How does the price of oil affect Venezuela's economy?

The price of oil is one of the most heavily watched trends in economics, as it has an effect on the economies of every nation in the world. Some countries, such as the United States, fare better economically when oil prices are low. The U.S. imports far more oil than it exports, and its citizens consume oil and gas at a higher rate than the citizens of any other country in the world. Because the U.S. buys more oil than it sells, and because gas constitutes a significant budget item for most U.S. citizens, low oil and gas prices generally improve the U.S. financial picture.

For countries that rely on oil exports to fuel their economies and are not among the world's largest consumers of oil, the relationship between oil prices and economic health is quite different. While it maintains mostly an inverse relationship with the U.S. economy, the price of oil and Venezuela's economy move pretty much in lockstep. When oil prices are high, Venezuela enjoys good economic times. When oil prices drop, economic disaster ensues for the South American country. 

Oil comprises 95% of Venezuela's exports and 25% of its gross domestic product (GDP), so high prices provide a boon to the country's economy. The period from 2006 until the first half of 2014, save for a brief dip in late 2008 on the heels of a global recession, saw oil prices mostly hover between $100 and $125 per barrel. During that time, Venezuela used its revenues from high oil prices to fund its budget and wield political power. By providing subsidized oil to as many as 13 neighboring Latin American countries, most notably Cuba, Venezuela extracted political favors and attempted to build a coalition against rival nations, namely the U.S. (For related reading, see "What Are the Economic Implications of Government Subsidies on Fuel Costs?")

Its oil giveaway program became more of a burden than a boon for the Venezuelan economy as oil prices collapsed toward the end of 2014. Venezuela was giving away over 200,000 barrels of oil per day – half of which goes to Cuba – reducing the amount it had available to export for profit. When oil prices were over $100, Venezuela received enough margin from exporting oil that the lower volume doesn't harm its economy. When oil dropped significantly below that price level, the country's margins were squeezed to the point where it did not meet its spending, resulting in ballooning debt.

In early 2015, Venezuelan president Nicolas Maduro, facing record low approval ratings brought on by the country's crumbling economy, embarked on a world tour to implore other nations with heavy influence on the oil market to take measures to push the price back to $100 or more. Maduro's desperate actions serve as a testament to oil's grip on the Venezuelan economy.

Because of the economic crisis and shortages of food, medication and basic necessities, more than 2 million people have fled the country since 2014. This mass migration has diminished the workforce, including those who work in the oil industry. As a result of this lack of labor and other issues, Venezuela's oil production has fallen to its lowest point in more than 70 years. In June 2018, production fell to 1.34 million barrels per day, an 800,000 barrel drop from the previous year. Because the country's economy is tied so closely to its oil production, this reduction will most likely further deteriorate their economic situation.

(For related reading, see "President Maduro Forces Venezuelan Banks to Accept Dubious Petro Cryptocurrency.")