Venezuela – How’d They Get Here?

Venezuela hasn’t been front page news in a while, but the deteriorating situation could mildly irritate you in the near future. Nicolas Maduro, the leader of Venezuela, has been at the helm of a failing government since the death of Hugo Chavez in 2013. Continuing the failed economic policies of Hugo Chavez’s socialist revolution in Venezuela, the nation now faces severe shortages of food, medicine, cash, and even Christmas toys.

While other nations failing is usually of little to no concern to the average US citizen, Venezuela has two things going for it that make it a concern of yours. First and foremost, Venezuela has the largest oil reserves in the world. Venezuela has larger oil reserves than the nations the average American associates with oil, like Saudi Arabia, Iraq, Iran, or even Nigeria. And secondly, Russia could gain controlling stake in the Texas based oil firm Citgo if Venezuela defaults on its loans.

Petroleos de Venezuela, the Venezuelan state oil company with the most generic name ever when translated to English, Oil from Venezuela, is suffering from decreasing production. When 95% of your exports are petroleum products and your petroleum company faces decreasing production then that is a bad thing. When people are engaged in running gun fights between pro and anti government factions in the streets then that becomes somewhat cataclysmic.

So how did Venezuela get to this point?

Valentina Perez of the Harvard Political Review wrote:

“Chávez’s socialist policies also hurt Venezuela’s productive capabilities by alienating business interests in the country. Venezuela was listed number 180 out of 185 countries on the World Bank’s list of “Ease of Doing Business” economies, a result of its socialist polices. In addition to these difficulties, Venezuela ended 2012 with an annual inflation rate of 20.1 percent. In the flourishing currency black market, a dollar is valued at 16 bolivars, contrasted with the official rate of 4.3 bolivars to the dollar. Venezuela’s only reliable export in the face of these circumstances is oil.

In addition to these economic challenges, the country’s security has also taken a hit. More civilians were killed in Venezuela from 2003 to 2011 than in Iraq during the same period of time, making Caracas more deadly than Baghdad.”

What is notable is that Valentina Perez wrote that article back in 2013, and things just got worse from there. Now inflation stands at over 800%.

To summarize, Hugo Chavez used the immense oil wealth generated from $100 / barrel oil prices (remember $4.00 / gallon gas?) and Venezuela’s large oil export capacity to fund massive social welfare programs. Once the oil prices started to decline the inability of Venezuela to attract any sort of outside investment, due to nationalizing its industries, inability to diversify its economy, and inability to deal with corruption and graft led to an unsustainable economy.

Now, instead of trying to deal with the problems responsibly, Nicolas Maduro is blaming it on gangsters and thieves, and clamping down however he can on the civilian population. This is indicative of a desperate regime in its death throes.

And why should Americans care?

Americans love cheap oil. If the nation with the largest oil reserves in the world can no longer export, oil prices will go up. How much they will go up is difficult to forecast, but what is far more troubling is that Russia could gain control of Citgo, which would include its US refinery assets.

That’s right, if Venezuela defaults on its loans and goes under then Citgo could become a tool of Russia.

And given Russia’s history of using energy as a weapon, it could prove extremely problematic indeed were this event to unfold.

So if Venezuela goes under, and that looks all but certain, the United States will have to act to protect itself from unwanted Russian influence over its energy security. US citizens will also have to prepare themselves to pay more at the pump.

The world doesn’t need another failed state, but that looks like that’s what we’re going to get, and now all we can do is work to ensure we are as insulated as possible from the ramifications of Venezuela’s socialist experiment.