Life for the non-governmental citizens of Venezuela seemingly cannot get worse. What could be worse than life defined by rampant poverty, chronic starvation, hospitals without the most basic supplies or sterile conditions, sky-high murder and crime rates, and martial law waged by a dictatorial government who created these conditions through its own economic and social policy?
On the individual level, it would appear that life could not get much worse. Personal accounts of the unceasing nightmare are the only way an outsider can understand the extent of the government-inflicted misery. But, what little food there is, what few medical supplies there are for the people, are provided by Venezuela’s chief resource, oil. With fracking already expanding worldwide oil supply, it was always inevitable that the nation’s economy would fluctuate from time to time under a traditional capitalist system. And, Venezuela’s own history with respect to corruption, economic and resource mismanagement, and high crime is far spotty at best. But the wanton, cronyism-first manner in which former Socialist president Hugo Chavez nationalized the oil industry, and the country as a whole, left Venezuela in a worse state than its people – including Chavez himself – ever could have imagined.
And now, it appears that a nation short on seemingly everything except oil may not even have that.
Whatever remains of the Venezuelan ‘economy’ is being held up by toothpicks. And those toothpicks have taken the form of oil exports. But, according to an Oil.com report, the increasingly poor quality of Venezuelan oil has prompted complaints and even shipment cancellations. The primary reason for the lack of refinery-quality Venezuelan oil, like the rest of the nation’s issues, is tied to its lack of money.
Current President Nicolas Maduro bears responsibility for continuing Chavez’s shameful legacy, but it’s Chavez who deserves the majority share of blame for Venezuela’s current state, especially the ruination of the oil the nation was fortunate to be founded upon.
Chavez, with alleged funding from Cuban dictator Fidel Castro, planned and executed a coup d’état against then-president Carlos Andres Perez in 1992. Though the first attempt to secure power failed, loyal soldiers executed a second attempt that year as Chavez sat in jail. Perez was, at the time, instating purely capitalistic, laissez faire economic policies in an attempt to strengthen the nation’s economy, an ideology which stands directly opposed to Chavez and Castro’s.
The transition to a freer economic system was rocky, and the seizure of media outlets by Chavez’s loyalists played a large role in Perez’s decline in popularity, and ultimately the two-party system. Most importantly, this coup allowed for Chavez’s election as president in 1998, appealing to the country’s significant poor population and running on a now-ironic anti-corruption platform.
It was eleven years after his election, in May of 2009, that Chavez announced formally what many suspected. Like the nation itself, he would be taking over Venezuela’s oil industry by force, seizing the assets of both domestic and foreign oil contractors while continuing the consolidation of power over the nation’s industries and political system. Essentially, all oil extraction and refining processes would be absorbed by Petróleos de Venezuela, or PDVSA, Venezuela’s state-owned oil company. Private operators went unpaid, Chavez’s way of avoiding approximately 40% of debts owed to private oil companies.
But, by avoiding those debts and ousting private contractors, Chavez would compromise the integrity of the nation’s oil profits in the long-term. Even qualified workers who stayed on to work had to remain staunchly loyal to Chavez, even if that meant substituting excellence for incompetence. Amidst an employee strike in 2002-3, Chavez fired 19,000 employees, replacing them with underqualified political patsies. Because new reserves were more difficult to produce into exportable oil, international state and private oil companies were invited back in, setting up the infrastructure to extract from these heavy-oil reserves, converting its contents into crude oil. These companies would also be investing in Chavez, who ultimately forced re-negotiation of contracts in his favor as oil prices increased. Should companies refuse his terms, they would risk having their operations seized, as ExxonMobil and ConocoPhillips found out in 2007.
Once again, Chavez discouraged private investment through his strong-armed, short-sighted, my-way-or-expropriate negotiation tactics. The forced flight of both highly-skilled private contractors and expertise within PDVSA, the high cost of oil production, widespread corruption and untenable Socialist policies in all aspects of society are the reason Venezuela is in the most dire financial straits it’s ever seen.
President Trump placed sanctions on Venezuela that resulted in a weekly oil purchase decline of approximately, 350,000 to 550,000 barrels per week, according to Oil.com. Now, even companies still willing to deal with Venezuela’s dictatorship have cancelled shipments because the oil’s quality is too poor. The Maduro government lacks the financing for essential chemicals needed to remove salt, metals, and water from the oil. And, as columnist Nick Cunningham adds, Venezuela seems to be near insolvency, having missed a round of massive debt payments with the 30-day grace period soon to end.
‘a bigger test comes in about a week: between October 27 and November 2, Venezuela has to make a whopping $2 billion in payments to bondholders, and there’s a lot of uncertainty around whether or not it can make those payments. And over the next three weeks, Venezuela and PDVSA owe a combined $4.4 billion. Analysts believe the central bank has a little over $9 billion in reserves, but much of that is in illiquid assets like gold. “It seems they’re saving every penny for these two big payments,” Russ Dallen, managing partner at Caracas Capital, told the WSJ.’
The canceled shipments have direct effects on the people of Venezuela, as each represents hundreds of millions of dollars that, at least partially, would help to provide the already scarce yet rapidly diminishing food and supplies needed to survive. Even if the Maduro regime put those millions toward paying off debts, it would stave off further financial ruin in the short term. In the long term, the Venezuelan people may be better off should a debt default occur.
For the Maduro regime, defaulting on its debts would perhaps be the nail in the coffin they have thus far avoided. Further loans would be extremely difficult to procure, and the imports that Venezuelans so rely upon would be more difficult to acquire than they already are.
Perhaps defaulting, which seems inevitable at some point in the near future, is the final catastrophe that the nation will need for a complete re-boot of its political system. Perhaps it will take the form of a military coup, but something will have to give. Unfortunately, and almost unthinkably, that will likely mean life getting even worse for the people of Venezuela before it can get any better.