Venezuela: the anatomy of fragility

This is article 1 of 3 in Natural Resource Curse series.

Venezuela holds the largest proven oil reserves in the world, and, for decades, petroleum revenues financed public spending, social programmes, and infrastructure, positioning the country as one of Latin America’s wealthiest nations and a regional economic powerhouse. Today, Venezuela stands as one of the most dramatic examples of economic collapse in modern history; hyperinflation, prolonged GDP contraction, mass emigration, and institutional breakdown have unfolded in a country that, by conventional logic, should have been among the most prosperous on earth.

This contradiction lies at the heart of a long-standing debate in political economy: natural resource abundance is often assumed to be a path to prosperity; however, it has frequently coincided with weaker institutions and macroeconomic instability. The question is not whether Venezuela suffers from a so-called “resource curse,” but whether resources acquire a negative character only when combined with poor governance. Are natural resources inherently destabilising, or do outcomes depend on political choices, institutional design, and state capacity? Examining that question across different contexts can show us what happens when governance collapses around resource wealth: the anatomy of fragility.

The dependency trap

States heavily dependent on a single commodity, particularly oil, are structurally exposed to inflationary pressures and macroeconomic imbalances: Venezuela represents one of the clearest contemporary cases of this phenomenon. Dr. Terry Karl, Gildred Professor of Latin American Studies and Professor of Political Science at Stanford University, whose work on resource-dependent economies has shaped the field, is direct about the framing: “I do not believe in a so-called ‘Resource Curse,’ because I think a resource doesn’t have a curse or a blessing: it’s how human beings use it.” In Venezuela’s case, the economy became overwhelmingly tied to oil revenues, creating a dependence mechanism that crowded out other productive sectors, reduced export diversification, and left the country fully exposed to global price fluctuations.

This dynamic (commonly known as “Dutch Disease”) occurs when large inflows of foreign currency from resource exports cause currency appreciation, undermining the competitiveness of non-resource sectors such as manufacturing and agriculture. As Dr. Karl explains: “When a country relies on a single product – oil – it tends to see its currency appreciate, because the currency is effectively backed by oil. […] That is the core of the Dutch disease: it is an economic phenomenon, and there is no real way to counter it except through export diversification.”

When oil prices fell, there was nothing else and the absence of alternative sources of growth left the economy completely exposed. The Venezuelan vulnerability was further complicated by its timing. Massimo Nicolazzi, from ISPI’s Energy and Sustainability Programme, notes that Venezuelan oil entered global markets during a period when the United States dominated the market – producing up to 70% of the world’s oil between the two World Wars. While Mexican and Venezuelan oil were indeed essential to global supply during this era, production remained firmly under the control of foreign corporations, meaning that even before nationalisation efforts, the wealth and strategic leverage flowed outward rather than benefiting the producing nations. This established a structural dependency long before any governance crisis occurred.

PDVSA, politicisation and the expropriation cycle

If the economic mechanism created vulnerability, it was institutional failure that converted vulnerability into collapse. Dr. Michael Ross, Professor in the Department of Political Science and the Institute of the Environment and Sustainability at UCLA, emphasises that Venezuela’s story is not a straightforward case against state ownership. For decades, the country’s oil resources were managed by PDVSA, and the model seemed to work: “It was politically independent and run by very skilled, highly trained technocrats. Surplus and revenues were well managed, in a relatively farsighted, independent way, and Venezuela was able to develop a more broad-based and diversified economy.”

The turning point came in the early 2000s when Hugo Chávez began to dismantle the institutional safeguards that had protected oil revenue management by politicising PDVSA, the central bank, and regulatory bodies, which caused credibility and operational independence to erode rapidly. High levels of corruption and political capture depleted capital, distorted incentives, and discouraged foreign investment. As Ross notes, the consequences were catastrophic: “Once prices began to fall back down in 2014, shortly after Maduro took over, the results were catastrophic. Venezuela has suffered, perhaps, the most dramatic economic collapse in the post-World War II period for any country that’s not in a civil war: it destroyed itself.”

This was not the country’s first policy reversal. Federica Castro, counsel in Mayer Brown’s M&A and Global Energy, describes a recurring cycle: early concessions to foreign companies, nationalisation in the 1970s – carried out with fair compensation and no major legal fallout – followed by a reopening in the 1990s that invited foreign capital back in. Then, in the early 2000s, the regime shifted again. This time, expropriation was authoritarian in nature: coercive renegotiations, seizure of assets without fair compensation, and a wave of international arbitration proceedings that remain unresolved to this day. As Castro recounts, this pattern extended well beyond oil companies – private land, shops, and small businesses were seized under the same authoritarian logic.

From an investor perspective, the signal was unmistakable: sovereign risk was repriced. Unstable policy environments raised risk premiums, increased the cost of capital, and drove capital flight. Yet Ross insists the lesson is not that state ownership fails but that institutional design matters, explaining: “Venezuela’s past shows that you can actually have a state-owned company that, under certain conditions, does an excellent job for the political system and for the economy.”

The 2026 reform and the question of trust

If Venezuela’s past demonstrates the cost of institutional collapse, its present tests whether reforms are possible under the same political conditions that caused the crisis. In 2026, Venezuela passed an amendment to its hydrocarbon law, marking the most significant legal shift in the sector in over two decades. The amendment allows foreign investors to operate independently, without the mandatory joint venture with PDVSA that had previously been required. Minority shareholders gain rights to manage bank accounts and market production. The U.S. has been progressively lifting sanctions,¹ and the pace of diplomatic and commercial engagement has accelerated after the U.S. Secretary of Energy visited Venezuela in early 2026 to discuss the framework for investor entry.²

Castro, who tracks these developments closely, describes the amendment as a meaningful but incomplete step: “The 2026 amendment of the hydrocarbon law is a good sign, but it’s only a little piece of the puzzle.” The law establishes general principles, but the implementing regulations and contract terms have not yet been finalised. The state retains significant oversight over investor operations and the broader legal infrastructure (for mining, renewable energy, electricity) remains undeveloped. Natural gas is an exception, with a relatively investor-friendly framework already in place, though the sector has historically played second fiddle to oil. According to Castro, the absence of these frameworks does not mean they cannot be built, but it underscores how much institutional ground needs to be covered before investor confidence can be fully restored.

A deeper challenge is trust: the very regime that authored the expropriations is the same one now inviting capital back. International investors and the market have responded with cautious optimism: recognising that the amendment is better than what came before but questioning whether it provides sufficient guarantees that rights will not be taken away again. Castro expects the first contracts to materialise within months, as the government moves to attract investment as quickly as possible. But she is clear: the law alone is not enough. “It still remains to be seen whether they’re going to actually shift in their practice. If they’re actually going to do what they’re saying they’re going to do.”

The question of energy transition adds further complexity; Nicolazzi notes that countries investing heavily in renewables tend to have low population density and different structural conditions, making Venezuela’s path to diversification less straightforward. Castro confirms that no legal framework for renewable energy currently exists though she emphasises the potential and willingness to develop one. The reform conversation, for now, remains anchored in hydrocarbons.

Dr. Karl places this in historical perspective: building institutions takes far longer than oil price cycles. The only oil-producing country that navigated resource wealth successfully, she argues, was Norway, and only because it built its institutional structure before discovering oil, while Venezuela is trying to do it in reverse, under far more constrained conditions.

Why resources fail without institutions

Resources alone do not guarantee prosperity: institutions and effective governance do. Venezuela’s current government is attempting to stabilise through targeted spending and legal reform. As Dr. Karl observes, some funds are being directed toward healthcare and food provision, “the minimum required to sustain political survival”. But short-term stabilisation has clear limits in a context this fragile. The question of whether private investment should replace or complement PDVSA is now shaped by U.S. political pressure as much as by domestic policy.

Dr. Ross is measured: “I don’t think privatisation is either necessary or sufficient to build a better managed, less politically damaging oil sector.” What Venezuela demonstrates, and what investors, policymakers, and institutions must internalise, is that institutional sequencing matters more than resource endowment. Oil did not destroy Venezuela: the failure to build governance structures capable of managing oil wealth did. But Venezuela’s collapse was driven mainly by internal dynamics: the erosion of domestic institutions under political pressure.

illuminem Voices is a democratic space presenting the opinions of leading Sustainability Thought Leaders, their views do not necessarily represent those of illuminem.

The world needs sustainability knowledge. At illuminem, no interest group or shareholder can influence our work. Thank you for supporting our mission to make high-quality and independent sustainability information free for all. Every contribution helps. Thank you for donating today.