Black Gold Takes Venezuela from the Black to the Red

Just as all that glitters is not gold, all that is gold does not bring wealth. Over the past few months, as the price per barrel of oil has drastically fallen, Venezuela has received painful instruction in that phrase’s meaning. Since 1999, when Hugo Chávez assumed control over the Venezuelan government, the country has continually exploited its position atop the largest crude oil reserves in the world. Consequently, oil’s share of Venezuelan exports has risen from 69 percent in 1999 to 96 percent in 2014. With the

steep decline in the price of oil pushing prices to just below $50 per barrel, the South American nation currently finds itself far below its break-even price of over $100 per barrel of oil. Venezuela, unlike its counterparts in the Arabian Peninsula, lacks the necessary economic structure to sustain itself in the face of declining oil prices. This problem is confounded by the lack of diversity in the Venezuelan economy, as most industries have been nationalized or solely created to support oil exportation.

With its oil-based foundation eroding away, the Venezuelan economy is beginning to collapse under its own weight. Since October 2014, inflation has risen 65 percent placing considerable strain on the nation’s populace and currency. The consequences have not gone unnoticed by international investors. Rumors that Venezuela’s depleted foreign currency reserve could impede it from repaying bonds forced the credit rating agency Moody’s to downgrade the nation’s credit rating to Caa3 status on January 13th. Moody’s determination places Venezuela one rank above default, and the agency warned it would likely be forced to further lower the rating should oil prices continue to drop.

The specter of default, which analysts say has a 97 percent probability of occurring in the next five years, has pushed the typically protectionist nation to begin seeking external means of injecting capital into the national economy. Venezuelan president Nicolas Maduro began a series of overseas tours in early January 2015 with the goal of finding possible lenders. While no nation has made an official loan promise, Maduro claims China, which has given Venezuela $45 billion over the past decade, has promised an additional $20 billion loan to be repaid in oil supplies, the only asset Venezuela has in abundance.

Beyond China’s immediate assurances, the president also expects numerous Qatari investors to issue a series of loans to Venezuela between 2015 and 2016.

The social implications of the impending economic collapse are beginning to materialize as citizens are left without access to various resources. The inefficient allocation of resources has led shortages of goods as basic as food. Since early January, state-run food suppliers have been beset by long lines of people waiting for access. The lines have forced police to restrict people to only purchasing food only twice per week. Private food stores, unrestricted by these limitations, continue to face blockbusting lines.

Despite the potential influxes of cash, under its current configuration the Venezuelan economy will burn through the loans and end up in the same situation. Attempting to fulfill its Bolivar-socialist mandate of providing equal access to resources, the government has diverted the majority of oil revenues into unproductive social programs while investing little money into infrastructure or development.

The political consequences for Maduro and his United Socialist Party of Venezuela (PSUV) have began mounting in response to the economic crisis. Polls have indicated that two-thirds of voters want Maduro to step down presently, a year into his six-year term. The PSUV itself has also shown signs of splintering, with less than one-tenth of members voting in recent internal elections. Combined with Maduro’s inability to summon up the same party enthusiasm at the grass-roots level, à la Hugo Chávez, this friction has left an opening for opposition groups to break the PSUV’s hold on power.

The PSUV’s most significant challenger, The Democratic Unity (MUD) alliance, remains decentralized across dozens of parties. However, should they manage to win a simple majority in the National Assembly during the next election cycle, Venezuela’s Executive and Legislative Branches will be split along different party lines for the first time since Chavez came to power in 1999.

Slammed with the dropping oil prices, the rise of the shale gas industry in the North, and spreading dissatisfaction across the country, Nicolas Maduro may soon find that the oil that made the nation rich is driving it into default and economic ruin.