Venezuela's Crisis: What's Oil Got To Do With It?

After over three years of following the disastrous effects of socialism unfolding in Venezuela I can confidently say that 99% of the articles I’ve read on the issue will sooner or later point out that Venezuela’s crisis is not only surprisingly dire but rather counterintuitive given that it is one of the most oil-rich countries in the world, with probably the largest proven reserves. As a result, most analyses will conclude that it is the current president’s incompetence on the one hand, and the fall in oil prices in the last 5 years on the other, that have brought about the collapse of the once-prosperous South American economy. The latest example is the short video posted by The Economist, which, in summarizing Venezuela’s recent history, explains that “after Mr. Chavez—who had spent generously when oil prices were booming—died in 2013, oil prices crashed and… Maduro inherited an economic crisis which he made worse with his ineptness. The country plunged into chaos.”

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That the gravity of the situation is still surprising to most commentators when it should have been expected long ago is something I’ve discussed before. I would like now to focus on the implicit economic fallacy that underlines the assumption that a country is bound to be inherently prosperous if it owns significant natural resources, particularly oil.

First of all, it is merely an impression that Venezuela was indeed prosperous in a healthy way at some point in the past. The large-scale exploitation of its rich oil reserves, first discovered before the Spanish conquest, began only in 1910. Before, Simon Bolivar’s 1811 decree stated national ownership of all domestic mines and production was minimal at first. The beginning of the Venezuelan oil industry was also still plagued by government intervention, as drilling and refining were still only permitted via governmental concessions—usually offered to close friends of the 1920s Gómez administration. Later in 1975-76, a monopoly of oil production was handed to the state-owned enterprise Petroleos de Venezuela (PDVSA), then the world’s third-largest refiner after Royal Dutch Shell and Exxon, as the Venezuelan oil industry was fully nationalized.1 Although foreign companies were allowed minority partnerships, the taxes they had to pay were significantly increased during the Chavez administration.

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