Why Is Venezuela Dirt Poor Despite Having The Largest Oil Reserves? - YouTube

INTRO: Most of us associate oil reserves with enormous

amounts of wealth, and this is for good reason. Oil has become one of the most sought after

commodities in the world which has allowed countries with notable oil reserves to rise

to the absolute top. Saudi Arabia, for example, has cash and gold reserves that total nearly

half a trillion dollars. Similarly, Saudi Arabia’s flagship company, Saudi Aramco,

is currently profiting over a quarter trillion dollars per year. Considering this, you would

think that any country with reserves that are comparable to Saudi Arabia would be filthy

rich, but this is actually not the case. In fact, Saudi Arabia doesn’t even have the

world’s largest oil reserves. This title actually goes to Venezuela who has roughly

300 billion barrels of oil. That’s nearly ⅕ of the entire world’s oil reserves.

Yet, despite this, Venezuela isn’t particularly well off or rich. They’re actually particularly

poor and struggling. For one, they recently experienced some of the worst hyperinflation

known to mankind with inflation peaking in the hundreds of thousands of percent. 10 years

ago, you could only get 4.3 Venezuealan Bolivars for 1 US dollar, but by late last year, you

could get 419 billion Bolivars with just 1 US dollar. This number has since plummeted

to 782,000 bolivars per dollar, but that’s not because inflation is cooling down. Rather,

this is actually become the government decided to divide their currency notes by a million.

So, without this conversion, each US dollar would actually be able to get nearly 800 billion

bolivars. Fortunately, the country has oil revenue to rely on, but this hasn’t been

nearly as helpful as you might think. Oil accounts for roughly 25% of Venezuela’s

GDP. With a GDP of $482 billion, this means that oil accounts for approximately $120 billion

worth of GDP. While this is not a bad figure in itself, when you consider that Saudi Aramco

itself is able to pull in net profits that are over double this figure, you start to

see just how behind Venezuela really is. So, why is Venezuela so poor despite having the

world’s largest oil reserves?

DUTCH DISEASE: Taking a look back, it’s definitely not

a lack of trying that has screwed over Venezuela. In fact, Venezuela has been trying to capitalize

on their oil reserves for over a 100 years. It all started in the year 1908 when a man

named Juan Vicente Gomez became the president of Venezuela. Juan was an ambitious man who

wanted to slash Venezuelan debt and revolutionize the country. And the way he sought to accomplish

this was by leveraging the country’s oil reserves. At the time, people knew that Venezuela

had enough oil for commercial purposes, but no one could have imagined the full magnitude

of just how much was actually available. President Gomez, however, was willing to roll the dice

and test the country's luck. So, he handed out oil concessions to his closest friends

and told them to go enrich themselves and the country. These guys would turn around

and hire oil companies to come in and begin the hunt. Within the next several years, these

companies would find several viable oil reserves. However, the blowout discovery didn’t come

till 1922 when Shell struck oil in the Maracaibo Basin. This well was able to produce over

one hundred thousand barrels of oil by itself. As you guess, it didn’t take long for more

oil companies to flood in and they were able to pump up production to 137 million barrels

of oil by the end of the 1920s. For perspective, Saudi Arabia didn’t find oil till 1938,

so Venezuela definitely had the first mover’s advantage, but what they didn’t have was

good management. You see, when you find oil, it’s not as simple as just cashing in the

checks and living the high life. You have to reinvest the profits and diversify the

economy if you want the money to actually create long term change. President Gomez,

however, didn’t do either of these. Now, this isn’t to say that he spent the money

in poor ways per se. Of course, he enriched himself and his friends, but he also spent

significant amounts on public projects and slashing the country’s debt. This might

seem like a good use of money, but it actually leads to a phenomenon called Dutch Disease.

Dutch Disease is when a country experiences a massive influx of economic growth within

one sector which diverts the entire country’s focus. Everyone suddenly wants to work in

this one industry or open a business in this industry. And while it’s definitely a good

idea to follow opportunity, this sort of behavior leads to the rest of the economy to fall to

the wayside and become underdeveloped in relation. In other words, the country becomes overly

dependent on just one part of the economy. And this is exactly what happened in Venezuela

given that oil accounted for 90% of their exports by the time Gomez died. This situation

has only gotten worse over the years as oil accounts for 95% of Venezuela’s exports

today. But, at the time, the Venezuelans didn’t realize what was ahead of them, and they would

simply lean further into their oil dependence.

BAD PLAYERS: Now that Venezuela had proven their viability

to the western world, it was them who had the leverage. You see, in the beginning, it

was the other way around. All these oil companies had to come in and make a massive gamble on

Venezuela, but now that that gamble had proven fruitful, Venezuela could start making demands.

One of the first demands the country made was for a larger proportion of the oil revenue

to flow into the government. In 1943, the government introduced the Hydrocarbons Law

which required that foreign companies hand over half of their oil profits to the state.

This proved to be extremely lucrative as Venezuela’s income would grow six fold in the following

5 years. But, Venezuela was just getting started. Over the next few decades, Venezuela would

slowly nationalize the entire oil industry. In the meantime, they were also pushing for

political reform and trying to escape a history of dictators. One piece of this puzzle was

the Punto Fijo Pact in 1958. This agreement stipulated that the oil money would be split

between the three main political parties in Venezuela. And the respective proportions

would be determined by the popular vote. At first glance, this sounds like a decent system.

By splitting up the oil money, you ensured that one political party couldn’t just overpower

the others. But, at the same time, this also opened up the country to loads of embezzlement.

I mean, who was gonna make sure that these political parties would actually use the money

in effective methods? The answer is no one. While this storm was starting to brew inside

Venezuela, to the rest of the world, it seemed like Venezuela was killing it. In 1960, they

would join up with the Middle Eastern countries to found OPEC. This was essentially an agreement

that these countries would work together to maximize oil profits for all member countries.

And now that Venezuela had the Middle East on their side, they were able to become even

more aggressive with their own oil endeavors. That same year, Venezuela established a state

owned oil company and increased taxes on oil companies to 65%. At this point, it was just

a matter of time until Venezuela nationalized oil production. All it would take is one more

monumental event, and that’s exactly what would happen in the 1970s with the oil embargo.

In 1973, OPEC would implement a five month embargo on countries that supported Israel

in the Yom Kippur War, and one of these countries was the United States. As all of their demand

shifted to non OPEC countries, oil prices would quadruple which was extremely lucrative

for all oil producing countries, but especially Venezuela. Venezuela would end up boasting

the highest per capita income in Latin America, and this is exactly the push they needed to

completely nationalize the country’s oil production in 1976. Normally, this would be

a good thing. It wasn’t until Saudi Arabia nationalized their oil production that they

became stupid rich. But, the problem was that Venezuela already had a massive leak when

it came to oil revenue due to corruption, and nationalization just kicked this issue

into full gear. Between 1972 and 1997, it’s estimated that $100 billion worth of oil money

was embezzled by politicans and government officials. With that sort of leak, it’s

no wonder why Venezuela ended up where they are today.

HUGO CHAVEZ: At this point, you might be thinking that

things can’t get much worse, but they did because a socialist named Hugo Chavez would

become president in 1998. During this time period, everyday Venezuelan’s were livid

because everyone knew what was happening. Politicians were siphoning national money

like there was no tomorrow, so when Chavez came in with his pitch of welfare and equality

for all, the Venezuelans ate it up. Now, people often like to blame Chavez for Venezuela’s

downfall, and this makes sense given that he was the reason. But, you can’t really

blame him because he didn’t really do anything unethical or immoral per se. He truly believed

in socialism and he campaigned on the premise that he would implement socialism, and that’s

exactly what he did. He took all the oil money and created loads of social programs focusing

on justice, welfare, poverty, education, the military, and so on. He also peddled socialist

ideologies that often led to horrendous results. In one of his most famous speeches, for example,

he essentially declared that it was ok to steal if you were hungry. Honestly, I think

he had good intentions when he said this, but what this resulted in was loads of crime.

Meanwhile, his social programs were simply feeding into Dutch Disease. As more people

started relying on these welfare programs, the other industries in Venezeula plummeted

to record lows while dependance on oil rose to record highs. Also, we should note that

Chavez didn’t really do anything to fix the corrpution problem. If anything, he partook

in the same activities as he would eventually grow to be a billionaire. While Chavez was

growing his wealth, however, Venezuela was quickly losing theirs. Take the 2002 Venezuelan

oil strike for example. Tens of thousands of oil workers would go on strike and demand

for a new election to replace Chavez in 2002. Instead of addressing their concerns though,

Chavez would just go ahead and fire 18,000 oil workers. While Chavez was definitely able

to show who was in charge, this would take a massive toll on the country’s oil production.

Venezuela was not only becoming more dependent on oil revenue, but oil production was declining.

This was simply a disaster waiting to happen, but Chavez would actually never see the consequences

as he would die due to health problems in March of 2013. Less than a year later, oil

prices would crash because Saudi Arabia would decide to start a price war. The entire world

would feel the pain of their actions, but most of them would survive to see the other

side. The same, however, could not be said about Venezuela.

THE COLLAPSE: Given that Venezuela was nearly a 100% dependent

on oil when this crash in prices took place, the country's economy basically fell off a

cliff. The government would try to stimulate the economy by printing money and injecting

it into economy. But the problem was that there was nothing to stimulate. Venezuela

had no economy. It was just oil and that’s it. So, when oil went belly up, the country

went belly up, and it was no time before hyperinflation settled in, and that brings us to where we

are today. Looking back, it’s not like Venezuela wasn’t able to leverage their reserves or

pump up production or pull in loads of money. The problem is that none of this money actually

went to anything useful. Virtually all of it went to corruption and social programs,

when it should’ve gone to developing the economy. Over time, Venezuela’s economic

development just became more and more uneven until they became fully dependent on oil revenue.

And at this point, it just took one downturn in the oil market to wipe out the entire country.

And that’s why Venezuela is dirt poor despite having the world’s largest oil reserves.

On the brightside, Venezuela still has their oil reserves. So, do you think Venezuela can

turn things around? Comment that down below. Also, drop a like if you hope things get better

in Venezuela. And of course, consider checking out our discord community to suggest future

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