Venezuela's oil, for best and worst
Oil made Venezuela rich, and now it's making it poor
“Venezuela,” New York Times reporter Nicholas Casey wrote this week , “is convulsing from hunger.” Grocery stores are out of food ; hospitals are out of medicine ; gangs are fighting in the streets over meager supplies .
Venezuela's collapse has many causes: excessive borrowing , political corruption , an official exchange rate that defies economic realities . But the country's poverty today is due in large part to the same thing that made Venezuela rich just a few years ago: oil.
Venezuela, a charter member of the OPEC cartel, has the world's largest oil reserves and is a major oil exporter. (The U.S. is its biggest customer.) Most of Venezuela's oil is of a thick, gooey variety that is expensive to refine and transport. But none of that mattered when oil prices surged in the late 2000s — at $100 a barrel, even the costliest oil was hugely profitable.
Because most of Venezuela's oil is produced by the state-owned oil company PDVSA, those windfall profits were controlled by the government, then headed by President Hugo Chavez. Chavez, who died in 2013, used that money to spend heavily on social programs , and spent even more by borrowing billions of dollars overseas. Many of his efforts worked, at least in the short-term: Under Chavez, Venezuela expanded access to education and health care , boosted employment and reduced poverty by more than half .
But all that spending — and borrowing — left Venezuela dependent on ever-rising oil prices. Instead, prices plunged , dropping from over $100 a barrel in mid-2014 to under $30 a barrel earlier this year. (It has rebounded to about $50 in recent weeks.) The unexpected price slump was bad news for oil-based economies from Riyadh, Saudi Arabia, to Williston, North Dakota. But nowhere was hit as hard as Venezuela, which was left with huge debts and no other meaningful exports to help repay them.
Making matters worse, Chavez's spending on social programs left little remaining to invest in PDVSA . Old fields were allowed to decline, while new drilling opportunities weren't adequately explored. As a result, Venezuelan oil production isn't rising and exports are falling due to rising domestic consumption. Meanwhile, production is falling in Venezuela's most profitable fields, those that produce a lighter type of oil. That leaves the country more reliant than ever on overseas sales of its gooey, heavy crude — oil that isn't in much demand when there's so much better oil to be had amida global glut. Venezuela has been forced to import lighter oil from other countries, including the U.S. , to mix with its oil so it can sell the blend.
It didn't have to be this way. For evidence of another path, look no further than the U.S., where private oil companies responded to rising prices by boosting investment in research and exploration. The shale-oil boom that resulted from that investment ultimately led to the near doubling of U.S. oil production in less than a decade. U.S. companies are struggling with low prices , too, but the investments they made during the boom are helping them survive the bust.
Many progressives, of course, would have liked to have seen the U.S. take a somewhat more Chavez-like approach to the oil boom via higher taxes on oil companies' profits . And there is certainly room for debate over the best way to divide revenues among investors, landowners and the public at large. But it is clear that by failing to think about the future during the boom, Venezuela made the present bust far worse.