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Socialism, Not Corruption, to Blame for Venezuela’s Oil Production Drop

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Socialism, Not Corruption, to Blame for Venezuela’s Oil Production Drop

June 14, 2018

Venezuela’s tragic famine and refugee crisis taking place despite the largest proven reserves of oil on the planet. Watching it play out on television is one thing. Living through the ways socialism pushes the middle class to poverty and the poor to starvation is another experience entirely. Although I was fortunate enough to leave Venezuela almost two years ago to come to the United States, not everyone has the chance to leave. Venezuela has become the latest experiment of socialism, and like all those before, it has resulted in famine and mass exodus.

However, some news outlets wrongly state that Venezuela’s crisis is due to lower oil prices and that its oil production has collapsed due to mismanagement and corruption, claiming socialist policies are not to blame. However, what these analysts fail to understand is that widespread mismanagement and corruption of a whole industry and country are only possible within socialism. Only an economy that lacks free prices and competition, with high levels of government involvement, and with tight regulations can harbor government mismanagement and corruption that lead to shortages and hyperinflation.

Venezuela nationalized oil in 1974 and constituted PDVSA as the sole state-owned oil company. In 1994 Rafael Caldera, Venezuela’s president at that time opened the Venezuelan oil industry to private investment as part of a package of free-market reforms. Venezuela’s oil production soared and peaked at more than 3 million barrels per day in 1998, while inflation slowed from 100 percent to 12 percent by 2001.

However, since Chavez became president in 1999, attitudes towards private investment changed. In 2003, after a strike of PDVSA workers, Chavez fired all workers politically opposed to him, including most engineers, technicians, and executives. This took away an important part of the oil company’s human capital.

Moreover, the government’s social programs designed to make the population dependent rather than help them escape poverty could not be sustained by PDVSA’s revenues. And the government’s foreign intervention to support Cuba’s regime and socialist movements worldwide took a share of oil revenues. Consequently, Chavez decided to confiscate private oil companies that were operating in the country. This would later prove a strategic mistake.

However, PDVSA was not providing enough for Chavez, and while raising taxes is always unpopular, issuing debt, printing money, and reducing maintenance spending is not. Therefore, PDVSA raised billions of dollars in debt and stopped proper maintenance of its equipment and structures, while the government took absolute control of the central bank and printed money to fund social programs.

Since 2003, PDVSA has become the most troubled oil company in the world. Explosions at refineries killed dozens of people, processing facilities shut down, and rivers became contaminated. Lack of maintenance, brain drain, debt, and the ban of private investment has led Venezuela from a peak production of more than 3 million to barrels per day in the late 1990s to less than 1.5 million barrels per day today. Most of this decrease occurred in the last three years because maintenance issues took time to show and brain drain accelerated due to hyperinflation.


Source: Energy Information Administration. Data for 2018 is as of May 2018.

Now, the most important threat to the government’s oil revenue is not brain drain nor maintenance, but that it defaulted on its debt in 2017 and it failed to compensate foreign private companies for their assets. This has led to key judicial upsets to PDVSA, forcing it to compensate those affected. Given that PDVSA cannot pay its creditors, companies are looking to confiscate its oil shipments in the sea, and its refineries in the Caribbean are in danger.

While Venezuela’s economic crisis was exacerbated by the fall in oil prices during 2014, the real reason behind hyperinflation, shortages, and lower crude oil output is the socialist policies the dictatorship put in place. Currency and price controls, excessive budget deficits, and nationalization of oil and other companies inevitably resulted in mismanagement and corruption since government officials oversee imports, food distribution, oil shipments, and all major aspects of the economy. Moreover, even in other countries with state-owned oil industries, that are highly corrupt, and where there is mismanagement, such as Mexico, its people do not suffer from famine nor its oil production is collapsing exactly because there is private investment.

Unfortunately for Venezuela, PDVSA’s production is set to continue decreasing and exports may stop altogether by next year. Venezuela’s next government will have a gigantic task to recover production. Instead of looking at the outdated and failed model of state-owned exploitation of natural resources, Venezuela should look upon successful models for oil production such as the United States, where private ownership and fracking are making oil production soar. If Venezuela lifted its currency controls and opened its oil industry, either by allowing private investment or better by privatizing PDVSA, the world would perhaps witness the largest oil production recovery a country has ever seen.

Daniel Di Martino is a contributor to Economics 21. Follow him on Twitter @DanielDiMartino

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