A paradox to be recovered
On paper, the country has enough energy resources and potential tourism to regain its prosperity and stability, but political decisions and a lack of economic diversification jeopardize its chance of recovery

When Christopher Columbus first saw what was to become Venezuela he thought he had discovered paradise on earth. Even today, it is a country of great beauty and abundant resources. Consider Angel Falls, a stunning natural beauty that is the highest uninterrupted waterfall in the world. Then there are the offshore islands, such as Magarita Island, with its crystal blue water, amazing reefs, beaches and tropical breezes. Venezuela also has a savanna, Le Gran Sabana, that has amazing wildlife. It also contains part of the Amazon River with its tropical wonders. If that is not enough, Venezuela also has the Andes Mountains, a part of which goes to the sea. Venezuela is also amazingly rich in excellent, fertile land, and it was an agricultural economy before the discovery of its gigantic oil fields. It also had one of the world’s largest fresh water lakes, Lake Maracaibo, but it was opened to the sea to ship oil, and it has been recently described by a Venezuelan scholar as "ruined." In addition to its abundant natural beauty, Venezuela has fascinating indigenous cultures, some of which have survived somewhat intact. Others have been distorted by exposure to external influences, most particularly when the mining and other companies used indigenous lands for production, transport, and other activities. Drug, fuel and other smuggling gangs have also distorted those cultures and peoples. Venezuela resources include diamonds, gold, coltan, feldspar, silica, nickel, iron, coal, uranium, bauxite, natural gas, and the one that has dominated the country since the early 20th century, oil. Venezuela may have the largest publicly known proved oil reserves on the planet. However, it is hard to tell the extent to which the country has claimed huge increases in reserves estimates that do not seem fully supportable. Much of Vene­zuela’s oil is very heavy oil that needs diluents such as naphtha to make it more usable. Venezuela also imports light, sweet crude from the U.S. via Curacao for mixing with its heavy crude. U.S. exports to the tiny country of Curacao have bloomed since it became legal to export crude to countries other than Canada and a few others. Venezuela is exporting less and less oil to the U.S., and is in fact relying more and more on refined products from the U.S., mostly from the Houston area and often from its U.S.-owned refineries run by CITGO, a Venezuelan company. Venezuela also imports oil into and exports refined products from the Virgin Islands in the Caribbean. And it has been involved in a project called Petrocaribe, which was started by Hugo Chavez to tie many Caribbean states to Venezuela and the "Bolivarian Revolution." These countries bought oil and oil products from Venezuela at well below international costs. Lately, however, they have been importing less from this program and more from the international markets, a change due to the relatively low oil prices that now exist in international markets. The largest beneficiary from this very costly project has been Cuba. Oil has been a foreign policy device through such projects. Historically, oil has been both a curse and a blessing to this astonishing country. It is astonishing because of its natural beauty and promise, but also because of how it has frittered away so much for the sake of political, ideological and economic disputes.

Unparalleled crude oil reserves

Venezuela may have 300 billion barrels of proved reserves of oil in the ground, larger than those of Saudi Arabia. Still, Saudi Arabia produces about 10 million barrels a day compared to Venezuela’s approximately 2 million barrels a day. Saudi Arabia’s production has been fairly steady in recent times, although it has had drops in production by choice due to an OPEC deal to cut production in recent months. Venezuela’s drop in production from 2.7 million barrels a day in 2005 to about 2.3 million barrels a day from 2009 to April 2016 did not seem voluntary, and its drop in production of over 400 thousand barrels a day from April 2016 to now also seems far from voluntary. These drops seem more the result of political instability, lack of investment in the national oil company PDVSA, poor maintenance, and so many different negative influences on the economy and polity of Venezuela as to make one wonder how anything works in PDVSA or in the country as a whole. Oil production was about 3.5 million barrels a day just a couple of years before Chavez took over in 1998, and it has been downhill since. In 2002, PDVSA had a period when it was not working as the company went on strike and simply shut down. This was in response to what they saw as a threat to the company by Hugo Chavez, and it is also considered a failed coup attempt by PDVSA people and others to oust Chavez. Chavez responded by firing more than 18,000 people from the company, including some of its best engineers and managers. PDVSA was never the same again. PDVSA, if managed properly, could, according to some experts on the company, produce 6 million barrels a day, but it is still seeing some of its top engineers and managers leave the company and flee the country. Many of the people working in PDVSA today are there because they passed ideological litmus tests, not because they have the necessary skills. Large, complex companies like PDVSA require the best and brightest in energy, technology, engineering and management, not those who are politically acceptable to politicians.

Venezuela is a country that is twice the size of California with well over 31 million people, and with massive natural resource endowments and natural beauty. I should and could become a wealthy, healthy and much happier place

Between economic decline and social divide

In a broader sense, Venezuela has had a Bolivarian diaspora of those leaving because of Hugo Chavez’s new constitution and "reforms," which have ruined their hopes. Hundreds of thousands have already left and some took wealth, knowledge and skills with them. The Venezuelan economy and society are in a state of debilitating collapse. Its GDP has precipitously collapsed in the last couple of years due not only to the global drop in oil prices, but also to egregious mismanagement of the economy. Its GDP growth rate is now between -5 percent and -8 percent, and starvation is increasing. The government has allowed people to cross over into Colombia to get food because it is so difficult to find it in Venezuela. Poverty is increasing. Inflation ranges to as high as 1,500 percent according to some sources. The official valuation of the currency has no real connection with the actual valuation, as the official exchange rate gives the currency a value 20 times that of the black market rate. Many markets have taken to weighing the local currency instead of counting it, and many stores, tourism resorts, and others are now asking for hard currency payments. The most desired currency is the U.S. dollar, but most Venezuelans are poor and do not have many dollars. There are some people who are doing very well in Venezuela, but they are very few. Most people are heartbreakingly desperate in their attempts to get even small amounts of food on the table for their families. Others have been sending cash and other valuables out of the country and buying up properties in the U.S. and elsewhere. For an allegedly socialist state, Venezuela has very sharp class divides. Some of the main reasons for the initial rebellions by Simon Bolivar and the many coups and counter coups over the last two centuries were inequality, human rights violations, poverty, misuse of resources, and limiting the power of outsiders on the development and politics of Venezuela.

Yet this is how Venezuela ends up

The big companies, and especially Standard oil, and later Exxon, dominated oil exploration and production in the country in the early years of the development of the oil industry. Standard oil and the other big oil companies were emasculated in Venezuela. At first Venezuela got smallish royalties from the big oil companies. Then in the 1950s, they got about 50 percent or so. Venezuela was one of the original parties to OPEC in the 1960s. After that royalties increased further. In 1976 the oil companies were nationalized fully into PDVSA. This was, of course, when oil prices were very high due to the 1973 war and oil boycotts. As the oil prices declined rapidly in the 1980s and stayed low in the 1990s, Venezuela was hurting economically—even with massive oil reserves in the ground. When the government realized the cash cow it had in PDVSA, it spent huge amounts of oil revenues form PDVSA on infrastructure and other projects. The new view Venezuelans had of their country was as a rich one that would continue to get richer. Many assumed that the oil prices would continue to go up and up, and politicians who wanted to be elected or elected again made many expensive promises to the people. As oil prices plummeted and stagnated in the 1980s and 1990s, Venezuela had to take out huge loans and essentially mortgage its future and its oil to pay for the projects that its myopic politicians had promised. This sort of behavior is hardly unusual for a petro-state, and that is what Venezuela became.

A balance difficult to identify

This economic stagnation, and the political turmoil that resulted, helped produce Chavez’s first failed coup in 1992. It also allowed him to continue to build power in the country from his prison cell, which eventually prompted his release from prison because some believed him to be more dangerous in prison than outside. They were wrong, as he was elected president in 1998 and remained president until his death in 2007. He built his power by exploiting the frustrations and fears of the poor and the lower middle classes, by ejecting from power many of those who threatened him, especially those in PDVSA, and by taking care of the military, the intelligence services and others so they would take care of him. He exploited PDVSA by extracting its profits for his economic and social "missions," and for his regional and international projects, which often brought more trouble than benefits to Venezuela. His economic policies of massive subsidies for food, fuel, housing, health and more led to huge budget deficits and debt when oil prices were low, and slight reprieves from economic and political pressures when oil prices were high. His economic policies made little sense for the long run prosperity of his people, and his international policies also drained the wealth and well-being of the people. Then Mr. Maduro took over. He vowed to continue the policies of Hugo Chavez even as the politics and economics of the country got more sour and dire. When oil prices collapsed after 2014, Venezuela’s slide into economic and social demise picked up pace. Yet the changes in policies that were needed to help slow this problem were not taken. The people got poorer, more upset and less patient with their leadership. The military remains loyal, but one wonders how long this will last. As the song by Bob Marley of Jamaica, an island near to Venezuela, goes: "A hungry mob is an angry mob." And angry they are and the anger is building. It could be getting to the point of another part of Bob Marley’s song: "Cost of living' gets so high, rich and poor they start to cry." Once the rich and the military "start to cry" something quite stunning could happen in Venezuela. Unemployment is rife, especially amongst the youth, and crime is off the charts. Venezuela has one of the highest murder rates in the world, second only to Honduras according to some data series. Venezuela is also considered one of the most important conduits for drug smuggling out of the cocaine fields and laboratories in its region. As the deadly drugs head for the U.S. and Europe, they often go via Venezuela. The country’s vice president was just indicted for drugs offenses by the U.S. Gun running, people smuggling and human trafficking are also big problems in Venezuela.

The country produces steel and aluminum, but it could produce much more from its raw materials. It could also rely much less on imported refined oil products and petrochemicals. Venezuela could have a world-class competitive petrochemicals industry

A solution in diversification

Venezuela is a country that is twice the size of California with well over 31 million people, and with massive natural resource endowments and natural beauty. It was the major source of oil to the Allies in World War II and was once the largest exporter of oil in the world. It is a country with massive potential and promise. Venezuela should and could become a wealthy, healthy and much happier place. It is a country sitting atop well over 300 billion barrels of oil, yet many cannot find enough bread and rice for the family table. There is a way to turn this around, but this would entail changes in many policies, especially economic policies. Diversifying the economy away from oil might save the country from being whipsawed every time there are oil price shocks. Oil has recently been 90-95 percent of all export earnings and oil and gas create 25-30 percent of its GDP. The revenues and profits of the poorly run PDVSA account for a massive amount of the government budget. Diversifying its export markets in oil could also help because relying mostly on purchases of the U.S., China and India subjects it to the whims of those countries’ economies. Diversifying into more value-added uses for its raw materials would not only change some of its export markets, but would also help train new generations on new technologies, methods and management skills in industry and agriculture. The country produces steel and aluminum, but it could produce much more from its raw materials. It could also rely much less on imported refined oil products and petrochemicals. Venezuela could have a world-class competitive petrochemicals industry. It could also move, with the right education, training and investments into car parts and other parts into making more sophisticated technological goods. Oil and gas are not particularly labor using industries. Getting more people to work in good jobs will likely require a reform of the economy in many ways. Venezuela could be a brilliant place for tourism. It has a lot to offer. However, crime, corruption and other problems would have to be addressed before tourism could really take off. Venezuela could have millions of tourist visits if it had a better legal, social and political environment. Recently, tourism has dropped by 20 percent year on year; the current level is roughly 800,000 tourists per year. Even internal domestic tourism has dropped given the perilous state of the economy for Venezuelans. Some political changes that would also help include moving away from its self-destructive defiance of the world. Such behavior and the sanctions that come with it have damaged Venezuela’s potential for the foreign investment and other economic activities that would help it greatly.

Unstrategic international alliances

Venezuela is the largest arms importer in Latin America. It has spent enormous amounts of money on defense and security. This often enriches those in the military more than making the country more secure. A poor and unstable country is not a stable and secure one. Relying on Russia, a country that is just 2.3 percent of the world economy to help bail it out from debts is surely a short-term move given the increasing fragility of the Russian economy. China could help more than Russia on foreign direct investment, aid, trade and more, but that might also push Venezuela into the orbit of defiance that has caused it so much grief. PDVSA will need to have a serious remake of the way it works, its infrastructure, training, management and more. It is one of the crown jewels of Venezuela. Recently it has been a damaged, heavily indebted and poorly run crown jewel. The entirety of Venezuela could benefit from the professionalization of PDVSA, and this professionalization could also be applied to other companies and industries. For example, it has brilliant soils and very good climate zones for certain crops that were developed historically in the country, crops like coffee, cocoa and yucca. Many of the agricultural lands were taken by the government, yet the government has not developed these lands sufficiently to take care of the food and other agricultural needs of the people. Also, much of the land is still owned by a few owners. Venezuela also has only tiny amounts of agricultural exports, yet imports massive amounts of rice, wheat, soybean meal, meats, and milk. It is a country with great land resources that imports much of its food. Lately it cannot afford to import some of the food it needs. Imports of meat are down about 65 percent, bread is down over 90 percent, and fruits are down 99 percent or so since last year. Agricultural processing companies are shutting down due to a lack of inputs to production so more people lost jobs. The answer the present leadership has for this? It would be to force Venezuelans to work on the land although that would increase instability. It may be that Venezuela could learn a lot from the Saudi plan for economic and government reform towards 2030. So far, Venezuela does not seem to have a plan other than a repetition of past mistakes. It is time for the country to move towards serious changes for the betterment of its people, not just a few politicians, business people and military officers. Otherwise, not only its region, but also the Western Hemisphere and beyond could feel the fallout from a total collapse of the country. Oil markets may have already calculated the short to medium effect of this, but have they taken into consideration the possibility of Venezuela being partly or mostly offline for years as oil demand starts to increase again? Obviously debt markets will feel the effect if the country does not pay what it owes. There may also be some strategic concerns if Russia ends up owning CITGO due to the large loans Venezuela owes Russia. Venezuela is in a strategic location at the northeast tip of Latin America near the Caribbean not far from Central America and bordering Colombia, Guyana, and Brazil. It also has allies and trading partners in China and Russia, competitors of the U.S. Its crime, drugs, corruption, and other social issues could fan out into the region and beyond with a total collapse. There could also be significant internal strife that may spill over into international strife. Yes, it is a lot better to have a peaceful, prosperous, and socially developed and stable Venezuela than to have an unstable, violent, poor, socially fractured and angry Venezuela. Let us all hope that Venezuela can move to a better future. And it surely can if the right decisions are made by development-oriented leaders with long-term vision focused on the wellbeing of the people. It is about time.