The Fall of Venezuela: An Oil Crisis
As a country with the most oil deposit in the world and a member of the Organization of the Petroleum Exporting Countries (OPEC), Venezuela was a wealthy country. In 2016, Venezuela was one of the top 10 oil producing countries in the world, producing 2.4 million barrel of oil per day. However, putting this reputation to shame, Venezuela is currently facing the worst economic downfall in the world’s history. What are the factors that pushed Venezuela to the end of the rope?
In 1973 and 1979, the world suffered from two major oil crisis that happened due to the decisions made by OPEC. From 1973 to 1980, the global oil price soared from $23.79 to $120.24, showing a 505% growth rate in less than 10 years. Thus, Venezuela had the chance to well off themselves with booming government income through oil refine and export. Nevertheless, the dependence on oil exportation pushed Venezuela into the corner of the rim.
As Venezuela earned most of their government budget through oil exportation, the country’s focus was slanted towards the oil industry, neglecting other industries such as the farming and manufacturing industry. At the same time, a huge inflow of dollar, the main currency used for international trade, was occurring in Venezuela through the sale of oil, increasing the value of the Venezuelan currency, Bolivar. Thus, the appreciation of the currency increased the price of the exported goods from Venezuela and led to loss of price competition of native firms. Nonetheless, diminishing strength in these fields could have been prevented by the government as they were able to maintain their affluence by purchasing lacking goods from the nearby foreign countries.
However, in 2014, the United States increased the production of shale oil which had a significant impact on the international oil price, changing the price of an oil barrel worth $62 to $26 within 2 years. Hence, the Venezuelan government faced huge trouble due to their decreasing income budget, ultimately causing inflation in the country. Venezuela had a poor agricultural and manufacturing industry due to their emphasis on oil production, and a shortage of necessary goods occurred internally. Therefore, the lack of capital to import the necessary goods from foreign countries intensified the inflation in the country.
In order to resolve this issue of inflation, the Venezuelan government increased the minimum wage by 300%, from 6000 Bolivar to 18,000 Bolivar. Nonetheless, since the government does not have the budget to sustain the economic system, the central bank of Venezuela kept on issuing the Bolivar. This wrong prescription of the government caused the depreciation of the Bolivar, aggravating the situation by stimulating the inflation boom.
Currently, the International Monetary Fund (IMF) is projecting that Venezuela will face an inflation of 1,000,000% in 2019. As a result of excessive dependence on oil and the implementation of the wrong economic policy, Venezuela is facing a fatal economic catastrophe despite its great potentials.
Edited by Urvi Agrawal.
Sources:
https://money.cnn.com/interactive/news/economy/worlds-biggest-oil-producers/index.html
https://www.britannica.com/topic/oil-crisis
https://www.macrotrends.net/1369/crude-oil-price-history-chart
https://www.thebalance.com/how-crude-oil-prices-affect-gas-prices-3306230
https://www.youtube.com/watch?v=khadBW2cTqo&t=1005s
https://news.joins.com/article/22900773
https://eiec.kdi.re.kr/material/archive/concept/view.jsp?cc=00002000010000100012&cid=160
