What Lies Ahead for Oil-Dependent Economies?

Could we see more situations like Venezuela in coming decades?

Oil has been one of the most lucrative and consistent commodities on the market arguably since the Industrial Revolution; much of the economic boom seen throughout the second-half of the 19th century and all of the 20th century was fueled by crude oil extraction and consumption. When inelastic demand is taught in Introductory Microeconomics around the world, oil consumption is normally used as an example, as consumers will, to use my freshman year professor’s words, “grin and bear it” when there is a price increase at the fuel pump rather than moving to another fuel option that might be cheaper.

This inelasticity has made it extremely profitable for resource-rich countries to build their entire economy and political system around oil extraction and export. For a long time, they were the envy of the world: oil was like the juiced-up horse that consistently out-ran the competition and always had the largest payouts at the racetrack.

However, oil consumption and steroid use in horse-racing have both somewhat fallen out of fashion in recent years. With international recognition of and action towards climate change compounding every year and the increased investment in R&D and deployment of cleaner renewable energy technologies, oil prices have halved in the past two years.

This has severely constricted the public coffers of heavily oil-dependent countries. In 2015, Russia ran its largest budget deficit (2.6 percent) in five years. It was projected that, if Saudi Arabia did nothing to respond to the plummeting price of oil, it would run out of money by 2020; it saw the writing on the wall, however, and is working to reduce its dependence on oil through its “Saudi Vision 2030.” Libya’s major oil firms are consolidating for their own survival and for the survival of their country, as 65% of its GDP and 95% of its government revenues come from them.

None of these are particularly rosy pictures, but they don’t even come close to what’s going on in Venezuela, formerly the most affluent country in Latin America: with a lack of revenue, the government has made extraordinarily painful cuts in social services, resulting in a lack of food, medicine, and other essentials. Inflation is expected to rise up to 500 percent over even higher, so any money that Venezuelans have is essentially worthless. No wonder, with this one-two punch, that so many are protesting and rioting in the street, turning against Maduro’s government, and fleeing to neighboring Colombia. In some political maneuvering this afternoon, Maduro has greatly increased the role of the military in the government and over its citizens, seen by many as a bolstering of armed support for the impending political and economic collapse and impending turmoil that is barreling towards the country.

The country’s historically heavy dependence on oil, paired with extremely irresponsible and corrupt financial management under Maduro’s predecessor, Hugo Chavez, have cast Venezuela into a downward spiral, and no one knows when or how it will end. Many such oil-dependent countries’ standard operating procedure was that of petrolization, or “making the spending of oil money [a] government’s main purpose, even after the oil money starts to run out.” Now that the price of oil has been cut at the knees and continues to stand on shaky ground, and in the wake of Venezuela’s situation, what could happen to the rest of these economies that hinge upon the supposed “black gold” in the coming months, years, decades?

As globalization has grown and the world has shrunk, we’ve seen domestic shocks and instability reach beyond their borders and bleed into their surrounding neighbors and regions. What could the regional fallout be from Venezuela in Latin America? Or from Libya in North Africa? Or from Saudi Arabia in the Middle East?

The even scarier scenario: what if Venezuela is just the first domino in a long line of subsequent falls? What happens to the global economy then? Are we prepared to handle such instability and the political, economic, and social ripple effects it’ll have around the world? If the major global oil producers fall asunder, do we have enough capacity to quickly and efficiently expand renewable energy infrastructure and access in order to fill the gap in domestic and international consumption?

In the wake of Venezuela, we need to prepare ourselves to see similar situations pop up around the world. And we need to prepare ourselves to deal with their ramifications, many of which cannot be made clear right now.

Which almost makes it more urgent.