Angry Planet - Venezuela: A Riches to Rags Story

Episode Date: September 10, 2018

People in Venezuela are murdering each other at the highest rate in the world. Workers are fainting on the job because of hunger. Citizens have lost 20 pounds on average since the country’s economic crisis began. It’s a nation in collapse with no clear way out.How did Venezuela, once one of the world’s richest countries, plummet so far? Keith Johnson of Foreign Policy helps us understand.You can listen to War College on iTunes, Stitcher, Google Play or follow our RSS directly. Our website is warcollegepodcast.com. You can reach us on our Facebook page: https://www.facebook.com/warcollegepodcast/; and on Twitter: @War_College.Support this show http://supporter.acast.com/warcollege. Hosted on Acast. See acast.com/privacy for more information.

Love this podcast? Support this show through the ACAST supporter feature. It's up to you how much you give, and there's no regular commitment. Just click the link in the show description to support now. There's a huge rogues gallery of criminal elements within the regime. So stepping down and sort of seating power voluntarily and saying, well, we've had our run. Now it's your turn. May not really be an option for these guys.

You're listening to War Call. A weekly podcast that brings you the stories from behind the front lines. Here are your hosts, Matthew Galt and Jason Fields. Hello and welcome to War College. I'm Jason Fields. And I'm Matthew Galt. Venezuela is melting down, and that's not an exaggeration. The local currency is nearly worthless. Production of oil, which is the nation's lifeblood, is falling.

The socialist government, largely responsible for the nation's problems, isn't going anywhere. Millions of people are fleeing the country, adding to regional instability, and it's not like Venezuela's neighbors need any help in the instability department. So how did we get here? Foreign policies Keith Johnson, who covers energy and wrote a fantastic article on Venezuela, joins us. Welcome, Keith. Hey, good to be here. So can we just start off with how bad things are in Venezuela? They're pretty dire. You know, we wrote the piece in the July issue, so a lot of the...

the reporting for this particular one was done in the spring. And I mean, just anecdotally, but one of the harder things to do, because, you know, we had sort of rolling deadlines to do the print magazine. And one of the hardest things to do during writing and fact-checking was trying to keep track of Venezuela's inflation, which was literally exponentially increasing, like, week to week. And so the number that I had in the first draft, you know, was multiplied by 10 in fact-checking. And, of course, now the IMF is talking about an annual inflation rate of 1 million percent, which starts to become, you know, that's worse than the Carter years. So you've got a situation down there where, no, and literally they've got a problem down there

where women, teenage women, are getting sterilized because condoms, this was in the BBC, condoms cost like one-third of a month's wage. And so there's literally no alternative. It's total societal meltdown. So, yeah, the short answer pretty bad. How do people eat if you have the answer to that? I mean, that's what I've been wondering about now for months. I know people are actually going hungry, but...

Yeah, I mean, malnutrition and undernutrition is a huge problem, I mean, broadly. And, you know, we've mentioned that Reuters did some reporting on the ground that we'd cited in the piece that, you know, not just oil field workers who were trying to, you know, actually do sort of roughneck labor on a low-calorie diet. We're passing out from hunger. School kids were as well. You know, the average Venezuelans lost. somewhere north of 20 pounds in the last year or two. It's across the board. I often wonder, obviously there's black market situations. You have an informal economy, but there's such widespread shortages of basic food, and the official salaries do so little to meet basic nutritional requirements.

The food is one question. The other huge question mark that comes up, and this is a big problem for Venezuela and the other countries, is the complete destruction of the nation's health care system. because there's no medicine, there's no medical care, there's no supplies of any sort, basically, in the hospitals. And so, you know, relatively treatable diseases have reflourished. And then, of course, with the migration, they have spread across the borders. So it's pretty bad. What's it like in the streets? You know, I haven't been down there. I talked with, you know, some folks from the wire services who were there recently, in fact, had to leave because of the security situation. You know, I mean,

it surpassed, you know, some Central American countries as the murder capital of the world. You know, there's a lot of the regular violence that's sort of economic driven. And then there's also an insecurity that comes from the regime because the Maduro regime uses sort of paramilitary forces and sort of armed thugs on motorcycles to intimidate regime opponents. So they can get you coming and going. It's a pretty nightmarish situation. So was Venezuela a vast, basket case that was waiting to happen before all this? No, no. In fact, I mean, you know, if you go back, it depends how far back in time you go. Yeah, I mean, this is the thing is, you know, if you go back to the 50s, right, to when all the big oil producers created OPEC, and we talk about this in the piece,

you know, Venezuela pumped 10% of the world's oil. They were the ones who actually came up with the idea for OPEC. It wasn't the, you know, the Saudis or the Gulf states. It was actually Venezuela. They were on the top of the hill. You know, when you go back and look at what, you know, per capita incomes were in the 50s and 60s, you know, Venezuela was within spitting distance of the U.S. It wasn't quite there, but it was, you know, it was pretty close. It was light years ahead of countries that Colombia and Peru and Mexico and things like that. And over the years, they've sort of slid backwards while their neighbors have caught up. So, you know, there was a time, you know, even as late as the 70s, when Venezuela was renowned.

for having stable democracy, you know, relatively good economic stewardship, big resource base, well-educated population. You know, it had a lot going for it. And the wheels in the oil industry in particular came off. I mean, really, they had some rough patches that were not, you know, due only to what was gone on in Venezuela. But basically, everything blew up when Hugo Chavez came in. So as recently as that?

Yeah, I mean, they were still pumping above three points. 3 million barrels a day, which is about twice what they're doing now, and that was roughly 4% at the time, this was in the late 90s, 4% of global consumption. So not quite the heyday they were at in the 50s or 60s, but they were still a major league player. And Chavez came in, you know, this was a guy who had tried to do a coup as a lieutenant colonel in 1992 and then spent some time in jail and then got out. and then, you know, he rehabilitates himself and runs as a populist in the 98 election. And the country was vulnerable because, you know, if you think back to the 90s, oil prices globally cratered. You know, the Soviets had a hard time. The Saudis had a hard time. You know, Indonesia dropped out of OPEC.

I mean, the 90s were terrible for oil producers, and it was really bad for Venezuela. So, you know, they had fiscal deficits. They had trouble with the budget. They were having inflation. problems and, you know, it was nothing at all like it is now, but it was still a tough enough climate that it's sort of a rabble-rousing populist who could say, hey, listen, I'm going to take the country's oil wealth and make it work for Venezuelans again. That message resonated, and, you know, he won the presidency in 98. But when he did so, you know, there was a pretty clear target on the back of the state oil company in his mind, and that manifested itself pretty much from day one.

Can we, if we can stay on Chavez a little bit, you know, in the states, everyone likes to say that Chavismo is socialism, and it's a little bit more complicated than that. I'm wondering if you can you dive into that a little bit? Yeah, I mean, it has that element. I mean, one of the principal elements of, you know, Chavismo's relationship to the oil sector is, you know, partially sort of a socialist thing, which is, you know, state ownership of the natural resources, which isn't in the rest of the world, that's actually not radical. Outside of the U.S., almost every other country has state ownership of the natural resources. There's very few places where, you know, a landowner can claim the rights to the oil underneath his house. So that's a pretty standard deal,

and that's long been in Venezuela, sort of a standard tenant, which is, you know, we have this huge oil wealth on paper, theoretically, the largest oil reserves in the world, larger than Saudi Arabia on paper. And this belongs to the Venezuelan people, and so the wealth should work for Venezuela. That's sort of been since the 20s. That's been an elite motif of Venezuelan politics. So there's that current. And then in particular, there's this suspicion in certain segments of Venezuelan political society that the guys at the national oil company were sort of elitist, technocrats, foreign educated, you know, more interested in, in, in sort of the kind of ExxonMobil mentality

where you want to create shareholder value rather than value for the man in the street. And basically, they were just a really high-functioning state oil company. But Chavez and a lot of people like him had this vision of the state oil company, Pede Vesa, as some sort of black box that sucked the resources out of Venezuela and kept them for themselves. And he would often say this.

He said during the campaign, Pede Vesa is a black box. It's a state within a state. You know, we have to break the box open and, you know, basically get at the wealth that's inside. And that's what he set out to do from day one. I mean, you know, he defenestrated the management. He drove out the people who knew what they were doing and tried to take over the state oil company to make it work, as he thought, for the state. Just didn't work out that way.

Well, let me ask you this. If he had survived and not reincarnated into the form of a little bird, do you think that, this whole thing could have kept going. Do you think that he would have been able to pull it together, or do you think that between the shale oil boom and everything else going on, that these problems were just kind of baked in, and he would be dealing with the same issues? Yeah, I mean, if he had lived or not after,

because the Maduro years are basically the continuation of the same policies. And that's, you know, one of the things we were trying to point out in the article is that, you know, the complete and utter collapse of Venezuela, Oilas oil sector and the massive hyperinflation and the refugee crisis and all of that has happened in the last few years. And it's logical to say, wow, Maduro has really screwed this up instead of Chavez. When you look at the oil sector in particular, you know, it's clear that the fuse was lit by Chavez. And I say that because, you know, there were a few very specific decisions that he made. He not only changed the top management, some of the best in the world, then, you know, shortly, you know,

when he was running for re-election in 2002, when he'd been in office, he was kind of unpopular, the oil company went on strike, and he lost it, and he set out to punish them. And he didn't just punish, you know, a few top managers. He literally fired like 20,000 people. So anybody who knew what they were doing in the oil company was pushed out the door. And so you had this loss of decades' worth of sort of Western-trained, really high-level, technical expertise. that was gone. And once it was gone, it was not coming back. Those guys got jobs elsewhere. They left the country. So that was gone. And that they knew was going to take years to recover from.

And then they compounded that by doing the sort of socialistic things you talked about earlier, which is to say, hey, there's foreign oil companies working in Venezuela too. We're going to stick it to them. We're going to raise royalties. We're going to arbitrarily charge them for back taxes. We're going to rewrite the contracts in the middle of the process. We're going to squeeze the foreigners. And that obviously has the effect of fewer people being willing to put in the investment in exactly the things you need foreign capital and expertise for. So, I mean, if you'd set out like a blueprint to say, how could I screw this up?

You know, basically Chavez just ticked off the list one by one in perfect form. And at the same time that he was taking the oil company apart, the state oil company, Wasn't he also creating enormous welfare programs? Well, and this was part of the reason that he wanted the state oil company to stop acting like an oil company where a lot of the money needs to be reinvested in technology and drilling and exploration and seismic surveys and things like that. He wanted to use it as a big piggy bank because part of his reason was a good socialist. And that's fair enough within the Venezuelan political context, oil wealth should be shared more broadly. okay, fine. But then the second part of that was not only do I want it to be shared to sort of the national budget, which would have been, and that's what they do in most other oil producing countries, is you'll have the oil revenues going to the national budget, like in Iraq, and that pays for all your stuff. They did sort of an extra legal off the books thing where he siphoned off revenues from the company into a whole bunch of sort of funds that he had control of. It weren't answerable to the central bank or anyone. and that's what he used for like social welfare programs.

Some of them, you know, quite laudable. Child nutrition programs, housing programs for low-income people. But it was basically taking the money from the oil companies' revenues that were needed for the future and using them to pay for socially popular programs. And in many cases, you know, desperately needed programs that would ensure him political support. So in the, you know, in the short term, there was a strong base and there still is a resident. of strong Chevishta supporters among low-income Venezuelans because they have received some benefits or had until recently.

But the long-term cost of the oil company was that, you know, if you don't put the money in today, you're not going to have the oil tomorrow. And that bill finally caught up with them in the last couple of years. So production is hurt. And also they had enormous trouble because oil prices fell, right? I mean, back when oil was $100-something dollars a barrel, it's a very different world from $70. a barrel. Well, yeah, and that's what happened in the latter part of the Chavez years is that, you know, he'd done all this damage, he'd wiped out the expertise, you know, he'd angered the

foreign investors, he'd minimize their ability to extract the technically challenging oil. But he managed to sort of coast along and mask how bad it was because, and we all remember this, you know, a decade ago in the 2000s, oil went up and up and up and it reached, you know, as you're saying, you know, $147-something dollars a barrel in the summer of 2008. I mean, if oil is $150 a barrel, you can get away with all kinds of mismanagement. What happened was what goes up, comes down, and after 2014, the price of oil fell off a cliff. And once oil went down in the case of Venezuelan oil, down into the 30s from 100-something, you can no longer mask mismanagement with these sloshy revenues.

then it becomes a question of we're literally not making the kind of money that we used to, and we can't pay the bills anymore. Is this part of what's called the resource curse? I mean, can you explain that concept to us? Because it seems like Venezuela has it real bad. Yeah, I mean, they're kind of a textbook example. I mean, the resource curse, they used to call it the Dutch curse, but basically it's if you have easy money lying around in the form of,

and it usually applies to countries with oil, If you have easy money theoretically line around that you can become relatively affluent and earn hard currency by pumping oil, the natural effect of that is going to be to retard the economic diversification in other sectors, in the sense that you're not going to have a thriving, you know, motor industry or a pharmaceuticals industry, or you're not going to spend, you know, uddles of money on technical education to produce quality engineers or doctors. or whatever, because 90% of the government revenues you can get out of a derrick in the ground. And this is particularly prevalent in Africa. Nigeria has it, Angola. You know, these are countries that were big oil producers and oil dominates the economy.

Libya has it. But Venezuela is a particular case because way back in the old days, oil was only about a third of the total government take. And it still had a diversified economy. And by the late Chavez years, oil sales accounted for something like 95% of government revenues. So it was basically nothing but an oil economy. The entire rest of every other business in Venezuela only provided about 5% of the government's revenues. Do you think Maduro is equipped to deal with this at all? And what does he do? No.

Well, he's doubling down. I mean, part of the problem is that the alternative for the guys in power right now is not very good. partially because it's kind of a narco criminal state. And a lot of the people related to the government, I mean, the vice president has, as I believe, is on the U.S. specially designated sanctions list as a trafficker. A number of high-ranking generals have either been indicted in absentia or put on designated list.

I mean, there's a huge rogues gallery of criminal elements within the regime. So stepping down and sort of seating power voluntarily and saying, well, we've had our run, now it's your turn, may not really be an option for these guys, which leaves them sort of like rats in a corner. The only option is to hunker down. There's a second element to that, which is, as I mentioned before, there's still a residue of support among Chavistas

who perceived, you know, the socialism and the fact that somebody was looking out for them. It may not have been like the most macroeconomically intelligent policy thinking long term, but, you know, a lot of these places, it's the first and only time that someone's ever tried to look out for them. So there's a residue of support. And then when all else fails, when there's protests in the street or when there's opposition politicians who run against you or who are popular, you know, you beat them up or you jail them. And so that's how he's managed to hold on to power so far, rewrite the Constitution, you know, completely take over the constitutional functions away from the National Assembly.

basically subvert the entire Venezuelan democracy and hang on to power. But, you know, this guy is a former bus driver. He doesn't have any particular expertise into the macroeconomic challenges that Venezuela is facing. I don't think anybody right now could parachute in and fix what's ailing Venezuela in any short period of time. And there's been several attempts in just even in just the past few years to oust him from power, correct? I mean, most recently and most famously, the assassination by justice. drone. Yeah, there was the drone thing. There've been a few, and sometimes maybe they were a board of coups. Sometimes in a lot of these places, when they, they claimed there was a coup and then

they round up a number of guys and interrogate them and then they confess. You don't know how much of that is simple divide and conquer, but, you know, one thing that people have often pointed to, and this goes back, you know, even to the late Chavez years, is, you know, the expectation that the military could be the lever that finally does force out these rulers because the opposition has been browbeaten and jailed and is divided. Even though it had won some assembly elections that were then rigged by the government, you know, it doesn't have the unity and the strength to really rest power. So a lot of people have looked to the military and he's certainly faced down a few challenges. That may actually be the end game here if things get bad enough.

Are we talking about, at this point, millions of people who have fled Venezuela and do you know where it is that they're going? Yeah, well, I mean, when we did the piece, the latest numbers that we could come up with were 4 million migrants due to the recent economic crisis. That, to my understanding, has not slowed down at all over the summer. So you're certainly looking north of 5 million. Basically, it's a neighboring countries. I mean, the vast majority who are leaving, who are really penniless, you know, are going by foot. So there's a lot, Colombia is very nervous about the exodus. There's some trying to go through, you know, Amazonian paths. You know, it's very difficult. You go out towards the west. You've got, you know, rough terrain.

People with money generally fled a long time ago. You know, there's a lot of Venezuelans in the States. A lot of better off Venezuelans went back to Spain, in many cases, their country of origin. but the people with means usually had gotten out long before this. Which means that they've got huge problems from, in terms of rebuilding, there's no human capital there. Yeah, there's not a whole lot left. I mean, the country as a whole is a little bit like the oil company after Chavez got done with it. You know, you take something that used to be sort of a model, certainly for the region,

you know, in some ways for the world, you wipe out all the human capital. You basically make it impossible, not just a function, but to propagate for the next generation, you can't pass on any knowledge because there's no knowledge to pass on. In this case, there's very little human capital. You've been brain drain. Even the workers that are left are impoverished and malnourished. You don't even have the physical labor to do, you know, the task of rebuilding. I mean, the challenge is phenomenally daunting.

Do you see any reasons for hope at this point? Well, I mean, it's not going to be a short-term situation. And then, you know, the other problem, too, is if you look, if you turn the focus back towards, okay, the one part of the economy that actually does have some prospect of bringing in money, it's, you know, half the oil sector is like half the size it was a couple of years ago, but they still pump some oil. So if you said, okay, assume we got rid of Maduro, assume we had some sort of change of government, what could you do?

Well, like we were saying, the state oil company's basically been wrecked, and it's also broke. So you would need to get foreign investors to come in and pour in lots of capital, in order to fix the damage reservoirs, putting the investments needed to dig out the heavy oil that they've got there. You need to spend a lot of money over a long period of time to get back to where they were a couple of years ago. Now, what's the trick if you're trying to get foreign investors

to come in and invest in your country? Well, you've got to offer them attractive terms. So the ironic upside or upshot of all of these Chavez-Muduro years that were meant to kick out the foreign Yankees. capitalists and reclaim Venezuela for the Venezuelans is that right now, like one of the only real prospects for Venezuelan recovery is to hand over the keys to the kingdom even more to foreign capitalists. Does the world need Venezuela's oil to keep things reasonable?

If you said they had the largest reserves, and I know it's the harder kind of oil to get out and it takes more processing, I just want to say these words, it's heavy, sour crude as opposed to light sweet, which is what I think the U.S. and other countries pump. Anyway, but does the world... No, it's actually... It's ultra-hame. I mean, the stuff they've got is actually like tar. I mean, it's almost like... It's in the same, you know, category. They're kissing cousins to Canadian tar sand. You have to melt this stuff before it'll leave a flow. So it's pretty nasty. Yeah, it's gunk. It's basically asphalt on a Georgia day is what you're looking at.

And so that requires treatment diluance in order to make it, you know, little bit more, you know, flow through a pipe. You need ore upgraders. There's a whole lot of stuff. That's what I was talking about with the foreign capital. You don't just, it's not like in Libya or in Kuwait, you put a straw on the ground and you basically get out light oil that you can, you know, process and ship to market. This is gunk. You almost have to mine and then process and then refine and ship to market. So there's a whole bunch of extra costs baked into what they're doing, which makes their situation all the more dire. So the thing is, yeah, does the world need it? I mean, right now, the world doesn't have a whole huge amount of spare capacity of oil production in its

back pocket, right? I mean, the world consumes ballpark, you know, 100 million barrels a day of oil. Ballpark, the Saudis might have, like, according to them, Saudis and OPEC, maybe a million and a half, two million barrels of spare emergency capacity, right? So that's like 2% of the global needs. So, you know, if you can imagine, if like Venezuela went offline entirely, or if Libya goes offline again entirely, well, there's your two million right there. And then the Saudis could meet that, and then there's literally no reserve. I mean, there's nobody left in the bullpen. You got nobody left. And so then the oil market start to freak out, because if you don't have any cushion, any spare capacity, then the slightest little tremor, if Iran makes a noise or whatever,

then oil prices go back above a hundred. And global pain and prices at the pump and economic slow down and all of that. So, you know, the short answer is, yeah, a million point three barrels a day that Venezuela has right now is kind of nice to have. Now, down the road, are they going to tap their umpteen billion barrels of heavy crude? Who knows? We might all be driving Priuses in 40 years, but right now it's not a bad thing to have. Keith Johnson, thank you so much for joining us to talk this through. No, my pleasure. Thanks for listening to this week's show. If you enjoyed it, Let the world know by leaving us a review on iTunes. It helps others to find the show, or at least that's what they tell us.

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