Scenes from the Venezuelan capital Caracas look like a war zone as the death toll rises in protests against the leader of the world’s most oil-rich country. (Marco Bello/Reuters)
As OPEC meets on Thursday, its most oil-rich member is collapsing into chaos.
While Saudi Arabia, Russia and even the United States and Canada make headlines as petroleum giants, it is actually troubled Venezuela that has the world’s largest reserves of crude, something in the order of 300 billion barrels.
- PHOTOS | Venezuelans shut down streets in Caracas to protest Maduro government
Even at reduced current world prices, back-of-the-envelope calculations show that oil wealth alone should make all Venezuelan families U.S. dollar millionaires.
Looking like a war zone
And yet last week we saw pictures from the country that looked like a war zone. Clashes between demonstrators and authorities have led to more than 40 deaths.
Food riots descend into looting as families go hungry. Surrounding countries are being overwhelmed by refugees.
Some say the chaos means Venezuela under the military-backed government of President Nicolas Maduro could be on its way to becoming a failed state like Somalia.
It seems clear that eventually Venezuelans must reach a political compromise, but whatever government is in charge, getting the country back on the road to economic health is crucial to ending the suffering of its people.
The country is so sharply divided that outsiders, including France and the Vatican, have called for international mediation. But even international Venezuela-watchers are sharply divided on what has caused the country’s economic troubles, and the ultimate solutions.
“For many years, the opposition has engaged in destructive economic sabotage, causing shortages through hoarding and speculation in a deliberate attempt to create economic instability,” Sujatha Fernandes, an Australian specialist in the Venezuelan economy, told me in an email conversation.
Nonetheless, she says, much of the current mess can be blamed on economic mismanagement by the Maduro government following the 2014 crash in oil prices.
Though they differ on many things, that is something Ken Frankel, president of the Canadian Association of the Americas, can agree on. But he scoffs at comparisons of Venezuela to Somalia.
“It’s nowhere fair to compare it to Somalia. Venezuela does have infrastructure, a history of democratic rule and a lot of the basic elements of a modern state and economic structure,” says Frankel.
Rather than blaming the country’s troubles on the pro-business opposition, he points to the undermining of the business sector first by the charismatic socialist leader Hugo Chavez and then by his successor Maduro.
Oil production actually declined sharply as the government chased foreign companies away and replaced qualified managers at the state oil company PDVSA with regime loyalists.
Desperate for cash
When oil prices crashed the government, which had maintained its popularity by transferring income from resource wealth to its people, became dangerously short of cash. In desperation it sold off gold reserves, used oil infrastructure as collateral for loans and made bad deals to sell future oil production at well below world prices.
Perhaps worse, says Frankel, it debased its currency, leading to inflation that the International Monetary Fund has estimated at 720 per cent but others have put at over 2,000 per cent. That destroyed domestic industries including coffee production while making the imports that people depended upon prohibitively expensive.
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Hidden numbers reveal scale of Venezuela’s economic crisis https://www.ft.com/content/a6f7bdae-2f46-11e7-9555-23ef563ecf9a … via @FT
Hidden numbers reveal scale of Venezuela’s economic crisis
But Frankel insists a full recovery is possible because Venezuela’s enormous resource wealth, including the world’s second largest underground reserves of gold, means the country is simply suffering from a cash-flow problem.
“It’s a liquidity problem as opposed to a solvency problem,” he says.
The hardest question, he says, is how to restructure the economy while minimizing the pain and making things fair for the country’s poorest.
York University political economist Viviana Patroni, who specializes in Latin America, says ending the pain was the reason that Chavez was elected so overwhelmingly in 1998 as part of the socialist “pink tide” that swept what she describes as “the most unequal region in the world.”
The Chavez idea was to transform some of the country’s wealth into better health care, better education and better nutrition for the poor.
“That’s not so radical,” she says.
But looking at Venezuela now, she can only think it was a failed experiment partly because Chavez was unable to diversify the economy away from natural resources and partly because he failed to engage the private sector to help him transform the economy.
“What’s broken is pretty much everything,” says Kurt Annen, professor of economics at the University of Guelph, who studies development aid and Latin America.
Before it can do anything else, he says, Venezuela must stabilize its currency and get its hyper-inflation under control. He says it has been done in the country’s neighbour, Bolivia.
There, the government’s first step to slash the the budget deficit, in Bolivia’s case by cutting gas subsidies, resulting in a tenfold increase in pump prices. That is certainly an option for Venezuela where gas sells for pennies a litre.
The next step, says Annen, is to entice the private sector back to the country in order to boost oil production to its traditional levels.
“The current government may not be willing to slash the budget deficit as this will further erode the little political power they still hold,” says Annen. Besides, he says, businesses are unlikely to trust assurances from this government. Any economic improvement almost certainly will require political change as well.
As several of the experts I spoke to suggested, those seeking change have one advantage. Conditions in Venezuela are so bad that people will be willing to accept a significant amount of pain to get the economy back on track.
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