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| Fig. 1:Historical oil production level in Venezuela. [4] (Source: D. Kandel) |
Venezuela, a country with the world's largest oil reserves, serves as a prime story of how a nation with immense valuable resources went from being one of the most prosperous countries to social, political, and economic ruin. Venezuelas economy is primarily reliant on oil, and in 2018, the total value of its oil exports was $34.67 billion, while non-oil exports were valued at just $0.38 billion. [1] The oil exports alone accounted for 35% of its GDP in 2018. The economic windfall of Venezuela is mostly a result of decadal sociopolitical and economic policies that the government of Hugo Chavez took, but a major event that marked the start of this drastic windfall is the sudden drop of oil prices in 2014 from $100 a barrel to $50. In the aftermath, a series of steps taken by the government, which includes controversial steps like price controls in goods and commodities, the country entered a phase of hyperinflation. [2] In 2018, Venezuela's inflation rate hit 65000%, a figure which implies 50% of the currency value decreases every month. [3] The inflation rate still hovers at 15000%.
Prior to 1960, the oil market in Venezuela was controlled by a few foreign companies like Royal Dutch Shell, Standard Oil, and Shell. They were however required to give over 50% of their profit to the government. In 1960, Venezuela joined with other leading oil-producing countries as a founding member of the Organization of the Petroleum Exporting countries (OPEC), and the coordinated effort of these countries in the oil market gave them control over their national oil supply, and because of this increased control, Venezuela established its first oil company and introduced several steps towards nationalizing the oil industry. The economy of Venezuela increased substantially in the 1970s to late 1980s, because of the increase in oil prices. While there was a significant decrease in production over this period (see Fig. 1), the price increase from less than $2/barrel in the 1970s to over $30/barrel in the late 80s created a steady increase in the oil revenue (see Fig. 2). However, in the 90s, the oil price decreased and the economy contracted.
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| Fig. 2: Oil revenue over year. This graph was produced by taking the product of yearly oil production and the yearly price of crude oil. [4] (Source: D. Kandel) |
Hugo Chavez was elected as the president of Venezuela in 1998. Several austerity steps taken by his government led to a steady decline in oil production. By 2013, the end of his presidency, the government debt had doubled. In 2014, the oil price collapsed by approximately 50%, which led to a free fall in oil revenue (Fig. 2), and thus in the country's GDP. The country's GDP shrunk by 6% in 2015 to 35% in 2019, and the inflation rate is hovering over a massive 15000%. [3]
In this report, we have focused on the economic collapse of Venezuela purely in terms of oil price collapse and the decrease in oil production. Unsurprisingly, the issue is much more complicated and the main part of the story is probably the political institution of the country, and how the oil resource was mismanaged and abused.
© Dinesh Kandel. The author warrants that the work is the author's own and that Stanford University provided no input other than typesetting and referencing guidelines. The author grants permission to copy, distribute and display this work in unaltered form, with attribution to the author, for noncommercial purposes only. All other rights, including commercial rights, are reserved to the author.
[1] "OPEC Annual Statistical Bulletin 2019," Organization of Oil Exporting Countries, 2019.
[2] M. Benzaquen, "How Food in Venezuela Went From Subsidized to Scarce," New York Times, 16 Jul 17.
[3] "World Economic Outlook," International Monetary Fund, October 2020, Tables A4 and A7.
[4] "BP Statistical Review of World Energy 2020," British Petroleum, June 2020.