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| Fig. 1: Venezuelans in line for groceries. (Source: Wikimedia Commons) |
Throughout the world, over the past century, many developed countries have entered a period of exponential growth where they have seen their population and wealth grow. To fuel this growth, primary resources are in need. In Latin America, many countries have found new riches as they continue to explore and develop their natural resources and export them to sell through the world. One country that has found immense wealth from oil is Venezuela. As a result of the new found wealth, Venezuela has used that wealth to fund social welfare programs for the people. Additionally, it uses the wealth as a way of subsidizing goods in order to make a certain good more accessible for its people and increasing productivity in the country. One good that has been subject to heavy price controls and large government subsidies is gasoline. Over its history with oil, Venezuela has used its state oil company as a way of funding its social welfare programs and has also had large subsidies on the price of its gasoline. It is this dependence on oil that has led it to its current economic struggles.
First drilled for in 1879, oil was seen as a resource that Venezuela could one day profit from if it ever grew in demand. [1] About 40 years after, the United States began to increasingly utilize oil, and Venezuela found itself sitting on a gold mine. [1] Venezuela oil production then shot up as it supplied the United States. The oil industry in Venezuela began to grow to the point where, in 1929, it dominated all other sectors in the country. When 1945 came, it was the United States' biggest oil supplier. [2] By the 1950s, agriculture, which compromised 1/3 of the economy in the 20s, was now compromising less than 10% of the economy. [2] However, by the 1950s it was very apparent that the country was suffering from Dutch Disease, the phenomenon that occurs when a country focuses its productivity on a single good at the expense of others. Venezuela did little to combat this, as its GDP per capita was still increasing. Venezuela from then on went to become the richest country in Latin America - until recently, when the decreasing price of oil had disastrous effects on its economy. [3] To increase productivity in other industries and the public's social welfare, the government enacted large gasoline subsidies to drastically decrease the price of gasoline to the point where it is almost free.
The Organization of Petroleum Exporting Countries, commonly referred to as OPEC, was founded in Baghdad in 1960. Feeling that the United States corporations were taking advantage of them, four Gulf countries and Venezuela joined together to form a cartel as a way to unify the oil-producing countries and being able to control prices for them to be most profitable. Their objective was to coordinate and unify petroleum policies among member countries, thus securing fair and stable prices for petroleum producers. [4] Being an original founding member, Venezuela had much to gain from this partnership. On two occasions, the first an oil embargo by OPEC and the second a crisis caused by the Iranian Revolution, OPEC was able to fulfill its mission.
In 1973, OPEC imposed an oil embargo in order to get back at the United States for supplying the Israeli military with arms and supplies during their conflicts with Egypt. It was also a way to gain leverage in the following peace negotiations. [5] As a result, the OPEC member counties limited the amount of oil that they produced in order to increase oil prices in the United States. [5] During the boom of the 70s, there was a rush to invest in Venezuela. People believed that the oil boom, and that Venezuela's growth would last forever. The bubble finally popped in 1983. The Bolivar's value declined rapidly. As the embargo's end, the price of oil began to drop, as did the Venezuela's GDP per capita. The annual inflation then was around 520%. This high rate of inflation eventually led the people to select Hugo Chavez as the president of Venezuela in 1999.
Fortunately for Venezuela, in 2003, the United States entered the Iraqi war against Iraq, which was one of the biggest oil producers at the time. [6] This greatly disrupted all oil production in the Gulf, leading to a large decrease in global supply. This led to the United States getting a majority of its oil from Venezuela, much like it had done during the World Wars. [6]
Chavez, wanting to appeal to Venezuela lower classes, decided to reroute the earnings from PDVSA, the Venezuelan state-owned oil company, into providing subsidies for goods. His mission was to eliminate poverty by making basic goods accessible to everyone. With the rising oil cost of the 2000s, Chavez, using PDVSAs earnings, had more than enough to accomplish his goals. At the start of Chavez's term, the state revenue from oil was only 5.79% of Venezuela's GPD. By the start of 2007, it was 15.89%.
One of the biggest subsidies was for gasoline. [2] With this subsidy, Venezuela became the country with the lowest fuel prices in the world. A liter of gasoline was less than a cent. [7] As a result, the demand for gasoline in venezuela greatly increased. Consumers in Venezuela also had much greater purchasing power. The large subsidy caused PDVSA to take a large financial hit with every liter of gasoline it sold. The gasoline was even so cheap that it became a frequent occurrence that people would fill up their tanks and take as much gasoline as they could into Colombia in order to sell it at market prices there. [8]
Being a country in which the main focus was oil, other industries in the countries suffered from Dutch Disease - due to being neglected. With the price controls, the goods were sold at less than a market price. The result was that these particular essentials were in high demand. This led to many shortages, as the sectors simply did not have the capability of producing more. According to the central Venezuelan bank, in 2013 most goods had a supply shortages that ranged from 5% to 22.2 percent, depending on the good. [2] As a result, through the 2000s the Venezuelan government spent a large fraction of its oil revenues importing consumer goods, that it then sold a lower cost. [9] It was effectively losing money on every single item that it imported. However, the idea was that the amount of money that people were spending on oil was simply going to keep going up.
By 2014, primarily due to shale oil's bringing the price down, PDVSA's revenues had dwindled significantly. With the amount of revenue from oil decreasing every year, Nicolas Maduros, the president who replaced Chavez one year after his death, began printing large amounts of money in order to pay for all its imports. This then led to high levels of inflation in the country. [9] The inflation increaseed the price of goods and services to the point where they were no longer accessible to the people. Currently, the cost of basic groceries is about 5 times the minimum wage. Fig. 1, shows a normally occuring line of Venezuelan citizens waiting for basic groceries. [9]
Being a country with such a wealth of petroleum, Venezuela, in fact, depends on hydroelectricity in order to supply most of its electricity generation. With large droughts affecting the amount of water in the reservoirs and dams, Venezuela has been unable to generate enough electricity for its citizens. [10] As a result, it has had to import a large amount of energy from Columbia. In 2012, electricity imports from Columbia rose 92.3%. [11]
In the recent years, technological advancements have made shale oil, an unconventional oil which can be refined to regular crude oil, easier to produce and extract. The United States has been able to drastically increase its own output of oil and natural gas to the point where in a couple of years it will now be net exporter of oil instead of an importer. [11] According to the European Central Bank, the United States increased its oil output to the point where in 2013 it was 3 times what it was in 2010. [12] Looking at the price of oil since 2011, the year in which US companies started extracting shale oil, the price has significantly decreased. [11] In the United States, the influx of shale oil has had large effects. In 2014, according to Andrew Critchlow, a commodities editor for The Telegraph, the threat of shale oil caused Saudi Arabia to increase the supply of oil in the market, with the hopes that it would decrease the price of oil to the point where it would not be profitable for US companies to continue to explore and extracting shale oil. [13] Nowhere have Saudi Arabia's actions been more detrimental than to fellow OPEC member Venezuela. At the high of 2008, oil exports accounted for 95% of all Venezuelan exports. [14] With the US no longer being a destination for that oil, it has now had to find other markets to sell its oil, primary China, which comes with a high transportation cost when compared to the United States. [14]
Blessed with a valuable commodity, Venezuela was able to increase its standard of living greatly and its GDP to the point where it was once the richest country in South America. It is now, the country with the highest amount of poverty, and its economy is in ruins. Unfortunately, the country focused so much on oil that its other industries suffered. Using price controls and large subsidies, Venezuela decided to use its seemingly never-ending oil revenues to fund its social welfare programs and to keep its people happy. This led to a weak local production and thus to Venezuela's having to import a lot of basic needs and having to sell them for much less in order to be able to support its people. In the end, the subsidies and price controls led to its economy to collapse as oil revenues failed.
© Angel Rubio. 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] H. M. Tarver and J. C Frederick, This History of Venezuela (Greenwood, 2005), p. 15
[2] M. B. Wu, "Issues in Venezuelan Monetary and Economic Reform," Johns Hopkins University, September 2016
[3] M. Fisher and A. Taub, "How Venezuela Stumbled to the Brink of Collapse," New York Times, 14 May 17.
[4] M. Gibson, "OPEC," Time, 10 Sep 15.
[5] T. Long, "Oct. 17, 1973: Angry Arabs Turn Off Oil Spigot," Wired Magazine, 17 Oct 11.
[6] A. Mahdi, Energy and U.S. Foreign Policy (I. B. Tauris, 2012).
[7] C. Helman, "Cheap Gasoline: Why Venezuela Is Doomed To Collapse," Forbes, 20 Feb 14.
[8] C. Kraul, "Venezuelan Gasoline and Goods Still Sold in Colombia Despite Crackdown," Los Angeles Times, 17 Jan 15.
[9] M. Benzaquen, "How Food in Venezuela Went From Subsidized to Scarce," New York Times, 16 Jul 17.
[10] G. Bakke, "The Electricity Crisis in Venezuela: A Cautionary Tale.," The New Yorker, 10 Jul 17.
[11] Adam Vaughan, "US will become a net oil exporter within 10 years, says IEA," The Guardian, 13 Nov 17.
[12] C. Mănescuand and G. Nuo, "Quantitative Effects of the Shale Oil Revolution," European Central Bank, Working Paper No. 1855, September 2015.
[13] A. Critchlow, "Saudi Arabia Increases Oil Output to Crush US Shale Frackers," The Telegraph, 27 Jan 15.
[14] M. McCarthy, "6 Things You Need to Nnow About Venezuela's Political and Economic Crisis," Washington Post, 18 May 16.
