How Socialism Wiped Out Venezuela's Spectacular Oil Wealth

Venezuela has the world's largest proven oil reserves and yet the country has run out of gasoline. The socialist government has lost the capacity to extract oil from the ground or refine it into a usable form. The industry's gradual deterioration was 18 years in the making, tracing back to then-President Hugo Chávez's 2003 decision to fire the oil industry's most experienced engineers in an act of petty political retribution.

The near-total collapse in the nation's oil output in the ensuing years is a stark reminder that the most valuable commodity isn't a natural resource, but the human expertise to put it to productive use.

"At this moment Venezuela is living through its worst nightmare," said Luis Pedro España, a professor of sociology at Andrés Bello Catholic University in Caracas, who has studied the nation's economic collapse. "We are witnessing the end of Venezuela as a petro-state."

Gasoline shortages have crippled the economy, made travel within the country prohibitively expensive, and it has increased prices at grocery stores. Shortages and price restrictions have given rise to a vibrant black market.

"Drivers who operate gas-powered busses prefer to keep them parked so that they can suck out the gas and later resell it," says Andrés, a public bus operator in Caracas, who asked that we only use his first name.

"[My] bus runs on diesel. It uses 16 [or] 17 gallons daily. Nowadays, we have to wait in a long line to fill up," he said. "The gas stations even have national guards who ask for bribes before they'll fill up the tank because the 40 liters that the government gives us isn't enough." 

Andrés is allowed special access to fill up his tank because he provides an essential city service. But earning the equivalent of just $200 a month, he struggles to make ends meet. So he keeps his bus parked and extracts gas from the tank to resell on the black market, earning about $8 per gallon. To put that into perspective, the average Venezuelan subsists on less than $10 per day.

The little gas that is still available comes via periodic shipments from Iran. But the Venezuelan government doesn't officially charge at most gas stations. It uses a quota system, so filling a tank can mean waiting in line for days.

David is a mechanic living in Caracas. These days he's making a living by waiting in line to fill up his tank and then extracting the gas to resell on the black market. 

"My business isn't selling gas," David says. "It is meeting the needs of my customers."

"A lot of the clients from my repair shop are elderly people—people who can't be standing in line for eight hours, or two days, or three days, or a week. I am the person who is sacrificing my time. Clearly, I have to charge for my time. We all have to make a living." 

The Venezuelan oil industry turned a once poor agricultural nation into an important geopolitical player and one of the region's richest countries. 

In the mid-1970s, Venezuela nationalized its oil industry, and Petróleos de Venezuela, S.A. (PDVSA) was created to manage operations. Though state-owned, the company was given a high level of autonomy and was known as a "state within a state." The nation's oil wealth allowed for a massive investment in infrastructure and the industry attracted talent from all over the world.

"The current administration, in the last 20 to 25 years, destroyed what we built," says Pedro España. What they had built was "economic independence."

"PDVSA once had over 20 refineries around the world," says José Toro Hardy, an economist and former director at PDVSA from 1996-1999. "We were able to move our oil from the nation's subsoil into the tanks of American drivers," he said. "And the entire process was managed by Venezuelan entities with Venezuelan oil wells, pipelines, Venezuelan tankers…We had built something gigantic, but suddenly, we were faced with a costly historic accident: Hugo Chávez won the election.

Chávez held power from 1999 to 2013, when he died of cancer. He dubbed his policy agenda "socialism of the 21st century." It turned one of the most prosperous countries in Latin America into the site of a humanitarian crisis. Chávez rewrote the constitution, clamped down on the freedom of the press, nationalized over a thousand private companies, and destroyed the national currency through hyperinflation. 

Chávez sought control of the nation's oil wealth to fund his political ambitions, but first, he had to dismantle the mechanisms that were put in place to protect PDVSA's autonomy.

In a move intended to begin that erosion, Chávez began appointing military leaders to PDVSA's board. The conflict between PDVSA's top management and Chávez culminated in a national strike, which took place from December 2002 to February 2003. Chávez proceeded to fire 18,000 state oil workers, including 80 percent of its top engineers, handing control of the industry to the military.

The workers who were fired had "an average of 15 years of experience," Toro says. "In a sense, he threw away 300 thousand years of experience."

"Now, instead of producing five to six million barrels of oil [a day], which is the amount we should be producing, last month's report from OPEC showed that our production, based on external sources, was 339 thousand barrels per day. After once having been a major player in the oil industry, we've become nothing. An insignificant exporter of oil," he says.

"[T]he erosion of checks and balances and the restructuring of PDVSA, allowed Chávez to convert the oil sector into, in essence, the regime's checking account," wrote the political scientists Javier Corrales and Michael Penfold in their 2011 book, Dragon in the Tropics: Venezuela and the Legacy of Hugo Chávez.

Andrés, the bus driver, believes that if the gas crisis doesn't abate, Venezuela will experience rioting and public unrest. "If there's no more diesel we can't transport food," he said. "Diesel is necessary for heavy shipping, including basic necessities. So people will be out in the streets protesting."

The economic crisis has caused much of the nation's educated middle class to flee the country, which will make rebuilding Venezuela's human capital an even greater challenge. In an ironic twist, Chavez's hand-picked successor, Nicolás Maduro, is now working to bring privately-run foreign oil companies back in.

Produced by Andrés Figueredo Thomson; translation by María José Inojosa Salina.

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Photo Credits: JORGE SILVA/REUTERS/Newscom; Juan Carlos Hernandez/ZUMA Press/Newscom; KIMBERLY WHITE/REUTER/Newscom;