Saturday, August 5, 2017

Venezuela and the Dutch Disease

You would be excused for believing that riches mean wealth.  Not always...In the case of Venezuela, her abundance of oil has made her poor. 

Two terms describe Venezuela: Rentier and the Dutch Disease.  A "rentier" state is one in which the country receives so much income from the export of petroleum, that the leadership becomes autocratic, ignoring the needs of society.  This so obviously describes the governments of the late Hugo Chavez and Venezuela’s current madman, Nicolas Maduro, that it really needs no further explanation.  But, what is the Dutch Disease?

Forgive me, for as a historian, no explanation is possible without a little back story. 

Venezuela has always had oil.  Long before the Spanish arrived, the oil seeped to the surface, particularly around the area of Lake Maracaibo.  The natives called the floating oils and accumulated asphalts mene and used it to make medicine, torches or caulk for the seams of their canoes. 

After the arrival of the Spanish, the uses of the seeping oil pretty much stayed the same.  The boats got larger, and some of the thick oil was used to waterproof canvas sails, or lubricate the ship’s cannons.  The first documented petroleum export from the new world was a single barrel of oil that was shipped from Venezuela back to Spain as medicine to treat Emperor Charles V for gout in 1539.

Note.  Not that this has anything to do with Venezuela, but the story is just too creepy not to discuss.  How, the reader will ask, do we know that Emperor Charles V actually had gout?  Well, the kings of Spain are taken after death to a vault deep under the castle, El Escorial, and left to rot for decades before the bones are moved to a burial vault.  Even as you read this, a dead king, and his wife have been rotting away there for a couple of decades.  In Charles’ case, before his corpse was placed in—and I swear I’m not making this up—The Royal Rotting Room, one of his fingers was cut off and saved as a Holy Relic.  Recently, the Church was convinced to part with microscopic traces of the bone examined.  Yep, King Charlie had gout.  The results of the test were published in the New England Journal of Medicine—which for some mysterious reasons—did not even mention The Royal Rotting Room.

Even when oil began to be refined and used commercially, Venezuelan oil was ignored.  For most of the 19th century, Standard Oil of Pennsylvania supplied almost all of the world’s need for refined petroleum products.  The only thing Venezuela exported was asphalt.  The first paved roads in America were covered with Venezuelan asphalt.  If you dig down deep enough in front of the White House, you will find the first layer of asphalt on Pennsylvania Avenue came from Venezuela. 

Little changed until the First World War  As late as 1900, the entire Venezuelan government ran on the export duties primarily garnered from coffee.  The wealthy elite of the agricultural country depended on the incomes they received from their vast cattle herds on the lowland plains.  What little industry existed in the country was clustered in the coastal towns.

Oil, long ignored, was affected by laws very different from those in America.  By law, the underground oil belonged to the state—it was not the property of the owners of the land above it.  Second, the president of the country had exclusive rights to lease or sell the rights to that oil.  These laws had long-lasting impacts on the oil industry.

Since Standard Oil believed it had limitless resources in North America, it was left to Europeans to begin development of the Venezuelan oil reserves.  It was the Royal-Dutch-Shell conglomerate that first began exploring the oil fields around Lake Maracaibo.  The difficulties were enormous:  There were no roads, no settlements, no power plants, no trained workers. There was, however, an overabundance of mosquitoes.  In addition, deep-draft vessels could not enter Lake Maracaibo. Neither did the lake's  seaports have developed harbors.  Still, the potential profits were enormous, so the oil companies slowly continued to explore.

On December 14, 1922, at a depth of only 1500 feet, drillers hit an enormous pool of oil.  The gusher blew the drilling rig apart, blasting heavy crude oil 200 feet in the air, flowing at 200,000 barrels a day.  It took 9 days to cap the flow.  From that point on, the Venezuelan oil boom never slowed down.

Immediately, vast sums of money flooded into the country, changing the economy forever.  Workers left agriculture for better paying jobs in the oil industry.  With a flood of foreign cash, it was easier to buy foreign manufactured goods than to produce them domestically.  Industry—and the jobs it provided—simply dried up.  With cash pouring in, the Venezuelan government no longer had to tend to the needs of the populace, of whom only a small minority was employed by the oil industry.  The government became increasingly corrupt and dictatorial, culminating in the disastrous governments of Hugo Chavez and Nicolas Maduro.

With an ever increasing amount of money competing for a shrinking supply of goods, prices invariably rose.   Increasingly, the country was dependent on foreign imports, not only for manufactured goods, but even for food.  Today, Venezuela imports almost everything, including a large variety of distilled petroleum products.  As prices spiraled upward, the government imposed price controls, decreasing incentives to produce and worsening the shortages. 

The flood of foreign money also collapsed the exchange rate of the Bolivar, the Venezuelan currency.  If you use the official exchange rate, the most expensive city in the world to live in is Caracas.  The black market exchange rate is roughly 1% of the official rate.

This condition is called the Dutch Disease, after the economic collapse the Dutch experienced after basing their economy on a single commodity, natural gas.

For the rest of the 20th century, the wealth continued to pour in.  Venezuela was one of the founding members of OPEC.  During the boom years, while oil commanded high prices, Venezuela borrowed money, built lavish public works, and greatly expanded its military.  But, the country was completely dependent on the price of a single export commodity. 

For the last five years, the price of oil on the international market has been dropping.  The price for Venezuelan oil has dropped by more than 50%, and the Maduro government is strapped for cash. 

Ironically, Venezuela, the country with the largest oil reserve in the world, is going bankrupt.

1 comment:

  1. My first nonprofit job was at a residential treatment center. The boss let us get too dependent on funding from a single state agency and when they cut their budget, they cut us out entirely because they needed to reduce the number of kids they were paying for by a couple of hundred and we had 176 kids. AND my boss was fixing to testify to the sunset commission that we needed to reduce the state agencies working with kids from a dozen or so to a single port of entry. The lords of their state fiefdoms couldn't have that so they killed the proverbial two birds with one stone and shut us down. They showed up for the closure, everyone wearing a red tie, even the women.