Wonkblog | Perspective
May 18, 2018 at 1:33 PM
Venezuela leads the world in two things: oil reserves and incompetence.
What else can you say about an oil-based economy that's falling apart faster than ever before despite the fact that oil prices have risen more than 50 percent over the past year? That shouldn't happen whether you're capitalist, socialist or something in between, but it has in Venezuela because of the country's mix of extreme corruption and economic illiteracy. Indeed, the International Monetary Fund estimates that Venezuela's economy will shrink another 15 percent this year to make it almost half the size it was at the start of 2014, and that its inflation rate will get up to 12,875 percent. Which points to maybe the most disconcerting part of all of this: Venezuela's collapse now has so much momentum of its own that not even good news such as higher oil prices can stop it anymore.
While it might seem impossible, then, for things to get worse in a country where food is so scarce that three-quarters of all adults lost weight in 2016 — for an average of 19 pounds each — they almost certainly will.
There's no mystery about what's happened in Venezuela. Its government has destroyed its economy. The simple story is that the Bolivarian regime has over-promised and under-delivered: It said it could afford to spend more money on social programs than it could even if it was selling a lot of oil at high prices, but then it bungled things so badly that it didn't pump nearly as much as it could. This was somewhat sustainable as long as oil stayed above $100 a barrel but not at all after the shale revolution helped send oil prices tumbling in 2014.
Caracas suddenly had to print much more money to fill its budget hole, fueling what's now turned into runaway inflation. To give you an idea how bad it's gotten, Venezuela's currency has lost 99.999 percent of its value, going by black market prices, since the start of 2012. This has been even more painful than it needed to be, though, because the government has tried to fix it with byzantine price and currency controls that removed any incentive for companies to sell goods, given that they would have to do so at a loss. It has meant that store shelves have gone empty, and lines have piled up at the few, often government-controlled, shops that are willing to sell at the government-approved prices.
What's changed recently is that this crash is begetting another. How is that? Well, Venezuela's oil production is no longer falling only for political reasons but also for economic ones. The important thing to understand here is that the Bolivarian regime has always viewed the state-owned oil company as a piggy bank to take money out of but not put back in — and as a result, as a source of power that must be controlled at all costs. The first part of that means that it has neglected the investments it needed to keep all of its oil fields up and running; and the second, that it's fired a lot of the experienced engineers who know what they're doing and replaced them with more politically reliable ones who don't necessarily. Put those together, and you can see why the country's oil production fell about 25 percent from the time former president Hugo Chávez took office in 1999 until he passed away in 2013.
But despite that, oil was still such a big (and maybe the only) part of the country's economy that to a large extent it determined how much Venezuela's currency was worth. As you can see below, the price of oil explained about 73 percent of the bolivar's black-market value from the start of 2012 till the end of 2015.
Since then, though, it has been about 51 percent. The difference now is that Venezuela is pumping so much less and printing so much more than it was even a few years ago. That's because inflation has gotten so out of control that the economy is coming to a complete standstill, which is only making inflation worse. In particular, oil workers are being paid so little now that prices are so high that workers are starting to resign en masse. One union leader estimates that 25,000 of the state-owned company's 146,000 workers quit in 2017 alone. It hasn't helped that the general who was put in charge of the company six months ago has been purging the ranks of people deemed insufficiently loyal to President Nicolás Maduro, encouraging the remaining workers to denounce one another and bringing in soldiers who don't have a background in the business. The result has been that Venezuela's already low levels of oil production have fallen 23 percent since the end of last year and are expected to fall another 20 to 30 percent the rest of this one.
That's why higher oil prices haven't helped Venezuela: It's not selling anywhere as much as it used to.
This might be the endgame for the Maduro regime. After all, a dictator who can't even pump oil won't be a dictator for long. The government is fast approaching the point at which its heavy-handedness and inability to ween itself off its obviously disastrous money-printing isn't just damaging its oil industry but also maybe destroying it. Not to mention that the prospect of even tighter U.S. sanctions and Venezuela's creditors seizing what little oil it does have, as ConocoPhillips just did. Which is to say that it might not be long until Venezuela's government is reduced to having little more than guns and a printing press. The only question, then, will be whether what's already one of the worst humanitarian crises in the world also turns into a civil war.
In the meantime, though, Venezuela will be leading the world in one last thing: hunger.