From Rags to Riches: The Collapse of Venezuela’s Massive Oil Sector

Venezuela’s ineffective leadership has led to an economic downturn.

Venezuela has more proven oil reserves compared to any other country on the planet. With roughly 300.9 billion barrels of oil, Venezuela is home to 18% of the world’s total oil reserves. However, despite the plethora of oil within Venezuelan lands, Venezuela’s massive oil sector is experiencing the culmination of a collapse that started in 2010, the likes of which the world has never before seen. 

Just a decade ago, Venezuela was the largest exporter of oil in Latin America and earned a net $90 billion a year doing so. By this year’s end, however, Venezuela “is expected to net about $2.3 billion,” according to The New York Times’ estimates. The sudden drop in Venezuela’s revenue, primarily based on oil, can be attributed to a decrease in exports. Oil exports from Venezuela plummeted 32% last year, and Industry Consultancy IHS Markit believes that oil production could fall to zero by 2021. 

This lack of revenue has resulted in numerous negative ramifications for Venezuela. Though many used to praise the country as a stable and confident democracy in Latin America, it now has a population in which 96% of Venezuelans are in poverty, and 70% are in extreme poverty, a result of the rule of corrupt politicians removing democratic institutions since the beginning of the 21st century. So, how did a once-great, wealthy, and booming country which began to contest the United States for regional Latin American influence just a decade ago become a piece of economically and politically dysfunctional land with a humanitarian crisis, where the average income in 2019 was 72 U.S. cents per day? The answer is a combination of corruption and  excessive dependence on oil.

Robert Papier, an engineer in the energy industry, believes that Venezuela’s decline stems from the reign of the deceased Hugo Chavez, the former president of Venezuela. Papier identifies a lack of expertise in Venezuela’s oil company, PDVSA, as the root cause for the eventual downfall. For example, 19,000 PDVSA employees were fired and replaced with Chavez loyalists.  Thus, when oil prices fluctuated, the absence of professionals who had an understanding of the international market led to billions being invested in the wrong places, as Chavez “failed to reinvest adequately in this capital-intensive industry,” according to a Forbes article. 

Furthermore, he blinded his people with a false dream of short-term economic prosperity while secretly transforming Venezuela into a socialist regime by erasing the private sector and placing the entirety of the economy into his administration’s hands. Chavez also allowed corruption to imbue all sectors of the government. His improper and novice grip on the nation’s oil sector, or in other words the overwhelming majority of Venezuela’s economy, crippled it. Notwithstanding that the oil sector failed, millions should not have been thrown into utter destitution. 

In the case of Venezuela, however, the socialist government had an over-reliance on oil. Often referred to as the “oil curse,” Venezuela found oil so profitable that it ignored other industries. As a rentier state, the economy may not survive the inevitable drop in oil prices. Most see this lack of diversification as a problem of the Middle East, but Venezuela exemplifies its disastrous consequences. Oil prices fell, and Venezuela was not equipped to deal with the repercussions of its inadequate leadership. To this day, Venezuela’s national budget is consumed with paying off debt and, ironically, spending the last of their gold reserves to buy oil from Iran, as the oil infrastructure in Venezuela is mostly obsolete due to a lack of capital to reinvest. 

Moreover, the subject here may be the oil sector, but the participants are the people. The collapse of the Venezuelan economy, caused by the lack of diversification, corruption, and bad leadership, has primarily affected people, who are often overlooked. According to a recent report, the U.S.’s history of sanctions on Venezuela has caused up to 40,000 Venezuelan deaths. Perhaps, in the future, Venezuela can rebuild its infrastructure and revive the oil sector by incentivizing private industry. But first, the humanitarian crisis that caused the collapse of Venezuela’s oil sector must be addressed.

Venezuela could be galvanized into the state it once was, without a humanitarian crisis, through proper leadership, new oil infrastructure, and an economy based on more than just oil exports. Because its leaders destroyed the country, Venezuela should learn from its past mistakes. Venezuelans, once their basic needs are met, have the power to elect new representatives into office. Such power that understands the journey the people have been through.

Photo from Shutterstock.

By Daniel Waheed