Essay Example on Venezuela: Boom-and-Bust Journey of an Oil-Rich Nation

Introduction

Venezuela is the host to the world's leading oil deposits, a nation where poor governance, money, and influence have been placed in the hands of a few people. After its invention in the 1920s, oil has led Venezuela to a thrilling yet risky boom-and-bust journey that should act as an example for other oil-rich nations in the world (Bliesie, 2020). Decades of political instability have brought economic misery to what used to be one of the most stable nations in Latin America. Venezuela was so flooded in oil sales that the socialist administration of late former President Hugo Chavez invested large sums on the people's welfare services and, at one level, also supplied the struggling Americans with free heating oil (Debinski, 2020). The natural oil resources are something that the people of Venezuela treasured because it provided economic stability and improved their ways of life.

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In 2008, the oil prices crashed due to the economic recession; this affected the economy, which was later able to revamp. In 2014, the country started to experience a shocking decline where the gross domestic product continued to fall far faster than that of the U.S. during the Great Depression, millions of its approximately 30 million people were unable to buy food, and the hospitals had no medicine for the patients. Suppose Venezuela is going to recover from its downward spiral; in that case, economic experts insist that the government has to set up a stable mechanism to enable the country's vast oil proceeds and attract investors. Therefore, the paper examines Venezuela's oil crisis, where the industry has gone from one of the strongest globally to one of the weakest due to total mismanagement of its natural resources.

Background Information

Venezuela's oil output hit a record peak in 1970 when the production was 3.8 million barrels a day (BPD). Venezuela publicly owned its oil and gas market in 1971 and started to nationalize the oil business (Coronil, 1997). The oil industry was formally a public asset in 1976. The Venezuelan developed a state-owned energy firm Petróleos de Venezuela S.A. (PDVSA), to manage all the production activities. Oil production in Venezuela decreased between 1970 and 1985 by more than 50% (Gallegous, 2016). Then production started to flourish once more. In 1997, Venezuela introduced its oil to the foreign market to gain international investors and increased production of heavy oil in the Orinoco Belt.

Venezuela's crude oil production had risen to 3.5 million BPD, almost exceeding its previous peak by 1998, providing more than 10% of global crude oil and had a GDP far higher than of its neighboring countries, not too far behind that of the United States (Tarver Denova & Frederick, 2006). Around that period, Venezuela was keen to expand from over-relying on oil production to escape the so-called resource trap, a prevalent trend in which comfortable income from natural resources such as oil trading drives nations to ignore more competitive aspects of their economies. In the 1970s, Venezuela's oil prices rose to what seemed like a constant economic determinism (Kurmanaev, 2020). In addition to years of robust prosperity, it appeared to be a prosperous country in a sometimes occasionally unstable region.

In 1999, Hugo Chávez was elected as President of Venezuela, and during the 2002–2003 Venezuelan mass protest, Chávez dismissed 19,000 PDVSA workers and substituted them with workers loyal to his administration. Venezuela has the highest confirmed oil deposits in the world. However, much of the confirmed oil deposits in Venezuela are heavy crude oil in the Orinoco Belt. The Orinoco holds an approximate 1.2 trillion gallons of oil (Debinski, 2020). This oil is tough to extract, which is why Venezuela has welcomed foreign oil firms to invest in the extraction of such deposits. Firms such as chevron, Total, and B.P. have invested billions of dollars in services and equipment in converting extra-heavy oil into crude oil exports.

The complexities of extracting this oil need substantial capital investments. These projects are risks to the oil-mining firm, but they can profit if the oil price continues to rise. In 2007, oil prices increased, and the president Chávez administration wanted more money as the investments made by foreign oil firms started to pay off. Venezuela called for improvements to the deals negotiated with the foreign oil firms that would allow PDVSA majority ownership over the ventures. The rapid downfall of the oil industry started when the government eliminated the skills needed to produce heavy oil in the region. It started with the sack of the company's workers in 2003, and the government push of the foreign experts out of the country in 2007.

How Venezuela Went From the Richest To the Poorest Country in the Region

Venezuela's failure started under President Chávez's leadership, who failed to recognize the amount of effort foreign investors had done for the oil industry in the country. He started harassing many companies by restructuring the initial deals made with the firms. Firms like ExxonMobil failed to agree with the new government's proposed agreements, and their assets were confiscated. The new administration lacked experience in the management of the oil sector; when oil prices shot up, president Chávez pumped billions from the oil sector into the country's social services. However, he failed to reinvest in the oil industry. In 2011, oil money meant for running the firms found itself in pyramid schemes organized by influential individuals linked to the president. This worsened the oil production since more than $500m was lost, frustrating the oil sector due to a lack of maintenance funds (Debinski, 2020). Most PDVSA workers laid off were experts and professionals managers who could run the companies. These professionals were replaced by political supporters loyal to president Chávez who had no experience leading to the collapse of the oil industry, which was the engine of the economy of Venezuela.

Normal crude oil can be extracted out of the field and shipped as it is unlike heavy crude oil, which is more complicated to mine and instead has to be converted to anything close to liquid oil before it is distributed. Doing all this required the extra cash and expertise which the PDVSA needed did not have at the moment. In the 1990s, foreign companies, notably Chevron and ConocoPhillips, had shifted back to the country and worked hard to access Venezuela's vast oil reserves. However, in 1998, the oil price crashed again, slipping to less than $10 a barrel (Debinski, 2020). The collapse of the oil sector in Venezuela was a major blow to the country's economy leading to the poverty situation seen today. Venezuela, just like any other oil rice country, had not diversified its economy to other fields; hence, they had no other source to generate state revenue.

The shortage of funding hindered PDVSA's ability to process and import its heavier crude oil product. The scarcity of machines and chemicals to appropriately treat and store oil became a challenge to the company, leading to the shutdown of production facilities. Sadly, Venezuela is evidence of systemic mismanagement of oil production, which has persisted in threatening South and Central America, where corrupt regimes rob citizens' birthrights. Venezuela is among the top corrupt nations in the world. The underinvestment and mismanagement of natural resources brought down Venezuela from the richest to the poorest country in the region within less than a decade. This is due to bad leadership, corruption, and overlying on crude oil as the main backbone of the country's economy, which has been catastrophic.

Venezuela Little Oil Production despite Being the World's Largest Oil Reserves

Venezuela sits above the largest oil reserves in the world way above countries like Saudi Arabia and the United States. In the 1970s, when the nation's oil production thrived at very high rates, the management of PDVSA was run by experienced experts, which brought the country more profits from the oil industry. Most of the oil produced mainly contributed to the economic growth of the nation. In 1977, the oil industry's growth attracted foreign investors (Fernando, 1997), which led to the extraction of more heavy oil in the Orinoco belt. It was then that Venezuela opened up the country for foreigners to invest their natural oil resources.

According to EIA's market report, the country's crude oil production in April 2019 was less than 800,000 barrels a day down from over 1.2 million by the end of 2018. This is the lowest production experienced in the country since 2013, when civil strife was on the verge contributing to the closure of operations in the country. The low oil production is due to the frequent power outage and poor management of the production plants. In addition, the government's lack of funds due to political instability has contributed to the closure of most production plants that have no money allocated to run their daily operations. The problem has been magnified by the United States sanctions against the PDVSA Company and the electricity sectors in Venezuela in an attempt to pressure the ruling leader to step down for proper reforms.

The downfall of oil production started when the government decided to control oil production in the country. The control of oil came with new management policies that were not well thought off. According to Raul (2016), the decline in oil production rates in Venezuela is a direct result of the poor management of natural resources. Raul explicitly referred to the management of the country's oil reserves as corrupt and lacked experienced expertise in the field. When the government chose to change the oil management policies, they did not consider how it would affect the rest of the country's foreign investors. The investors had seen these effects elsewhere, and therefore, they chose not to abide by the government's directives. Lack of proper management of the resources brought the country to reduced oil production, as foreign investors were not comfortable with the country's policies, which led them to invest elsewhere rather than be mistreated by policies in Venezuela.

How Unemployment Has Reached 44 Percent

In 2019, the unemployment rates in Venezuela were estimated to hit 44% by the IMF highest in the world. Millions of people lost their jobs in private sectors due to the high inflation levels in the country. The government expropriation on the private companies made most of the investors leave the country to bring down most private companies. The government action was influenced by political ambitions, which favored their supporters to mobilize more voters in their support. As a result, some of the employees working in the crude oil centers lost their jobs (Ricardo, 2014). Mismanagement of oil resources and corrupt government officials based on a left-sided and anti-American operation increased the unemployment rates for the opposition parties and their supporters.

Conclusion

In recent days, Venezuela's depression intensified during the first half of 2020 battered by the outbreak of the COVID 19 pandemic (Kurmanaev, 2020). Crude oil accounts for more than 95 percent of the total exports in Venezuela. The industry has collapsed, leading to the loss of millions of jobs across the country, both directly and indirectly. The oil expected to other countries for foreign income is no longer available. Having in mind the oil industries come with a lot of international business and foreign exchange, the pandemic has seized most international businesses, which led to the increased unemployment rates, especially those working in the energy industry (Kurmanaev, 2020).