Venezuela, home to the world's largest oil reserves, is a case study in the perils of petrostatehood. Since it was discovered in the country in the 1920s, oil has taken Venezuela on an exhilarating but dangerous boom-and-bust ride that offers lessons for other resource-rich states. Decades of poor governance have driven what was once one of South America's most prosperous countries to economic and political ruin.

What is a petrostate? Petrostate is an informal term used to describe a country with several interrelated attributes:

• government income is deeply reliant on the export of oil and natural gas.
• economic and political power are highly concentrated in an elite minority, and
• Political institutions are weak and unaccountable, and corruption is widespread.

Counties often described as petrostates include Algeria, Cameroon, Chad, Ecuador, Indonesia, Iran, Kazakhstan, Libya, Nigeria, Oman, Qatar, Russia, Saudi Arabia, the United Arab Emirates, and Venezuela.

What's behind the petrostate problem?

Petrostates are thought to be vulnerable to what economists call Dutch disease, a term coinedduring the 1970s after the Netherlands discovered natural gas in the North Sea.

In an afflicted county, a resource boom attracts large inflows of foreign capital, which leads to an appreciation of the local currency and a boost for imports that are now comparatively cheaper. This sucks labour and capital away from other sectors of the economy, such as agriculture and manufacturing, which economists say are more important for growth and competitiveness.

The so-called resource curse also takes a toll on governance. Since petrostates depend more on export income and less on taxes, there are often weak ties between the government and its citizens.

How does Venezuela fit the category?

Venezuela is typical of a failed petrostate, experts say. Oil continues to play a dominant role in the country's fortunes, more than a century after it was discovered there. Oil prices plunged from more than $100 per barrel in 2014 to under $30 per barrel in early 2016, sucking Venezuela into an economic and political spiral. Conditions have only worsened since then.

Several grim indicators tell the story:

• Oil dependence. Oil sales make up 99 percent of export earnings and roughly one-quarter of gross domestic product (GDP).

• Falling production. Starved of adequate investment and maintenance, oil output has declined to its lowest level in decades.
• Spiralling economy. GDP shrank by roughly two-thirds between 2014 and 2019, and experts forecast that, with plummeting demand for oil amid the coronavirus pandemic, it would decline by roughly another 30 percent in 2020.

• Hyperinflation. Annual inflation is running at 6500%

These issuescoupled with international sanctions and the coronavirus pandemichave fuelled a devastating humanitarian crisis, with severe shortages of basic goods such as food, drinking water, gasoline, and medical supplies. According to a recent survey, 96 percent of Venezuelans live in poverty, the highest proportion in South America.

Since 2015, more than five million people have fled to neighbouring countries and beyond. However, over one hundred thousand Venezuelan migrants have returned home since the coronavirus pandemic began, often after losing their jobs in other South American countries.

How did Venezuela get here?

In 1976, amid the oil boom, President Carlos Andres Perez nationalized the oil industry, creating state-owned Petroleos de Venezuela, S.A. (PDVSA) to oversee all exploring, producing, refining, and exporting of oil. Perez allowed PDVSA to partner with foreign oil companies as long as it held 60 percent equity in joint ventures and, critically, structured the company to run as a business with minimal government regulation.

Hugo Chavez, a military officer, was elected president in 1998 on a socialist platform, pledging to use Venezuela's vast oil wealth to reduce poverty and inequality.

While his costly reforms expanded social services and cut poverty by 20 percent, he also took several steps that led to a long and steady decline in the country's oil production, which peaked in the late 1990s and early 2000s. His decision to fire thousands of experienced PDVSA workers who had taken part in an industry strike in 2002-2003 gutted the company of important technical expertise. Beginning in 2005, Chavez provided subsidised oil to several countries in the region, including Cuba, through an alliance known as Petrocaribe. Over the course of Chavez's presidency, which lasted until 2013, strategic petroleum reserves dwindled and government debt more than doubled.

In mid-2014, global oil prices tumbled, and Venezuela's economy went into free fall. As unrest brewed, Chavez's successor, Nicolas Maduro, consolidated power through political repression, censorship, and electoral manipulation. In 2018, he secured re-election in a race widely condemned as unfair and undemocratic.

In recent years, the US has escalated sanctions against Venezuela, which have curtailed the Maduro government's income. Still, Venezuela has retained oil-trading partners, and analysts say that support from China, Cuba, Iran, Russia, and Turkey is keeping the Maduro regime afloat.

Adapted from:https://www.cfr.org/backgrounder/venezuela-crisis

Questions

1. What are the major long-term economic & social problems with Venezuela's overdependence on the oil industry and oil exports? [hint: what about the importance of developing other essential industries?]

1. Venezuela's oil export income became the government's major source of income instead of income tax. The export income is then used to improve social services like food subsidies, unemployment benefits, free housing & schooling, etc. Why is that risky in the long term? [hint: what's the problem if people are too dependent on the government, i.e., socialism?]

1. The local currency, Bolivar, has devalued 6500% (hyper-inflation), and export income has decreased. If you are an exporterof essential foods & medicines to Venezuela, what problems could you face? [hint: availability of foreign currencies?]