Oil can once again drive Venezuela's recovery

VENEZUELAS oil industry is one of the most striking illustrations of how politics can both create and destroy economic prosperity.

- CHIFIPA MHANGO

Endowed with the world’s largest proven oil reserves, Venezuela should, in theory, be among the most prosperous energy economies globally. Instead, it has become a case study in how political choices, institutional decay, and misaligned incentives can cripple a strategic sector and, by extension, an entire national economy.

At the heart of Venezuela's political economy lies oil. For nearly a century, petroleum has shaped the country’s fiscal structure, foreign policy, social contract, and political power dynamics. The state’s dominance over oil revenues transformed government into the primary allocator of wealth, embedding rent-seeking behaviour deep within political and economic institutions.

Over time, this created an economy heavily dependent on oil rents rather than productivity, diversification, or innovation.

Since the nationalisation of the oil industry in 1976 and the creation of Petrdleos de Venezuela S.A. (PDVSA), oil has functioned not merely as an economic commodity but as a political instrument. Control over PDVSA translated directly into control over state finances.

Oil revenues funded public spending, subsidies, and social programmes, allowing successive governments to maintain political support without expanding the tax base or strengthening accountability to citizens.

This rent-based political economy weakened institutional discipline. When governments rely on oil rents rather than taxation, the incentive to build efficient public institutions diminishes. Accountability shifts from citizens to global oil markets.

During periods of high oil prices, inefficiencies, corruption, and fiscal indiscipline are masked. When prices fall, structural weaknesses are brutally exposed.

The Chávez Era