Venezuelan Crisis: the price of oil

February 08, 2019 | AtoZ Markets - Venezuela is currently undergoing one of the biggest economic and humanitarian crises in Latin America, with 80% of its population living in extreme poverty without food, medical supplies and basic services. Millions are fleeing the country to save themselves and their families.

Venezuela crisis: President Maduro is to blame

President Maduro is blamed by the people for mismanaging the country. His government is seen as an authoritarian regime. In 2018 he won his second term as Venezuela’s president in what foreign powers and many people in Venezuela dispute as fraudulent elections. People have taken to the streets in protest, with violence erupting in places and tensions building up stronger with each passing day.

On the 23rd of January 2019, opposition leader Jaun Guaido declared himself as interim president of Venezuela and was recognised by Canada, the US and a group of neighbouring Latin American countries who called upon the Venezuelan army to depose Maduro. Today 5 February, Germany, France, Spain, the UK and other European countries have recognized Guaido after Maduro refused their demands for new elections.

Maduro is supported by the Venezuelan military, Russia and China. This issue has now turned into one with great geopolitical implications. Immediately after recognizing Guaido, the US imposed new sanctions on Venezuela’s government and seized oil-related assets that are worth billions of dollars. The US political and diplomatic language has become even more aggressive, with rumours of a possible military intervention being considered.

With Maduro refusing to step down or call elections, having the full support of his military and millions of loyal Venezuelans by his side, and with foreign powers legitimizing Juan Guaido who also has the support of millions of disgruntled Venezuelans the situation could soon burst into civil war if not defused properly.
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How did Venezuela, once the richest economy in Latin America end up in such a huge economic and humanitarian disaster?

What led to the Venezuelan crisis?   

In 1998 when Chavez was first elected, Venezuela’s oil exporting profits made the country’s economy the strongest one in the entire south America. However, many Venezuelans were living in poverty in contrast to the country’s vast oil-sales wealth. Chavez tried to tackle poverty in Venezuela by planning to redistribute the oil revenue down to the poorest person.

He adopted new ideas on socialist programs having to do with access to healthcare, education and food and moved to nationalize the biggest businesses and government assets such as the electricity sector, the telecommunications sector and the oil sector. He bought Banco de Venezuela from Spanish Banking house Santander and nationalized construction related businesses like all the concrete producers of the country. Persons were persecuted with properties and assets confiscated.

Chavez did not follow a specific economic plan in his nationalization process, he just tried to turn most businesses into state control. In the end, this has stripped Venezuela of most of its private businesses and managed to make the entire economy dependable on one single variable.

The price of crude oil

As long as the price of oil remained at $100 dollars poverty was down by 49% and extreme poverty by 63%. The economy had already surpassed the point of self-sustenance, being overburdened by the costs of the running socialist programs with the liquidity infrastructure to support them now subsidized, the country required foreign lending and money injections to stay afloat.

And everyone was willingly lending money to Venezuela until 2014 when oil price suddenly crashed. Since then the country has found itself in borrowing debt of $150 billion and a massive humanitarian crisis.

Chavez died in late 2013 and Maduro, his protégé, was elected president in 2014. He found himself presiding over a colossal economic collapse which has been said by political and economic analysts that he gravely mishandled by printing new money to battle inflation while reducing the access and availability of foreign exchange, ultimately getting the economy stuck in deeper recession than it was before, while it was being battered by the volatile fluctuations of oil price in 2014.


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