The severe energy crisis which emerged after Russian President Vladimir Putin’s decision to invade Ukraine is causing energy prices to soar. This couldn’t have come at a worse time for a global economy that is struggling to recover from a devastating pandemic and is now confronted by the threat of surging inflation. A marked decrease in hydrocarbon supplies caused the international Brent oil price to surge by 42% since the start of 2022 to be selling for over $93 per barrel, while natural gas has gained a whopping 39% be $5.20 per million British thermal units (MMBtu). Acute global supply constraints resulting in higher prices and the headwinds posed by spiraling inflation are threatening the post-pandemic global economic recovery. As a result, many countries, notably the U.S. and those in Western Europe, are urgently seeking additional oil and natural gas supplies. This sees them eyeing Venezuela, which was once Latin America’s largest oil producer, as a potential major source of supply.
Venezuela’s vast oil reserves, estimated to be 303.5 billion barrels, are the world’s largest. The founding OPEC member also has proven natural gas reserves totaling a whopping 196 trillion cubic feet. Key to accessing Venezuela’s considerable proven hydrocarbon reserves easing Washington’s harsh sanctions against the country and the autocratic regime of President Nicolas Maduro. Those measures, which were ramped up by former President Donald Trump under a policy of maximum pressure, were designed to foment regime change by preventing Caracas from accessing global financial and energy markets. Upon implementation, those sanctions were responsible for Venezuela’s oil output collapsing. Before Trump’s measures, Venezuela was pumping an average of over 1.5 million barrels per day, but production volumes plunged to under one million barrels daily as those measures took full effect. For 2020, Venezuela only produced an average of 512,000 barrels per day which was nearly a seventh of the 3.5 million barrels per day reported for 1998 when oil production peaked.
The disintegration of Venezuela’s oil industry triggered what is being called the most spectacular economic collapse to have ever occurred outside of war. The destruction of the OPEC member’s economic backbone, its oil industry, caused the gross domestic product to spiral downward, particularly as national oil company PDVSA’s cashflows dried up, preventing crucial maintenance and overhauls of vital infrastructure. IMF data shows Venezuela’s economy shrank by a stunning 28% in 2019 and by another 30% in 2020 as sharply weaker oil prices and the pandemic weighed heavily on the OPEC member’s economy. That has harshly impacted the lives of ordinary Venezuelans, with it estimated that 91% of households live in poverty, with 68% experiencing extreme poverty. After a devastating period of hyperinflation ended, prices are surging once again. Inflation recently soared, according to Reuters, to an annualized rate of 114%, the highest in Latin America, further magnifying the hardship faced by everyday Venezuelans with the risk of destabilizing the economy. Shortages of gasoline, diesel and even natural gas are further exacerbating the hardships faced by Venezuelans.
Venezuela’s economic catastrophe has seen over 6 million people flee their homeland, according to estimates from the International Organization for Migration. Despite plunging oil production, the economic collapse, an exodus of economic refugees, and near-bankrupt government finances Maduro has consolidated his grip on power. By December 2020, Venezuela’s autocratic leader and his allies had seized control of Venezuela’s National Assembly, the only government body that was under opposition control. U.S.-backed opposition leader Juan Guaido, one-time president of the National Assembly, lost his seat and his parliamentary immunity, thereby significantly undermining his standing domestically and internationally. That significant development saw much of international support for Guaido decline, with the European Union announcing in January 2021 that it no longer recognized the opposition figure as Venezuela’s legitimate interim president. These events culminated in Venezuela’s opposition parties stating in October 2022 that they will withdraw support for Guaido’s Washington-backed interim 2023 government. That effectively hobbles Guaido’s role as an opposition leader who can organize a nationally recognized government. This couldn’t come at a worse time for a fractured opposition that has consistently struggled since Chavez’s rise to power to establish a coherent resistance to the autocratic socialist government. Those aren’t the only factors bolstering Maduro’s grip on power. There are signs that Venezuela’s economic crisis has finally bottomed. Estimates vary, but it is believed that the petrostate’s gross domestic product expanded by between 0.5% and 4% during 2021, a notable contrast to the 30% contraction for a year earlier. That development alone stresses U.S. sanctions have been unsuccessful. In fact, those measures forced Maduro to build close ties with other countries opposed to Washington’s foreign policy aims, notably Russia, China and Iran. That now gives those pariah states a solid presence in Latin America and the ability to challenge U.S. hegemony in the region while propping up a handy ally.
While there is considerable opposition to Biden removing or significantly easing existing sanctions, recent developments point to a recalibration being urgently required. There are signs that Washington is considering whether to allow U.S. oil supermajor Chevron, the last remaining major global energy company with operations in Venezuela, to recommence production in the country. To consider scaling down sanctions, the Biden Administration requires Maduro to reengage with Venezuela’s opposition after suspending talks in Mexico last year. Washington also requires a commitment on the part of Venezuela’s president to allow free and fair presidential elections, which are scheduled for 2024, with a view to Maduro giving a cast-iron commitment to restoring democracy. To date, there is no evidence that Maduro is willing to entertain such measures. Biden’s conciliatory gesture, where Venezuela was allowed to resume limited oil exports to Western Europe with the proceeds being used to meet debt payments, was rejected by Maduro.
If anything, the bottoming of Venezuela’s economic collapse, along with a global energy crisis forcing the U.S. to find alternative sources of oil and natural gas, has strengthened Maduro’s position. When combined with the support of Russia, China and Iran, there is no pressing need for Maduro to agree to Washington’s terms. For those reasons, any attempts by the Biden Administration to recalibrate sanctions to allow foreign energy companies to drill in Venezuela will, aside from meeting considerable domestic opposition, not garner the outcomes desired. This makes it likely that Venezuela will not return to being a major oil producer and exporter for some time yet.
By Matthew Smith for Oilprice.com
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