On 18th January 2016, the global prices of Brent Crude oil nosedived to about $28, a point at which the barrel carrying the oil became more valuable than the actual Crude itself. Aside from the annoying listicles that were generated on Buzzfeed; oil-dependent economies around the world suddenly realized, with sickening dismay that it might be time to press the proverbial ‘big, red button’.
Primarily, this meant solving the problem of an oil ‘glut’. Years of excessively pumping for oil had led to a situation where nearly every oil-carrier in the world had a surplus stockpile. Throw in the discovery of new fields of oil in Russia and the shale oil boom in the USA,it was only a matter of time before demand would fail to meet supply – triggering a price collapse.
This does present a simple solution. Scale back production, give everyone in the drilling business a holiday, and wait it out until the rest of the world is thirsty for oil again. If you’re lucky (and sensible) you would have saved up a huge stash of foreign exchange to weather out the inevitable losses that you’ll make in the meantime.
But unfortunately, it wasn’t as simple as that (when is it, really?). In the 70s, as a show of solidarity towards the nations who were opposed to Israel, OPEC moved to curtail oil production by around 5 million barrels a day. Intended to be an ‘oil embargo’ on Western nations who were pro-Israel, the strategy backfired, hitting the Arabs painfully in their wallets.
Instead of causing oil-prices to skyscraper, the loss in production only opened up the market for non-OPEC nations to fill with their supply. This resulted in a loss in market share for OPEC, curbing their ability to influence oil prices as much as they’d have liked to. The fear that this could happen again, coupled with the speculation that oil would rebound sharply made the Arabs in particular, averse to curtailing production.
You see, every gang sort of has this straggler who repeatedly sets fire to his own room and then shrugs to say “Oops, I did it again”. He then expects his friends to bail him out. For the EU, this sort of chap would be Greece.
For OPEC, it is Venezuela.
Venezuela was one of five countries liberated from Spanish rule by Simon Bolivar, all the way back in 1821. After noodling around with being a Republic for a while, they fell in and out of extended periods of Military rule throughout the first half of the 20th century. Then in 1958, they sort of got tired of the constant coups, and having to salute a different chap every other month. The nation held formal elections, and became a democracy, something that it has remained since – save for the occasional hiccup then and there.
The current president of Venezuela is Nicolas Maduro, a protégé of the former president Hugo Chavez, who died of terminal cancer in 2013. Both were members of the ruling socialist party and upon coming to power, Maduro vowed to carry on the legacy of his predecessor. Blessed with the largest known reserves of crude oil in the world, estimated by some to be equivalent to 298 billion barrels of Brent, it seemed like the newly elected Head of State had some leeway to work with.
Remember, this was still when oil was valuable enough that American Congressmen would get a curious case of hard-hearing whenever “Saudi Arabia” and “Human rights violations” came up in the same sentence. (“Whatever do you mean?”) Additionally, Venezuela had a strong, aspirational middle-class, an efficient public health service sector and some of the initiatives started by President Chavez did indeed lift out millions of citizens out of poverty.
Sadly, when they say ‘too much of a good thing is bad’ they really mean it. The Latin nation bet huge on crude and went nothing on anything else to hedge their losses. Since 1999, there had been little done by the government to improve what should be the backbone of any nation – the agricultural sector. Instead, the State accumulated vast amounts of debt through excessive importing of goods and reckless borrowing. Furthermore, due to some complicated factors, such as tight government regulations and corruption, the cost of importing necessities proved to be cheaper than manufacturing them locally – a situation that would come back to haunt the country greatly.
And because that wasn’t a recipe enough for disaster, a great deal of that borrowed money wound up financing socialist campaigns in theneighbouring nations of Brazil and Argentina. This was initially successful with Socialist governments winning elections and coming to power in both those countries in the early-2000s. But in a span of six-months in 2016, Christina Kirchner was voted out of power in Argentina while her counterpart in Brazil, Dilma Rousseff faces months of impeachment proceedings in the Brazilian Supreme court.
Once Crude oil crashed, the profits that kept the government afloat dried up. Suddenly, the Socialist regime found itself potentially facing a debt of $120 Billion, with no way to repay that amount. The economy, propped up on oil, crashed. Commodities and food, propped up on imports, dried up because the government couldn’t afford to buy anything. Local manufacturing and production flatlined because government-run industries couldn’t pay workers and privately-owned industries were subjected to police raids and government investigations.
Heck, the situation got so out of hand, Coca-Cola shut down operations due to lack of locally made sugar. The government wasn’t any better, cutting back working days for civil servants and staff to just two weekdays.
The domino effect caused by these cataclysmic changes within the nation was felt immensely by its citizens. Crime and murder (and suicide) skyrocketed, especially in Caracas, the capital city. Hospitals are dangerously understaffed and out of the most basic of antibiotics. This in turn, has caused mortality rates amongst infants and the elderly to shoot to never-before-seen levels. It has also led to a burgeoning underground trafficking system; pirates and cartels now smuggle goods like toilet paper and soap instead of cocaine. In the current scenario of Venezuela, such items are proving to be vastly more profitable than the drugs ever were.
Nearly everyone’s unemployed, which cruelly, may be a good thing. The queues for government rations are endless, and trudge along for hours at a snail’s pace.Meanwhile, amidst calls for his removal as president, Nicolas Maduro has called for a sixty day government emergency, citing “external threats” to the nation.
Onlookers concur that the fate of the country will become vastly clearer when the deadline for this year’s payment of dues – around $7 billion – passes later this year. If the nation defaults on the payment, something that economists believe will occur next year if not this one, it would likely entail some sort of collective bailout sponsored by other nations, similar to Greece. Whatever the case, irrevocable damage has already been done on the citizens of Venezuela – politically, economically and personally.
Sometimes, natural calamities set nations back by decades, wiping out the work of generations. But they have a knack of bringing a nation together, bound together as they become through a shared pain of loss. We saw this earlier in 2015 in Nepal, when a country divided by religion came together to form a secular constitution.
But a man-made disaster like this? This has the potential to drag several successive generations into the mire of despair.
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– Abinesh Kumar