Venezuela Defies Expectations As Economy Rebounds

• After suffering an economic collapse, Venezuela's economy is showing signs of recovery due to a resurgence in its oil industry.
• With assistance from allies Russia, China, and Iran, Venezuela has managed to increase oil production, contributing significantly to the economic rebound.
• Despite restrictions from U.S. sanctions, Venezuela plans to tap into its vast natural gas reserves to support further economic growth, with Chevron and European companies Repsol and Eni involved in the effort.

In less than a decade, the economy of what was once South America’s wealthiest country, Venezuela, collapsed. The oil-rich country, which once pumped over three million barrels of petroleum daily, slumped into the worst economic collapse of modern times to occur outside of war. For the decade between 2012 and 2022, Venezuela’s gross domestic product plummeted by a whopping 300%, falling from $372 billion to $93 billion. It wasn’t until 2021 that the OPEC member’s economy finally returned to growth after being almost destroyed by weaker oil prices, endemic corruption, declining petroleum production and harsh U.S. sanctions. In 2022, in an event that surprised many, Venezuela’s economy grew at its fastest rate in nearly 20 years, expanding by a stunning 8%. There are signs of further growth ahead as Venezuela’s economic backbone, the oil industry, recovers.

Venezuela’s rapid economic decline can be attributed to a multitude of factors that were evident even before Hugo Chavez won the presidency and launched his Bolivarian socialist revolution in 1999. It was the OPEC founding member’s dependence on petroleum, which was, and still is, Venezuela’s primary economic driver, with oil rents by 1979 responsible for 36% of GDP, which is responsible not only for its wealth but also the country’s startlingly rapid and disastrous decline. Indeed, the 1980s oil price collapse, where the international Brent benchmark price by mid-1986 had plummeted to its lowest level in over a decade, triggered a crisis that shook Latin America’s most stable democracy to its core.

In 1989, after the central government instituted a multitude of harsh neoliberal economic reforms aimed at stabilizing Venezuela’s oil-dependent economy and currency, the capital Caracas was engulfed by violent anti-government protests. After a brutal crackdown by security forces in Caracas, which saw up to 3,000 people killed, Venezuela was embroiled in endless political turmoil that caused democratic rule to unravel. It was in 1992 that the Venezuelan military launched two failed coup d'états, the first time since the 1960s, against the administration of democratically elected President Carlos Andrés Pérez Rodríguez.

One of the military leaders of those coups, Hugo Chavez, went on to win the 1998 presidential election and take office in February 1999. President Chavez then promptly went on to implement a new constitution, overturn the democratic order and launch his socialist Bolivarian revolution. Just as it had been sharply weaker oil prices that had created the conditions which facilitated Chavez’s rise to power, it was the massive oil price rally from late-1999 to 2008 that allowed Venezuela’s 45th president to consolidate his power. 

Chavez used the considerable profits created by Venezuela’s vast oil reserves and production to invest in social programs aimed at reducing poverty. That allowed the charismatic former military officer to build considerable popular support among Venezuela’s poor. It was Venezuela’s working poor who had suffered the most under the neoliberal economic reforms introduced during the late 1980s as oil prices collapsed and the country’s petroleum-dependent economy unraveled. Support for Chavez was so strong that even a 2002 military coup failed to unseat him, with the president returning to power after an absence of nearly two days.

It was during Chavez’s tenure as president that the implosion of Venezuela’s oil industry and economic breakdown began. By 2008, when Brent peaked at over $143 per barrel, Venezuela was pumping 2.5 million barrels per day compared to 3.1 million barrels daily in 1998, the year before Chavez took power. It was endemic corruption, malfeasance and cronyism coupled with a massive outflow of skilled oil industry labor which was responsible for the ongoing decline in production. Foreign energy investment gradually declined as Chavez implemented waves of nationalization that saw state-controlled PDVSA not only cement control of the best energy assets but privately owned energy assets subsumed by the state. This acted as a major deterrent to foreign energy investment, further magnifying the shortages of skilled labor, technology and capital required for maintenance as well as asset development.

Those events, coupled with volatile oil prices, which collapsed in late-2008 as the global financial crisis bit ever deeper, caused economic growth to decline steeply. After the economy grew by a healthy 5.3% during 2008, it slipped into a recession, with GDP shrinking by 3.2% in 2009 and again by 1.5% in 2010. Venezuela’s economic condition only worsened after Chavez died from cancer in 2013, and Nicolas Maduro emerged to take his place. It was the precipitous oil crash of late-2014, where Brent plunged to under $30 per barrel by early 2016, that again saw Venezuela’s economy sharply contract. GDP declined at an alarming rate over the next seven years as oil prices remained weak, contracting by double digits annually from 2015 to 2020 until returning to growth in 2022. For 2015, GDP plummeted by 6.2% year over year, then a whopping 17% in 2016, 15.7% in 2017 and 19.7% in 2018.

It was the imposition of strict U.S. sanctions, designed to cut Caracas off from global financial and energy markets, by former President Donald Trump in 2019, combined with heavily corroded industry infrastructure, which caused that decline to accelerate. During 2019 alone, Venezuela’s GDP shrank by an alarming 27.7% and then 30% in 2020 as the COVID-19 pandemic hit Latin America particularly hard. During 2020, Venezuela’s oil production plummeted to a multidecade low of 392,000 barrels per day during July of that year. It wasn’t until 2021 that the economic crisis bottomed, and the economy returned to growth, with GDP expanding by a modest 0.5% and then 8% for 2022. This generated a sense of relief in Caracas, where collapsing oil production and a failing economy almost bankrupted the state, causing inflation to spiral out of control and authorities to lose control of vast swathes of national territory.

Key to that economic recovery, which surprised many, was Caracas’ ability to boost oil production from that 2020 record low. That was achieved with the assistance provided by the important allies Russia, China and Iran. Indeed, it was Teheran’s provision of skilled oil industry technicians as well as parts, and a steady supply of crucial condensate is pivotal to PDVSA expanding hydrocarbon production. Condensate is crucial because the vast majority of the oil extracted by Venezuela is heavy and extra-heavy, which means it must be mixed with super light hydrocarbon liquids so that it can flow, allowing it to be transported, processed and exported. By May 2023, data from Caracas supplied to OPEC showed that Venezuela was lifting 819,000 barrels of oil per day, more than double the historic low recorded for July 2020 of 392,000 barrels daily.

Venezuela’s hydrocarbon production will continue to rise. U.S. energy supermajor Chevron recommenced lifting oil from its joint ventures with PDVSA, with the company ramping up operations as it seeks to recoup $3 billion in debt by 2025. While PDVSA is unable to receive payment for the oil extracted by Chevron and shipped to the U.S., that activity will still deliver considerable economic benefit. Maduro’s regime plans to tap Venezuela’s vast natural gas reserves in a bid to drive continued economic growth and revive the flailing economy. The OPEC member has over 200 trillion cubic feet of natural gas reserves which are the 10th largest globally.

Venezuela historically has made little effort to tap that vast hydrocarbon wealth with its vast oil reserves, a far more lucrative source of wealth. Over 80% of the country's natural gas reserves are associated with oil production, with it estimated that Venezuela wastes through flaring and leaks more of the fossil fuel than the UK produces annually. Reportedly, Caracas reached an agreement with Spain's Repsol and Italy's Eni to export natural gas to Europe. While this offers an enticing means of bolstering economic growth through the exploitation of Venezuela’s natural gas and using it to ease Europe’s shortage, it could still run afoul of U.S. sanctions. 

Trinidad and Tobago was forced to acquire a U.S. license, which was granted by the Biden White House, to develop an offshore natural gas deposit located in Venezuelan territorial waters. By mid-2022, the Biden administration had authorized Repsol and Eni to receive shipments of Venezuelan crude oil, although both companies were blocked from making cash payments to PDVSA. That crude oil could only be received in exchange for the debt owed to both European energy companies. For these reasons, PDVSA is prevented from receiving cash payments for the sale of oil and unless exempted by the White House, will be incapable of receiving such benefits for the sale of natural gas. Such a move will deliver very little direct economic benefit for Caracas, making it difficult to see how the exploitation of Venezuela’s considerable natural gas reserves will drive further economic growth. While that may be the case, there are clear signs that Venezuela’s economic decline has bottomed and that GDP will continue to expand, albeit at a modest pace, with the International Monetary Fund estimating 5% growth for 2023.

By Matthew Smith for Oilprice.com

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