Oil, Power and the Slow Unravelling of Venezuela’s Economy

Oil, Power and the Slow Unravelling of Venezuela’s Economy

Venezuela should have been one of the richest energy economies on earth. With the world’s largest proven oil reserves beneath its soil, prosperity once seemed inevitable. Instead, the country has become a cautionary tale, not because it ran out of oil, but because politics hollowed out everything around it.

The story of Venezuela’s decline is, at its core, a story about oil and power: how a single resource came to dominate the economy, shape political authority, and ultimately expose the country to collapse when institutions failed.

When Oil Became the State

For nearly a century, oil has been Venezuela’s economic backbone. Petroleum didn’t just fund the state, it became the state.

As oil exports grew, governments relied less on taxation and more on crude revenue to pay for public spending, subsidies and social programmes. This fundamentally reshaped the relationship between citizens and the state. When governments don’t depend on taxpayers, accountability weakens. Political competition shifts away from service delivery and toward control of oil money.

By the time the industry was nationalised in 1976, with the creation of state-owned PDVSA, oil had evolved into more than an export commodity. It was the main source of political authority. Whoever controlled PDVSA effectively controlled the country’s finances.

A System Built on Rents, Not Production

This oil-driven model embedded rent-seeking deep into Venezuela’s institutions. Wealth flowed from the ground, not from productivity, innovation or industrial growth. During oil booms, inefficiency and corruption were easy to hide. High prices covered poor planning and weak governance.

But when prices dipped, the cracks widened.

The economy was never diversified in a meaningful way. Manufacturing stagnated. Agriculture declined. Imports replaced local production. Oil revenue became a shortcut an easy substitute for long-term economic planning.

Chávez and the Politicisation of Oil

The election of Hugo Chávez in 1998 marked a turning point.

Chávez openly recast oil as a political tool. PDVSA was no longer treated as a commercially run energy company but as a direct instrument of redistribution and ideological power. Oil money was channelled into expansive social programmes, the misiones aimed at reducing poverty and inequality.

For a time, the impact was visible. Living standards improved for many. Chávez’s popularity surged.

But beneath the surface, the foundations were eroding.

PDVSA was increasingly forced to fund social spending directly, bypassing normal budgetary oversight. Investment in maintenance, exploration and technology declined. Experienced engineers and managers left, often replaced by politically loyal appointees with limited technical expertise.

Oil rents became a currency of loyalty. Efficiency gave way to patronage.

Decline Before Sanctions

By the mid-2010s, Venezuela’s oil production was already in trouble, long before sanctions entered the picture. Years of underinvestment, decaying infrastructure and internal mismanagement had taken their toll.

Then came international sanctions, particularly from the United States, which tightened access to finance, technology and export markets. While sanctions didn’t cause the collapse, they accelerated it by squeezing an already weakened system.

Production fell sharply from over three million barrels a day in the late 1990s to a fraction of that level. Refineries broke down. Pipelines rusted. Smuggling and oil theft surged.

Because the state relied almost entirely on oil income, declining production quickly turned into a full-blown fiscal crisis, triggering hyperinflation, currency collapse and a dramatic fall in living standards.

Oil and the Politics of Sovereignty

Oil also shaped Venezuela’s global posture.

Energy diplomacy became central to foreign policy, from preferential oil deals in the Caribbean to strategic partnerships with China, Russia and Iran. These alliances provided short-term relief but often came with long-term costs, including oil-backed loans that locked up future production.

Domestically, oil was framed as a symbol of sovereignty and resistance to external pressure. This narrative played well politically, but economically it narrowed reform options. Reviving the oil sector requires foreign capital, advanced technology and regulatory credibility, all difficult to secure in an environment of political centralisation and institutional uncertainty.

The Real Crisis Was Institutional

Venezuela’s oil problem is not about geology. The reserves are still there.

The real crisis lies in institutions.

Oil does not flow simply because it exists underground. It requires predictable policy, professional management, transparent regulation and trust. When state-owned companies are turned into political instruments, efficiency collapses and corruption thrives.

In Venezuela’s case, oil empowered the state while quietly destroying the systems needed to sustain production. What should have been a development engine became a trap.

Why This Matters Beyond Venezuela

For resource-rich countries, including many in Africa, Venezuela’s experience carries uncomfortable lessons.

Natural resources cannot replace institution-building. National oil companies must be commercially run and insulated from party politics. Resource revenue should build factories, skills, infrastructure and resilience, not fund short-term political loyalty.

When a single commodity dominates government income, economic shocks quickly become political crises. Venezuela had no buffer when oil faltered.

A Future Still Tied to Oil, But Not Hopeless

Venezuela’s recovery, if it comes, will depend on separating oil from political patronage. Reforming the energy sector without addressing governance, transparency and institutional credibility will not work.

Oil can still be part of the solution, but only if it is treated as an economic asset, not a political weapon.

Venezuela’s story is a reminder that resource wealth is not destiny. Without disciplined policy and strong institutions, even the richest oil reserves in the world can leave a country poorer than before.

{Source: IOL}

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