By The ‘Paradox of Plenty’, the ‘Dutch Disease’ or the ‘Resource Curse’ are often cited as reasons for Venezuela’s economic crisis. However, economic processes in such oil-exporting economies deserve deeper theoretical investigation to overcome the misunderstanding of oil rent as their main source of income. In Venezuela, declining oil rent alone may not explain the economic crisis of this oil-exporting economy—the mismanagement of oil rent due to the ambiguous conception of oil rents into the GDP strongly contributes.
The Venezuelan economy is experiencing a very complex crisis. Misguided economic policies have created profound distortions throughout the whole economy. Exchange rate parity has led to drastic reductions in foreign currency and a deterioration of the productive sectors, with damaging effects on the ability to import. This has resulted in crises in production and distribution of goods. The common sense view is to focus on the so-called resource curse and conclude that the high oil prices “feast” is over. But declining oil rent alone may not explain the economic crisis of this oil-exporting economy. As I will argue, oil rents are neither a blessing nor a curse. Oil rent is just a peculiar income stream that deserves a specific status in the GDP of oil-exporting economies[1].
What are oil rents?
The extraordinary profit observed in the global oil sector is due to the presence of very significant rents in the international oil market. These rents reflect fundamental differences in geological endowment of each oil producer, showing significant and systematic divergence from the average cost of production between countries. Table 1 shows that in 2016 the productivity of 463,305 wells located in the USA was 18.9 barrels per day. This was significantly less than the productivity in Saudi Arabia of 2,876.3 barrels per day.
In addition, the price of oil is not determined by the average of production costs between all wells in the world. On the contrary, the price of a barrel is determined in 80% of cases by the production cost of the least productive region. This means wells located in the US determine world prices. Enormous differences between regional productivities allow the most productive regions to take advantage of their low production costs in the form of rents. This is what economic theory has called Differential or Ricardian rents. However, since 2014 the emergence of “shale oil” in US is also playing a key role in the oil price determination, transforming its productivity pattern.
Thus, oil rent is widely accepted as an inevitable and specific remuneration from any oil business. In historical terms, national oil companies, major oil companies, national states and private owners have struggled for control of oil rents. Whether in Texas, Alaska, Saudi Arabia, Kuwait, Norway, UK, Nigeria or Venezuela, the property rights regime represents the main legal tool used to keep part of the rent.
What is the problem with oil rent in the Venezuelan economy?
Ever since 1912, when Venezuela started to export crude, oil rents have historically provided recurrent income for Venezuela. However, oil rents remain absent in accounting for the national GDP. This invisibility is perhaps one of the main reasons for historic mismanagement of oil rents in the past. Indeed, the absence of the specific account for this income makes impossible the control by citizens and policy-makers of the way in which this rent is being spent. The problem becomes bigger when the entire economy bases its plans and policies (both in the oil and non-oil sectors) on oil rents as if these resources were a stable and more or less inexhaustible part of national income.
Why do falling oil rents create a crisis for the Venezuelan economy?
Crisis occurs in an oil rent-dependent economy when oil prices fall below the commitments made in the national budget. If the government and private sectors did not set funds aside in the form of savings as protection against episodes of decreases in oil prices, and if the economic system is not prepared for such fluctuations in oil rents, the crisis will always have the size of the commitment acquired.
However, the current Venezuelan crisis has three additional characteristics:
- The national oil industry has suffered a significant deterioration in its productive capacity[2];
- The non-oil sector, also dependent on oil rents, has suffered very serious damage to its productive capacity; and
- The inefficiency in internal fiscal accounts and unsustainable exchange rate parity create profound distortions throughout the economy (non-official estimates indicate that inflation was near 2,616 per cent in 2017).
Non-productive solutions for the massive economic crisis.
The national government is still far from initiating a plan of national economic recovery that could boost production. On the contrary, the fall in oil rents has led the government to look for other sources of rents, exacerbating the extractive condition of the economy. At present, the government is trying to recover revenues through further indebtedness using a cryptocurrency called Petro. This only commits further, future barrels of oil into private hands and reverses rights obtained in 2001 with the Hydrocarbons Law. In addition, the government has created the Orinoco Mining Arc as a new source of rent for the exploitation of gold and other minerals, placing more than half of the southern province of Guayana at the disposal of large transnational mining corporations.
How to prevent mismanagement of oil rents? Build oil rents accountability.
In Venezuela, the public discussion about the uses of oil rents in national development started in 1934 and is still ongoing. However, the ambiguous conception of oil rents into the GDP has prevented a consensus on the uses of oil rents, leading to indebtedness and mismanagement of this income. Given the fact that the Venezuelan economy has to deal with oil rents as recurrent and fluctuating income, it is important to prevent further mismanagement and to build an institutional framework based on solid political interest to given this issue public visibility. This public visibility will allow for greater accountability for uses of oil rents, and will certainly prevent the historical mismanagement that this country has witnessed.
[1]Baptista (2008), Mommer (1989) and Regnault (2013) have developed an alternative GDP methodology for the oil exporting economies.
[2] According to the OPEC, the Venezuelan Oil production losses 604,000 barrels per day since 2016 (2.373 MBD 2016/ 1.769 MBD Jan 2018).
References
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Baptista, Asdrúbal. (2008). Bases Cuantitativas de la Economía Venezolana: 1830-2008, Fundación Polar, 2008.
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Mommer, Bernard (1989). ¿Es posible una política petrolera no rentista? In Revista BCV: Caracas, Volumen 4 – No. 3 – 1989; pp. 56-107.
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Murshed, S. Mansoob (2018) Revisiting the Resource Curse. Book Manuscript.
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OPEC (2018) Monthly Oil Market Report, 12th February 2018. Available in http://www.opec.org/opec_web/en/
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Regnault, Blas (2013). Neither a blessing nor a curse: National Accounts for oil-exporting economies (The Venezuelan case). International Institute of Social Studies, Erasmus University of Rotterdam http://iippe.org/wp/wp-content/uploads/2013/06/Blas-Regnault-Neither-a-Blessing-nor-a-curse-IIPPE.pdf
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About the author:
Humberto Vivas
May 1, 2018No other oil producer has suffered the results of the drop in oil prizes as Venezuela were the results are of catastrophic propportions …why ?? two reasons : other countries created funds in which they deposited a part of the surplus income coming in from the increased oil revenues to offset the effect of any future drop in oil prices ,
Venezuela has a law ennacted in 1998 which required a part of the oil income to be set aside to provide for those periods when oil prices fell , the law was ignored , if the law had been applied Venezuela would have accumulated some 270 billion $ by 2016 , more than enough to cushion and perhaps prevent the current crisis , second contrary what most other oil countries did which was to limit their borrowing and to apply most of them to increasing oil production Venezuela borrowed to the tilt even as its production was dropping , in propportion to the production Venezuela was borrwing much more heavily than all its oil producing partners …., the end result is that now Venezuela is burdened with a debt load so heavy that it cant be paid without making its people go hungry.
Also the income was wasted in unsustainable subsidies , in giving oil to other countries on terms so generous that they amounted to a gift , or on so called grand patriotic projects handled with such mismanagement and corrupion that they were never finished or produced very poor results……..we are talking of at least 200 billion $ lost in this last item.
If Venezuelans oil wealth had been managed with the same prudence than any other oil producing counttry Venezuela could have avoided the terrible crisis which now engulfs its life.