The Fall of Venezuela’s Oil-Based Economy
Currently, Venezuela is in an economic crisis. According to the International Monetary Fund (IMF), Venezuela’s inflation rate will exceed 10 million percent by the end of 2019. This high inflation has destroyed Venezuela’s economy, causing poverty and unemployment rates to rise. In turn, it has also created mass food and medical supply shortages across the nation. Venezuela was not always in a state of crisis; it was once a thriving country backed by a booming oil-based economy. If one understands the fall of Venezuela’s oil-based economy, they will know how Venezuela’s current crisis came to be.

Fruitful Origins

Back in the 1920s, people found some of the world’s largest deposits of oil in Venezuela. Upon this discovery, Venezuela embarked on the path of a petrostate. As a petrostate, Venezuela’s economy relies almost entirely on oil exports. The government overlooked domestic manufacturing and agriculture, choosing to import basic goods instead of producing them within Venezuela. With strong support for an oil-based economy, Venezuela rode on its economic boom until the end of the worldwide energy crisis of the 1970s.

The 1970s energy crisis involved international oil shortages due to interrupted supplies from the Middle East. In place of the Middle East, Venezuela became one of the top oil suppliers worldwide. Oil prices thus skyrocketed due to limited suppliers and oil production in Venezuela increased to meet rising demand. Venezuela added about $10 billion to its economy during the energy crisis, providing enough wealth to cover the importation of basic goods. It was even able to begin more social welfare programs.

The Fall

Once the energy crisis ended in the early 1980s and oil prices stabilized again, Venezuela’s economy saw its first notable decline. Oil production did not decrease in spite of lowered oil prices and demand, resulting in a capital loss for Venezuela’s economy. The production of oil is an expensive endeavor which requires high capital investment in the hopes of that even higher sales can offset the investment. Therefore, while oil production remained high, Venezuela failed to build off of the investment, losing capital immediately.

This loss of capital marked Venezuela’s oil-based economy’s initial fall, as Venezuela risked its well-being on the unstable oil market. Just prior to the drop in oil prices, Venezuela went into debt from purchasing foreign oil refineries. Without investing in domestic agriculture or manufacturing, the Venezuelan government became economically strapped; it could no longer pay for its imports and programs, and especially not its new refineries.

In order to pay for its expenses, Venezuela had to rely on foreign investors and remaining national bank reserves. Inflation soared as the country drilled itself further into debt. It was not until the early 2000s that oil prices began to rise again and Venezuela could once more become a profitable petrostate — in theory. Under the regime of Hugo Chávez, social welfare programs and suspected embezzlement negated the billions of dollars in revenue from peaked oil exports.

By 2014, when oil prices took another harsh drop worldwide, Venezuela did not reserve enough funds from its brief resurgence of prosperity. Ultimately, the country fell back into a spiral of debt and inflation.

Lasting Effects

The fall of Venezuela’s oil-based economy sent shockwaves throughout its population, affecting poverty and unemployment rates and causing mass food and medical shortages. Estimates determined that in April 2019, Venezuela’s poverty rate reached nearly 90 percent nationwide. A notable factor of its widespread poverty, some suggest that Venezuela’s unemployment rate was 44.3 percent at the start of 2019.

Unemployment is rapidly increasing in Venezuela as both domestic and foreign companies lay off workers — with some companies offering buyouts or pension packages, and others just firing workers without warning. As Venezuela falls further into debt and its inflation rises, there is not enough demand within the country for foreign companies to stay there.

As previously mentioned, the earlier Venezuelan government chose to rely on imports rather than domestic production for its basic goods. Now, in 2019, the country suffers from its past mistakes. Unable to afford its imports, food and medical supply shortages are rampant across Venezuela. According to recent United Nations reports, over a 10th of the nation’s population is suffering from malnourishment. In addition, malaria — which the country virtually eliminated several decades prior — is reappearing as there are more than 400,000 cases nationwide.

A Way Out

While the fall of Venezuela’s oil-based economy may be detrimental to the nation’s overall stability, there is a way out of ruin: the International Monetary Fund, an international agency that exists to financially aid countries in crisis. In the fight against global poverty, the IMF is a vital tool that can prevent countries from reaching an irreparable state.

If Venezuela defaults on its debt and seeks funding from the IMF, Venezuela would be able to invest in domestic agriculture and other infrastructure. Therefore, if the oil industry continues to decline, there will be a fallback for supplies and potential exports. While this is not a panacea to the fall of Venezuela’s oil-based economy, it is a way for the nation to prepare for any future declines in oil prices and begin to work toward prosperity.

– Suzette Shultz
Photo: Flickr