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Matthew Smith

Matthew Smith

Matthew Smith is Oilprice.com's Latin-America correspondent. Matthew is a veteran investor and investment management professional. He obtained a Master of Law degree and is currently located…

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The End Of Venezuela’s Oil Era

Venezuela, once Latin America’s largest oil producer and a founding member of OPEC, has seen its economically vital oil industry collapse triggering one of the worst economic and humanitarian crises of the century. The pain is far from over for Venezuela’s people and the country’s failing economy. Before 1920, Venezuela was a poor agricultural country facing many of the developmental issues plaguing Latin America. The country’s journey to becoming a crude oil superpower, leading petroleum state, and founding OPEC member began in 1914 with the drilling of the Zumaque well in the Mene Grande field on the eastern shores of Lake Maracaibo. This was Venezuela’s first commercial oil well and it launched a monumental oil boom that transformed the country and by 1950 saw it become the world’s fourth wealthiest nation per capita. Venezuela was not only heralded as Latin America’s richest nation but also its most developed. By the 1970s, the country, which is now a socialist dictatorship, was lauded as Latin America’s most stable democracy at a time when most nations in the region were ruled by military dictatorships. By the 1980s, Venezuela’s democracy was unraveling because of a global recession and sharply weaker oil prices. These events weighed heavily on the economy, and government spending, causing the country to spiral into debt. By the late-1980s Caracas had turned to the International Monetary Fund for help. The IMF recommended market-oriented neoliberal economic reforms including savage budget cuts, primarily impacting social programs such as public health and education. When these reforms were implemented by Caracas, they triggered considerable civil unrest. The reforms also sparked runaway inflation which only worsened the suffering of every-day Venezuelans. Those events illustrated the substantial dependence of Venezuela’s economy on oil and the country’s vulnerability to weaker prices. It was the government’s failure to diversify the economy away from oil which was to blame for the crisis, with petroleum responsible for around 80% of export income, almost a third of GDP, and over half of the government income. By February 1989, the streets of Caracas, once described as the jewel of South America, exploded into riots as dissatisfaction with rising prices and the government accelerated sharply. A harsh government crackdown, rising poverty and inequality, and savage spending cuts sparked considerable dissent among Venezuela’s poor. This social and economic upheaval created the ideal political environment for a charismatic junior military officer and socialist Hugo Chávez to win the 1998 presidential election. Upon entering office, Chávez commenced his Bolivarian Revolution, reformed the constitution, established vast social programs, and redistributed land. Like his predecessors, Chávez ran the economy almost entirely on oil. This was only sustainable for as long as oil prices remained high. After Chávez’s death in 2013 and Nicolás Maduro’s rise to power, oil prices collapsed again in late-2014 as Saudi Arabia opened the spigots to bolster production and regain market share. Venezuela’s petroleum-dependent economy spiraled into crisis causing millions of Venezuelans to flee the country and sparking the collapse of the economically vital oil industry.

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By July 2020 Venezuela was pumping an average of 345,000 barrels of crude daily, the lowest level in nearly a century, and by September it had only climbed marginally to 383,000 barrels daily despite Maduro’s claims of an impending recovery. This demonstrates the dire outlook for Venezuela’s economically all-important petroleum industry. Of greater concern is that activity in the Latin American country’s energy patch has fallen to a standstill. According to the Baker Hughes September 2020 rig count, there are no operational drilling rigs in Venezuela. The lack of investment and drilling activity means that, eventually, production could fall to zero, heralding the end of a one-time leading global oil producer and founding OPEC member. That will sharply impact the value of Venezuela’s oil exports, which at their height were earning around $90 billion, yet only produced $22.5 billion in 2019 and will drop further during 2020.

The vital infrastructure responsible for driving exploration, production, and refining is crumbling with much of it now rusting away or salvaged for scrap. Five years of mismanagement, a tremendous lack of capital, and the steady outflow of skilled oil industry labor means that crucial maintenance activities are no longer undertaken. National oil company PDVSA’s ongoing decline and inability to control its operations and infrastructure are underscored by a growing environmental emergency in the Caribbean. A recent report from Oilprice.com’s Haley Zaremba indicates that there is growing fear about an offshore Gulf of Paria floating storage and offloading facility jointly operated by PDVSA and Italian energy giant Eni. There are fears the vessel could dump its load of crude oil into the Caribbean triggering an environmental disaster up to eight times worse than the 1989 Exxon Valdez oil spill in Alaska. Worse are claims that disintegrating oil infrastructure is causing crude to spill in the municipalities where PDVSA had operational facilities, poisoning the environment. There are claims of at least four large spills this year alone on Venezuela’s Caribbean coast destroying the environment and wiping out crucial tourism as well as fishing industries, the only remaining income for those communities.

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These events have sparked an economic calamity of immeasurable proportions. A key impact of the collapse of the petroleum industry is a severe shortage of fuels, magnifying the hardships faced by ordinary Venezuelans and causing the economic crisis to spiral out of control. This makes it even more unlikely that Caracas will ever rebuild the country’s shattered energy sector. The situation is so desperate for Caracas it has resorted to not only seeking assistance from Russia, with Moscow as a lender of last resort and owner of some of Venezuela’s prize oil assets, but also selling gold to fellow pariah state Iran in exchange for gasoline. Venezuela’s state assets have dwindled significantly since 2014. Caracas has sold billions of dollars of currency and gold reserves to raise desperately needed capital to fund government spending, but even this has not been enough. The lack of fiscal revenue is exacerbated by rampant corruption. It is speculated that Maduro’s regime and its supporters have looted billions of dollars of state funds for their own benefit. Venezuela’s crisis is magnified by strict U.S. sanctions. These have cut Caracas off from global financial and energy markets, preventing Maduros’ regime from obtaining credit and selling Venezuelan crude. 

These events make it impossible for Maduro’s pariah regime to access the resources required to rejuvenate the economically crucial oil industry or the economy. Aside from production likely dropping to zero in the future, there are signs that it will take a decade or more for Venezuela’s beleaguered oil industry to rebuild. It will take tremendous injections of capital, technology, and skilled labor for any recovery. That will not occur for as long as Maduro is in power and U.S. sanctions remain in place. Related: Why Natural Gas Is The Most Important Fuel Of the Next Decade

A massive offshore oil boom underway in neighboring Guyana, where breakeven costs are $35 per barrel and falling, will attract preferential investment from global energy majors, especially as the geopolitical risk in the country wanes. Neighboring Suriname, which shares the offshore Guyana-Suriname Basin, holds similar potential further reducing the attractiveness of investing in Venezuelan oil. The growing global push for low sulfur emission fuels means Venezuela’s copious oil reserves are unattractive, especially compared to the light sweet low sulfur content crude found in the Guyana-Suriname Basin and Brazil’s pre-salt fields. Venezuela’s oil reserves are comprised of heavy sour crude, which is high in sulfur, meaning higher refining costs and lower quality fuels. The low sulfur light sweet oil discovered in neighboring offshore Guyana and Suriname as well as Brazil’s pre-salt fields is fast becoming the crude of choice for Asian refiners. That may explain not only Beijing’s decision to boost oil imports from Brazil but why the world’s second-largest economy ratcheted down investment in Venezuela along with loans to Maduro’s pariah regime.

The collapse of Venezuela’s leviathan oil industry, which once shaped the Latin American country’s fortunes, is a world-changing event. The Andean country’s economy has imploded creating a failed state, precipitating the second-worst refugee crisis in the world. This has triggered greater regional instability, and brought the socialist Bolivarian revolution to an end, arguably fortifying Washington’s influence and strengthening erstwhile ally Saudi Arabia as the undisputed leader of OPEC.

By Matthew Smith for Oilprice.com

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  • Mamdouh Salameh on October 23 2020 said:
    There can neither be a global economy nor civilization as we now have and enjoy without oil and vice versa. The global economy will continue to run on oil throughout the 21st century and probably far beyond. That is why there can never be an end of Venezuela’s oil era with the South American country sitting on the world’s largest oil wealth.

    And while Venezuela’s economic decline preceded US sanctions, the sanctions have intensely exacerbated the hardships of the Venezuelan people and accelerated the deterioration of the country’s oil industry.

    Venezuela’s oil industry may never recover significantly while the US sanctions continue, but it will never succumb to the United States plots and pressure.

    Still, Venezuela is doing what it can with help from China, Russia and Iran to stabilize its oil industry and help its economic recovery against most intrusive US sanctions. Its oil production averaged 542,750 barrels a day (b/d) in the first eight months of 2020.

    The United States has so far failed miserably to effect a regime change by installing its puppet Juan Guaido in order to help it get its hands on Venezuela’s oil wealth.

    China and Russia are keeping Venezuela’s economy afloat while Iran is helping repair the country’s refineries and increase crude oil production as well as shipping diluents. Furthermore, China, India and scores of other countries are still buying volumes of Venezuelan crude.

    Venezuela, like Iran, has perfected the art of evading US sanctions and could be producing and exporting more crude than it is admitting to fool the United States. If anything, sanctions have strengthened President Maduro’s grip on power because despite the great hardships facing the Venezuelan people, they will never accept US meddling in their affairs and they will rise to defend their country against US aggression. After all they are the descendants of the revolutionary leader Bolivar who liberated the continent of Latin America from Spanish imperialism and oppression.

    The elections on the 6th of December for the control of the National Assembly could further strengthen President Maduro’s hand by inflicting a crushing defeat on Juan Guaido and his followers since the National Assembly is the only government body that can legally approve oil-licensing deals.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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