(FORTUNE Magazine) – Ten years from now, 20 years from now, you will see," former Venezuelan Oil Minister and OPEC co-founder Juan Pablo Perez Alfonzo predicted in the 1970s, "oil will bring us ruin." It was an oddball statement at a time when oil was bringing Venezuela unprecedented wealth--the government's 1973 revenues were larger than all previous years combined, raising hopes that black gold would catapult Venezuela straight to First World status. But Perez Alfonzo had a different name for oil: "the devil's excrement."

Today he seems a prophet. When it hit the jackpot, Venezuela had a functioning democracy and the highest per-capita income on the continent. Now it has a state of near-civil war and a per-capita income lower than its 1960 level.

Far from an anomaly, Venezuela is a classic example of what economists call the "natural resource curse." A 1995 analysis of developing countries by Jeffrey Sachs and Andrew Warner found that the more an economy relied on mineral wealth, the lower its growth rate. Venezuela isn't poor despite its oil riches--it's poor because of them.

How could that be? For the same reason so many entertainers go bankrupt. Showered with sudden windfalls, governments start spending like rock stars, creating programs that are hard to undo when oil prices fall. And because nobody wants to pay taxes to a government that's swimming in petrodollars--"In Venezuela only the stupid pay taxes," a former President once said--the state finds itself living beyond its means.

A cycle begins. The economy can't absorb the sudden influx of money, causing wages and prices to inflate and the nation's currency to appreciate (by an average of 50%, according to a World Bank economist's study). That makes it harder for local manufacturers to compete. Incentives, meanwhile, become wildly distorted. When free money is flowing out of the ground, people who might otherwise start a business or do something innovative instead busy themselves angling for a share of the spoils. Why slog it out in a low-margin industry when steering some oil business toward a contact could make you a millionaire? Thus a doubly deadly dynamic: a ballooning public sector, a withering private one.

Eventually you're 16th-century Spain. It, too, once struck it rich on gold (not the black kind) from the Americas. Its monarchs spent like loons, expanding the army 15-fold, creating an elaborate patronage system and sending conquistadors in search of El Dorado. (Spanish gold also financed Columbus's discovery of Venezuela.) While inflation and currency appreciation slowly killed industry and agriculture, a parasitic class of noblemen lived off gold money (think of Saudi Arabia's idle princes), waiting for the next ship to come in. By the time ships stopped coming, Spain wasn't able to feed itself, forcing it to declare bankruptcy eight times and finishing it as a world power.

But the Midas myth dies hard. "This is a country that can never, ever sustain itself on oil," Terry Lynn Karl, author of The Paradox of Plenty: Oil Booms and Petro-States, says of Venezuela. "But everyone from the President to the poor believes it can." And therein lies the trap. President Hugo Chavez rode popular rage into office by focusing on corruption. But what neither he nor anyone else will face up to is this: Oil is not an economy. Creative economic activities have spillover effects that become self-sustaining. Oil spills only into a barrel--and from there usually into the hands of a favored few. That's the real reason Venezuela's productivity growth has been roughly half the Latin American average.

Can the curse be avoided? A few smaller countries--Malaysia, Norway, Mauritius--curbed its worst effects by spending slowly and using the money to diversify their economies. In Venezuela oil still accounted for 80% of exports before a devastating strike made even that scarce. As a 16th-century Spanish economist said of his homeland, "What makes her poor is her wealth"--a suitable lament for Venezuelans who have been waiting so long for their ship to come in.