From Oil to Inflation: When a Petrostate Loses Its Currency

How Oil Dependence Triggered a Currency Collapse and Chronic Inflation in Venezuela

Venezuela’s economic path is perhaps the clearest contemporary example how extreme dependence on natural resources can transform into an economic curse. Despite holding the world’s largest proven oil reserves, estimated at roughly 300 billion barrels, the country has seen its endowment evolve from a source of wealth into a structural trap. This configuration aligns Venezuela with the classic petrostate model, where government revenues, political power, and economic stability are all tied to the performance of the oil sector. What followed was not a conventional recession, but a systemic collapse.

According to data from the Council on Foreign Relations (CFR), living standards in Venezuela plummeted by about 74% between 2013 and 2023. When oil prices collapsed after 2014, the consequences were immediate : output shrank, fiscal balances deteriorated, and inflation rapidly eroded purchasing power.

The foundations of this collapse go back much further. During the commodity supercycle (2000–2012), while other exporters were building sovereign wealth funds, Venezuela opted for aggressive pro-cyclical spending. The result was a classic case of Dutch Disease: massive inflows of petrodollars flooded the economy, the local currency became overvalued, and domestic industries were replaced in favour of imports. As domestic production weakened, the country became increasingly dependent on imports, leaving it exposed to oil price swings and external financial conditions.

When oil prices crashed in 2014, the government, deprived of its primary revenue source, turned increasingly to monetary expansion to finance large fiscal deficits. U.S. sanctions targeting Venezuela’s energy sector then struck an already fragile system. In a petrostate, oil exports are the main channel for foreign currency inflows. When sanctions constricted that flow, the shortage of dollars quickly spilled over into the exchange rate, reserves, and ultimately domestic prices.

According to Central Bank of Venezuela (BCV) data, as foreign exchange inflows dried up, the local currency lost over 82.7% of its value against the U.S. dollar in 2025 alone. The rate moved from roughly 52 bolivars per dollar at the beginning of the year to over 300 by the end of it.

Venezuela now operates with three exchange benchmarks : the official BCV rate, the black market, and the peer-to-peer (P2P) crypto rate, largely based on USDT transactions. In practice, when reserves are insufficient, it is the parallel market that determines prices. On the black market, the dollar trades near 560 bolívars. The widening gap between official and black-market rates is no longer a matter of short-term volatility; it reflects a deeper loss of confidence.

In an imports-dependent economy, a weaker bolívar translates immediately into more expensive food and fuel. Yet expectations are even more destabilising than depreciation itself. When individuals expect further devaluation, they adjust prices today to try to anticipate tomorrow’s collapse, accelerating the inflationary spiral. At this point, the exchange rate is no longer a stabilising tool, but it is a daily transmitter of instability.

Depreciation alone, however, doesn’t trigger hyperinflation. It is the toxic combination of fiscal fragility and monetary expansion that drives the spiral. As real fiscal revenues continue to shrink, (dropping from $9.8 billion in 2024 to $7.7 billion in 2025), and with restricted access to international credit, the government has fallen back on monetary financing, creating money to sustain spending. As a result, the Central Bank expands the monetary base by 386% year-on-year, reinforcing the inflationary impulse.

This is the classical condition of fiscal dominance : monetary policy no longer acts independently to stabilise prices, but accommodates the financing needs of the state. The suspension of regular inflation data publication by the Central Bank further undermines credibility, embedding uncertainty into pricing decisions. While the UNDP estimates suggest inflation could hit 500% annually, IMF projections exceed 600%.

As in the 2016-2019 crisis, expectations have become self-fulfilling. In line with Cagan’s model of hyperinflation, once confidence collapses, money demand falls and velocity accelerates. Inflation becomes self-sustaining, not just a macroeconomic variable, but an everyday reality.

As inflation accelerates, economic agents are responding rationally by abandoning their domestic currency. Venezuela’s dollarization has therefore re-emerged, but in a different form : unlike the 2019–2022 phase dominated by physical U.S. dollars, today transactions have increasingly moved towards stablecoins and digital channels. Households convert every bolívar received into goods or digital dollars (USDT) as quickly as possible to escape the erosion of purchasing power. With minimum wages worth only a few dozen cents at parallel exchange rates, holding local currency is simply irrational.

Prices are quoted in dollars and settled in USDT through low-cost digital networks, such as TRC-20. Formally, the bolívar remains the official legal tender, even though its economic relevance has eroded. Meanwhile the U.S. dollar, specifically in its digital form, locally known as “Binance dollars”, has become the primary medium of exchange.

This shift reflects a deep erosion of trust that effectively deprives the Central Bank of its remaining sovereignty. In practice, it is a form of de facto dollarization where citizens actively prefer a digital token over their own national currency. The government may still set a rate, but in reality, it is the market participants’ behaviour that dictates the reality.

The Venezuela fallout is therefore more than a domestic crisis; it highlights a broader reality about the limits of monetary sovereignty. In a previous analysis, I argued that the Supply Shock Decade “pulled back the curtain” on the world’s most powerful central banks. But if the Fed and the ECB have simply lost their status as magicians, the Venezuelan experience shows us what happens when the institutional stage itself collapses.

Venezuela demonstrates that it is not just a matter of rethinking supply shocks, but that without institutional credibility and economic diversification, monetary policy stops being a stabilising tool and starts amplifying instability.