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AskUs: How come Venezuela is in such a poor state if it has nearly 300 Billion barrels of proven oil reserves?

So one of our readers asked us this question the other day: How come Venezuela is in such a poor state if it has nearly 300 Billion barrels of proven oil reserves?

ANSWER

There are two main factors in play: The horrible economic mismanagement of the Chavez regime and oil prices.

Venezuela has always been a one industry nation, that being oil. Like many other South American nations it suffered some severe inequality and racial issues. In 1999 Chavez came to power promising a socialist revolution and to redistribute the nation’s oil wealth to the people. He nationalized the oil industry and ramped up social spending, making him popular with the lower classes.

However Chavez proved to be really bad at running the economy. He fired most the nation’s skilled workers (many of whom immigrated to the US) and put his cronies and supporters in their place. He put massive subsides on food and oil which lead to smuggling to Columbia and Brazil. Investment plummeted as he nationalized more businesses and became increasingly vitriolic against the west. He began giving free oil to Cuba and other Caribbean states in an attempt to build an anti US alliance. This made him even more popular with the poor despite the massive cost of all these programs and the loss of economic productivity and growth.

Eventually these costs caught up with Venezuela (despite surging oil prices), forcing them to take out tens of billions in loans from China ($50 billion in the last decade). The debt is backed by oil. The debt is repaid directly with the physical oil shipments, but just how much debt that pays off depends on market value of the oil. Now, with oil worth far less per barrel, China is taking a very large bite of their production. 45% of Venezuela’s oil output is going just to service their debt to China.

Inflation grew and the US dollar became more and more valuable on the black market. Chavez implemented a byzantine tariff and monetary exchange policy but this only made the black market worse. As Venezuela continued to slowly crumble Chavez died (in 2013) and his successor Maduro was even more incompetent (a former bus driver) and, even worse, was not blessed with the oratory skills that Chavez had.

The straw that broke the camel’s back was the oil price collapse, destroying Venezuela’s last source of income and trade. Now Venezuela faces 400%+ inflation, a shortage of foreign currency and severe shortages of food and consumer goods. The nation is now resorting to forcing city works to spend time in the fields in a vain attempt to increase agricultural yield.

A longer-term aspect is Dutch Disease, an economic problem that occurs without any intent. If you have a high-value commodity being exported in high volume, it raises your exchange rate so high it kills the ability to export anything else. Thus there will be no other native industries.

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