enezuela is a country with the largest deposits of unrefined oil resources in the world. Yet it has the world’s highest rate of inflation -- a staggering 2,600% last year -- according to recently released figures. Its economy is tittering on the brink of bankruptcy. How did this happen?
Venezuelan oil isn’t high in quality. It needs heavy processing and consequently Venezuela’s oil requires specialized refineries and thereby oil fetches lower world market prices. But in the 1990s with oil prices at a high, the country was a powerhouse in Latin America, wielding enormous power and influence in the region.
Today oil prices are less than half their peak from 2008. According to the Organisation of Petroleum Exporting Countries (OPEC), Venezuela’s oil production has fallen 12% over the past two months. The 1.7 million barrel production, is the lowest since 2002, a direct fallout of the 2002/3 sacking of nearly half the trained staff of Petroleos de Venezuela (PDVSA) by the country’s then President Hugo Chavez for taking part in a strike, which he saw as a plot to overthrow his regime. He went on to fill the posts with party loyalists; majority of whom had no training as skilled oil workers.
Not surprisingly though, around 95% of Venezuela’s income is derived from the sale of oil, the country’s production and sale has kept falling. resulting in a serious loss of income. To overcome the crisis, it had also sold oil to China in advance.
When the oil prices declined, the shipments had to increase to keep up with the lower price. But Venezuela had sacked most of its trained staff and the newly-recruited untrained staff it recruited in the aftermath of the expulsions, were not in a position to raise production to meet the new demands.
Again, specialised oil producing machinery is expensive to maintain. According to Francisco J. Monaldi, Ph.D -- a fellow in Latin American energy policy at the Centre for Energy Studies -- it costs Venezuela a minimum of at least $8 billion a year as maintenance costs alone. The untrained post 2003 staff were not aware of this. Instead of maximum reinvestment to meet greater production needs, money was taken away from an industry which takes massive amounts of money to maintain and relocated to providing relief and building infrastructure. Maintenance and upgrading of machinery were cut by half as funds were diverted.
Chavez utilised oil money to fund many of his infrastructure and housing projects, which saw vast improvements in the quality of life for some of the poorest Venezuelans, according to Gregory Wilpert, a sociologist and author of “Changing Venezuela by Taking Power: “The History and Policies of the Chávez Government.”
With the drop in the price of oil, there was the inability to increase its production and falling oil revenues. In November, the country defaulted, failing to pay interest on two US$-denominated bonds by the end of a grace period in November.
However, the problems plaguing the Venezuelan economy are not solely due to its policies of re-investing oil profits in an attempt to raise the living standards of its people or its socialistic policies. While these policies played a role in destabilising the country’s economy, it was the artificially low oil prices and sabotage by hostile forces that have brought the Venezuelan economy to its knees, so-to-say.
Since 2014, Saudi Arabia flooded the market with cheap oil -- a calculated move coordinated with US foreign policy goals. Despite not just losing money, and even falling deep into debt trap, the Saudi monarchy continues to expand its oil production. The result has been driving down oil price from $110 per barrel to $28. The goal weakened those opponents of US, whose economies are centred around oil and natural gas exports. And Venezuela is one of those countries.
The problems currently facing Venezuela started in 2014. The already growing abundance of oil due to hydraulic fracturing, or fracking, was compounded by Saudi Arabia flooding the markets with cheap oil.
The result: Massive price drops affecting countries the US sees as its enemies. Russia, Venezuela, Ecuador, and the Islamic Republic of Iran all have economies that have suffered the sting of low oil prices.
Michael Reagan - the son of Ronald Regan- writing for ‘Townhall’ in 2014 said “My father did the same thing to hurt the Soviet Union during the 1980s. Since selling oil was the source of the Kremlin’s wealth, my father got the Saudis to flood the market with cheap oil. Lower oil prices devalued the ruble, causing the USSR to go bankrupt, which led to perestroika of Mikhail Gorbachev and the collapse of the Soviet Empire.”
History seems to be repeating itself.