What's really up with Venezuela?

"I personally believe that US Americans, like the Iraq, and South Africa, don't have maps"

I haven't written about what's happening in Venezuela, except for that time when I showed the John Oliver episode below (featuring a somehow-not-too-funny Wilmer Valderrama and a very sassy Popeye), or when John Bolton strangely pointed at Venezuela in his axis-of-evil-redux speech.  Despite my best effort, it's just annoyingly difficult to find an expansive writeup that doesn't just dwell on mistakes of recent past. So recently I read an excellent article on the crisis that not only gives nuanced historical context (beyond "people are eating rats because socialism") but also elaborates as to why we should pay attention to it.

So isn't Venezuela just a basket case of crazy people with ass-backwards ideology and no money? 

As usual, the answer is a bit more complicated.  The hometown of Simón Bolívar brewed a perfect storm, mixing a potent concoction of corruption and gross economic mismanagement in a monumental scale.  However, when we dig deeper, surprisingly certain key factors are wholly unrelated to the Chavismo ideology.

Dr. Nafeez Ahmed, former investigative journo for The Guardian, sees Venezuela as symptomatic of the end of the oil era. It's not that there's no more oil (remember "peak oil", from like ten years ago?); in fact the shale revolution in North America means there's "enough oil to fry the planet". It's just the economics of oil have been upended, and Venezuela's 32mn population is the first large-scale victim.  The country's crude production peaked in 1997 at 3.5mmbopd; over the last two decades, output continued to fall to just 1.0mmbopd in February, or 72% drop (!!), according to OPEC.

Looking back 50 years ago, Venezuela was a notable US ally with a dynamic and flourishing economy. As Latin America experts Moises Naim and Francisco Toro explain on Foreign Affairs:

"[1970s Venezuela boasted] a stronger social safety net than any of its neighbors and is making progress on its promise to deliver free health care and higher education to all its citizens. It is a model of social mobility and a magnet for immigrants from across Latin America and Europe. The press is free, and the political system is open; opposing parties compete fiercely in elections and regularly alternate power peacefully. It sidestepped the wave of military juntas that mired countries in dictatorship. Thanks to a long political alliance and deep trade and investment ties with the United States, it serves as the Latin American headquarters for a slew of multinational corporations. It has the best infrastructure in South America. It is still unmistakably a developing country, with its share of corruption, injustice, and dysfunction, but it is well ahead of other poor countries by almost any measure."

The 1973 OPEC oil embargo and the price shock brought wealth to Venezuela -- which by then was producing and exporting well over 3mmbopd -- but even then, technocrats saw plenty of red flags.  Oil minister (and OPEC co-founder) Juan Pablo Pérez Alfonzo presciently warned in a prophetic 1976 speech, "you will see, oil will bring us ruin... [oil] is the devil's excrement,"  foreseeing the pains that his country will suffer from.

Sure enough, crude prices normalized in the next decade, and the economy's rapid growth quickly came to a halt. Lower petroleum revenue meant cuts in public spending, scaled-down social programs, runaway inflation, a banking crisis, and mounting unemployment and hardship for the poor. The heavily indebted country faced currency devaluation and was forced to seek bailout from the now-infamous International Monetary Fund (IMF) in 1989. The lender imposed austerity that further crippled the economy and worsened everyday life.

Eventually this lead to the rise of Hugo Chávez, a populist demagogue who vowed to bring economic and social justice to the downtrodden, who lead an unsuccessful coup in 1992 and won presidency in 1998.  By then, the economy was limping along, as oil prices slumped to just $11, emptying the government coffers.  Chavez' brilliance was in mining discontent: he eloquently stirred public opinion against inequality, poverty and corruption of the political elite. For support, he turned to Cuban dictator Fidel Castro, offering oil (over 150,000 barrels/day at discounted prices -- over $1bn in value every year) in return for skilled professionals (brain drain was well underway) and political cover.

After Chavez' passing in 2013, his handpicked successor Nicolás Maduro deeply curtailed economic freedoms and erased all traces of liberalism from the country’s institutions. He expanded Chávez’s practice of jailing or exiling opposition leaders.  Other than Cuba, Maduro also deepened alliances with anti-Western regimes, turning to Russia for weapons, cybersecurity, and expertise in oil production; to China for financing and infrastructure; to Belarus for homebuilding; and to Iran for car production.

Fast forward to today: more than three million Venezuelans have fled the country (mostly towards Colombia and Brazil) in search of a better life as its once-robust oil industry collapsed, the bolivar currency loses value due to hyperinflation, and life savings were depleted.  Widespread shortage of food and medicines was inevitably followed by an unchecked wave of violent crimes including robberies and kidnappings.  In the last five years, real per capita income shrunk by 40% – a peacetime decline that parallels those seen in recent wartime Iraq and Syria.  Just this month, the country's electrical grid failed, causing prolonged power and communication blackouts.  Fifteen dialysis patients died, and foods went stale due to the heat and lack of refrigeration.  Maduro, naturally, blames the blackouts on an "international cyber-attack" by the United States.

Although poverty, corruption and economic crises are quite common in South America’s various republics, Venezuela's sensational decline into a failed state “eclipses anything witnessed in decades”, according to British newspaper The Independent.

So what's really the culprit?

Source: Council of the Americas

Economics of Heavy Oil

Ahmed writes that while failed socialist experiments, corruption and neoliberal capitalism are all implicated in various ways, no one is talking about  how the world has shifted into a new era over the last decade or so. From largely drilling cheap, easy crude in the Middle East, we are now  dependent on "unconventional" fossil fuels that are much more difficult and expensive to produce. As a result, the highest cost producers have become increasingly unprofitable.

Venezuela's product is categorized as "heavy oil", a highly viscous liquid that requires unconventional techniques to extract and flow, often with heat from steam, and mixing with thinners or lighter forms of crude in the refining process. Heavy oil thus has a higher cost of extraction than normal crude, and a lower market price due to the refining difficulties. This isn't any fault of Venezuelans; it's just a fact of geology.  Where Venezuela is at fault, they don't even try to make production efficient: gas byproduct is flared instead of captured, where it can be (and is widely) used for power generation. 

When oil prices were at their peaks between 2005-2008, Venezuela was able to weather the inefficiencies and mismanagement in its oil industry due to much higher profits thanks to crude prices of US$$100-150/bbl. At today's US$60-70/bbl, the country's production becomes unprofitable and unsustainable.  Adding insult to injury, the Trump administration's August 2017 sanctions severely restricted national oil company PDVSA's access to financing, a difficult problem given Venezuela's highly-levered economy (110% debt-to-GDP).  Economist Fransisco Toro wrote that the sanctions made any dealing with Venezuela toxic, and slams the door shut to any Western diplomatic rapprochment to the Maduro regime.

This US policy greatly exacerbated the economic and humanitarian crisis; in fact, former UN rapporteur Alfred de Zayas criticized the US for engaging in “economic warfare”.  He declared that “sanctions are killing Venezuelans”, they fall most heavily on the poorest people in society, demonstrably cause death through famine and malnutrition, are aimed at illegally coercing "regime change", and lead to "crimes against humanity" under international law.

Climate Change

Pico Humboldt: 4,940m above sea level

Over the past two decades, Venezuela has experienced severe and persistent drought, including the 2013-16 period when rainfall was lower by 50-65% than the recorded historical average.  In 2016 water levels reached within five meters of a dead pool at the Guri Dam, the nation's largest hydroelectric facility (around 70% of the country's electricity is generated by hydropower), causing months of blackouts in and surrounding Caracas. This is caused by the El-Niño Southern Oscillation, the fluctuation in the climate system comprising a cycle of warm and cold sea-surface temperatures in the tropical Pacific Ocean -- a well-documented phenomenon going back to the 17th century -- which has increased in intensity due to climate change.  Piled on top of the devastating effects of the country's mismanagement, these shortages adversely affect agricultural output.

The country has also lost, or in the midst of losing, all of its glaciers, including its iconic Pico Humboldt at Merida, threatening an important source of freshwater.

Professor Juan Carlos Sanchez, Nobel laureate for his work with the Intergovernmental Panel on Climate Change (IPCC), says Venezuela is extremely susceptible to climate change because 75% of the population reside along coastal lines and unstable terrains, such as in the Zulia, Miranda, Carabobo and Aragua states. Throughout the 20th century, the average temperature in the country rose by up to 3°C, making these areas vulnerable to rising sea levels.  Short-term effects include increasing frequency of extreme weather events, like torrential rains, massive flooding and mudslides, droughts and hurricanes -- all of which we are already witnessing.  There are also alarming outbreaks of infectious diseases: vector-borne malaria, Zika, and dengue fever are up 400% over the last decade.  However, his long term predictions are ominous:

"Big parts of already-dry Falcon, Sucre, Lara and Zulia states, including the north of the Guajira peninsula, can expect desertification: the permanent degradation of the land and its capacity to carry crops, as a result of insufficient water. The pabellón criollo and even the iconic arepa are at risk: land degradation and decreased rainfall could make it difficult to impossible to grow corn, black beans and plantains in much of the country.  In general, water will become scarce in the coming decades as it will rain less over the country – in some regions up to 25% less than what they see today."

Warning to Humanity

When Ahmed underlines the rising cost of oil production, he isn't singling out Latin America.  Even in North America, where the energy industry is enjoying a renaissance at the Permian and Bakken fields, most of the companies have yet to show any profits whatsoever.  In fact, exploration activities are artificially sustained by the availability of cheap debt and private equity funding; market observers expect the bubble's burst is not so far away.

Of course, the cost cannot just be measured in US$ terms.

When we study the Venezuelan case, we begin to understand the impact of our civilization's addiction to fossil fuels and how it affects the Earth.  Very often, city dwellers and policymakers gobble up finite resources, demanding higher and higher amounts of energy in the name of "economic progress" without understanding its source and the toll that society pays to provide it.  Some may call it the "resource curse", or "paradox of the plenty".  Are renewables the solution?  Perhaps, or perhaps not, but at least it's time for the world to study and discuss the science in earnest, instead of stubbornly sticking to one's ideological grounds.

In Venezuela, we are seeing in real-time what happens when mother nature pushes a nation to its breaking point, to the brink of unraveling into a failed state.  If I am to offer one prediction: it won't be the last in our lifetime.