INTRO: Most of us associate oil reserves with enormous
amounts of wealth, and this is for good reason. Oil has become one of the most sought after
commodities in the world which has allowed countries with notable oil reserves to rise
to the absolute top. Saudi Arabia, for example, has cash and gold reserves that total nearly
half a trillion dollars. Similarly, Saudi Arabia’s flagship company, Saudi Aramco,
is currently profiting over a quarter trillion dollars per year. Considering this, you would
think that any country with reserves that are comparable to Saudi Arabia would be filthy
rich, but this is actually not the case. In fact, Saudi Arabia doesn’t even have the
world’s largest oil reserves. This title actually goes to Venezuela who has roughly
300 billion barrels of oil. That’s nearly ⅕ of the entire world’s oil reserves.
Yet, despite this, Venezuela isn’t particularly well off or rich. They’re actually particularly
poor and struggling. For one, they recently experienced some of the worst hyperinflation
known to mankind with inflation peaking in the hundreds of thousands of percent. 10 years
ago, you could only get 4.3 Venezuealan Bolivars for 1 US dollar, but by late last year, you
could get 419 billion Bolivars with just 1 US dollar. This number has since plummeted
to 782,000 bolivars per dollar, but that’s not because inflation is cooling down. Rather,
this is actually become the government decided to divide their currency notes by a million.
So, without this conversion, each US dollar would actually be able to get nearly 800 billion
bolivars. Fortunately, the country has oil revenue to rely on, but this hasn’t been
nearly as helpful as you might think. Oil accounts for roughly 25% of Venezuela’s
GDP. With a GDP of $482 billion, this means that oil accounts for approximately $120 billion
worth of GDP. While this is not a bad figure in itself, when you consider that Saudi Aramco
itself is able to pull in net profits that are over double this figure, you start to
see just how behind Venezuela really is. So, why is Venezuela so poor despite having the
world’s largest oil reserves?
DUTCH DISEASE: Taking a look back, it’s definitely not
a lack of trying that has screwed over Venezuela. In fact, Venezuela has been trying to capitalize
on their oil reserves for over a 100 years. It all started in the year 1908 when a man
named Juan Vicente Gomez became the president of Venezuela. Juan was an ambitious man who
wanted to slash Venezuelan debt and revolutionize the country. And the way he sought to accomplish
this was by leveraging the country’s oil reserves. At the time, people knew that Venezuela
had enough oil for commercial purposes, but no one could have imagined the full magnitude
of just how much was actually available. President Gomez, however, was willing to roll the dice
and test the country's luck. So, he handed out oil concessions to his closest friends
and told them to go enrich themselves and the country. These guys would turn around
and hire oil companies to come in and begin the hunt. Within the next several years, these
companies would find several viable oil reserves. However, the blowout discovery didn’t come
till 1922 when Shell struck oil in the Maracaibo Basin. This well was able to produce over
one hundred thousand barrels of oil by itself. As you guess, it didn’t take long for more
oil companies to flood in and they were able to pump up production to 137 million barrels
of oil by the end of the 1920s. For perspective, Saudi Arabia didn’t find oil till 1938,
so Venezuela definitely had the first mover’s advantage, but what they didn’t have was
good management. You see, when you find oil, it’s not as simple as just cashing in the
checks and living the high life. You have to reinvest the profits and diversify the
economy if you want the money to actually create long term change. President Gomez,
however, didn’t do either of these. Now, this isn’t to say that he spent the money
in poor ways per se. Of course, he enriched himself and his friends, but he also spent
significant amounts on public projects and slashing the country’s debt. This might
seem like a good use of money, but it actually leads to a phenomenon called Dutch Disease.
Dutch Disease is when a country experiences a massive influx of economic growth within
one sector which diverts the entire country’s focus. Everyone suddenly wants to work in
this one industry or open a business in this industry. And while it’s definitely a good
idea to follow opportunity, this sort of behavior leads to the rest of the economy to fall to
the wayside and become underdeveloped in relation. In other words, the country becomes overly
dependent on just one part of the economy. And this is exactly what happened in Venezuela
given that oil accounted for 90% of their exports by the time Gomez died. This situation
has only gotten worse over the years as oil accounts for 95% of Venezuela’s exports
today. But, at the time, the Venezuelans didn’t realize what was ahead of them, and they would
simply lean further into their oil dependence.
BAD PLAYERS: Now that Venezuela had proven their viability
to the western world, it was them who had the leverage. You see, in the beginning, it
was the other way around. All these oil companies had to come in and make a massive gamble on
Venezuela, but now that that gamble had proven fruitful, Venezuela could start making demands.
One of the first demands the country made was for a larger proportion of the oil revenue
to flow into the government. In 1943, the government introduced the Hydrocarbons Law
which required that foreign companies hand over half of their oil profits to the state.
This proved to be extremely lucrative as Venezuela’s income would grow six fold in the following
5 years. But, Venezuela was just getting started. Over the next few decades, Venezuela would
slowly nationalize the entire oil industry. In the meantime, they were also pushing for
political reform and trying to escape a history of dictators. One piece of this puzzle was
the Punto Fijo Pact in 1958. This agreement stipulated that the oil money would be split
between the three main political parties in Venezuela. And the respective proportions
would be determined by the popular vote. At first glance, this sounds like a decent system.
By splitting up the oil money, you ensured that one political party couldn’t just overpower
the others. But, at the same time, this also opened up the country to loads of embezzlement.
I mean, who was gonna make sure that these political parties would actually use the money
in effective methods? The answer is no one. While this storm was starting to brew inside
Venezuela, to the rest of the world, it seemed like Venezuela was killing it. In 1960, they
would join up with the Middle Eastern countries to found OPEC. This was essentially an agreement
that these countries would work together to maximize oil profits for all member countries.
And now that Venezuela had the Middle East on their side, they were able to become even
more aggressive with their own oil endeavors. That same year, Venezuela established a state
owned oil company and increased taxes on oil companies to 65%. At this point, it was just
a matter of time until Venezuela nationalized oil production. All it would take is one more
monumental event, and that’s exactly what would happen in the 1970s with the oil embargo.
In 1973, OPEC would implement a five month embargo on countries that supported Israel
in the Yom Kippur War, and one of these countries was the United States. As all of their demand
shifted to non OPEC countries, oil prices would quadruple which was extremely lucrative
for all oil producing countries, but especially Venezuela. Venezuela would end up boasting
the highest per capita income in Latin America, and this is exactly the push they needed to
completely nationalize the country’s oil production in 1976. Normally, this would be
a good thing. It wasn’t until Saudi Arabia nationalized their oil production that they
became stupid rich. But, the problem was that Venezuela already had a massive leak when
it came to oil revenue due to corruption, and nationalization just kicked this issue
into full gear. Between 1972 and 1997, it’s estimated that $100 billion worth of oil money
was embezzled by politicans and government officials. With that sort of leak, it’s
no wonder why Venezuela ended up where they are today.
HUGO CHAVEZ: At this point, you might be thinking that
things can’t get much worse, but they did because a socialist named Hugo Chavez would
become president in 1998. During this time period, everyday Venezuelan’s were livid
because everyone knew what was happening. Politicians were siphoning national money
like there was no tomorrow, so when Chavez came in with his pitch of welfare and equality
for all, the Venezuelans ate it up. Now, people often like to blame Chavez for Venezuela’s
downfall, and this makes sense given that he was the reason. But, you can’t really
blame him because he didn’t really do anything unethical or immoral per se. He truly believed
in socialism and he campaigned on the premise that he would implement socialism, and that’s
exactly what he did. He took all the oil money and created loads of social programs focusing
on justice, welfare, poverty, education, the military, and so on. He also peddled socialist
ideologies that often led to horrendous results. In one of his most famous speeches, for example,
he essentially declared that it was ok to steal if you were hungry. Honestly, I think
he had good intentions when he said this, but what this resulted in was loads of crime.
Meanwhile, his social programs were simply feeding into Dutch Disease. As more people
started relying on these welfare programs, the other industries in Venezeula plummeted
to record lows while dependance on oil rose to record highs. Also, we should note that
Chavez didn’t really do anything to fix the corrpution problem. If anything, he partook
in the same activities as he would eventually grow to be a billionaire. While Chavez was
growing his wealth, however, Venezuela was quickly losing theirs. Take the 2002 Venezuelan
oil strike for example. Tens of thousands of oil workers would go on strike and demand
for a new election to replace Chavez in 2002. Instead of addressing their concerns though,
Chavez would just go ahead and fire 18,000 oil workers. While Chavez was definitely able
to show who was in charge, this would take a massive toll on the country’s oil production.
Venezuela was not only becoming more dependent on oil revenue, but oil production was declining.
This was simply a disaster waiting to happen, but Chavez would actually never see the consequences
as he would die due to health problems in March of 2013. Less than a year later, oil
prices would crash because Saudi Arabia would decide to start a price war. The entire world
would feel the pain of their actions, but most of them would survive to see the other
side. The same, however, could not be said about Venezuela.
THE COLLAPSE: Given that Venezuela was nearly a 100% dependent
on oil when this crash in prices took place, the country's economy basically fell off a
cliff. The government would try to stimulate the economy by printing money and injecting
it into economy. But the problem was that there was nothing to stimulate. Venezuela
had no economy. It was just oil and that’s it. So, when oil went belly up, the country
went belly up, and it was no time before hyperinflation settled in, and that brings us to where we
are today. Looking back, it’s not like Venezuela wasn’t able to leverage their reserves or
pump up production or pull in loads of money. The problem is that none of this money actually
went to anything useful. Virtually all of it went to corruption and social programs,
when it should’ve gone to developing the economy. Over time, Venezuela’s economic
development just became more and more uneven until they became fully dependent on oil revenue.
And at this point, it just took one downturn in the oil market to wipe out the entire country.
And that’s why Venezuela is dirt poor despite having the world’s largest oil reserves.
On the brightside, Venezuela still has their oil reserves. So, do you think Venezuela can
turn things around? Comment that down below. Also, drop a like if you hope things get better
in Venezuela. And of course, consider checking out our discord community to suggest future
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