667. How Did Venezuela Mismanage Its Oil Reserves? A Lesson in Socialism’s Failure

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Hi everybody, welcome back to another episode of The Way the World Works. Today I want to talk about Venezuela and its history with oil and how it is a lesson in how socialism doesn't only fail, but it makes a people suffer. It puts them in poverty and it just ruins everything.

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So if you have listened to the news or even walked outside your house or glanced at a newspaper, if those even still exist, you will see that everybody is talking about Venezuela. And that is because President Trump went in and he captured the president of Venezuela, President Maduro, and that has been a big source of controversy and people are debating whether or not that was the right thing to do. That is not what we're going to discuss on this show today.

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What we are going to discuss is what happened to Venezuela. Why did we even get to a point where we're even paying attention to Maduro and what he was doing in Venezuela? And it has everything to do with socialism and how a country that should be so prosperous, that has this wealth of oil, of a natural resource, how their people ended up starving. So let's get into it.

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First of all, so in the 1900s, I'm going to go over a little bit of a timeline, Venezuela basically finds out that they are sitting on a gold mine of oil reserves, some of the biggest oil reserves in the entire world. And this is great news because oil is worth a lot of money. And so what do they do? They start granting concessions.

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And what do I mean by that? So the country where the oil is underneath, they technically own that resource, right? But oil isn't just like, I was going to use the show Beverly Hillbillies as an example. And then I realized that that is dating me and it was on reruns when I was a kid, but it's a show about these like hillbillies that accidentally are drilling one day and they find oil and they become like rich and they moved to Beverly Hills. But the beginning is just them just like accidentally striking oil and oil pouring out of the ground and like, oh, now they're rich.

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But here's the thing about oil, that's, it takes a lot more to make oil actually useful. Okay, you have to extract it, you have to refine it, you have to do all these things, you have to export it. And so having the oil is not enough.

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You need people to actually take that and turn it into something. And so Venezuela, it's their oil, but they start granting concessions to private companies, which a lot of them were foreign interests, other companies from other countries and nations that were wanting to make money off this oil. Okay, so these companies were doing what they do, extracting it, refining it, exporting it, making money off of it.

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And Venezuela, they're collecting taxes and royalties. But the day-to-day, the actual handling of the oil was private, right? They were these private corporations. And this was great.

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It made Venezuela very prosperous. It's creating jobs because some of these companies, even though they're foreign interests, are still going to be hiring locals. And it's stimulating the economy because people have jobs and they can buy things.

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It's really just prosperity is happening. It's a very prosperous time. Slowly that started changing.

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So we get to 1943, and while the oil reserves are still owned privately, the government starts taking a little bit more control. Surprise. The government always does that, right? So they start tightening control.

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They start passing standards and regulations that just make it a little bit harder to do business with them. They are taking more money. They're increasing state oversight.

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So slowly, even though it's still being owned by private firms, you are seeing the government start to slowly crack down on the oil industry. Now, 1976 comes around and this is going to put a nail in the coffin of Venezuela's prosperity. And it happens because the government decides to nationalize the oil industry for all those oil reserves under Venezuela.

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So what does that mean? That means foreign companies just lost their direct ownership. They're no longer able to do the day-to-day dealings. They're not handling that anymore.

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Now it is state run. And let me ask you this, how many from all the things we've talked about on this show and everything you guys know about history, how many times has making something state run ended up in a better program? We've seen it with health care. It's been disastrous.

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People always talk about how America should have free health care, forgetting that countries that do have free health care are horrible. Sometimes you can't even get in to see a doctor for months and months and months. And there's no incentive for doctors to start new practices because they're not being paid what the market should say they should be paid.

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It's just a big disaster. So state run anything never ends up being great. And yet that's where Venezuela puts itself in 1976.

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And of course that doesn't go so well. So in the 1990s, they partially reopened this nationalized oil. So they start doing joint ventures.

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So they start partnering with, you know, private firms and allowing some operational agreements, some partnership. But it's still going to be heavily controlled and regulated by the state, the state meaning Venezuela. 2007 is going to mark a big turning point for what happens with Venezuela because you have Hugo Chavez, who is it comes into power.

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And under him, you're going to see the oil reserves be kind of re nationalized. So many of these projects now become even if they're joint ventures, they are mostly going to be handled and controlled by the state. And obviously, private companies, they don't like this, right, because things were running fine when they were allowed to just do their day to day as they were supposed to.

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But now things are going, you know, things are it's harder to work with Venezuela. So what are they doing? They're pulling out. They're leaving because they're like, this is not worth our time.

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Now, Venezuela had gotten itself into a little bit of trouble because their economy was so focused on oil that that was where all the focus was going and they became very dependent on it. They needed it. So now that the oil is becoming nationalized and things are getting worse, their economy and everything starts slowly suffering and they're going for being a prosperous country to to to not being so prosperous.

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And that's going to get worse in 2013 when Maduro gets into office. And Maduro is the one who was just captured. It's weird to say captured.

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It sounds like pirates or something. But so at this point, when he takes over the oil industry, it's it's already very fragile. I shouldn't say industry, because at this point, it's just the state oil is very fragile in Venezuela.

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So he is inheriting a pretty bad situation, but he makes it worse. So there's I mentioned that when something gets state run, when the government takes it, we know that it never ends up being a good industry. And I used health care as an example.

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Well, why does that happen? A lot of times it's because there's mismanagement. You know, when there's a government taking over, it's very bureaucratic. Sometimes things get missed.

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You don't have a private company who's incentivized to to make sure that work is efficient because they're paying for it. You don't have that there. Right.

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So things get mismanaged very quickly. What else happens when you have a government takeover or something? Corruption, as always, you're going to see that you're going to see under investments or you're going to see it's it's you're not responding to market demand. And so it's not you're not using the same tools that the free market uses.

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And then you're also going to see way too much intervention from the government, which, again, as we know, makes things worse off. So a smart person would look at this and say, all right, maybe the way we're going about this is not good. Let's reverse course.

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And you remember Venezuela already kind of did that in the 70s when they like tried to make it a little bit more nationalized. But then they like went back on it in the 90s and said, OK, let's give them a little more power. So but that's not what Maduro does.

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Instead of Maduro being like, my bad, we should fix this. He was like doubling down. He was saying, no, we're right, national nationalization is right.

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This is going to work. If you don't agree with me, you're fired. So oil prices are falling.

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They're losing money. And instead of fixing the course that they were on and making some changes, Maduro doubles down and things get worse. And what happens? Poverty is it becomes the norm, widespread poverty.

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So this country is sitting on these massive oil reserves, but they're not producing anything. Production is falling because it's so mismanaged that they're not even able to extract the oil. And it's really tragic to watch something like that happen.

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So then money printing and inflation. And you know, we know, creature from Jekyll Island, we know that that printing money always makes things worse. So that happens, printing money, inflation.

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And then you have people where they can't afford to import food and medicine anymore. And so there's just no money for that. And so what happens when you can't import food and medicine? Well, that's the shortage.

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It's going to create a shortage because they are getting some food and medicine. Who do you think is is getting the food and medicine first when those shipments come in? Do you think it's the people? Do you think it's the you know, the the schoolteacher or the farmer? That's not who's getting it. It's Maduro.

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It's the government. So they're taking what is left for themselves, which means the rest of the people are suffering. The rest of the people are paying for Maduro's poor choices.

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Private markets and the free market as as we know, it just basically ceases to exist under Maduro, except for black markets. Now, of course, you can never stop the free market. Can't stop, won't stop.

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That's what the free market does. There it will always find a way. And usually in these kinds of circumstances, there there becomes a black market where people are charging more because it's illegal and it's dangerous.

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But like maybe you they have extra bread, but they're going to charge you way more than it's worth because that's your only option. So black markets are still there. But I mean, any semblance of a free market is gone.

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So at this point, people are not able to get the food they need to to maintain a regular life. They are waiting in bread lines that run out of bread before they get through the lines. Like I mentioned in the beginning, some people are even getting robbed of what little they have while they're waiting in line.

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So not even the bread lines are safe. There is corruption everywhere. People are being forced to eat their dogs.

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Going to the doctor, if you needed to go to the hospital and there was an emergency, it was such a risk because of the sanitation. There was just no way to sanitize everything. That's how bad it was.

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And there wasn't enough resources to even be able to help somebody. So it's very possible that going to a hospital might actually make you sicker because you might catch whatever, you know, the contamination from other people's blood and things like that. It was really awful or is really awful.

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So this is a full blown humanitarian crisis. You know, when you think of having to eat your pet to survive, it's just awful. So this is happening and people are trying to flee if they even can, because, you know, moving out of the country is also very expensive.

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And so socialism and Maduro's failure to say, oh, my policies aren't working and him sticking to his guns was horrible for his people. OK, so a lot of really horrible things are happening. And so this is this is where and again, I'm not going to get into the actual capture of Maduro and whether or not we should or shouldn't have done that or whether or not it's a good or bad thing.

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I just want to set the stage for what Venezuela was going through. And so when you do hear people say like, well, we should have come in and we should have, you know, gotten him out. Why they're saying that is because it was a horrible situation.

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Maduro was being horrible. His choices were having horrible repercussions on his people. And remember, socialism is always fine for the people in charge because they're making sure they get the best of the resources available, even though it's supposed to be for the people and everyone's supposed to be equal.

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That never ends up happening. And it is the the the actual people, not the government that end up suffering. And so Venezuela is such a perfect example of why socialism can can just ruin everything because you had a country that should be wealthy.

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You have a country that should be prosperous. Their people should have opportunities. And now they're eating their pets because socialism destroyed everything they have.

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And socialism breeds corruption. And it allows all these horrible government officials to come and come to power and stay in power. So that is what's happening or what has been happening in Venezuela.

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And like I said, it's taken 100 years, over 100 years to really get to a bad point. But it's it's even the most prosperous countries aren't immune to socialism coming in and destroying everything. So we will leave it there.

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I don't want to get in. I'm worried if I keep talking, I'll get more into Venezuela and what happened recently. And I want to avoid that because I want to make sure we are laying the foundation for why Venezuela was in a state for us to even be paying close attention to it anyway.

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So we will leave it there for today. As always, don't forget to like and subscribe to the podcast. And until next time, I will talk to you later.