Venezuela’s current crisis offers a clear example of the dangers of socialist policies, but another, deeper lesson lies below. Many nations’ over-reliance on oil, combined with the very recent US-centered oil boom, threatens to destabilize dozens of economies. Venezuela serves as an example of the risks that grow from tying foreign and domestic policy and finances to a single economic good. The current situation that Venezuela faces stems from global trends that have been exacerbated by poor management at home. With oil prices now falling, many nations will be forced to implement reform measures, or they will share the fate of Venezuela.
Following the 2008 financial crisis, oil prices dropped after seemingly constant growth from $147 a barrel to under fifty dollars a barrel before quickly rising again to over one hundred dollars a barrel by 2010. Many predicted that the rise in prices, driven at the time partially by the Organization of Petroleum Exporting Countries’ (OPEC’s) annual agreements to limit production and decreasing global oil reserves, would continue indefinitely. But new discoveries and innovations in extraction techniques, specifically fracking in the US, have caused a staggering drop in production costs while simultaneously opening hundreds of billions of barrels of previously inaccessible crude oil to extraction.
The most imposing problem oil-reliant nations face is the discovery of these vast oil reserves around the world. Venezuela, the country with the largest proven oil reserves, has approximately 256 billion barrels. Venezuela’s reserves are comparable to the oil reserves of Russia (also about 256 billion barrels, though less than Venezuela) and Saudi Arabia (212 billion barrels). South Africa recently made a discovery of around one billion barrels while Brazil has nearly doubled its production over the last seven years to reach 956 million barrels a year. But the recent discovery in Pakistan dwarfs all others. This one discovery alone could be greater than the entirety of the proven reserves of Kuwait (101.5 billion barrels) and could change Pakistan from a nation that imports nearly all of its oil to a top-ten oil producer.
The metrics for calculating proven oil reserves are fairly specific, which can lead to some confusion. Proven oil reserves refers to oil that has a 90 percent chance of being extracted economically. The number can fluctuate due to a few outside forces such as price variation for regions with very impure oil and new technology creating cheaper and more effective extraction methods. Proven oil reserves, however, does not refer to the productivity of the nation, but is best described as a reasonable measure of the oil production capabilities of a nation.
The greatest threat to oil-reliant countries, though, lies in American production. In 2004, proven oil reserves in America stood at 39.23 billion barrels. Now estimates place that number at around 264 billion barrels, a 671 percent increase over fifteen years due to improved technology and new discoveries. This has allowed America to become the largest oil producer in the world and America is estimated to become a net exporter of natural gas, oil, and coal by 2027. American growth in the last decade or so represents the largest increase in oil production in history and comes only four years after an effective American oil exportation ban was lifted. The ban, a forty-year-old Cold War-era policy, was intended to guard America’s oil supply in case of war and was lifted under the Obama administration in 2015. Taken together, these new reserves represent a massive increase in the global oil supply.
The reason Venezuela is facing this crisis before other nations lies in the dual fact that Venezuela’s economy is amongst the most reliant on oil sales to maintain spending and has seen a decrease in production while prices were falling. The large welfare system that exists was implemented from 1998 to 2002 during the presidency of Hugo Chavez. Venezuelan oil production has stagnated since Chavez ascended to the presidency; in fact, production has steadily declined even as Venezuela’s proven oil reserves have grown. This began when Chavez fired nineteen thousand of the state oil company’s experienced employees and replaced them with government loyalists as part of his reforms. With the rise in oil prices in the 2000s, Venezuela invited foreign investors to provide the necessary capital for extraction.
After 2007, Venezuela illegally seized the assets of many foreign investors, pushing them out of the country. With the experienced personnel gone in the Venezuelan state oil company, Chavez did not reinvest the funds necessary to maintain Venezuelan production levels and instead squeezed revenue to fund social programs. In the same timeframe, Venezuela saw a sharp decline in production. At first, prices rose to cover the disparity, but in recent years, the decline in oil prices has severely squeezed the Venezuelan budget. Conversely, in the last decade or so, the United States has seen an 86 percent increase in oil production despite, until very recently, having much smaller reserves than Venezuela. Venezuela also continues to export oil to Cuba at a financial loss in order to support their ailing regional ally. The Venezuelan government has thus made a series of poor decisions that contributed to the decline of its oil economy.
Iran mirrors Venezuela in that its economy is largely reliant on oil exports to maintain economic growth, 95 percent of Venezuelan exports are oil while oil represents 74.4 percent of Iranian exports. Also, Iran faces a more pressing situation than its international contemporaries: the implementation of sanctions by the United States has drastically cut exports. Reliance Industries and Mangalore Refinery and Petrochemicals, two major Indian refineries, both announced their intent to stop using Iranian oil as a then-precautionary measure in case the United States decided to remove exemptions to sanctions against Iran. The Trump administration has since announced its intentions to remove all exemptions for Iranian sanctions, meaning any nation or business that buys Iranian products will be cut out of the US economy.
The shift away from a pressured Iran foreshadows greater isolation, as the two companies were exempt, at the time, from sanctions on Iran. Furthermore, India receives reduced prices on Iranian oil compared to other buyers, so movement away from Iranian oil signifies a conscious decision to reduce profits in the short-term for some long-term goal. The reduction in Iranian oil exports has forced the Iranian government to cut their reliance on oil revenues by 28 percent in their upcoming budget. Moreover, sanctions have produced a predicted 6 percent reduction in the size of the Iranian economy this year, as the US government aims to completely eliminate international trade (and oil deals) with Iran.
Many of the larger producers use oil to generate power and maintain basic utilities too. Saudi Arabia, Kuwait, the UAE, and Qatar consume a disproportionate amount of fossil fuels relative to their sizes; the UAE and Kuwait have to import natural gas to meet domestic demand. Saudi Arabia is the fifth largest consumer of natural gas, beaten only by countries an order of magnitude larger than them: the US, China, Japan, India, and Russia. Such an over-reliance is due to the ease with which fossil fuels are extracted in the Middle East—the extraction of a barrel of crude oil in Saudi Arabia costs just $2.80 as of April. Though Saudi Arabia maintains low production costs, the state budget requires large profit margins to cover and sustain military and social spending; current oil prices are not making ends meet.
Russia nearly matches the Middle East’s economic reliance on oil. 70 percent of Russian exports in 2014 were natural gas and petroleum, and 50 percent of state revenue was generated by these industries. Until 2019, Russia was the largest producer of oil in the world, but, like Iran, Russia is facing external pressure beyond low prices. New international environmental agreements mandate that marine vessels use fuels with a low sulfur content. Russian oil is extremely rich in sulfur and the Russian oil industry does not have the necessary technology to remove sulfur. Russian oil will likely face a rough future from the combination of these regulations and declining prices.
Similar to Russia’s situation is Nigeria’s oil-based export economy. Nigeria has a staggeringly strong reliance on oil: 90 percent of Nigerian exports are petroleum products. Nigeria’s oil industry comprises 39 percent of its GDP and the industry provided 76 percent of state revenue in 2013. While a member of OPEC, Nigeria is exempt from production limitation agreements due to ongoing insurgencies and domestic instability, though the government of Nigeria recently agreed to cap production at 1.8 million barrels a day. Nigeria as a whole seems to be focused not on reducing its oil reliance but on streamlining and improving its existing oil industry to maximize revenues.
Certain states within the United States are heavily reliant on the oil industry and oil revenues. Alaska draws nearly three quarters of its annual revenue from the oil industry. Both Alaska and Oklahoma were forced to make large budget cuts with the decrease in oil prices between 2014 and 2016. Other states, such as North Dakota and Texas, mitigated the downturn. North Dakota implemented a cap on oil revenue at $300 million to prevent the state from becoming reliant on one source of income. Texas, on the opposite end, has a large enough economy that, despite being the largest oil-producing state, only 10 percent of its state income is from oil.
Based on current trends, cheap oil is here to stay for the foreseeable future. The discovery and extraction of oil in non-OPEC countries will likely have a severe impact on OPEC members and will hopefully bring benefits for global markets and economies due to sustained, low prices. The same cannot be said for OPEC members and partners that have relied on oil production to reach their current economic state. Overall, Venezuela offers a stark warning about over-reliance on any one product or market trend, even one as potent as oil. Without reforms, many other countries may fall into the same trap as Venezuela–with no clear path out.
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