Reasons for Financial Crisis in Venezuela


For the economic and political drop, Venezuela has been in the news on and off for the past couple of years. If you see pictures or videos from the country that shows long lines for food, the massive crowd at the grocery store and young people protesting in the streets with the tear gas used against them by the national guards.

According to last year reports, thousands of Venezuelans protested on a daily basis, for more than three months against the government of Nicolas Maduro. Most of them were young students. During these protests over 120 people were brutally killed at the hands of national forces. According to human rights organization at that time, stories f abuse and torture were common, and around 5,000 people were arrested.

In a case study of petrostatehood risks, Venezuela was considered as home to the largest oil reserves of the world. In 1920’s discovery, oil has taken Venezuela at its peaks, but it was a hazardous ride that presents warning lessons to other source rich states.

Due to poor governance, the most wealthy country of Latin America falls regarding financial and political destruction. Most of the experts say, if Venezuela emerges from its roots, then the government should make robust strategies to encourage a productive investment of vast oil revenues.

What is Petrostate?

An informal term Petrostate used to explain a country with quite a few interrelated attributes, such as;

Financial and political power are highly determined in a privileged minority,
Government income highly dependent on the oil and gas export,0
Corruption is widespread due to weak and unmanageable political institutions.

According to some experts, Venezuela is the prime example of a petrostate.  Oil keeps on playing a vital role in the fortune of a country even more than a century after it was first discovered. The most latest fall in oil prices has swallowed Venezuela. Oil prices in 2014, falling from $100 per barrel to a very low of under $30 per barrel. And lower prices come to the surface at the start of 2016, which gulped down the economic and political worth of Venezuela. Undoubtedly, it would take decades to go back to Venezuela at the normal state.

How did Venezuela Get Here?

Some financial and political factors put Venezuela to the path of a petrostate.

Oil Discovery

In 1922, the Royal Dutch Shell geologist at La Rosa, a pasture in the Maracaibo Basin smacked oil, which gusted out at an unusual rate of one hundred thousand barrels per day.

More than one hundred overseas companies were started producing oil, backed by General Juan Vicente Gomez who was a dictator. During the 1920s, the annual production burst out from just a million barrels to 137 million barrels. By 1920, Venezuela was the second only country to the US in total output.

Dutch disease had become accustomed, the basic monetary unit of Venezuela the Bolivar had ballooned, and the oil shoved aside other sectors to account for 90% of exports.

Regaining Oil Rents

By the 1930s, 98 percent of the Venezuelan oil market was controlled by just three foreign companies, which are Royal Dutch Shell, Gulf, and Standard Oil. The successors of Gomez wanted to transform the oil sector towards funnel funds into the government treasuries.

The first step taken in the direction was the Hydrocarbon Law of 1943, which needed foreign companies to share half of their oil profits to the state. Moreover, the government income within five years had increased sixfold.


In 1960, Venezuela united with Iraq, Iran, Kuwait, and Saudi Arabia as a founding member of the Organization of the Petroleum Exporting Countries (OPEC). During this union, later on, Qatar, Nigeria, Libya, Indonesia, Algeria, Ecuador, Angola, Equatorial Guinea, the United Arab Emirates, and the Republic of Congo included in it.

All these largest producers of the world coordinated prices and hand over the control of their national industries. Venezuela introduced its first state oil company, and in the same year, the income tax of oil companies increased to 65 percent of profits.

1970s Boom

Oil prices quadrupled in the 1970s, which made the Venezuela country with the highest per capita income in Latin America. In 1973, OPEC ban for a five-month on countries backing Israel in the Yom Kippur War increased oil prices fourfold.

Over two years, the boon added $10 billion to the treasures of state, which led to uncontrollable splice and mismanagement. Some expert analysts determine that more than $100 billion was misused during 1972 and 1997.

Revolution of Chavez Bolivarian

In 1998 Chavez was the president of Venezuela on a socialist platform. He took an oath to use the massive oil wealth of Venezuela in removing poverty and discrimination.

However, his pricey “Bolivarian missions” reduce poverty by 20 percent. He fires thousands of expert PDVSA workers who had taken part in a strike in 2002-2003, which devastated the company of technical expertise.

In early 2005, Chavez started providing subsidized oil to various countries including Cuba through an alliance known as Petrocaribe.  In the period of Chavez’s presidency, until 2013, the considered petroleum reserves declined, and the government liabilities were doubled.

Final Thought

The curse is much harder to avoid when a country socks oil or any other resource before developing the infrastructure of the state. However, Venezuela is no doubt an excellent example for those who don’t focus on the development of their country when they are in charge. Some remedial measures are here that developing and low-income countries can try. For example, a government should serve the earnings of oil in responsible manners.

Sana Rafi, a writer by profession loves to write exciting bogs and articles to inspire businesses and people to grow their worth. You can also get help for more financial, personal, tax accountant hiring, and bookkeeping topics.