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Venezuela On The Precipice Of Civil War As The Economy Collapses

Anti-government protests in Caracas, the national capital of Venezuela.

The economic downward spiral for Venezuela is reaching a critical stage. Desperate citizens wait in line for hours, just for the opportunity to buy dwindling supplies of basic food and provisions. As the authoritarian regime clings to power, the country nears the precipice of open civil war.

The socialist economy created by former President Hugo Chavez in the early 2000s and continued by his successor Nicolas Maduro, has totally broken down.

The economy has already shrunk by a third, in the last five years alone. The Gross Domestic Product (GDP) declined by 18.6% in 2016 alone.

Venezuela already suffering from a deep recession, is also experiencing runaway inflation. Consumer prices rose at an annual rate of 800% in 2016. According to the IMF (International Monetary Fund), the hyperinflation in 2017, can be expected to head as high as 2200%.

The country was once considered the richest in South America. A half a century ago, living standards in Venezuela, were almost comparable to parts of Western Europe.

According to some energy analysts, the country of Venezuela, has more oil reserves than any other nation in the world, including Saudi Arabia. The Orinoco contains an estimated 1.2 trillion barrels with 235 billion, proven to exist.

However, most of the oil reserves are comprised of extra-heavy crude. This type oil is expensive to process and refine. It was the reason why international oil companies, were invited to help develop the resource years ago. These firms invested billions of dollars in needed infrastructure and technology.

It is easy to blame the lower international oil prices, for the economic and financial catastrophe, Venezuela is now experiencing. Crude now sells for 50% less, than it did a decade ago. From an excess of $100.00 USD (United States Dollar) in 2007, to less than $50.00 USD in 2017.

There is no doubt the drop in the value for oil has made matters worse, but the real problem has been the mismanagement of the oil sector, by the socialist Venezuelan government.

Venezuela was originally able to increase production of crude, as a result of these large investments, with output reaching a peak of 3.5 million barrels a day in 1998. This also coincided with the election of Hugo Chavez, the same year.

Hugo Chávez, president from 1999 until his death in 2013.

Over the subsequent years, the socialist government would constantly interfere with the oil industry. The Chavez administration would use the income derived from the sale of crude, to finance the expansion of many social programs.

The enormous revenue derived from oil sales, encouraged President Chavez to unwisely ramp up public spending, to unsustainable levels. From 2000 to 2013, expenditures as a share of GDP increased from 28% to 40%. Over $1 trillion USD in oil revenues, would be appropriated for this purpose.

Large subsidies were provided for food, fuel and medicine,along with other schemes to transfer wealth, to the poor and disadvantaged citizenry.

A bloated and inefficient bureaucracy would lead to widespread waste. A substantial portion of government income, would also be lost to graft and corruption over the years.

Filling station in Venezuela of PDV (a subsidiary of PDVSA)

This enormous rise in spending was far larger than other economies in Latin America. It prevented the growth of foreign exchange reserves, that would be needed, once oil prices headed down after 2013.

During the general strike of 2002 and 2003, President Chavez would fire the 19,000 employees of the state owned oil company (PDVSA). A great deal of expertise in the energy sector, would therefore be lost. These workers were replaced with individuals, that would instead maintain their loyalty to the Chavez run government.

As the price of oil began to climb in 2007, President Chavez demanded a renegotiation of the contracts with the international oil firms. They were going to be forced to give up majority control of their investments. BP, Chevron, Statoil and Total agreed to become minority owners in their own projects.

Two American companies ConocoPhillips and ExxonMobil, would refuse and ended up have their assets expropriated, by the Venezuelan government. The cases have still not been resolved. A World Bank arbitration body has repeatedly ruled against the Venezuelans, but the appeals continue.

Venezuela on a world map.

The growing lack of skilled workers as well as declining domestic and foreign investment, has taken a toll on total crude output. Venezuelan oil production has been in a steady decline since 2007. By 2015, output had dropped to just 2.6 million barrels. This was more than a 20% decline from the 2006 levels.

Regardless, Venezuela remains among the world’s top ten largest oil producers. Crude still accounts for over 90% of the country’s exports. It not only funds the government budget, but provides the urgently needed foreign exchange, to pay for imports.

When the boom in oil prices ended in 2014, it left the government with crushing external debt and a shortage of funds, to pay the enormous entitlements costs.

The flow of hard currency into Venezuela slowed considerably. Instead of allowing a devaluation, the Maduro government instead began to ration dollars. Access to foreign currency became even more restricted, as the economic situation deteriorated.

Nicolás Maduro, the current president 2013-

The Maduro government has continued to make paying back foreign debt, a priority over expenditures inside the country.

To deal with rising prices, the government enacted controls, which simply created a new black market, as the regular supply chains collapsed.

Almost all consumer goods are now imported. The collectivist ideology in regards to the private sector, have driven most individual businesses to bankruptcy. The government in the name of politics, demands the owners of firms, to sell their goods below market value.

This eventually forces entrepreneurs out of business. If they refuse to cooperate, their property is taken over by the government.

The ongoing government expropriation of businesses and property, along with the general redistribution of wealth, has had a long term detrimental effect on the economy. Venezuela no longer has the private capital and expertise, to maintain a modern economy, despite abundant natural resources.

Empty shelves in a store in Venezuela due to shortages.

In addition, by refusing to cut public spending or expanding the tax base, it leaves the government with few options, other than printing money. This is contributing to the hyperinflation, the country is now experiencing. It has made the national currency the bolivar, practically worthless. It has lost more than 99% of its original value, in less than six years.

The growing dissent is the result of a citizenry, that can no longer survive the economic chaos, caused by incompetent government policies.

Protesters opposed to the socialist government are being increasingly harassed, beaten up and killed.

The electorate is now demanding economic reform and an end to the authoritarian rule of President Maduro. He has resisted the calls for his removal by a vote for months. He instead has voiced the proposition, that the crisis now enveloping the country, is a conspiracy.

The Maduro government continues to insist that foreign powers, particularly the United States, are attempting to topple the legitimate government of Venezuela and install a right-wing regime.

As the opposition grows against him, Maduro is increasingly dependent on the army and his militias to keep his government in power.

A peaceful transfer of power becomes increasingly unlikely, as President Maduro seems determined to stay in office at least, until his six year term ends in January of 2019.

National Assembly of Venezuela building

He prevented a referendum for his recall, to take place last year. The opposition which had taken control of the legislature in 2015, had been largely ignored already last year. Since a democratic solution is no longer viable, it has led to increasingly violent demonstrations.

Since Maduro has allowed the judiciary which he controls, to seize the political power that once belonged to the National Assembly, he has now been labeled a dictator by the opposition inside Venezuela.

In March of this year, the Supreme Court totally took over the function of legislature. The court has subsequently overturned most laws, that were passed since late 2015.

The Supreme Court has even authorized Maduro to create oil joint ventures, without the previously mandated legislative approval.

President Maduro now proposes, the drafting of a new constitution. Most of the political opposition refuses to participate. The believe it to be another delaying tactic, on the part of the President. These politicians no longer believe that President Maduro and his supporters, will ever voluntarily relinquish power.

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