Venezuela’s oil wealth collapsed under socialist cronyism and hyperinflation

At the beginning of the last century, Venezuela was considered the leading economy in South America. At least part of the story is that the country discovered vast oil reserves in 1922. The country currently has the largest reserves of any country: 303 billion barrels. Although that sounds good on paper, it does not change the fact that the economy is the poorest in South America. The puzzle is: how did things get so bad, with all that oil wealth waiting to be converted into money?

The first major step in the wrong direction occurred in 1976, when the Venezuelan government decided to nationalize all foreign oil companies in the country. In turn, the acquired new oil companies were largely placed under the already state-owned oil company Petróleos de Venezuela, SA (PDVSA).

AFTER Maduro, Venezuela faces difficult choices to rebuild its devastated economy

Fully socialist

The next change came with the election of Hugo Chavez in 1998. A year later, he introduced the “Plan Bolivar,” which included goals involving “a poverty reduction program that includes road construction, housing construction and mass vaccination,” according to the Council on Foreign Relations. The government’s desires may seem sympathetic, but in reality Chavez was on the verge of becoming fully socialist.

Crony corner

In 2002, the Chavez government fired PDVSA’s top officials and another 18,000 employees, many of whom were highly skilled in petroleum extraction. And a significant portion of those laid off emigrated to other countries. The question now was: who would be hired to run the oil business? It turned out that many agreements at PDVSA were not kept political accomplices instead of skilled experts in the field of petroleum extraction.

Oil pumps operate near Lake Maracaibo in Venezuela on July 12, 2024. Decades of mismanagement, underinvestment and sanctions have contributed to the demise of Venezuela’s once dominant oil industry. (/Getty images)

Hyperinflation is crushing the country

Nicolas Maduro took over Venezuela’s presidential role in 2013 and made matters worse.

US oil giants mum after Trump says they will spend billions in Venezuela

Cuban President Fidel Castro, left, talks with President Hugo Chavez during their meeting in Campo Carabobo, Venezuela, on October 29, 2000. (Adalberto Roque/AFP via / Getty Images)

To satisfy the people, the government provided services to the country. But there was a mistake. “They paid for it by printing money, which of course led to hyperinflation,” Wright said. According to data from Trading Economics, growth started in 2016 and peaked at 375,000% in 2019.

There were other problems. “The government took over the oil industry, thinking it would become a cash cow,” Blitz said. “Ultimately, revenues went down.” And at that moment there was nothing else for the country to lean on; no major banks, no other important sectors than the self-employed. Wright says, “They never developed the economy.”

An oil pump screw jack and a tank with the corporate logo of state oil company PDVSA in Lagunillas, Venezuela, January 29, 2019. (Isaac Urrutia / Reuters Photos)

Over the past decade, Venezuela has been subject to multiple US sanctions. These sanctions are varied, but are mainly intended to hinder the country’s rulers by imposing a wide range of bans, including the ban on entering into financing agreements with the Venezuelan government.

During the Maduro years (2013 to early 2026), the number Venezuelans living in other countries jumped. In 2015 there were just 700,000, but according to the International Organization for Migration that number rose to around 7.9 million last year. It is likely that at least some of the refugees would have been the highly skilled workers, the ones the country needs now.

CLICK HERE TO GET FOX BUSINESS ON THE GO

“The people who governed Venezuela had a unique point of view,” says Blitz. “They thought the party would never end.” But it did, and now many hope that a new era – ushered in by Maduro’s ouster – is about to begin.