- Adam Volf
On July 28, 2024 Venezuela held presidential elections.
Vying for the role was Nicolás Maduro - the incumbent - who was seeking a third consecutive term. Maduro had run Venezuela with a tight fist since first attaining power in 2013, mirroring the reign of his predecessor, Hugo Chávez. Running against him was Edmundo González, the opposition candidate, long seen as having the most support among the public.
However, to the surprise of many (or perhaps not), Maduro triumphed and won re-election by a narrow margin, with 51% of the vote. The result shocked the public, as two independent exit polls gave Gonzalez as much as 65% of the vote and Maduro only 31%.
Thus the result was widely contested, with many countries calling for full transparency in the election results and some claiming that González was the true winner. Protests and disorder erupted across Venezuela, and a massive spotlight was shone on (pseudo)democratic processes in the country once more.
Controversy over elections has been part of Venezuela's political landscape for years. In 2018 Maduro retained the presidency under similar circumstances, despite an apparent lack of popular support and despite the enormous economic difficulties Venezuela has faced during his rule. The 2018 elections led to similar protests and the imposition of international sanctions against Venezuela.
The fatigue, or even anger, of Venezuelans should come as no surprise. After all, the atrophy of this fabulously beautiful and resource-rich country has been going on for many years. Once a leader in South America, Venezuela has fallen to the bottom, and the average Venezuelan has gone from the richest to the poorest on the continent. The dire economic situation is fueling rising crime and a dramatic brain drain in a country that has recently seen ¼ of its citizens leaving it.
Everything in this list has a single source - oil. Oil is almost synonymous with Venezuela. No country in the world is more addicted to black gold than the Bolivarian Republic. But like any addiction, even more so when it is highly psychoactive (meaning profitable), oil has dominated Venezuela's entire economy, first bringing wealth and then, when it became dependent on it, a spectacular collapse.
Oil - the backbone
This map shows the oil reserves of Venezuela. At the centre of the map is the Faja Petrolífera del Orinoco, or Orinoco Oil Belt. Individually, it is the most oil-rich place in the world. In 2009, the US Geological Survey estimated that the Orinoco Belt contained 513 billion barrels of oil. It's unclear how much of that is worth extracting, but suffice it to say that these deposits alone, if extracted, would satisfy 15 years of global oil demand.
OPEC is more cautious in its reserve estimates, putting Venezuela's at around 303 billion barrels of proven oil reserves - but this is still the largest in the world. Venezuela's reserves are well ahead of second-placed Saudi Arabia, which has about 260 billion barrels of proven reserves.
Oil was first discovered in Venezuela in the early 20th century, at a time when the world was beginning to move away from coal in favour of more productive natural resources. It also coincided with the emergence of new forms of transport fuelled by oil derivatives.
Karl Benz's invention of the automobile just a few decades earlier was made possible by running on petrol, a cheap oil derivative. And when Henry Ford introduced his Model T in 1908, cars became available to most of the public. This led to a surge in demand for fuel, exacerbated by the conversion of other existing forms of transport to this resource.
Ships and trains soon switched from bulky and inefficient coal to oil as a power source. And with the development of aviation in the 1920s, the use of oil increased even further.
So when the first Zumaque 1 field was discovered in Zulia state in 1914, and later in 1922 Shell Company geologists found oil in the Maracaibo Basin, champagne corks popped in Caracas. By 1929, the country was producing as much oil as the whole of Europe. And this was still at a time when no one in the Middle East was thinking about petrodollars.
In a short period of time, Venezuelans became fabulously rich by world standards. By the middle of the 20th century, Venezuela was the fourth richest country in the world in terms of GDP per capita, behind the United States, Switzerland and New Zealand.
But what looked like finding the Holy Grail soon turned out to be like opening Pandora's box. What is this Pandora's box and how can it (theoretically) be closed?
Venezuela has very rapidly begun to transform itself into a rentier state. That is to say, one that derives all or most of its income from rents paid by foreign individuals, companies or governments. At the same time, it produces no added value other than the exploitation of deposits won in the global lottery. By this definition, the Bolivarian Republic is also a petro-state.
According to political scientist Jeff Colgan, a petro-state is a country that derives more than 10% of its GDP from oil. In Venezuela's case, it's 25%, and its budget is already about 60% oil-related revenue. In his book Petro-Aggression: When Oil Causes War, Colgan also notes the close correlation between countries' dependence on oil and their willingness to start conflicts with each other, which, as we will see later in this video, is relevant in the case of Venezuela.
And while Venezuela was prosperous for most of the 20th century, its status as a petro-state meant that its fate was directly tied to the price and demand for oil, which, as we now know, can be highly volatile.
Venezuela learned this the hard way in the 1980s.
Oil shock and the beginning of Venezuela's problems
Before the period of oil oversupply in the 1980s, the preceding years had been kind to Venezuela, with the price of oil rising sharply.
In 1973, the Yom Kippur War began between Israel and a coalition of neighbouring Arab states led by Syria and Egypt. During the war, the Organisation of Arab Petroleum Exporting Countries (OAPEC) announced a total embargo on oil exports to countries supporting Israel. This meant that oil-producing countries that were members of the organisation - including some of the world's leading oil producers - refused to supply oil to Britain, the United States and several other major economies, including in Europe. This led to fuel shortages in those countries and a spike in oil prices, which in turn affected global trade.
This was good news for Venezuela, which was not affected by the embargo and saw a significant increase in oil revenues as a result. However, when the price of the commodity inevitably fell again, Venezuela was hit particularly hard - and that was just the beginning.
In the early 1980s, the situation turned 180 degrees, and the world market experienced a glut of oil. Crude prices collapsed, and with them Venezuela's economy, so much so that Venezuela was forced to seek foreign loans to save the country from collapse.
Venezuela was not helped by the fact that corruption flourished in the country. In 1997, the Venezuelan NGO Pro Calidad de Vida estimated that around one hundred billion dollars of oil money had been squandered or misappropriated by Venezuelan officials. Moreover, Venezuela was already showing clear signs of the economic phenomenon known as 'Dutch disease'.
"Dutch disease” occurs when a country becomes so dependent on a particular resource that it neglects all other industries while deepening its dependence on that one particular resource. The term first appeared in The Economist to describe the decline in Dutch manufacturing following the discovery and rapid exploitation of natural gas in the country. Exactly the same was happening in Venezuela.
Due to the oversupply of oil and the resulting drop in the price of oil, the quality of life in Venezuela fell sharply in the 1980s, although it was still relatively good. The worst times were yet to come.
The downturn fueled public anger, which reached a tipping point in 1989. This led to El Caracazo - mass riots in the streets of Caracas and other Venezuelan cities after the government of President Carlos Andrés Peréz announced an austerity programme to secure a bailout loan from the International Monetary Fund. The protests, which erupted over an increase in public transport fares in Guarenas, were violently repressed, with nearly 300 people killed and several thousand injured. The government's credibility collapsed and people began to demand change. Change that brought Hugo Chávez to power.
Hugo Chavez Era
Hugo Chávez came to power in 1999 after years of public controversy, a failed coup and several years in prison.
The fourteen years of Chávez's rule, from 1999 to 2013, are known as Chavismo and are fondly remembered by some in Venezuela. During this time, Chávez introduced popular social programmes known as the 'Bolivarian Missions', which ended the poverty experienced by some Venezuelans.
It is worth noting that the governments that preceded Chávez paid little attention to solving pressing social problems. This was all down to oil, which provided the government with revenues independent of tax revenues.
This has changed under Chávez. The Bolivarian Missions provided adult literacy programs, free community health care, social housing for low-income communities, subsidised food programmes and some improvements in general healthcare standards.
However, like his predecessors, Chávez followed the same economic path of over-reliance on oil exports. He was fortunate in this respect, as the price of a barrel began to break records on world markets in the 2000s, reaching almost $150 a barrel in 2008.
However, like a typical autocrat, Chávez slept through the period of renewed oil prosperity and did not set aside money for a sovereign wealth fund that would protect Venezuela if the price of oil fell again. A fund like Norway's $1.7 trillion GPFG or Saudi Arabia's $900 billion-plus PIF.
Oil envy
On the other hand, Hugo Chávez wanted more control over his golden goose and became jealous when he saw other companies making money from Venezuela's lucrative business. The problem was that these entities were mainly US oil companies, which also possessed the necessary know-how closely linked to extraction efficiency. Chavez, therefore began, without further reflection, to drive the American companies out of the country. The companies that had played a key role in the development of the sector.
It should be remembered that although Venezuelan oil is indeed black gold, extracting it and, above all, refining it is a difficult process. This is because Venezuelan crude is of relatively poor quality. Oil is mainly measured in terms of its lightness and purity, and these two factors play an important role in its extraction and sale.
Lighter oil is easier to extract than heavier oil. A common measure of oil weight is the American Petroleum Institute's gravity index, or API for short. Oil with a high API moves easily from the reservoir to the producing well.
According to McKinsey, Venezuelan oil has an API between 16 and 30, making it relatively heavy. By comparison, oil from Saudi Arabia ranges from 28 to 51. This means that Venezuelan oil requires much more intensive refining - a process that requires specialised knowledge and direct access to the oil field, which Venezuela (under Chávez and Maduro) has been unwilling to provide to outsiders.
Venezuelan oil is also rich in impurities, the most common of which is sulphur, which causes corrosion and damages production wells. The high sulphur content of Venezuelan oil means that it is in danger of becoming a stranded cost: in other words, a resource that is particularly undesirable in the event of a gradual industrial transformation, for example towards green forms of energy.
By cutting off the foreign companies, Chávez also cut off the branch on which he was sitting. Symptomatically, Venezuela's oil production peaked just before Chavez came to power in 1998. Then it was the world's fifth largest oil producer! Now it is 21st.
Venezuela's public debt has increased by around three hundred per cent during Chávez's rule. And as if driving out the oil multinationals wasn't enough of a blow to the extractive sector, in 2002 Chávez came into conflict with the sector's workers. Massive layoffs took place, resulting in the loss of more than 19,000 jobs at the state oil company PDVSA. This had a significant impact on the Venezuelan economy, leading to a decline in oil production capacity in later years.
However, Chavez did not live to see the real collapse of Venezuela's oil industry and, with it, the economy. He died of cancer in 2013, handing over leadership of the country to his vice-president, Nicolás Maduro.
The Illusive Chavismo
Chávez introduced a series of centralised programmes that maintained tight control over the population. Maduro has continued this approach since taking power. These included restrictions on press freedom, the elimination of political pluralism, attacks on the judiciary, withdrawal from international criminal courts and restrictions on private enterprise. Many private companies were nationalised, including those that provided essential services to the Venezuelan economy. This has made Venezuela even more dependent on oil exports.
One thing about Chávez, however, cannot be denied - his charisma. He had the ability to win over the public, in part because of his commitment to society, which was not overlooked by the state-run press, which created the image of a down-to-earth, kind-hearted man. Of course, the cult of personality was inextricably linked to the oil bonanza that fell during his reign and brought relative economic stability to Venezuela during his presidency. Also important was the role of China, with which Venezuela signed a lucrative oil supply deal in 2007.
When Chávez died, his successor had almost none of these qualities. Lacking his charisma and luck, he became president just before the oil price plummeted in 2014.
And just like that, Venezuela's problems exploded in the years that followed.
While the country grew economically during the Chávez era for the reasons mentioned above, with GDP growth of almost 6% as recently as 2012, the following years were a disaster.
Between 2014 and 2020, the Venezuelan economy shrunk by 4, 6, 17, 16, 20, 28 and 30% successively. A total contraction of 75% in just 7 years! Add to that one of the highest rates of hyperinflation in the world. In 2018, Caracas recorded an inflation rate of 2,000,000%! It has fallen in later years, but still remained at 190% in 2023.
This period, unsurprisingly, coincided perfectly with the fall in the global price of a barrel of oil. In addition, the country has been sanctioned by the EU, the UK and the US. The country's debt is also estimated at around $150 billion.
The dire economic situation creates favourable conditions for crime to flourish, and Venezuela has become the place with one of the highest murder rates in the world, with the vast majority of criminals going unpunished.
The second effect of the economic collapse is equally obvious: people are fleeing the country. Since 2013, when Maduro took power, a record eight million Venezuelans have left the country. This means that one in four Venezuelans has left the country in the last decade!
Most are fleeing to other Spanish-speaking countries: Colombia, Peru, Ecuador or Chile. A significant number also go to Brazil, Spain or the United States. The brain drain is one of the greatest tragedies a country can face.
But should we be surprised? According to a November 2022 survey, half of Venezuela's 28 million people live in poverty, although the rate was as high as 65%. Paradoxically, it may have decreased as a result of emigration.
Did it have to end up like this?
Venezuela seems to have made all the mistakes possible to get to where it is today.
The country has had 80 years to prepare for the potential impact of turbulent oil markets, to diversify and to build institutions to ensure that domestic resources are not stolen but, following the Norwegian model, work for the whole country.
On the basis of the Punto Fijo Pact of 1958, Venezuela emerged from military dictatorship when the country's three main political forces reached an agreement under which state contracts, and in particular oil rents, would be distributed among the three parties in proportion to their electoral performance. While the new system held out the hope of promoting the democratic process, it quickly degenerated.
While Punto Fijo defended itself against the military dictatorships that persisted in many parts of the region, the system also excluded from political life other, new groups that did not have access to such resources. At the same time, it cemented the power of the ruling elite and encouraged patronage and corruption.
Nevertheless, the oil dividend forgave it all. In 1976, in the midst of the oil boom, President Carlos Andrés Pérez decided to nationalise the country's oil sector and create a colossus called PDVSA to oversee all oil exploration, production, refining and export. Pérez allowed PDVSA to partner with foreign oil companies as long as it held 60 per cent of the joint ventures.
The example of Saudi Aramco, the world's largest oil company, shows that large national oil companies can operate effectively. Although also ruled by an autocratic regime, Aramco is run technocratically, with a professional management structure created by lavishly paid, often Western, managers. The Saudis have also spared no expense in investing heavily in their mining sector. The Venezuelans, on the other hand, especially since the Chávez era, have treated PDVSA as an ATM for the implementation of any political idea and for increasing the wealth of the entire clique that maintains the regime. Investing in the sector or allowing foreign companies to enter did not fit into this policy.
The Saudis, unlike the Venezuelans, also have the good fortune to be indispensably needed by the Americans to balance the Islamic Republic of Iran, for which they are forgiven many things, and Washington ensures that Riyadh always has the resources to buy American arms. Caracas has almost no bargaining chips like this. The Americans don't need the Maduro regime to contain anyone.
This may also have led to Venezuela's gradual antagonisation of the world's most powerful country, which is, on the other hand, quite close geographically. Instead, it opted for an informal alliance with America's enemies - Russia, Cuba or China. Inevitably, this was another perfect idea to ruin the country.
And as if that wasn’t enough, the Maduro regime is going even further in this direction.
How about attacking Guyana?
In 2015, US specialists discovered rich oil deposits off the coast of Guyana. These resources were small compared to Venezuela, but most importantly, they were rich in oil of much better quality. The oil found in Guyana in 2015 had a high API, and therefore high lightness, and a relatively low sulphur content, making it cheap to produce.
Caracas quickly reminded itself of its dusty territorial claims to Guyana's Essequibo region, de facto more than half of the tiny country. The Essequibo claim was followed by a claim to Guyana's offshore shelf, which strangely tilted to the south-east to include the Starboek deposit where the oil was discovered. These deposits are being exploited by the ExxonMobil conglomerate, previously expelled from Venezuela by Maduro-Chavez duo.
An invasion of Guyana at this time would be suicidal. Not only would it lead to even greater and harsher sanctions against Venezuela, but it could even lead to defensive action by outside actors - such as the United States, which has a key stake in Guyana's oil development.
Venezuela is already teetering on a knife edge, with a faltering economy, sanctions, mass poverty, high crime and instability over disputed elections. Adding war to the mix would undoubtedly further devastate the country.
So Maduro, with the ghost of Chavez, is relentlessly trying to destroy what remains of this fabulously rich country.
What next?
The public feels this, which is why the 2024 elections, which were supposed to bring some semblance of normality finally, have generated such anger. People are looking for change and a reversal of the years of marasm, a kind of curse that oil wealth has imposed on the country.
The possible removal of Maduro, even if it were to happen, would only be the beginning of a very difficult road for the country. For almost a century, the country has evolved into a patron-client system based on oil profits. When that revenue disappears, the system collapses under its own weight.
To put it brutally, when the oil was found and the profits from it began, Venezuela was an immature political structure. It was not ready for it, so to speak. At the other side in this comparison is Norway, which has far fewer resources, which are much more difficult to access and which were discovered almost 60 years later. But Oslo had the mechanisms, the political elite and the national consensus to manage such resources. The result?
Norway now produces more than twice as much oil as Venezuela, despite having 50 times fewer proven reserves, which are harder to explore. It also produces four times more gas, despite having more than three times smaller reserves. This shows the importance of effective and healthy institutions in the development of any democracy.
In a way, the situation can be compared to winning $10 million in the lottery. Venezuela in this analogy is a 20-year-old young man who suddenly became rich and, with no reflection for the future, began to spend everything he had. His children and grandchildren lived on this pension, but the situation gradually deteriorated. Eventually the well dried up and the family ended up on the street.
Norway, on the other hand, was a man who had been taught for years to work hard in a harsh climate, whether it was farming, fishing or forestry. The lottery win came after decades of hard work and was also much smaller in relative terms. But the Norwegian million was reinvested and wisely guarded against squandering. Meanwhile, work in other sectors continued and was reinvested.
Today, the average Norwegian is 20 times richer than a Venezuelan.
In conclusion, Venezuela's current problems go much further than Nicholas Maduro himself. It is a decades-long accumulation of ineffective governance, corruption, nepotism and every other nuisance imaginable. Removing the dictator is an important step, but only the first. After that, it is necessary to work at the grassroots and create mechanisms that will work for future generations of Venezuelans.
Exit the swamp
All the more so as Venezuela faces another major challenge - a green transition and a gradual shift away from fossil fuels. A study by the United States Institute for Peace suggests that Venezuela would suffer the most from such a development. But while this fact alone spells trouble for much of Venezuela's economy, it may also offer an opportunity for shock therapy and an attempt to move away from petro-state status.
What can Caracas do to reverse the lost decades? If we assume that Maduro would actually be out of the picture by now, and that an independent government would run the country with the goal of actually improving the situation and not just building a new network of interests, then the possible solutions easily come to mind.
First and foremost, Venezuela should lift the ban on foreign companies and make access to the domestic market conditional on their investment and the revival of the country's oil sector. We are mainly talking about American and European oil companies. It may also be in Caracas' interest to withdraw from the OPEC cartel. As the country with the largest reserves, and given the lost decades of production and the potential twilight of oil, Venezuela should increase oil production and exports as soon as possible to take advantage of the oil era while it lasts.
Of course, such a policy would require a geopolitical recalibration. Caracas would have to make a 180-degree turn in its relations with Washington and the Europeans. Withdrawing from OPEC and flooding world markets with millions of new barrels would be seen as an outright hostile action by other petrostates such as Saudi Arabia, Russia and Iran. However, the geographical distance that separates these countries means that Venezuela would have nothing to fear, especially as it would already be on the side of Pax Americana in this scenario.
With a lot of mobilisation, in an optimistic scenario, after a decade or two, Venezuela could even think of entering the production ceiling of the world's leading oil producers, such as Russia or Saudi Arabia, so we're talking about a ceiling of 10 million barrels of oil per day (10 times more than today). Together with the Americans, they could then supply up to 20-30% of world demand, completely breaking the cartel's dominance. Of course, it would then be the Americans who would ensure that the oil was extracted at a margin that suited them. In 2015, the cost of extracting a barrel in the United States was $36, while in Venezuela it was less - $24. These may not be the values of the Gulf countries, where the cost of extraction is the lowest, but the price of oil would certainly fall from the current ceiling of $80, much to the displeasure of the guardians of the system.
The second chapter of Venezuela's oil bonanza, would have to be aimed from the outset at building national wealth and reinvestment, rather than immediately living off it. To this end, there would certainly have to be a sovereign fund into which export profits would be invested. Although Caracas would have to come to terms with sharing profits with Western companies, it could, during negotiations, force provisions for assistance in building effective institutions and investment in non-oil sectors in addition to investment in the oil sector. Over time, once Western capital felt a sense of stability, investments could spill over across the country, helping to diversify the economy.
However, attempts to turn the tide and find ways to diversify do not have to be so complicated and dependent on external actors. After all, another resource besides oil that can be tapped here and now is the sheer... beauty of Venezuela.
While it now seems unlikely to become a tourist destination, given its high crime rate and internal instability, the same was once true of neighbouring Colombia. For much of the 1980s and 1990s, Colombia was an arena of drug crime and FARC rebellion, accompanied by killings, kidnappings and emigration - ironically, largely to Venezuela.
Despite this, Colombia's tourism industry is currently booming. It is estimated to reach revenues of nearly US$4 billion by 2024, representing a significant portion of Colombia's GDP. Colombia is seen as an emerging tourism powerhouse, along with other South American countries such as Peru and Brazil, which are also experiencing record visitor numbers and reaping handsome profits.
Meanwhile, Venezuela is a fabulous country with a vast Caribbean coastline, dense and picturesque rainforests in the central part of the country, on the tropical Los Llanos plain. It is crossed by the majestic Rio Orinoco, which receives water from the Andean peaks in the northwest and the highlands and mountains of the southeast, including the Tepui Mountains. These are some of the oldest geological formations on earth and provide a unique habitat for many endemic plant and animal species. It is no surprise, then, that up to 15% of the country's territory is covered by 43 national parks.
Of course, we are only limited by the length of a sheet of paper when drawing such scenarios, and the reality is much darker. However, the situation is never so bad that it cannot be reversed; every well has a bottom. The question is whether Venezuela has already reached its own?
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