Venezuela is one of the world’s largest exporters of oil and has the world’s largest proven oil reserves at an estimated 296.5 billion barrels (20% of global reserves) as of 2012. The country is a founding member of the Organization of the Petroleum Exporting Countries (OPEC).
Despite the knowledge of the existence of oil reserves in Venezuela for centuries, the first oil wells of significance were not drilled until the early 1910s. In 1908, Juan Vicente Gómez replaced his ailing predecessor, Cipriano Castro, as the president of Venezuela.
Over the next few years, Gómez granted several concessions to explore, produce, and refine oil. Most of these oil concessions were granted to his closest friends, and they in turn passed them on to foreign oil companies that could actually develop them.
By the end of 1918, petroleum appeared for the first time on the Venezuelan export statistics at 21,194 metric tons.
First Dutch Disease
By 1929, the dramatic development of the Venezuela oil industry had begun to dominate all other economic sectors in the country, however, agricultural production began to decrease dramatically. This sudden increase of attention to oil and neglect of the agrarian sector caused the Venezuelan economy to suffer from a phenomenon that later became known as the Dutch Disease.
This “disease” occurs when a commodity brings a substantial increase of income in one sector of the economy, causing a strengthening of currency which in turn harms exports of manufacturing and other sectors.
Agriculture accounted for about one-third of economic production in the 1920s, but by the 1950s this fraction dramatically reduced to one-tenth. This sudden increase in oil production restricted Venezuela’s overall ability to create and maintain other industries.
The government had ignored serious social problems, including education, health, infrastructure, agriculture, and domestic industries, causing Venezuela to fall well behind other industrialized countries.
1940-1950
By 1940, Venezuela was the third-largest producer of crude oil in the world with more than 27 million tonnes per year – just slightly less than the production in the USSR. In 1941, Isaías Medina Angarita, a former army general from the Venezuelan Andes, was indirectly elected president. One of his most important reforms during his tenure was the enactment of the new Hydrocarbons Law of 1943.
This new law was the first major political step taken toward gaining more government control over its oil industry. Under the new law, the government took 50% of profits. Once passed, this piece of legislation basically remained unchanged until 1976, the year of nationalization, with only two partial revisions being made in 1955 and 1967.
In 1944, the Venezuelan government granted several new concessions encouraging the discovery of even more oil fields. This was mostly attributed to an increase in oil demand caused by an ongoing World War II, and by 1945, Venezuela was producing close to 1 million barrels per day (160,000 m3/d).
Being an avid supplier of petroleum to the Allies of World War II, Venezuela had increased its production by 42 percent from 1943 to 1944 alone. Even after the war, oil demand continued to rise due to the fact that there was an increase from 26 million to 40 million cars in service in the United States from 1945 to 1950.
Second Dutch Desease
During the mid-1980s, Venezuela’s oil production steadily began to rise. By the 1990s, symptoms of the Dutch Disease were once again becoming apparent. Between 1990 and 1999, Venezuela’s industrial production declined from 50% to 24% of the country’s gross domestic product compared to a decrease of 36% to 29% for the rest of Latin America, but production levels continued to rise until 1998.
However, the efficiency of PDVSA was brought into question over these years. During 1976–1992, the amount of PDVSA’s income that went towards the company’s costs was on average 29 percent leaving a remainder of 71 percent for the government.
From 1993 to 2000, however, that distribution almost completely reversed, to where 64% of PDVSA’s income was kept by PDVSA, leaving a remainder of only 36% for the government.
Third Dutch Desease
The Chávez administration used high oil prices in the 2000s on his populist policies and to gain support from voters. The social works initiated by Chávez’s government relied on oil products, the keystone of the Venezuelan economy, with Chávez’s administration suffering from Dutch disease as a result.
According to Cannon, the state income from oil revenue grew “from 51% of total income in 2000 to 56% 2006”; oil exports increased “from 77% in 1997 […] to 89% in 2006”; and his administration’s dependence on petroleum sales was “one of the chief problems facing the Chávez government”.
By 2008, exports of everything but oil “collapsed” and in 2012, the World Bank explained that Venezuela’s economy is “extremely vulnerable” to changes in oil prices since in 2012 “96% of the country’s exports and nearly half of its fiscal revenue” relied on oil production.
Economists say that the Venezuelan government’s overspending on social programs and strict business policies contributed to imbalances in the country’s economy, contributing to rising inflation, poverty, low healthcare spending, and shortages in Venezuela going into the final years of Chavez’ presidency.
Since 2014, oil production in Venezuela has suffered from a poor oil market and Venezuela’s insufficient funding of the industry. Venezuela’s nationalistic oil policies have not succeeded in making them more independent from their oil customers. In 2016, the United States imported 291,461,000 barrels of oil from Venezuela, an amount consistent with imports in the five years prior.
Hyperinflation: -14 Zeros
To assuage the oil price decline which began back in June 2014 and continues through to today, President Maduro printed more currency, resulting in inflation as high as 700% of what the inflation rate was in 2014. The Economic policy of the Nicolás Maduro administration did not revive the oil decline, and by 2016, the oil production reached the lowest it had been in 23 years.
According to analysts, the economic crisis suffered under President Nicolás Maduro would have still occurred with or without Chávez.
By 2017, PDVSA could not even afford to export oil through international water, which requires safety inspections and cleaning under maritime law, with a fleet of tankers stranded in the Caribbean Sea due to the issue. In July 2017, this arrangement was extended from just the first half of 2017 to continue until March 2018.
This continued depression in income from oil has led Maduro to pressure OPEC to raise the falling oil prices to help the Venezuelan economy. In April 2017, a controversial Venezuelan Supreme Court ruling granted Maduro executive powers over PDVSA, which allow him to act autonomously in selling shares or making international agreements of the oil company.
In October 2017, Venezuela had its lowest oil output in 28 years, with only 1.863 million BPD being pumped that month. By late 2017, the PDVSA struggled to repay US$725 million of debt, part of a total US$5 billion owed.