Country report: Venezuela

Materials World magazine
1 Sep 2016

As part of our ongoing series, Rhiannon Garth Jones considers the latest example of the resource curse – Venezuela.

The resource curse is a well-documented phenomenon where countries with an abundance of natural mineral and petroleum resources show significantly lower economic growth and development than resource-poor countries. While there is no academic consensus about the causes, mismanagement is a commonly cited issue. Recently, Venezuela has demonstrated why.  

Venezuela has the largest proven oil reserves in the world and huge hydropower potential, but it is currently close to collapse. It has had problems with poverty and inflation since 2010 but, as oil prices have fallen and the occurrence of droughts has risen, its issues have spiralled. In March 2016, the Government shut down the country for five days over the Easter weekend to conserve energy. It then announced four-day weeks going forward, to achieve the same thing. Neither worked. The working week has now been reduced to two days.

In May, President Maduro declared a state of economic emergency. In July, he announced executive powers that could force citizens to work in agricultural fields and farms for 60-day (or longer) periods to supply food to the country. When the border with Colombia was reopened after nearly a year, more than 35,000 Venezuelans crossed to buy the food, soap, toilet paper and medicines no longer available in their own country. Tens of thousands of middle-class Venezuelans have left the cities to pan for gold in illegal mines, where malaria is rampant. Maduro’s personal approval rating is at 21.2%. 

How did this happen?

The situation in Venezuela is mostly a consequence of mismanagement, compounded by low oil prices. Oil provides 95% of Venezuela’s foreign-exchange earnings, and its price has traditionally been linked to the popularity of its leaders. Venezuela also has substantial holdings in gold, which fell in price during 2015, contributing to the country’s economic problems. 

But while the low price of commodities is exacerbating the problem, it isn’t the explanation for the current situation. Venezuela has been enduring periodic blackouts and electricity rationing since 2009. For the past 10 years, more than 60% of energy has come from Venezuela’s other major natural resource – hydropower. With proper backup (such as the natural gas turbines used in California, which is similarly reliant on hydropower), hydropower is a reliable source of renewable energy. Without proper backup, it is highly susceptible to droughts, of which there have been many in the past seven years. Venezuela doesn’t have sufficient backup. 

Venezuela's per capita rate of electricity use is one of the highest in Latin America, but the electricity grid doesn’t have the capacity to support that demand. According to the US Electricity Information Administration, Venezuela’s installed capacity grew 28% between 2003–2012 but the country’s electricity consumption grew by 49%. A lack of proper infrastructure and failure to maintain those backup generators that have been installed since the major droughts of 2009–2010 has led to frequent blackouts in cities. 

Can this be fixed?

Maduro has announced on state television that the cost of oil needs to rise to at least US$70. But for that to happen, production elsewhere needs to fall. Other OPEC countries, such as Iran, Russia and Saudi Arabia, are refusing to cut production and are instead producing at near-record levels, even as costs remain low. Worse, as Ellen R Wald, Adjunct Professor of Social Science at Jackson University, USA, notes, ‘Venezuela cannot afford to produce the oil it needs to sell’. Much of Venezuela’s oil is difficult to recover, and the cost per barrel of recovery is estimated to be around US$18. In contrast, Saudi Arabia’s recovery cost is below US$10 per barrel, and sometimes as low as US$2. Worse still, the lack of electricity being generated means that, even ignoring economic concerns, the oil pumps aren’t working.

Wald sums up the situation, saying, ‘Venezuela’s fault was that it relied on its oil industry at the expense of other aspects of its economy, when its particular oil industry is especially vulnerable in a market with fluctuating prices. The central planners neglected farming, manufacturing and other industries and instead imported basic goods paid for with profits from oil exports. Moreover, the Government did not invest to improve efficiency.’ 

Increased oil production and higher oil prices would probably help deal with the immediate issues facing the country – it would be able to import foodstuffs, household goods and medicines, for instance. But the fact that Venezuela can’t produce the oil it needs to save itself suggests the key to the problem lies elsewhere – in the energy policy for the country. 

Venezuelans depend on the money provided by oil sales, but their electricity doesn’t actually come from oil. The country’s electricity capacity needs to be expanded, transmission lines improved and a reliable, properly maintained back up to hydropower installed. El Niño has shown the impact changeable weather can have on hydropower, so an alternative energy source is crucial. Improved electricity capacity would enable the country to get back to work but it would also, of course, require funding. 

Wald recommends the privatisation of the oil industry, and political action that will convince companies that there is no danger of renationalisation, or arbitrary fiscal impositions. That suggestion could sound extreme to the famously socialist Venezuelan Government but, in August, Maduro announced that he had signed US$4.5 billion worth of mining deals with foreign and domestic companies and that he expected US$20 billion more in mining investment contracts to be signed in the near future. He added that the income Venezuela received would be used to ease the recession and support social projects. The deals announced so far have been to mine gold, coltan and copper, all resources that the country also has a great quantity of. It remains to be seen how the money raised will be spent, and whether it will be effective.