Venezuela’s Imminent Economic Collapse

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With oil prices remaining at historic lows, Venezuela and other petrostates are on the verge of failure as their economies stutter to a halt.

Despite recent Wall Street optimism that the world’s oil giants may be considering production cuts across the board, a significant (and unlikely) jump in petroleum prices would not save Venezuela’s plummeting economy. Simply put, the country stands on the brink of collapse. Inflation, while historically an issue, has skyrocketed to almost 200% and is expected to rise to 700% by the end of next year. Chronic food shortages and long lines at the grocery store have become a staple in the lives of most Venezuelans, who have also grown accustomed to living in one of the most violent nations in Latin America. President Nicolás Maduro, once widely admired in his country as Hugo Chavez’s successor, now faces unprecedented amounts of public criticism and an empowered opposition party looking to curtail his reign. Recently, Maduro has tried to stop the bleeding by cutting fuel subsidies and devaluing the Bolivar, but such policies amount to little more than a drop in the bucket.

At this point, policymakers should be asking two questions: How did Venezuela fall so far? And what does it mean for the future of the Western Hemisphere and U.S. foreign policy in the region?

Based mainly in a strip of petroleum-rich land south of Caracas known as the Oronoco Belt, Venezuela’s oil reserves are the largest in the world at over 290 billion barrels. With massive natural gas deposits and a historic abundance of oil, the country has long represented a powerful force in the petroleum industry as a founding member of OPEC and one of the globe’s largest exporters. Despite these geological and institutional advantages, low crude prices and internal politics pushed a vulnerable Venezuela to its current economic instability.

Unlike the sweeter and lighter crude of the United States or Northern Africa, much of Venezuela’s reserves contains extra-heavy crude that involves high extraction and distillation costs. In fact, Venezuela’s aging downstream capacity means that the country is poorly equipped to handle such complex refining processes, let alone more typical oil production from its original petroleum hub, Lake Maracaibo. When oil hovered above $100 a barrel for most of the late 2000s, high production costs had no effect on Venezuelan output as the world’s ravenous demand for petroleum greatly outweighed supply. As oil continued to sit at its high price point, ex-president Hugo Chavez increased government control of the already nationalized domestic oil industry under the auspices of his Bolivarian revolution to fund numerous social welfare and subsidy programs.

In the short term, this ensured political popularity among the Venezuelan populace and economic growth, but Caracas’ failure to diversify its industries means its financial strength rests heavily on the price of crude.  Furthermore, Venezuela’s inability to attract foreign investment and rampant corruption meant that other crucial industries like manufacturing and agriculture were left without the maintenance funds needed to keep factories running. Thus, as the hydraulic fracturing boom rapidly expanded oil production in the United States and as previously uneconomic exploration projects across the globe came online, the world was soon faced with the possibility of oversaturating the markets. Instead of operating as an effective cartel, OPEC has failed to allow a price correction as numerous countries (e.g. Saudi Arabia and Iraq) contemplate maintaining peak production levels while Iran’s petroleum begins to flow into international markets.

With over $13 billion in debt payments due this fiscal year, many analysts predict Venezuela will default on its loans. Low prices and stagnant production mean the country has little revenue on which it can rely, and years of poor monetary policy have left the country’s finances in ruin. While the opposition government may be able to force Maduro out of power, it is unclear to whom the country would turn for assistance (the IMF is the most reasonable bet) and if the vestiges of Chavez’s Venezuela would be willing to give up power so easily. A messy political – even physical – fight seems likely.

Though the White House’s only foreign policy initiative in Latin America may be normalizing relations with Cuba, the U.S. should monitor Venezuela’s economic crisis closely. Relations between Venezuela and United States have understandably deteriorated in recent years as Maduro has done little to dampen his inflammatory rhetoric or improve Venezuela’s poor human rights record, but that does not mean Washington should ignore the country’s current plight or its hemispheric effect.

The U.S. should consider reducing its sanctions against Venezuela. Some of these sanctions may be warranted, like those targeting FARC supporters in the Venezuelan government, but their more recent application sends a message of U.S. interventionism – one that many Latin American countries find unacceptable. It is clear that the region is undergoing a critical political shift (see elections in Argentina, Venezuela, Bolivia, etc.), and the United States should be keen to capitalize on the public backlash against command economies and Chinese economic intervention, a leading driver of South American development.

Citing what can happen to a country that is unable to combat bad governance, drug violence, or fiscal irresponsibility, the White House should work with Latin American leaders on new anti-corruption initiatives and responsible economic partnerships. Presenting the United States as a neighbor looking to aid the Americas through a tough economic period would drastically improve our country’s standing in area mindful of past meddling.  




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