Why is Venezuela poor despite having the world's largest oil reserves?

Venezuela possesses the world's largest oil reserves. In 2018, the CIA estimated these reserves at over 300 billion barrels.

Oil is a geostrategic resource; all countries need it for their economic activities. Several geopolitical conflicts have erupted around the world in an attempt to obtain control of oil fields. Global demand continues to grow, and one might assume that countries possessing oil reserves must be rich and developed.

Well…despite an economic growth rate of 5% in 2024, in Venezuela, more than half of the population lives below the poverty line and the annual inflation rate exceeds 200%.

Due to the political situation, it is not easy to find official data…however, according to the United Nations High Commissioner for Refugees (UNHCR), 7.9 million Venezuelans have left the country hoping to find refuge elsewhere (UNHCR, 2025). Why is that?

The mechanisms of oil exploration and production activities in Venezuela

Oil nationalism

Since Simón Bolívar, Venezuela has built its " oil-nation identity" (“identidad petróleo-nación” in Spanish) (Ricardo Dávila, 2005), in particular under the dictatorship of Juan Vicente Gomez (1908-1935). 

First of all, what is oil nationalism? It can be defined as all the policies that aim at making oil the primary source of state revenue, prioritizing national interests over those of oil companies, through the implementation of royalties. Oil nationalism is often linked to anti-imperialism, the two concepts go hand in hand. Oil represents national pride.

Historically, Venezuelan oil nationalism is much less radical than Mexican nationalism, for example.

Oil is a central theme in the Venezuelan political narrative and was even used to establish and strengthen democracy in the country during the second half of the 20th century. In populist rhetoric, the revenues derived from oil exploitation could allow to finance social programs and guarantee the sovereignty of Venezuela.

Venezuela is a petrostate

Oil exploration and production activities allowed Venezuela, an undeveloped country, to generate new profits and invest in public infrastructure, among other things. Until the beginning of the 20th century, national revenue came mainly from taxes levied on coffee, cocoa, and leather exports.

However, the second industrial revolution (approximately 1850-1914) made the Venezuelan State quickly realize that it could profit from its large oil reserves and tax the North American and European companies that were interested in exploiting them.

Indeed, since 1829, the Venezuelan subsoil has belonged to the State: the oil mines belong to the Bolivarian Republic of Venezuela and, consequently, the State levies a tax on companies that lease plots of Venezuelan land for oil exploration and exploitation activities.

So, until 1917, companies only paid rent to the State, like when you have to pay your rent every month for your apartment. However, in 1918, the Ministry of Development, headed by Dr. Gumersindo Torres, decided to implement another type of tax: a royalty for granting the right to exploit state-owned assets.

Therefore, companies must pay:

• A rent to the landowner, that is to say to the State

• Royalties for the right to exploit the deposits

These are two distinct concepts. The first one is a rent tax, while the second corresponds to the “payment of a sum arising from a contractual stipulation relating to the enjoyment of a national asset” (Ricardo Dávila, 2005).

Venezuela is what is called a rentier state.

Rentier state: this term, coined by Hossein Mahdavy in 1970, refers to states whose revenues come primarily from primary and export activities. Rentier states generally have economies based on the extractivist development model and depend on their natural resources. State revenues do not result from the action of a set of factors of production, but come from the fact that the state actually owns resources.

In 1928, Venezuela was the second largest oil producer in the world.

In 1948, a reform of the income tax law was implemented, incorporating the “fifty-fifty” principle, which guaranteed the Venezuelan state at least 50% of the profits related to the production and sale of Venezuelan oil.

The nationalization of the oil sector

In August 1975, the law nationalizing the petroleum sector was enacted and came into effect the following year. The state-owned oil company PDVSA (Petróleos de Venezuela S.A.) was created through this law. The Venezuelan state holds all the shares of this company, which falls under the Ministry of Popular Power for Petroleum and Mines (formerly the Ministry of Energy and Mines).

Indeed, in the 1970s, the multinationals that exploited the resources reduced their production: in 1975, Venezuela produced 2.3 million barrels per day. However, after nationalization, production slowly recovered, and PDVSA's production peaked in 1998, with 3.12 million barrels produced daily (OPEC, 2025).

In the 1990s, President Rafael Caldera attempted to liberalize the sector by allowing private companies, such as Shell, to distribute hydrocarbons and their derivatives under certain conditions. However, the 1999 Constitution (under the government of Hugo Chávez) repealed this principle and stipulated that PDVSA could not be privatized. The Constitution only authorizes:

1. The creation of semi-public corporations: companies whose capital is majority-owned by one or more public entities.

2. The granting of concessions for the sale of hydrocarbon derivatives.

The 2006 hydrocarbons law, implemented by the chavista government, requires private companies located in Venezuela to sign a contract with PDVSA and form semi-public companies in order to exploit the country's resources.

©Reuters

Bankruptcy for the oil state

The Achille’s heel of rentier states

When a country has natural resources that are valued on the international market, (domestic and foreign) private investments favor this sector to the detriment of all other sectors of the economy, creating great economic instability (Gustavo, Delgado, 2016).The rentier state depends on the profits generated by the extraction of this resource and on price fluctuations on international markets. When it comes to Venezuela, which has the world's largest oil reserves, the economy’s health depends on the price of oil and its exports.

On top of that, rentier states generally have an unrealistic exchange rate and a currency that is often overvalued. Oil represents Venezuela's main export (86% of its exports in 2023 according to the United Nations). Significant oil exports boost the value of the Venezuelan currency. This is what happened to Venezuela in the late 1990s and early 2000s. .

Example (fictional):

If in 2010 1 bolívar = 1 US dollar; in 2025, 1 bolívar = 3.50 US dollars. In 2025, the bolívar is stronger than the dollar.

In 2025, an American citizen has to spend more dollars to buy a product that still costs 1 bolivar in Venezuela. This is what happens when a currency appreciates.

A country's currency appreciates when its exports increase. With the rise in oil exports, the Venezuelan bolivar has appreciated against other currencies.

To understand the impact of this currency appreciation, it's crucial to remember that no private investment is being made in other sectors of the Venezuelan economy. The government is also not investing in the development of other productive sectors. Yet, investment enables, among other things, skills development, innovation, and improved productivity—all essential elements for strengthening competitiveness in international markets.

Without investment in other sectors, Venezuela cannot be competitive. The appreciation of its currency, due to oil exports, makes its other exports far less competitive in terms of price.

Another fictional example:

Price per kilo of coffee in 2010

• Venezuela = 10 bolivars = US$5

• Colombia = 200 Colombian pesos = US$5

appreciation of the Venezuelan bolivar

Price per kilo of coffee in 2025

• Venezuela = 11 bolivars = US$9

• Colombia = 220 Colombian pesos = US$5.50

In this example, Venezuela cannot compete with Colombia on price. This is what can happen when a currency is overvalued. The exchange rate does not accurately reflect the true value of prices in Venezuela; it is much higher than it should be. Venezuela doesn't export much, only oil, once in large quantities but not really anymore. As for the other goods it does export, they are extremely high for other countries to buy due to an overvalued currency.

This phenomenon is what is called the “dutch syndrome” or the “resource curse”. The latter is a term coined by the English economist Richard Auty in his book Resource-based industrialisation: planting oil in eight developing countries, published in March 1990. These two terms refer to the "curse" that befalls an economy following the discovery and exploitation of natural resources.

The other industrial sectors are completely neglected by the State which results in a dearth of private investment that stems from a lack of confidence from the various (economic) agents, both domestic and foreign. The economic policies implemented generally favor the oil sector and sometimes harm other industries. Consequently, the level of FDI (foreign direct investment) in Venezuela is almost non-existent. The country must import many products due to its underdeveloped industry, which creates a trade deficit as well as limited and low-quality economic growth. The standard of living of Venezuelans depends on oil-related revenues.

Finally, the rentier model generally favors clientelism and corruption between the state and those who exploit the resources. These actors seek to control natural resources in order to share the wealth produced. This phenomenon can be exacerbated by a regime where power is concentrated in the hands of a single person.

The downside of nationalization

The fact that Venezuela depends on oil revenues is not the only obstacle to its economic development.Venezuela depends on revenue from an activity it no longer even carries out:

Fuente: OPEC

As you can observe in this graph, Venezuela’s oil production increased from 1990 to around 2015. In the early 2000s, Venezuela benefited from commodities supercycle or the 2000s commodities boom, which we often mention here in Latam Sin Filtro, and from the increase in the price of oil, logically increasing state revenues. However, this money has not been reinvested in the oil sector, but has been mainly used to finance the chavista revolution and the social policies of the Chávez government.

The major problem is that with nationalization, the State has become the sole player in the oil sector, and if it doesn't invest, no one else will. Furthermore, oil exploration and production activities require modern infrastructure, modern equipment, a skilled workforce, and so on. Without investment, production levels cannot be sustained.

Don’t get me wrong, the social policies implemented by the Chávez government had positive short-term effects. However, given that nearly 90% of State revenue comes from oil exports (UNCTAD, 2025), a lack of investment in this sector will ultimately lead to a decline in production and exports, thus depriving the State of resources to implement such measures.

It is clear that since 2020, production levels have been extremely low. Venezuela produces virtually no oil, and since the government has never strived to develop other productive activities, the country neither produces nor exports “anything” and has to import “everything”.

According to UN figures, in 2023, Venezuela recorded a trade deficit of more than US$8.368 billion (UNCTAD, 2025). The Maduro government has gone into debt to cover all necessary public spending. Official data on the situation in Venezuela is sorely lacking, but the country is in default since 2017 (Pérez F, MacQuhae, 2024), that is to say, Venezuela is no longer able to repay its debts. According to the work of Pérez and MacQuhae, its external debt represents more than US$60 billion.

Finally, since nationalization, tax revenue from oil revenues has been declining (Lander, 2005). Since the creation of PDVSA, taxes linked to oil revenues have steadily decreased. Bureaucracy, corruption, and cronyism are the main causes of this phenomenon. In other words, the Venezuelan State receives less and less money than it is supposed to receive from PDVSA’s activities.

In conclusion, we have seen that possessing large reserves of natural resources does not necessarily result in wealth or economic development. Furthermore, a country can experience economic growth but distribute that wealth poorly.

If a State could truly go bankrupt, Venezuela would have already done so years ago. Its foreign exchange reserves are nearly depleted, its trade deficit is widening, its external debt has skyrocketed, and there is no money left to implement anti-poverty policies. Furthermore, the sanctions imposed by the United States since 2017 prevent Venezuela from accessing most international financial markets. 

Poverty and food insecurity are the reality of the country that possesses the world's largest oil reserves.

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Davila, Luis Ricardo. Petróleo, Cultura y Sociedad En Venezuela. Accessed November 5, 2025. https://www.academia.edu/22930979/Petr%C3%B3leo_Cultura_y_Sociedad_en_Venezuela.

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Mendoza Pottellá, Carlos. 2006. “Vigencia del nacionalismo petrolero.” Revista Venezolana de Economía y Ciencias Sociales 12 (1): 183–207. http://ve.scielo.org/scielo.php?script=sci_abstract&pid=S1315-64112006000100011&lng=es&nrm=iso&tlng=es.

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UNCTAD. “General Profile: Venezuela (Bolivarian Rep. Of).” UNCTAD Data Hub. Accessed November 6, 2025. https://unctadstat.unctad.org/CountryProfile/GeneralProfile/en-GB/862/index.html.

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