The Venezuelan Oil Market: The Fall of a Petrostate

Workers at the Maracaibo basin operating the oil rig

In 1922, geologists from the Royal Dutch Shell company struck oil in the Maracaibo Basin in Venezuela, marking the beginning of one of the most dominant — yet disastrous — petrostates in world history. Within the first few years of its discovery, the Maracaibo Basin quickly began to yield about one hundred thousand barrels of oil per day. Astonished by the Royal Dutch Shell company’s success, around one hundred foreign companies rushed in to try and participate in this flourishing industry. With the arrival of these new foreign companies, Venezuela saw its annual production of oil dramatically increase from one million barrels to 137 million in the 1920’s, and by 1927, Venezuela was only second to the United States in total output of oil. This rampant growth continued into the 1930’s, and by 1935, Venezuela’s oil industry had an enormous grasp over Venezuela’s economy to account for 90 percent of all exports. Despite Venezuela’s massive success, Venezuela would eventually be crushed under the weight of their own achievements in the forms of descending market prices and corruption. This would then lead to Venezuela effectively donating oil to the United States after Russia’s hostile actions against Ukraine in 2022.

In the 1930’s, three foreign companies controlled 98 percent of Venezuela’s oil industry: Royal Dutch Shell, Gulf, and Standard Oil. Seeking to capitalize on these company’s profits, Venezuela’s government passed Hydrocarbon’s Law in 1943, a policy that mandated that all foreign companies give half their oil profits to the government. As a result, the Venezuelan government’s income increased to over six times its original amount in just five years.

In 1960, Venezuela joined Iran, Iraq, Kuwait, and Saudi Arabia as a founding member of the Organization of the Petroleum Exporting Countries, or OPEC, which would later invite Qatar, Indonesia, Libya, the United Arab Emirates, Algeria, Nigeria, Ecuador, Gabon, Angola, Equatorial Guinea, and the Republic of Congo. OPEC’s creation allowed the world’s largest producers of oil to get together and coordinate prices while also trying to give themselves more control over their own industries. In particular, Venezuela’s attempt to take their oil industry back was by increasing the tax on foreign oil companies from 50 percent to 65 percent. Additionally, in 1973, a five month OPEC embargo on countries that backed Israel in the Yom Kippur War quadrupled oil prices, which made Venezuela the country with the highest per-capita income in Latin America. This added $10 billion dollars to Venezuela’s treasury, however, it ultimately led to an increase in corruption which spurred the embezzlement of around $100 billion from 1972 to 1997.

In 1976, President Carlos Andres Perez attempted to nationalize Venezuela’s oil industry and created the Petroleos de Venezuela S.A., or PDVSA, and allowed the organization to partner with foreign oil companies as long as the organization held 60 percent equity in all joint ventures. For the most part, the PDVSA ran smoothly without too much additional support from the government.

However, as oil prices plummeted in the 1980’s, Venezuela began the start of its downfall. Venezuela’s economy started collapsing and inflation rose extremely, and it contracted enormous amounts of debt from purchasing foreign refineries. Hugo Chavez, a military officer that had launched a failed coup on the former president, rose to power, beginning an era of corruption and dictatorship. Although some of his policies were beneficial to the country such as his “Bolivarian Missions” that expanded social services and decreased poverty by 20 percent, his other policies started the downfall of Venezuela’s oil industry. 

One of his biggest mistakes was firing thousands of experienced PDVSA workers for going on strike. This crippled the PDVSA and both decreased the amount of technical expertise that the company possessed as well as the motivation that remaining workers had. Chavez also ended term limits, closed independent news outlets, and effectively took control of the supreme court. With his newfound power over the state, he nationalized hundreds of private companies and foreign owned assets, such as oil projects run by ExxonMobil and ConocoPhillips. 

Executive Order (E.O) of March 8, 2022, “Prohibiting Certain Imports and New Investments With Respect to Continued Russian Federation Efforts to Undermine the Sovereignty and Territorial Integrity of Ukraine”, prohibited imports of crude oil, petroleum, petroleum fuels, oils, as well as  products of their distillation such as liquefied natural gas, coal, and coal products of Russian Federation origin into the United States. Because the United States couldn’t get their oil from Russia, they turned to Venezuela, demanding Venezuela supply at least “a portion” of oil exports to the United States in an attempt to ease the 2019 trading sanctions on the country. This would potentially start a new era of Venezuela’s oil industry if their sanctions on crude oil by the United States were lifted.

By John Mo

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