Tooze on How Oil Came to Define Venezuela’s Economy

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Tooze on How Oil Came to Define Venezuela’s Economy

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The Trump administration’s apparent planning for a potential regime change in Venezuela is inseparable from that country’s economy. The U.S. government claims that Nicolás Maduro’s regime has become a narcostate, relying on the production and export of drugs to stay afloat. What’s clear is that Venezuela’s traditional reliance on oil revenue has come undone—and that the United States has itself played a role in that development.

Has oil always defined the Venezuelan economy? What accounts for the precipitous fall in Venezuela’s living standards in the past decade? What role do drug cartels play in Venezuela?

Those are just a few of the questions that came up in my recent conversation with FP economics columnist Adam Tooze on the podcast we co-host, Ones and Tooze. What follows is an excerpt, edited for length and clarity. For the full conversation, look for Ones and Tooze wherever you get your podcasts. And check out Adam’s Substack newsletter.

Cameron Abadi: Venezuela has the largest oil reserves in the world. Has that fact always defined the Venezuelan economy and its pathologies?

Adam Tooze: The Venezuelan economy is heavily dependent on oil now. But, no, it has not always been that way. Throughout the 19th century, you would have described Venezuela, broadly speaking, as a coffee-dependent economy more than anything else, right? It was cacao. But it was above all the weak, war-scarred state. The history of Venezuela’s emergence as an independent state is the stuff after all of Bolivarian legend. And it’s really from 1914 onward, with the first big oil discoveries, that Venezuela has emerged as a powerhouse. And it’s with the nationalization of the oil assets—50-50 profit-sharing regime in the ’40s and ’50s and then full nationalization in the framework of the PDVSA—that a true oil-centered regime emerged. This is in the context of OPEC politics, the 1973 oil crisis, the sudden boom in oil prices that gave Venezuela the promise of huge riches, because having oil in the early 20th century, when oil prices were really bargain-basement, was one thing; having oil from the ’70s onward was quite another.

But then that also exposed Venezuela from the 1980s to the 2010s to repeated shocks to its economy following the oil price. So, as oil becomes this global asset with an entirely different price level from the 1970s onward—and, as in Venezuela, oil is concentrated in the PDVSA as a kind of anchoring state capitalist vehicle—you are exposed in the 1980s to the downward shocks in oil prices, which produce huge tremors in Venezuelan society. And then driving and underpinning the [Hugo] Chávez and Maduro regimes from the early 2000s and into the 2010s was a huge surge in oil prices up to the structural break in 2014, which hurled Venezuela and Venezuelan society in the post-Chávez regime into deep crisis. So Venezuela has become more and more dependent on oil and with that also strapped to this really vicious whiplash logic of global oil prices.

CA: How does the oil sector entangle Venezuela with the U.S. economy? Is it possible to disentangle U.S. oil companies such as Chevron and Citgo from the Venezuelan economy?

AT: They are deeply entangled both on the supply and the demand side. So Chevron is responsible for about 25 percent of Venezuelan production in a normal year in Venezuela, insofar as that exists. And the biggest market for the Venezuelan crude has always been the United States. And that has conditioned a desperate search on the Venezuelan part for alternative markets. And from the early 2000s onward, that then became the basis for a deep entanglement—very one-sided but nevertheless real—between the Chávez government and China because China was emerging as a key oil buyer, the biggest global source of demand growth. And Chávez looked for Chinese support and received it in various forms. So, as part of China’s outward movement of investment and technology, it built a relationship with Venezuela and has had a really hard time earning any return on that investment. It has not proved a very successful Chinese engagement. But that was driven very much by the realization on the Venezuelan part that, like it or not, they are caught within the sphere of American power.

CA: Living standards in Venezuela have fallen by 74 percent between 2013 and 2023. That marks the fifth-largest fall in living standards in any state in modern economic history. To what extent is that the product of macroeconomic mismanagement by the Venezuelan government versus the sanctions that the United States has imposed on the Maduro regime?

AT: The easiest way to break that down is chronologically, and I think you could argue that between 2000 and 2016, we have a progressive deterioration of the Venezuelan situation driven by internal struggles around the PDVSA—the oil company never really recovers from the politicized strike of 2002 to 2003, there’s chronic underinvestment, and there is an increasing reliance on external sources of funding such as China to maintain investment. Then there’s the oil price shock of 2014 to 2016, which combines with the fall in production from the increasingly ailing PDVSA to massively compress export revenues. The regime from 2003 onward imposes foreign exchange controls, which lead to an overvaluation of the currency, which lead to a series of distortions within the domestic economy. There is credit financing, increasingly inflationary pressure within Venezuela—all of this proceeds, which is profoundly damaging and drives millions of Venezuelans into seeking refuge outside Venezuela.

This is a migrant flow that above all spills into Colombia. Colombia and Venezuela are historically very closely tied together, have separated over the course of the 19th century but are very close both geographically and culturally. And so millions of Venezuelans essentially relocate to Colombia. And then, with the first Trump administration, the sanctions arrived—so the 2017 financial sanctions; the oil sanctions in 2019, which aim at restricting exports; then a further tightening between 2020 and 2022, with some relief delivered as the pressure really becomes unbearable and the Biden administration is trying to manage global energy markets in the context of the Ukraine war. But I think most analysts would see this as two distinct phases, with the original damage being done by largely domestic factors and the vagaries of the global oil market and then the powerful impact of American sanctions from 2017 onward.

CA: The basis for the Trump administration’s hypothetical bid for regime change is that Venezuela poses a national security threat because it is a narcostate—the claim is that Venezuela relies on the production and export of drugs as an essential part of its economy. What role are drugs and drug cartels playing in the overall political economy of Venezuela right now?

AT: I think made up in large part, right? So it is true that 10, high side 15, percent—I’ve seen estimates as low as 8 percent—of Colombian cocaine production is channeled, as you’d expect if you just look at the map. You can go across the border for Colombia and gain access to the Caribbean or the Atlantic coast of Venezuela, lightly policed zones of the Venezuelan territory. You can then there work with the Cártel de los Soles, which is the name for a group of essentially rather corrupt police and national guard officials. “Soles” refers to the suns that they wear on their epaulets. And you can thereby account for plausibly, like I say, about 10 percent of the Colombian cocaine traffic. But there’s no fentanyl, which is notionally at the center of this program. It’s clearly not the most direct route. The vast majority of Colombian cocaine is smuggled more directly north, some by land, the majority by sea.

And the argument that this is at the core of the Maduro regime—there is no doubt that in survival mode, certain elements of that regime are increasingly resorting both to drug smuggling and informal gold mining from the very large gold deposits that are in Venezuela. Venezuela is thought to have, at current, hugely inflated gold prices, $250 billion to $350 billion worth of gold that could be excavated, and some official mining is going on, with an awful lot of unofficial mining also going on. No doubt there are parts of the Venezuelan regime where this is happening. But the idea that this is the sort of central character of the Venezuelan regime or defines why it’s a key problem for the United States, or, from the American side, that this is the major source of America’s drug problem or even the trafficking problem—the drug problem of course resides in the United States, but even the main avenue for trafficking—it’s just disconnected from any real sense of reality.

So to call it a smoking gun somewhat overstates it. Yes, there’s reason to think that there is this kind of activity going on, but does it merit the deployment of this huge naval task force and the threats of military action, let alone very open talk about mechanisms for regime change? Not by any reasonable standard, no.