Global oil prices are plummeting and they are falling fast. As a result, Venezuela, which has the world’s largest known crude oil supplies, is left with an economy that is barrelling out of control. On January 22, Venezuela's oil price fell to $21.50 a barrel, compared to over $100 a barrel in 2014 (Yahoo News, 2015). As prices continue to fall, Venezuela’s surplus of oil stocks grow. Rising oil surplus, however, does not translate into food, medical supplies, and political and domestic stability in Venezuela, as President Maduro is quickly finding out. A country rich in one of the world’s most demanded natural resources, Venezuela is riddled with poverty and instability, having been cursed by the resource upon which it depends so deeply.
The phenomenon of the “resource curse,” or Dutch Disease, is not a new one. The term Dutch Disease was coined in 1977 to explain a sharp decline in the Dutch economy following their discovery of natural gas reserves in 1959. Due to a new overreliance on a natural gas resource, the Netherlands underwent devastating economic trends that included ignoring domestic industries and markets in favor of the export of natural gas, as well as an overvaluation of the Dutch currency. This new reliance on a natural resource caused inflation to rise, investment fell and poured out of the country, and domestic industries lost their competitiveness in the global market (The Economist, 2014). Dutch Disease taught economists that a large commodity boom from a natural resource can cause extreme economic distress, cursing the economy for years to come.
It is a not a new phenomenon, and yet, in 2013, of Venezuela’s $143 billion in exports, $139 billion were comprised of crude and refined petroleum (Observatory of Economic Complexity, 2013). Petroleum in Venezuela accounts for 96 percent of export earnings, about 40 percent of government revenues, and 11 percent of GDP (CIA World Factbook, 2015). Such a heavy dependence on one natural resource means that when world oil prices plummet, Venezuela’s economy crashes. Economists know that commodity prices continuously fluctuate, and as such, economies need backup industries that can sustain the economy when natural resource prices fall. More often than not, a country high in exports of natural commodities is found to be low in economic growth rates. Venezuela is no exception to this paradigm.
As of 2013, Venezuela’s export economy was 34th in the world economy, a fact that is telling when signifying its importance to global oil markets (Observatory of Economic Complexity, 2013). Despite its strength in global exports, in GDP real growth rates, Venezuela ranks extremely low when compared to the rest of the world, falling in 219th place in 2014. Inflation rankings for 2014 were even worse, with Venezuela maintaining a 62.2 percent inflation rate, 225th place in comparison to the rest of the world (CIA World Factbook, 2015). More distressing for economic trends in the country, the end of 2015 saw inflation rates at 141 percent in Venezuela, and the International Monetary Fund predicts inflation to continue to rise, reaching 204 percent in 2016.
As a result of all of these economic concerns, Venezuelan president, Nicolás Maduro, placed Venezuela under a temporary, 60-day state of economic emergency in early 2016. President Maduro may be too optimistic in his use of the term “temporary,” as the economic crisis in Venezuela shows no signs of abating. In fact, the opposite would seem to be true. Inflation is rising. The currency is devaluing, with one bolivar now worth $0.0011 US dollars (Gillespie, 2016). The country is predicted to default on their debt this year. Perhaps most concerning for the average Venezuelan citizen, the government does not have enough money to import basic food and healthcare items, as store lines get longer, and supplies become shorter. Venezuela’s economic overreliance on crude oil is not sustainable. In part due to these chronic basic food shortages, voters in Venezuela ushered in political change at the end of last year, with the opposition winning significant electoral gains, running campaigns on anti-Maduro and anti-Chavismo messages. Maduro blames the opposition for the chronic shortages, while the opposition continues to find fault with Maduro’s handling of the economy. Thus, oil has not only cursed Venezuela’s economy, but also its political climate. Ultimately, it is just a matter of time before the economy, government, or both, fatally crashes.
References:
Gillespie, Patrick. “5 Reasons why Venezuela’s Economy is in a Meltdown.” CNN Money. 20 Jan 2016. http://money.cnn.com/2016/01/18/news/economy/venezuela-economy-meltdown/index.html
“Venezuela.” CIA World Factbook. 2015. https://www.cia.gov/library/publications/the-world-factbook/geos/ve.html
“Venezuela.” Observatory of Economic Complexity. 2013. http://atlas.media.mit.edu/en/profile/country/ven/
“What Dutch Disease is, and Why it's Bad.” The Economist. 5 Nov. 2014. http://www.economist.com/blogs/economist-explains/2014/11/economist-explains-2
