Venezuela’s long standing dependence on oil is a major driver of economic turmoil in the country. Venezuela is commonly described as a petrostate, in which the country’s economy and government revenue is heavily dependent on the export of oil, the economic and political power is concentrated in an elite minority, and political institutions are weak. Economic reliance on oil and Maduro’s authoritarian tendencies of governance make Venezuela a petrostate.
Oil revenues account for approximately 99% of export earnings and about 25% of GDP in Venezuela. The country’s economy is thus reliant on income from this sector, which the government of Hugo Chávez used to fund ambitious social programmes in the mid 2000s, when oil prices were consistently high. However, as the global fall in oil prices by 50% in 2014 was compounded by a decline in production levels, the country’s economy rapidly declined.
With oil as the primary source of revenue, Venezuela especially felt the devastation of this crisis. Venezuela’s foreign debt rose from $37 billion in 1998 to an estimated $150 billion in 2021. By the end of 2021, annual inflation in the country reached 1945.9%, following four years of hyperinflation. Oil output continued to fall to historically low numbers through 2020, and GDP shrunk by over 75% between 2014 and 2020. Imports have also fallen by 95% since 2013, which has exacerbated shortages in consumer goods.
Throughout his mandate, Maduro has introduced a variety of policies in an attempt to battle the economic crisis, including price controls, a new digital currency, debt restructuring, and budget balancing. However, price controls have decreased the accessibility of consumer goods, and the digital currency was ineffective in practice. As for policies that aim to decrease national debt, Maduro has continuously directed the central bank towards printing more money, which has contributed to increasing inflation. Maduro’s other response to addressing national debt has been to receive assistance from Russia, China, and Iran, Venezuela’s international financial backers. However, leaders in Russia and China are becoming increasingly hesitant to back Venezuelan debt. Iran, on the other hand, has proven that they are willing to defy US sanctions in order to alleviate Venezuela’s fuel shortage. In 2022, Maduro and his Iranian counterpart are expected to sign a twenty year deal that would relieve some of the pressures of current US sanctions on both countries.
So far, Maduro’s domestic response has not been adequate to bring Venezuela out of the economic crisis. He blames the economic crisis on foriegn “economic war,” mainly referring to US sanctions. While US sanctions that specifically target Venezuela’s oil sector do contribute to falling oil prices in the country, these effects are compounded by the adverse effects of other government policies.
The Burden of Oil
For Venezuelans, oil is “the devil’s excrement.” Venezuela is one of many countries that faces political and economic challenges because of the natural resources they control. This phenomenon is called the “resource curse.” Countries suffering from a resource curse also tend to be more prone to conflict and authoritarianism. The survival of Maduro’s administration depends on oil revenues, yet, after years of mismanagement, most refineries are stopped or barely functioning. Venezuela’s crude oil exports have fallen consistently since 2015. Therefore, Maduro’s administration has turned to foreign powers for financial support and management of their natural resources. Yet, with waning oil exports has come waning influence abroad for Maduro. The insuffincies of the oil industry have damaged Venezuela’s international reputation as a trading partner.
However, with oil prices rising early in 2022 as the West attempts to isolate Russia’s economy, Maduro has the potential to reassert Venezuela as an important exporter of oil. Early in March 2022, senior US officials traveled to Caracas to engage in negotiations that could result in the US lifting some sanctions from the Venezuelan economy. By allowing Chevron, the US’s last oil company in Venezuela, to resume production and exports, the US could break the ice for further sanctions to be lifted from Maduro’s government. However, this is dependent on external factors, as well. Opening up to oil trade with the US would contradict Maduro’s outright support for Putin’s actions in Ukraine and condemnation of Western economic sanctions against Putin and other Russian officials. Additionally, US officials’ agreement to lift sanctions is largely dependent on Maduro releasing a number of American prisoners and a commitment to free and fair elections.
As various structural challenges have impacted Venezuela’s economic and political stability since the discovery of oil in the country one hundred years ago, it is necessary to take the modern economic challenges that Maduro and his administration face in the context of the broader institutional impediments.