Venezuela once considered one of Latin America’s prosperous countries has plunged into the abyss. Years of economic mismanagement, cronyism and corruption have sparked a monumental economic collapse which saw the oil rich country become one of the poorest in South America. There are emerging signs that Venezuela is on the verge of becoming a failed state. Oil plays a dominant role in Venezuela being responsible for almost all export income and a significant proportion of gross domestic product. The oil rich Latin American country’s once mighty petroleum industry, which long ago was responsible for producing a tenth the world’s oil, has virtually collapsed. This has cast Venezuela’s economy into the abyss, triggering a crisis of immense proportions which has forced nearly five million Venezuelan’s to flee their homes for neighboring countries as they struggle to find a means to survive. It is also applying considerable pressure to the administration of socialist president Nicolàs Maduro and seen Caracas lose control of vast swathes of territory. Just over two decades ago, Venezuela’s Bolivarian Revolution commenced when Hugo Chavez won the 1998 presidential elections and was formally sworn into office in February 1999. He immediately introduced a new constitution focused on establishing a state-run economy, land reform, the redistribution of wealth and using the country’s vast oil wealth to fund extensive social programs. When Chavez took power Venezuela, which has the world’s largest oil reserves totaling 298 billion barrels, was one of the most prosperous countries in Latin America.
World Bank data shows for 1999 that Venezuela had real gross domestic product of $98 billion, ranking it fourth in Latin America behind Brazil, Mexico and Argentina. Venezuela was also one of the region’s wealthiest countries with GDP per capita of $4,127 placing it sixth. The oil rich country’s 1999 GDP per capita was significantly higher than many current regional economic powerhouses, being 19% greater than Brazil and almost double neighboring strife-torn Colombia.
Since then Venezuela’s economy has collapsed with it estimated that 2019 GDP was a mere $70 billion or 29% lower than it had been two decades earlier, yet Colombia’s GDP has almost quadrupled over that period to $324 billion. The outlook for the deeply impoverished country is austere. The IMF predicts Venezuela’s GDP will contract by 15% during 2020 and shrink another 5% in 2021. The key reasons for this rapid disintegration are the collapse of Venezuela’s economically vital petroleum industry, sharply lower oil prices and progressively more severe U.S. sanctions.
Oil is responsible for 25% of Venezuela’s GDP and according to OPEC accounts for 99% or almost all exports by value. It was in 2015 when Venezuela’s economically vital petroleum production started spiraling downwards. Related: Oil Prices Rise As U.S. Dollar Index Drops To 2-Year Low
Source: OPEC Monthly Oil Market Report (MOMR).
* For 2020 average daily output for 1 January to 31 July.
This was initially triggered by the oil price collapse which began in mid-2014 as global supply expanded at a rapid clip because of booming U.S. production, waning geopolitical risks and growing OPEC oil output. By 2016, as oil prices weakened further and Venezuela’s economic crisis snowballed, vital spending on crucial maintenance of oil infrastructure and operations plunged.
When combined with a massive outflow of skilled labor because of poor management, politically motivated layoffs and an ever-worsening economic climate it became clear that Venezuela’s petroleum industry was in terminal decline. This is being exacerbated by steadily growing U.S. sanctions aimed at cutting Caracas off from global capital markets and preventing access to assets to force regime change. The economic fallout is immense causing Venezuela to spiral deeper into crisis and causing Caracas to default on its foreign debt in November 2017.
It was at the start of 2019, when Juan Guaidó declared himself interim president with U.S. backing, that the end game for Venezuela’s beaten-down oil industry had arrived. Washington imposed further sanctions on Caracas with the most significant specifically targeting Venezuela’s oil industry and PDVSA. These are aimed at preventing Maduro’s regime from accessing Venezuelan assets held in foreign jurisdictions as well as international financial markets. Those crippling U.S. sanctions are also preventing offshore oil majors from operating in Venezuela, recently forcing Chevron to wind down operations, and preventing Caracas from selling its oil abroad. This prevents Maduro’s regime from accessing urgently needed capital to repair and maintain vital oil infrastructure and perform the necessary development activities to maintain oil production. Even Russian intervention, including the provision of loans, technical expertise and other crucial resources, has failed to revitalize operations. This essentially signals the death knell for Venezuela’s economically crucial but stricken petroleum industry.
By July 2020, Venezuela produced a daily average of 339,000 barrels of crude compared to 755,000 a year earlier and almost a seventh of a decade earlier.
Source: OPEC Monthly Oil Market Report (MOMR).
The outlook remains poor, particularly if the domestic rig count is used as a proxy measure of oil industry activity. At the end of July 2020, according to Baker Hughes, there were no active oil rigs in Venezuela and only one operational natural gas rig. That is compared to a total of 25 operational rigs for the same period a year ago and 70 rigs a decade earlier.
Source: Baker Hughes.
It is important to note that there are still rigs operating in Venezuela which are not captured by Baker Hughes because their count excludes cable tool rigs, very small truck mounted rigs or rigs that cannot operate without a permit. For this reason, national oil company PDVSA regularly contests the accuracy of the Baker Hughes data and will keep pumping crude, although likely at miniscule levels.
Analysts predict Venezuela’s oil production could fall to zero by 2021. Industry consultancy IHS Markit estimates that Venezuela is pumping around 100,000 to 200,000 barrels daily and that production will keep falling. The perfect storm of sharply weaker oil prices, economic breakdown and U.S. sanctions could very well see the unthinkable occur, the fall of a major global oil producer and founding OPEC member. While an oil production recovery is possible, it is someway off because of the immense capital, skilled labor and infrastructure required.
The impact on Venezuela’s already failed economy will be immense, leading to greater starvation in a country already reeling from a major economic crisis. It is feared that the Venezuelan state could implode, creating further instability in a region marred for decades by asymmetric conflict between various state and armed non-state actors. Already, Caracas has lost control of vast swathes of territory which is under the control of non-state armed groups including leftist Venezuelan collectives (colectivos in Spanish) and Colombian guerillas, notably the ELN, and paramilitaries.
By Matthew Smith for Oilprice.com
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