Is Venezuela becoming a failed state?

Is Venezuela becoming a failed state?

Venezuela remains mired in a political and economic crisis that shows no signs of letting up. But while street protests, soaring inflation, scarcity, and skyrocketing crime are massive headaches, the government can count on still-high oil prices to soothe the pain a bit.

The question that begs asking is: How will Venezuela maintain stability if oil prices drop?

A recent report by the International Energy Agency underscores the challenges the country faces in the short term. The United States has made huge progress in oil extraction thanks to fracking technology. It is set to become the world’s largest oil producer by the year 2020, and the global spread of fracking is bound to significantly increase international recoverable oil reserves in the near future. The agency crows that fracking is creating a "supply shock that is sending ripples around the world."

This obviously matters to Venezuela, a country that exports large amounts of oil and little else. Venezuela is increasingly reliant on high oil prices to maintain some semblance of stability. A prolonged drop in oil prices will undoubtedly shake the foundations of the petro-state to its core.

Being an oil producer, Venezuela can earn money in two ways: by sustaining high prices, or by increasing production. (Obviously, if it can do both things, it has hit the jackpot). Fracking threatens the first, and the country has seriously failed on the latter.

Venezuela produces less oil now than it did in 1999, the year Hugo Chávez first came to power. Worryingly, the IEA sees few prospects for increased production. For example, in spite of increasing investment to $22 billion last year, Venezuelan production barely budged. State oil giant PDVSA vows to increase production by 3 million barrels per day in the next six years, but the IEA believes that a combination of the company’s inefficiency and its heavy debt burden means the increase will actually be a tenth of that amount.

Two other developments conspire against the future viability of Venezuela’s oil industry. The country is increasing sales of crude oil to China, as part of a geo-strategic move the Chávez administration embarked on many years ago. The problem is that the oil being shipped has already been paid for, and the government has also already spent the money.

The other issue is Venezuela’s creaking refining infrastructure. Last year, following several accidents at its refineries, Venezuela became a net importer of gasoline and other refined products. In the last part of the year alone, PDVSA bought refined products for $1.5 billion, only to turn around and give it away for practically nothing, thanks to the heavy subsidies that characterize its internal market.

The consensus is that Venezuela needs high oil prices just to stay afloat. But if the fracking oil boom results in low oil prices, what does the future hold for the South American country?

Sadly, Venezuelans have nothing else to fall back on. Its private industry is a shambles, and the country is even importing toilet paper. Years of populism have left the state crippled and heavily in debt. The public deficit reached a whopping 15 percent of GDP last year, even in the context of high oil prices. Most of the spending came in the form of entitlements and subsidies that will not be easily eliminated. Furthermore, the country’s current power clique seems particularly inept in dealing with the complicated economic and political conditions it has inherited.

Nicolás Maduro’s only claim to legitimacy is that Hugo Chávez chose him. Now he is left with the thankless task of dealing with the Chávez mess. He has surrounded himself with a Cabinet composed of many of the same old faces, and neither his policies nor his rhetoric suggest any shift toward the type of solutions that could steer Venezuela away from the precipice.

The problem for Venezuelans is that there is no great reformer in the governing party. And while opposition leader Henrique Capriles would undoubtedly steer Venezuela toward greater economic freedoms, there is little he would be able to do if the price of oil were to tank.

A long period of low oil prices spells doom for Venezuela’s political sustainability. Without high oil revenues, basic services would practically disappear, and the potential for instability would be enormous. Already the country is stuck in a state of undeclared in civil war, and there are claims that drug smuggling has permeated the higher echelons of the government.

Venezuela has so far avoided the fate of its neighbor Colombia, a country still deep in a long civil war with Marxist guerrillas and drug cartels. This is largely due to the deep pockets oil has afforded the government, which allowed for state presence even in the most remote corners of the country. It is hard to see how that presence could be maintained if oil rents were to dry up significantly, and for a prolonged period. This could lead to the type of problems that have bedeviled Colombia, or even poorer neighboring failed states such as Haiti.

Even though its problems are of its own making, the thought of a large, failed state in the heart of the Western Hemisphere should trouble the continent’s leaders.

Juan Nagel is the Venezuela blogger for Transitions and co-author of Blogging the Revolution. Read the rest of his posts here