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Venezuela’s Electricity Blackout Could Cut Off Oil Production

Venezuela’s Electricity Blackout Could Cut Off Oil Production

On Tuesday, Venezuela shortened its workweek to just two days as the country suffers through a deepening power crisis.

Venezuela sources about 60 percent of its electricity from hydroelectric dams, but a stubbornly persistent drought has caused water levels to drop dangerously low, curtailing electricity generation. The Venezuelan government, in an effort to deal with a shrinking power supply, first declared in early April that Fridays would not be working days. But the four-day workweek has quickly been shortened to just two days as power shortages have become acute. For the next two weeks, government offices will only be operational on Mondays and Tuesdays. Even with those measures, the country is experiencing rolling blackouts, particularly in smaller towns. 

Already home to one of the most violent capital cities in the world, Venezuela’s electricity crisis could cause public security to deteriorate. On Tuesday evening, protests and looting hit Caracas as well as Maracaibo, the country’s second largest city. The AP reported that protestors took to the darkened streets, “setting up flaming barricades and raiding shops for bread and other scarce food.” According to local news reports, protestors chanted “we want food.” Related: Why The Saudi Aramco IPO Will Not Be Enough

The Venezuelan economy has been hit hard by the collapse in oil prices, but economic mismanagement has turned what could have been a slump into a meltdown. Inflation is in triple digits, the government’s cash reserves have dwindled, and its ability to meet its debt obligations over the next year or two is highly questionable. Venezuela has struggled with food shortages for much of the last year, as well as a scarcity of other basic goods including medicine. The problem has become so bad that the government has even fallen into arrears with currency printers, which has resulted in a shortage of paper money.

The cult of Chavismo has long since turned Venezuela into a quasi-one party state, but the public is increasingly enraged at the government of President Nicolas Maduro. The opposition is pushing a recall of the president and the election council has allowed it to begin gathering signatures, although removing the president from office will be an uphill battle. Related: Has the Oil Price Rally Gone Too Far?

The problems could, unfathomably, still grow worse. The water levels at a major hydroelectric dam are dropping close to a threshold that could require it to completely shut down in order to avoid damage. The Guri dam produces about three-quarters of the country’s electricity. The situation could erupt into a full-blown humanitarian crisis.

That, in turn, could result in a death spiral for the economy. Without electricity, Venezuela’s oil and gas sector, already on hard times, will deteriorate even further. Oil production has been in steady decline for years – Venezuela produced 2.53 million barrels per day in the first quarter of 2016, down almost 12 percent from the same quarter two years ago. International companies, including Schlumberger are abandoning the country because they have not been paid. That could cut into production even more. Related: Big Oil Surprises Analysts, Is The Worst Behind Us?

But the blackouts could spark a serious short-term supply disruption. Power shortages, insufficient maintenance, and an inability to obtain spare parts are hampering refining operations. The Amuay oil refinery has a capacity to produce 645,000 barrels per day, but is only producing about half of that amount today. "At the weekend we were producing at around 25 percent, nothing more," a worker at Amuay refinery told Reuters. The shortage of refined products is forcing the state-owned oil company PDVSA to reduce exports and import more. Adding insult to injury, there have been loading delays at key ports, causing a buildup of tankers and slowing exports.

If the dam is forced to curtail power even more, or even shut down, more production will be affected. “What will happen to production of refined products and crude oil in Venezuela starting at the end of next week is a big question mark,” Olivier Jakob, from consultancy Petromatrix, told the FT. “The country should continue to be considered as a real and immediate supply disruption risk.”

The Venezuelan government has requested emergency aid from the United Nations in order to address electricity disaster, but unless some rain comes to restore the dam’s water levels, there are few short-term answers.

By Nick Cunningham of Oilprice.com

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