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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 Case For Washington To Remove Sanctions On Venezuela

By the 1990s, founding OPEC member Venezuela had become a true petroleum power pumping over two million barrels of crude oil per day. This saw the Latin American country ranked as OPEC’s third-largest oil producer, behind Saudi Arabia and Iran, and among the top-10 petroleum-producing nations globally. By 1998, the year that Hugo Chavez democratically won the presidency, Venezuela pumped a record average of 3.1 million barrels of crude oil per day. Since then, the now crisis-riven Latin American country’s petroleum output has rapidly declined, falling to an average of 500,000 barrels daily during 2020, less than a quarter of what it had been a decade earlier. June 2021 OPEC data shows Venezuela pumped an average of 529,000 barrels daily that month, nearly a 4% increase compared to May but still a mere sixth of the country’s crude oil production when Chavez came to power. The sharp decline in the founding OPEC member’s petroleum output started in 2017 when it dipped below 2 million barrels daily for the first time since 1989 as sharply weaker oil prices and U.S. sanctions bit deeper. As production volumes declined and crude oil prices remained caught in a deep long-term slump Venezuela’s economic decline accelerated.  In 2016, the country’s gross domestic production shrank by 17% and then by 15.7% in 2017, but it wasn’t until 2019 that Venezuela’s essentially collapsed under the weight of ever-stricter U.S. sanctions with GDP contracting by a disconcerting 35%. That was followed by a 30% decline during 2020 and the IMF anticipates the near-failed petrostate’s GDP will shrink by a further 10% in 2021. That has triggered one of the world’s worst humanitarian catastrophes, which is only eclipsed by the wars in Syria and Yemen. It is estimated that nearly 80% of Venezuelans now live in extreme poverty - a telling indicator of the catastrophe engulfing Venezuela, which was once the wealthiest country in Latin America. Surprisingly, for a country with the world’s largest oil reserves, totaling around 304 billion barrels, Venezuela is suffering from dire shortages of diesel and liquified petroleum gas which are key domestic fuels. That can be blamed upon the petrostate’s crumbling energy infrastructure with refineries including the Amuay Refinery, one of the world’s largest, only operating intermittently at severely diminished capacity.  The collapse of Venezuela’s petroleum infrastructure and inability to obtain crucial fuels, such as diesel and LPG, which power the economy, is adding momentum to the sharp economic decline and creating greater hardship for Venezuelans.

As a result, nearly six million Venezuelans have fled because of substantial political and economic turmoil, creating what the International Rescue Committee calls the world’s second-largest external displacement crisis. It is conflict-weary neighboring Colombia which is bearing the brunt, with nearly two million Venezuelans choosing to settle there. That is applying substantial pressure to Colombia’s already fragile infrastructure and an economy seriously weakened by the pandemic with GDP contracting nearly 7% during 2020. It is also fueling civil discontent because of already limited socioeconomic opportunities, high unemployment, and rising levels of crime as well as violence in Colombia. That formed part of the broad spectrum of grievances that drove recent violent nationwide anti-government protests, after President Duque’s clumsy attempt at tax reform, impacting Colombia’s economically vital oil production.

The disintegration of Venezuela’s oil industry and harsh U.S. sanctions aimed at preventing the Maduro regime from accessing international energy markets is responsible for triggering anti-government protests in Cuba. Venezuelan fuel oil powers Cuba’s aging power plants which are responsible for producing 80% of the island nation’s electricity. Venezuela is Cuba’s largest supplier of crude oil, meaning that as its hydrocarbon infrastructure crumbles and production declines it is incapable of supplying the socialist Caribbean nation with sufficient fuel oil to operate its powerplants. That has led to sustained electricity outages, which can last for days, in a country where living standards have deteriorated sharply over the last decade. That is amplifying the considerable suffering of the Cuban people who have been sharply impacted by the coronavirus pandemic and deteriorating living conditions among a lack of basic goods and services.

Related: U.S. LNG Exports Jump To Record In H1 2021

Those occurrences demonstrate the far-reaching consequences of Venezuela’s near-collapse in a volatile region which has a long history of conflict, instability, and fragile governments. The situation is only worsening as Caracas steadily loses control of its territory with various criminal gangs and non-state armed groups, notably Colombian Marxist guerillas, filling the void left by an increasingly absent crumbling state. Elements of the Colombian Marxist guerilla group the National Liberation Army (ELN – Spanish initials) have established a strong presence in Venezuela, notably in the states of Amazonas, Apure, Bolivar, Tachira, and Zulia. In many remote regions, the ELN is now the de-facto government providing basic public goods, maintaining law and order, and doling out justice. Colombian FARC dissidents, those that refused to accept the 2016 peace agreement, have been steadily expanding their influence in Venezuela. It was during March 2021 when fighting broke out between Venezuelan security forces and the dissident FARC 10th front in Apure, near the Colombian border, as the Maduro regime attempted to weaken their influence. The Colombian guerillas through much of the conflict appeared to have the upper hand, underscoring the weakness of Venezuela’s security forces which are suffering from a chronic lack of resources and training as well as endemic corruption for over a decade. Even the capital Caracas is not immune. The government’s control of the city is becoming increasingly tenuous as heavily armed criminal gangs, many with military-style munitions, take over large portions of its slums. Those gangs are now thought to control several of Caracas’ largest slums imposing their own law and order on the territory within their boundaries with the Venezuelan police unable to enter many of those districts. 

These circumstances point to a rapidly eroding security situation within Venezuela, where an increasingly weak state under dire economic and social stress is unable to provide basic public goods, including law and order, and is close to imploding. Maduro’s autocratic regime simply lacks the resources to provide a state presence, including basic public goods as well as infrastructure, and maintain security within much of Venezuela’s territory. That coupled with increasing lawlessness has made Venezuela a popular destination for a wide range of non-state armed groups, including U.S. designated foreign terrorist organization Iran-backed Hezbollah. Some sources estimate that Colombian guerillas and neo-paramilitary groups, criminal gangs, and Venezuelan Colectivos exert control in up to two-thirds, possibly more, of the OPEC member’s national territory.

It is Venezuela’s disintegration and the notable decay of state resources that has become the chief threat to Maduro’s position rather than U.S. sanctions, which only strengthened his grip on power. Recent events demonstrate that the accelerating collapse of the Venezuelan state poses a dire threat to regional stability with the impoverished country a haven for heavily armed non-state actors engaged in cocaine and weapons trafficking, environmentally damaging illegal gold mining, and terrorism. For those reasons, Washington must act before Venezuela completely unravels and becomes a fully-fledged failed state, leading to greater regional instability. 

By Matthew Smith for Oilprice.com

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