Petrostate Economics: Venezuela’s Oil Struggles

Written by Caleb Barsch, ESLLC 2016-2017

Any fund manager in the world will advocate for diversification of investments, which is just the Wall Street way of saying, “Don’t put all of your eggs in one basket”. However, a number of countries have done just that, going all in on production of one resource. Most commonly, this resource is oil, as it has universal demand and stratified geographic supply. The country that has gone all in on oil in the Western Hemisphere, Venezuela, is now paying the price of the repressive government structures that come with running a petrostate coupled with a downturn in the worldwide price of oil over the last two years.

The formula for running an oil-rich country, invented and perfected in the Middle East, is this: make an absurd amount of money selling oil, implement generous welfare institutions to keep the poor happy, and continue to rake in the money. At no point do these states invest in proper education for the poor, because that would encourage upward mobility and endanger the ruling class. Instead, encourage all-encompassing religious devotion (Saudi Arabia), or all-encompassing ideological devotion (Venezuela).

This system works well for the ruling class, until the price of oil drops and the government cannot afford to keep up its rampant corruption and bloated welfare system. In Venezuela, all hell has broken loose. Hospitals have run out of bandages and gauze and shops are bare of necessities like toilet paper, soap, and toothpaste. According to a Reuters article from April 18th, Venezuelan oil tankers are sitting derelict in the Caribbean with oil leaks, their government unable to get them repaired and certified. Much like the tankers that are supposed to provide the economic stimulus their country desperately needs, Venezuela is sitting dead in the water.

Ultimately, all resource-driven export states that rely on exploiting the environment end up like Venezuela. Normally it ends with mining or coal towns completely emptying out, but too many people live in Venezuela to just pack up and move. Pressure is mounting on President Nicolas Maduro to resign, and hopefully a new government institutes a more sustainable economic policy and remembers the reasons why Venezuela is collapsing.


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