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Venezuela—home to the largest oil reserves in the world--will for the next 40 days experience a four-hour blackout every single day, and there are fears that the rationing could lead to unrest and trigger a decline in oil output at a time when the country is barely hanging on.
The decision to ration electricity was brought about by a severe drought that has rendered the level of the Guri dam – the country’s major source of power generation – so low that if the weather doesn’t change, the authorities will have to shut it down.
The blackouts will affect households and industrial users alike--and it’s very likely that oil production will drop. This drop, however, will not be too significant, especially in the current state of oversupply.
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The Financial Times last week quoted analysts as estimating that irregular power outages could lead to a daily decline in oil output of between 100,000 and 200,000 barrels. That’s a little less than 10 percent of the average daily output in the country for last year, according to OPEC data.
Besides the power outages and the 40-day power rationing, the Venezuelan oil industry has been hit extremely hard by the recession that Venezuela has plunged into because of the oil prices crash. No cash for investments and infrastructure deterioration are the main problems of the industry and they are unlikely to get a solution anytime soon.
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Venezuela’s economy is entirely dependent on oil revenues, which is why the country was so insistent on agreeing to a production freeze with other OPEC members. Unfortunately for the South American nation, no freeze was agreed upon, so it has been left to take care of its problems on its own.
To top it all off, crude oil benchmarks started the week with losses, after a three-week rally that was largely the result of bullish hedge fund activity, speculation, and forex movements, according to Morgan Stanley. These factors can’t help Venezuela. What it needs is a fast and sustainable improvement in oil’s fundamentals that would prop up prices. Such a development, however, is nowhere on the horizon.
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The International Monetary Fund (IMF) has warned that this year, inflation could jump to a staggering 481 percent, up from 122 percent last year. The economy is expected to contract by 8 percent. Whatever action the government takes, it seems ineffective. Limiting access to foreign currency, food and essential item shortages, as well as price controls have been all deemed as failures by observers.
The effectiveness of power rationing is also questionable. One Venezuelan sector analyst told Bloomberg that rationing will make matters even worse, deepening the chaos; though many parts of the country aren’t likely to notice because they’ve been suffering from day-long power outages already.
So, this is where the world’s top oil reserve holder is: three-figure inflation, the worst recession in the world and no light in sight for oil, the commodity that Venezuela depends on for its survival.
By Charles Kennedy of Oilprice.com
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Charles is a writer for Oilprice.com