"The product of nearly twenty years of neglect and mismanagement, Venezuela’s reality is not one the world could have imagined two decades ago.”
Venezuela is well-known for having the world's largest oil reserves. It was once the leader of the emerging markets in Latin America and during the 1950s it was the world’s 4th wealthiest nation per capita. Its future seemed bright, so what went wrong?
In the mid-1970s, then-president Carlos Andrés Pérez started the process of nationalizing the oil industry with the creation of Petróleos de Venezuela (PDVSA). Although the South American nation had enjoyed years of economic prosperity, in the following two decades, a mix of factors, including fluctuations in the oil prices, caused an economic decadence, according to Foreign Policy. However, for most of the second half of the 20th century, the price of the oil barrel was around $40 (inflation-adjusted), excluding a few peaks at the end of the 70s.
In 1998, oil prices fell to $12 per barrel. The following year, Hugo Chavez took office and in 2000 oil prices soared, reaching its highest price ever in 2008. This offered Chavez funds not seen since Venezuela’s economic collapse in the 1980s.
So there are primarily two related causes that have resulted in the steep decline of Venezuela's oil production, despite the sharp increase in the country's proved reserves. The first is the removal of expertise required to develop the country's heavy oil. This started with the firing of PDVSA employees in 2003 and continued with pushing international expertise out of the country in 2007.
Second, the Chávez government failed to appreciate the level of capital expenditures required to continue developing the country's oil. This was in no small part due to inexperience among the Chávez loyalists that were now running PDVSA, but it may not have mattered in any case. When oil prices were high, Chávez saw billions of dollars that could be siphoned to fund the country's social programs, and that's exactly what he did. But he failed to reinvest adequately in this capital-intensive industry.
Following the firing of the PDVSA employees in 2003, there was an initial steep decline in the country's oil production below 3 million BPD. Then Venezuela's oil production recovered back to the 3.3 million BPD level from 2004 to 2006. But since 2007 oil production there has been on a steep decline, despite oil prices that were regularly above $100/bbl. In 2015 Venezuela's oil production had fallen to 2.6 million BPD, a decrease of more than 20% below 2006 levels.
Venezuela’s oil industry has been in a tailspin in recent years, with the country’s crude oil production falling from 2.4 million barrels per day (bpd) in 2015 to only 1.34 million bpd at the end of 2018. This freefall is poised to carry over into 2019, according to energy research and consulting firm Rystad Energy.
In Rystad Energy’s base case forecast, Venezuelan production drops by another 340,000 bpd year-on-year to 1 million bpd in 2019, and slips even further to 890,000 bpd in 2020.
In the mid-1970s, then-president Carlos Andrés Pérez started the process of nationalizing the oil industry with the creation of Petróleos de Venezuela (PDVSA). Although the South American nation had enjoyed years of economic prosperity, in the following two decades, a mix of factors, including fluctuations in the oil prices, caused an economic decadence, according to Foreign Policy. However, for most of the second half of the 20th century, the price of the oil barrel was around $40 (inflation-adjusted), excluding a few peaks at the end of the 70s.
In 1998, oil prices fell to $12 per barrel. The following year, Hugo Chavez took office and in 2000 oil prices soared, reaching its highest price ever in 2008. This offered Chavez funds not seen since Venezuela’s economic collapse in the 1980s.
So there are primarily two related causes that have resulted in the steep decline of Venezuela's oil production, despite the sharp increase in the country's proved reserves. The first is the removal of expertise required to develop the country's heavy oil. This started with the firing of PDVSA employees in 2003 and continued with pushing international expertise out of the country in 2007.
Second, the Chávez government failed to appreciate the level of capital expenditures required to continue developing the country's oil. This was in no small part due to inexperience among the Chávez loyalists that were now running PDVSA, but it may not have mattered in any case. When oil prices were high, Chávez saw billions of dollars that could be siphoned to fund the country's social programs, and that's exactly what he did. But he failed to reinvest adequately in this capital-intensive industry.
Following the firing of the PDVSA employees in 2003, there was an initial steep decline in the country's oil production below 3 million BPD. Then Venezuela's oil production recovered back to the 3.3 million BPD level from 2004 to 2006. But since 2007 oil production there has been on a steep decline, despite oil prices that were regularly above $100/bbl. In 2015 Venezuela's oil production had fallen to 2.6 million BPD, a decrease of more than 20% below 2006 levels.
Venezuela’s oil industry has been in a tailspin in recent years, with the country’s crude oil production falling from 2.4 million barrels per day (bpd) in 2015 to only 1.34 million bpd at the end of 2018. This freefall is poised to carry over into 2019, according to energy research and consulting firm Rystad Energy.
In Rystad Energy’s base case forecast, Venezuelan production drops by another 340,000 bpd year-on-year to 1 million bpd in 2019, and slips even further to 890,000 bpd in 2020.
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Source: Trading Economics
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In 2003, the Ministry of Finance suspended foreign exchange trading, creating CADIVI. In 2007 the housing market in Venezuela shrunk significantly with developers avoiding Venezuela due to the massive number of companies who have had their property expropriated by the government.
In 2007, after winning the 2006 presidential elections, Chavez began to nationalize strategic sectors such as, oil, electricity, food, and communications.
In 2007, after winning the 2006 presidential elections, Chavez began to nationalize strategic sectors such as, oil, electricity, food, and communications.
Timeline of Expropriations
According to The Heritage Foundation and The Wall Street Journal, Venezuela had the weakest property rights in the world, scoring only 5.0 on a scale of 100, with expropriation without compensation being common.
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By 2012, oil accounted for 95% of venezuela’s exports. After Chavez’s death in early 2013, Venezuela’s economy continued decreasing into a greater recession. The Bolivar Fuerte, Venezuela’s currency which was devalued already, was further devalued due to growing shortages in Venezuela. In 2014, oil prices started to go down and Venezuela entered an economic recession having its GDP growth decline to -3.0%. Additionally, Venezuela was placed at the top of the misery index for two years in a row.
To worsen things in the economic realm, the government had established policies that called for “precios justos” (a just price), where they would establish the price of certain products. This policy scared investors and almost broke all of the private sector businesses. In a 2014 report titled Scariest Places on the Business Frontiers by Zurich Financial Services and reported by Bloomberg, Venezuela was ranked as the riskiest emerging market in the world. It is no surprise that many companies, such as Toyota, General Motors Company, Air Canada, Air Europa, American Airlines, and United Airlines slowed or stopped operations in Venezuela.
In 2015, Venezuela was at the top of the misery index according to the World Bank. The IMF predicted in October 2015 an inflation rate of 159% for the year 2015, which was the highest rate in Venezuelan history and the highest in the world. In 2016, Venezuela was suffering an economic collapse with no brakes. The inflation rate had reached 256% by 2016 and by December the inflation exceeded as 50% for 30 consecutive days. There were rumors at this time that PDVSA was in risk of default.
To worsen things in the economic realm, the government had established policies that called for “precios justos” (a just price), where they would establish the price of certain products. This policy scared investors and almost broke all of the private sector businesses. In a 2014 report titled Scariest Places on the Business Frontiers by Zurich Financial Services and reported by Bloomberg, Venezuela was ranked as the riskiest emerging market in the world. It is no surprise that many companies, such as Toyota, General Motors Company, Air Canada, Air Europa, American Airlines, and United Airlines slowed or stopped operations in Venezuela.
In 2015, Venezuela was at the top of the misery index according to the World Bank. The IMF predicted in October 2015 an inflation rate of 159% for the year 2015, which was the highest rate in Venezuelan history and the highest in the world. In 2016, Venezuela was suffering an economic collapse with no brakes. The inflation rate had reached 256% by 2016 and by December the inflation exceeded as 50% for 30 consecutive days. There were rumors at this time that PDVSA was in risk of default.
Top 10 Countries by Inflation Rate (1980–2018)
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Source: International Monetary Fund
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