 Bolivars, but everyday Venezuelans would happily pay 85 bolivars for a dollar on the black market. This left the Venezuelan economy with two price points on the worth of the bolivar driving inflation up and up.
Today, on the black market a dollar can get you about 3,000 bolivars, whereas under the Dicom exchange rate, one dollar can get you 10 bolivars. Merchants see little value in importing basic goods, and instead find more value in dealing dollars.
Food can be cheap under government controlled price points, but quantity is extremely scarce leading to day-long lines. But just like the value of the bolivar, there are two price points. Where on the open market the price of chicken per kilo is over 3,000 bolivars compared to the government’s 900 bolivars.
Maduro’s has been authoritarian in nature by increasing security tactics, and looking to rewrite the Venezuelan constitution in order to postpone elections. His approval rating is dwindling, he has refused humanitarian aid, as well as faced condemnation from other nations.
Where Venezuela goes from here is yet to be seen, however, intervention seems imminent.
Manuel Ramos is a contributor for Politicsay. Manny is a Chicago based journalist focusing on race relations in the United States, and policies impacting Latin America and the Caribbean. His work has appeared in the Chicago Reader, South Side Weekly, and the Daily Line.