Why the country with the largest oil reserves in the world became a failed state.

On January 3, U.S. forces captured Nicolás Maduro and removed him from power, putting Venezuela back at the center of global headlines. It has brought renewed focus on the epic economic failure Maduro visited upon the country.  Venezuela suffered what the IMF has described as the single largest economic collapse for a non-conflict country in decades. 

To put it in perspective, here are the countries which saw the ten largest economic collapses as a percent of their peak gross domestic product in the last 100 years: 

Above Venezuela are Liberia, which descended into civil war in the 1980s and 90s, Kuwait and Iraq, which were both devastated by the first Gulf War, and Georgia, which, like multiple other countries on the list, saw severe economic collapse in the aftermath of the fall of the Soviet Union.  

So, what caused Venezuela’s collapse? The first driver was oil dependence. As the holder of the largest oil reserves in the world, oil supplied to Venezeula most of the dollars used to import food, medicine, and industrial machinery that help fuel economic growth. When global oil prices plunged in 2014, the flow of dollars dried up fast. For a country that imported a large share of what people consumed, that shock hit daily life immediately. 

Making matters worse, the government responded with policies that broke the basic rules of commerce. Centralized price controls tried to keep essentials cheap, but they also made it unprofitable to produce or sell many goods legally, so shortages spread, and consumers were often greeted with empty shelves at Venezeulan supermarkets. Currency controls and multiple exchange rates meant companies could not reliably get dollars to import supplies unless they had political access. That pushed trade into black markets, rewarded a small group of government insiders, and drove investment out of the country. 

Third, the oil sector itself deteriorated. PDVSA, Venezuela’s state-run oil company, became less a professionally run energy firm and more a funding arm of the state under Nicolas Maduro. Maintenance and investment in refineries lagged, skilled workers left, and overall production fell over time, from around 3.5 million barrels per day in the late 1990s and early 2000s to barely 1 million barrels per day in 2025. Even when oil prices later improved, Venezuela could not produce and export the volumes it once did, so revenue never recovered the way leaders promised. 

Fourth, the state financed growing deficits by creating money. As revenue collapsed and borrowing options narrowed, the government leaned on the central bank, which pumped money into a country that was not seeing economic growth to match. As a result, inflation turned into hyperinflation – peaking at 344,509% in 2019, wiping out salaries and savings and making normal business planning impossible. 

Sanctions tightened the squeeze later. U.S. financial sanctions and later oil-sector measures further restricted Venezuela’s access to financing and oil cashflow. While Venezuela’s downturn began before the toughest oil measures, these sanctions made an already severe shortage of dollars even more severe. 

By the end of the 2010s, the economic breakdown fed a social breakdown: failing public services, shortages in hospitals, and a mass exodus totaling roughly 8 million people, almost a quarter of the population. 

This is the economic situation the U.S. is wading into. A post-Maduro transition will be determined in large part whether Venezuela can rebuild the basics: a currency people trust, rules that apply to everyone, and an oil sector that produces real revenue for the nation.