The state of Gran Columbia collapsed in 1830 giving birth to the country now known as Venezuela (the other two countries that came from Gran Columbia are Ecuador and Columbia which was formerly known as New Granada). The country has been ruled by military men until the start of democratic election in 1959 (CIA Factbook, 2013). In 1999, Hugo Chavez got elected as the country’s president and implemented a new brand of “socialism” which according to him was the answer to the pressing social problems of Venezuela. This move however, led the way to a host of other problems such as a highly politicized military system, polarized political systems, weakened democratic processes and institutions, high crime rate, ecological abuse and extremely high dependence on the country’s petroleum industry (Momamer, 2010).
Venezuela is the 33rd largest country in the world by land area. Its total area is 912,050 square kilometres, 882,050 square kilometres of which is land mass. Venezuela is bound by the Caribbean Sea and the North Atlantic Ocean and lies between the countries of Guyana, Brazil and Columbia in the south. The country is naturally rich with petroleum and economically important minerals such as iron, bauxite, diamonds and natural gas.
Venezuela is the 45th most populated country in the world with an estimated population of 28,459,085 (CIA Factbook, 2013). Poverty in the country remains high at an estimated rate of 27%. This poverty rate is the result of the initiatives of the Chavez Administration, which managed to drop poverty levels from 50% in 1999 to it’s the 27% level in 2011. Because of the country’s overly dependent oil economy, the country still faces problems on poverty, income distribution inequality, unemployment, crime and delivery of social reforms due to continued and singular reliance on oil. Thus the alleviation of these social issues is still not mitigated significantly due to the failure of the Venezuelan authorities to find alternative solutions. Added to this is the current brain drain that the country is experiencing. Due to the administration and reforms made by the Chavez Administration, an estimated 1,000,000 middle-class Venezuelans have left the country causing a haemorrhage in terms of knowledge, talent and entrepreneurial skills. A case in point is the removal of 20,000 oil engineers and other employees of government controlled petroleum companies in Venezuela in 2002. These engineers quickly migrated to Canada, Columbia, the US and other countries leaving the country with very little institutional and technical knowledge (Grisanti, 2011).
The Venezuela’s Petroleum Sector
Venezuela’s economy is currently based on its petroleum sector. It produces 2.2 million barrels of oil every day according to the International Energy Agency (2013). As of today, the country’s exports are 95% oil and petroleum-based products, accounting for 18% of the Venezuela’s total Gross Domestic Product (GDP). The country produces the fifth most volume of oil in the world and is a member of the Organization of Petroleum Exporting Countries (OPEC). The growth in the economy of the country had attracted a lot of immigrants in the 1950s up to the 1980s. However, when oil prices collapsed in the 1980s, the Venezuelan economy went into a shocked state. The result was very steep inflation (about 84% in 1989 and a staggering 99% by 1996). Hugo Chavez’ ascension into power helped mitigate the step inflation rate and by 2007, posted a 9% growth for the entire economy thus indicating progress (Alvarez, J. and Hanson, S., 2009).
Figure 1 Historical Oil Production
The manufacturing sector contributed to Venezuelan’s economic growth as well. In 2006, the manufacturing sector contributed 17% to the country’s Gross Domestic Product (GDP), coming from exports of industrial goods and commodities that include aluminium, cement, beverages, automobiles, electronics and steel among others. Energy was exported to neighbouring countries as well due to the production of the Guri Dam. Agricultural production in Venezuela, despite its massive land only accounts for a paltry 3% of the country’s Gross Domestic Product.
The United States is the country’s most important trading partner as of current because of the exports of the US to Venezuela of industrial goods, agricultural products, automobiles and other goods and services while Venezuela is the fourth largest exporter of petroleum and petroleum products to the United States. Of the 2.2 million barrels of oil produced by Venezuela on a daily basis, about 800,000 barrels are exported to the United States.
Figure 2 Oil Production per Country
There are four stages of oil development in Venezuela. These are characterized in the succeeding sections of this report.
The Stage of Discovery and Primary Production in 1912-1943
Oil was discovered in Venezuela before the Columbian times. There are records that showed that the indigenous inhabitants of the area already know about oil, using oil from the ground for medicinal purposes (Wilpert, 2003). The Spanish conquistadors that arrived in the early parts of the 16th century used oil as well, bringing a barrel of oil to Emperor Charles V of Spain as a medicinal solution for the Emperor’s gout in 1539.
Oil was first commercially extracted from the Venezuelan territories in 1912, which ushered in the operation of the Royal Dutch Shell company (presently known as “Shell”) and by the United States’ Standard Oil which was owned by Rockefeller. Venezuela became the second largest oil producer in 1929, with a total export share amounting to 91.2% of the country’s total exports. The boom of the petroleum industry caused the agricultural sector and all other sectors of the Venezuelan economy to stagnate.
Affirmation of Power over the Industry by Venezuela in 1943-1974
In 1943 Venezuela began asserting power over its petroleum industry. It started a chain of policy reforms which was designed to tie the country’s income with the movement of oil in the country. This is a revision from the original model followed by the Venezuelan government of concessions and customs, which now explicitly states that oil companies will make profit but not greater than what they will have to pay the Venezuelan government by way of royalties. Everything was going well for Venezuela until the 1950s when oil was literally flooding the markets. Demand and supply forces caused oil prices to shrink, thus bringing down the national income of petroleum-dependent economies such as Venezuela. The Venezuelan government tried to counter this along with other petroleum producing countries through the establishment of the Organization of Petroleum Exporting Countries in 1960. On its own, the country nationalized its oil production as well (Wilpert, 2003).
Nationalization and Oil Boom in 1973-1998
The revenues of the Venezuelan government quadrupled between the years 1972 to 1974 due to a trade embargo imposed by the Middle East countries. Then Venezuelan president, Carlos Andres-Perez claimed that Venezuela would be a “developed country” within a few years due to the windfall of earnings of the country. President Andres-Perez instituted what is known as “La Gran Venezuela”, a scheme that incorporated key social reforms, improvement of agriculture and the other sectors of the economy that contributed less to GDP, as well as import substitution. It also included the nationalization of the country’s oil production. In 1976, the oil operations in Venezuela have been fully nationalized, after the creation of the Petroleos de Venezuela (the Venezuelan National Oil Corporation).
The windfall did not produce the promised development of Venezuela. Instead, the country experienced chronic inflation and high levels of indebtedness. When oil prices collapsed in the 1980s, Venezuela was one of the countries that were hit the hardest. Up until today, Venezuela has not been able to achieve per capita income equivalent to its pre-1980s levels despite substantial increase in oil prices in the last decade.
Attempt By The Venezuela Government To Recover Maximum Power In The Expanding Autonomous Industry In The Years 1999-2003.
Venezuela urged the re-development of the OPEC in 1998. In 2000, Hugo Chavez organized OPEC to strengthen the organization through the adherence to production quotas (for the purpose of controlling supply and prices). Because of Chavez’s efforts, oil prices rose from US$ 27 per barrel in 1985 to US$ 27 per barrel in 2000. While this was a great development for the OPEC, it was a direct conflict with what the nationalized petroleum company of Venezuela was designed to do, which was, to produce as much oil as possible. This prompted Chavez to re-nationalize the entire oil industry resulting in the firing of 20,000 oil engineers and the brain-drain in Venezuela as a result of the conflict.
The Dutch Disease
The “Dutch Disease” is an economic occurrence wherein negative consequences result from a country having an increasing level of income (Investopedia, 2013). Normally, the “Dutch Disease” is associated with natural resource discovery and exploitation but in recent times, the disease was found in instances of increasing foreign currency, foreign direct investments, in the increases in receipt of foreign aid or in the unnatural increase in commodity prices. The Dutch Disease was first observed in the Netherlands in 1960s from a discovery of natural gas, in Great Britain in the 1970s from the discovery of oil off Scotland, and in Venezuela due to the over-dependence of the country on its oil production.
When associated with a natural resource discovery, the Dutch Disease first leads to an increase in the ability of a country to be price competitive with respect to the discovered resource. Secondly, the Dutch Disease prompts an increase in the level of imports of that country. The first effect is positive to any economy, since it increases the country’s competitiveness. The second effect is detrimental in that the increase in wealth of industries that are based on the discovered resource forces none-related industries out of contention (operation) because the resource-rich industries now have the cash to import. Simply put, the disparity in the incomes of the many sectors of the industry is so great that a gain in one industry suffocates the rest of the economy.
In Venezuela’s case, GDP shrank substantially in the 1920s. Industrial production was reduced to 24% of GDP and agricultural production declined to about 6% of GDP. Venezuela constantly devaluated its currency and inflation continuously increased. All of these were symptoms of the disease. There had been other issues as well, with the government finding serious problems with its fiscal policies with the Venezuelan government spending more than it was earning, despite its revenues increasing due to oil production and exports. This taught the country as a sad lesson, when oil prices collapsed in the 1980s and the government was left with an almost insurmountable overhead in terms of government spending. This resulted in massive government spending withdrawals which ultimately resulted in social and economic inequality for Venezuela.
Conclusions
Many experts are have chipped in their opinion about the current state of Venezuela and the effects of the policies that are instituted by President Hugo Chavez. A lot of the backers of President Chavez see his policies as a way for true social and economic reform while a lot of critics feel that the economy is still oil-centric. It is undeniable that the country’s poverty levels have decreased significantly. Unemployment has also been at its lowest since the current administration began its reforms. Still a lot of work has to be done to contain the effects of the oil dependency the country has firmly affixed itself to. And the dependency on oil may not be resolved overnight. What Venezuela has is a rich resource and a chance to turn this resource useful not just for a few sectors but for the entire country. And that remains the challenge to Venezuela as of today. Newly elected Venezuelan President Nicolas Maduro now inherits the looming effects of Chavez’s policies which would be interesting to see in the coming days.
References
Alvarez, J. and Hanson, S. (2009). Venezuela's Oil-Based Economy. Backgrounder, Council on Foreign Relations. Retrieved from http://www.cfr.org/economics/venezuelas-oil-based-economy/p12089
Arnold, J. (2002). Analysis: Venezuela's crippled economy. BBC News. Retrieved from http://news.bbc.co.uk/2/hi/business/1925514.stm
CIA Factbook (2013). Venezuela. Retrieved from https://www.cia.gov/library/publications/the-world-factbook/geos/ve.html
Investopedia. (2013). The Dutch Disease. Retrieved from http://www.investopedia.com/terms/d/dutchdisease.asp
Grisanti, A. (2011). Venezuela's Oil Tale. Americas Quarterly. Retrieved from http://www.americasquarterly.org/node/2436
Mommer, B. (2010). Integrating the Oil: A Structural Analysis of Petroleum in the Venezuelan Economy. Latin American Perspectives Vol. 23, No. 3, Postbonanza Venezuela (Summer, 1996), pp. 132-158, Sage Publications, Inc. Retrieved from http://www.jstor.org/discover/10.2307/2634111?uid=3738824&uid=2&uid=4&sid=21102009155653
Reuters. (2013). Analysis: Venezuela's Maduro inherits tough economic problems. Retrieved from http://www.reuters.com/article/2013/04/15/us-venezuela-election-economy-idUSBRE93E0CD20130415
Wilpert, G. (2003). The Economics, Culture, and Politics of Oil in Venezuela. Opinion And Analysis: Oil and Gas. Retrieved from http://venezuelanalysis.com/analysis/74
