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ince,
its unstoppable progress after the discovery of oil to the burning of its economic
framework to the ground, Venezuela has a moving yet an interesting story. Since
its inception of the oil industry back in 1922, the country has made several
mistakes to finally lead to a tremendous resource curse. This post tries to
relook at the narrative of Venezuela and analyze its mistakes in the past.
It was 1922 and the oil
well was called Barossa 2. The geyser
shot up 130 feet in the air and 100,000 barrels of oils rained on the
inhabitants for a week. This was the time when Venezuela realized that they had
found the goose who lays golden eggs. It was game-changing event for the country. In 20th century, Venezula predominantly relied on coffee
and cocoa to fuel their exports and the discovery of oil led to a huge
transformation of the economy as a whole. This was a utopian world for
Venezuela when foreign companies started to take notice and expressed their
interests to set their operations in Venezuela. In 1928, the de-facto ruler of
Venezuela, Gen. Juan Vincent Gomez allowed 100 foreign companies to leverage
the benefits of booming economy. Towards 1940s, oil behemoths like Exxon Mobil,
BP, Chevron and ConocoPhillips started setting up their businesses in
Venezuela. With this, oil infrastructure in the country transformed
dramatically as country observed a huge inflow of investments across the
frontiers. The country’s leadership passed laws that foreign entities should
turn over half their profits to Venezuela. This step worked fine because
companies were looking to explore different avenues in oil industry &
Venezuela did provide them the required platform.
By 1958, Romulo Betancourt, the man who
engineered the Venezuelan democracy, took control of government machinery and
military support and consolidated all the oil revenues in the hands of the
government. The year 1973 was a very significant year for oil lobby. The
embargo by OPEC countries on United States of America led to oil prices to
quadruple. In 1971, President Nixon removed United States off the gold started
as he halted the Bretton
Woods agreement. This sudden decision eroded the value of dollar considerably
and sent the gold prices skyrocketing. The depreciating value of dollar
impacted OPEC countries as majorly all the oil transactions were dominated in
the dollar terms. United States of America landed in bad books of the OPEC
countries as USA extended its support to Israel against Egypt in 1973 Yom Kippur War.
Although, the embargo ended in March 1974, Venezuela had observed tremendous
capital inflow in the country and the economy boomed like never before. In
1975, Venezuelan President Carlos Andres Perez nationalized the oil industry
and created a government-owned oil company Petroleos
de Venezuela, S.A (PDVSA). The government then seeked 60 percent ownership
in the oil projects from the foreign firms.
Eventually, the
macroeconomic parameters tripped the running Venezuelan economy when the 1980 oil
glut and reducing oil demand led to a sustained collapse in the oil prices. To
stitch some numbers to the fact, oil production in 1985 fell below 2 million
barrels per day, which was almost 50 percent lesser than the utopian era
pre-nationalization era. Perez took to a
huge foreign debt (USD 33 billion to be exact) in order to fuel the slowing
economic engine. The debts kept piling up to an extent that International
Monetary Fund (IMF) had to impose austerity measures and grant a bailout in
order to rescue the sinking ship. This entire mishap resulted in huge oil price
fluctuations.
The populist leader
Hugo Chavez, former lieutenant colonel in the army, was elected as President in
the year 1998. He vowed to assuage Venezuela from its ballooning resource
curse. However, his strategy did not hit the required targets and situation
gradually went out of control. He wanted to exert Venezuelan influence over
Cuba and hence provided subsidized oil to Cuba in return for its medical and
academic professionals. He also sold oil to South American counterparts at
rates below market prices. His agenda was to quell poverty, however he failed
to decrease the dependence on oil which he promised to do. Chavez also deferred
from spending on maintaining the oil production facilities and with this the
oil production in Venezuela took a nosedive. Hugo Chavez passed a law that all
the oil projects in Venezuela would be led by the PDVSA and not by an outside
company. He played with PDVSA’s internal senior management by firing employees,
who acted against his interests, by replacing them with the political hacks.
PDVSA’s output collapsed as the discontented workers refused to pump oil,
halting the company’s operations. The injury done to PDVSA was so magnified
that it was estimated that PDVSA would need longer than a decade to rebuild its
technical prowess.
Venezuela was a affluent
country in mid-1990s. It produced more than 10 percent of world’s crude and
was not far behind the global power, USA. Venezuela never had an outside
threat. All the wounds came from the internal mismanagement and their inability
to diversify. By end of 2015, oil from Venezuela was selling at 30 USD per
barrel whereas the market rates were around 60. Venezuela, at this juncture,
made 95 percent of its export revenues from oil and after its failure to
diversify had absolutely no cards up its sleeve. Chavez’s successor Nicolas
Maduro added the final nail to the coffin. He changed the political structure
and established a dictatorial rule, averse to the discontent expressed by the
United Nations. The economy has spiralled into a hyperinflation (about to reach
1,000,000 % mark) following years of mismanagement and ignorance. The country that
once reaped rich benefits from the oil bonanza has to now turn to outside
investment to secure the burning economy.
The solutions are
pretty obvious and when the end is in sight, it is imperative to execute them
faster. Venezuela needs a regime makeover. It needs a leadership who can make
the right decisions at right time. The international community should
collaborate with democratic forces in Venezuela to enable a smooth transition
from the current toxic leadership. Venezuela should also allow investments from
foreign companies. However, this will come at a sacrifice. Venezuela should
give up its regulations of maximum ownership
stake and allow foreign companies to
have the greater share of the pie. Lastly, Venezuela needs a reliable currency
exchange rate with respect to dollar to get out of the hyper inflationary
quagmire.
