Most Venezuelans have a love-hate relationship with oil. I personally was never one of the haters—I was one of the lovers. When I was very young, I would go after school to my mother’s office at Meneven, a subsidiary of Venezuela’s state-owned oil company, where I was fascinated by the processes of production and refinement, as well as the economics of the industry.
When I was 16, I toured the massive oil fields of Zulia State, about a day’s drive from my hometown of Caracas. It was then that I realized that the country’s massive wealth potential was at odds with the widespread poverty that was all around me. I was too young to know anything about resource curses, the all-too-frequent phenomenon in which a country’s natural-resource wealth feeds economic distortions and inequality. But you didn’t have to be an academic to understand something was terribly wrong. I have never stopped thinking about the dichotomy in Venezuela between the wealth underground and the poverty on the surface.
That was 30 years ago. Today the contrast is more severe. Venezuela has the world’s worst economy, even though it has the world’s largest oil reserves. The paradox is that, even though oil helped lead the country to its present devastation, the same resource is essential to getting it out.
Reconstructing Venezuela will be a massive and arduous task. The country is like an intensive-care patient that has depleted all muscle and organ function in a struggle to stay alive: We have no cash reserves, staggering amounts of debt, no industry to speak of (outside of oil), our shelves are empty, and the people are starving.
When I ask economists for historical parallels, they tell me none exist in modern times. Our current hyperinflation—expected by one estimate to reach 2,300 percent in 2018—has been matched by only a handful of countries in the past 100 years, including post-World War I Germany, and Zimbabwe in 2008.
But even among these examples, Venezuela stands alone. We have no real industry apart from oil, there are few businesses, and we import nearly everything, including—shockingly—oil itself: This year, Venezuela must import up to 30 percent of its oil needs from other countries, because of how badly our refining capability has deteriorated. It is now common to see long queues for gasoline, a development that was unimaginable just a few years ago.
And yet, oil is our lifeline to recovery. Venezuela today holds 20 percent of the world’s estimated oil reserves: more than those of Kuwait, Russia, Qatar, Mexico, and the United States combined. Venezuela also has around 200 trillion cubic feet of gas reserves—the largest reserves in Latin America and the 8th largest in the world. Petroleum generates the vast majority of our economic activity, accounting for 95 percent of our exports and half of GDP.
Why, with such riches in the ground, is Venezuela on the brink of collapse? In a word: mismanagement. A succession of governments fell into the classic resource-curse trap of allowing easy proceeds to create economic distortions, displace important industries, and feed whip-sawing boom-bust cycles that destabilized the country.
More insidiously, our way of managing oil proceeds has encouraged an unhealthy rent-seeking relationship between the people and the state. The state maintained a monopoly on distributing the benefits of oil, feeding a relationship of dependency among citizens and private interests, who over time became accustomed to thinking of oil wealth as something the government provides, rather than as something they own.
This provided fertile ground for the emergence of the populist demagogue Hugo Chavez, who—taking advantage of a massive spike in oil prices beginning in 2002—used the windfall to extend the people’s dependence to unprecedented levels. The oil boom allowed the regime to buy votes and goodwill even as it seized, undermined, and dismantled competing facets of the economy.
By the time the windfall ended, independent institutions and businesses had been so weakened that, perversely, people became yet more dependent on the government, which could no longer afford to provide for them. The population was reduced to relying on the small favors the government could grant, translating to political dominance and oppression. And the further collapse of the economy under Chávez’s successor, Nicolas Maduro, has been strategically useful to his regime. An entire population is now in subsistence mode. It is hard to protest when it takes half a day’s search to track down basic staples.
It will fall to a future government to repair not only the industry itself, but also the broken politics and the cycle of dependency it has produced.
It starts with increasing production. Despite holding 20 percent of world’s oil reserves, we account for less than 2 percent of the world’s oil production. Gross mismanagement, rampant corruption, failure to maintain the infrastructure, and the persecution and exodus of vital expertise have crippled the Venezuelan oil industry. Petroleos de Venezuela (PDVSA), the state-owned oil company, currently produces less than 2 million barrels per day—far below its potential and nearly 50 percent below a high of 3.7 million barrels per day in 1970.
Fixing this is not something we can afford without outside investments. But who would provide it, now that we are viewed as one of the most unreliable partners in the world? The only way to make the Venezuelan oil industry “investible” again is to reform PDVSA to be more efficient and profitable, and to prove the trustworthiness of our institutions by creating strong oversight. It’s feasible that doing so could more than double production in a little over a decade.
That’s the easier part. More important is to reverse the people’s dependency by managing the oil proceeds in a radically different fashion. For many Venezuelans, oil is a curse. To most, it is a mystery that has been left to a small subset of elites to manage. The Venezuelan people deserve to have a say in the management of this resource.
It starts by creating a clear link between the financing of the state and the oversight and consent of the citizen. Currently, the state gets most of its funds from the oil industry and then distributes it to the citizens. But the reverse should be happening: The money should go to the citizens first, and then be distributed to the state. In this system, all royalties from Venezuelan oil sales would be divided equally among personal accounts for every Venezuelan. Monthly statements and a detailed website would help citizens track total assets, along with key information about the management and performance of oil production. Like dedicated fans tracking their favorite teams, Venezuelans would become newly invested in the management of their resource; thinking like owners, instead of beneficiaries.
These accounts could be used to pay for health care, housing, education, or other long-term needs. At retirement age, citizens would receive a pension based on the assets in the fund. To promote transparency and independence from the government, the fund’s assets could be managed by an independent board, with tight rules governing their qualifications and independence.
Whereas today the Venezuelan government funds itself directly from the proceeds of PDVSA, under this scheme it would be funded directly by the people through a 50 percent tax on the assets in the individual funds. This would reverse the current dynamic, making the government the beneficiary of the people.
Our models show that if such a fund had been in place since 1998, with the right management in place, each Venezuelan would have an account worth as much as $26,000 in U.S. dollars—many times the annual income of most Venezuelans, for whom the current minimum wage is less than $10 per month.
The money is one benefit, but the mindset is more important. Our goal must be nothing less than a fundamental transformation of the relationship between the people and the government.
Oil is not sufficient to build a healthy economy or power a vibrant society. Ideally over time, oil and gas would have a smaller footprint in a much more diverse Venezuelan economy.
Norway is a great example of how this can be done. Today, Norway’s companies in shipping, engineering, drilling, services and technology, and dozens of other sectors—all initially nurtured by the petroleum sector—form the foundation for economic expansion across a range of rising industries, including fish-farming, bio-refining, logging, and mining. Expertise related to the oil and gas industry—not just the oil and gas itself—is now a major Norwegian export.
This is one set of ideas, and of course the only way to know whether the Venezuelan people favor them is to let them vote, in a free and fair referendum that truly empowers the people as directors of their future. But Venezuela is racing against time. Fears of “peak oil” have been replaced by the threat of “peak demand.” The danger is not that Venezuela’s resources will run out; it’s that our energy wealth will stay in the ground, untapped and unrealized—while people starve and the country disintegrates.
A thriving oil sector does not have to be a trap or a curse for Venezuela’s economy.
And the very thing that helped a succession of governments drive a country into the ground, handled the right way might just save it.
This article has been adapted from Leopoldo López and Gustavo Baquero’s forthcoming book, Venezuela Energética.