Tragedy of Venezuela

Oil-rich nation faces a slow and agonising demise

• The Daily Telegraph
• 2 Feb 2019
• Andy Critchlow

Venezuela should be a global oilexporting superpower. Instead, the Marxist Latin American junta ruling the country teeters on the brink of complete economic capitulation, with hyperinflation reminiscent of Weimar Germany and the chances of a political coup d’état in Caracas rising every day.

Despite its enfeebled state, Venezuela punches above its weight in oil markets. Uncertainty over its supplies has helped to push up prices by almost 20pc since the start of the year. That’s because many refineries in Texas and Louisiana – America’s fuel-producing engine – are configured to process Venezuela’s heavy blend of crude.

The country supplies about 50pc of the oil used by the southern states’ plants dotted around the Gulf of Mexico. Finding suitable alternatives at short notice won’t be easy.

“Crude oil production in Venezuela, and especially exports to the US, are expected to drop in response to the growing political crisis and the US implementing new sanctions against its state-run oil company, PDVSA,” said Ole Hansen, head of commodity strategy at Saxo Bank.

Even so, daily shipments to the world’s largest economy have slumped below 500,000 barrels, down from over 1.2m barrels per day a decade ago, according to the Energy Information Administration.

US President Donald Trump’s decision this week to slap punitive sanctions on PDVSA is a further economic hammer blow aimed at Nicolás Máduro, his Venezuelan counterpart.

The embargo comes at a tricky time for oil markets and consumers. Saudi Arabia is pushing its partners in Opec to implement deep output cuts the cartel agreed last December in order to boost depressed global prices. Venezuela is a founding member of the production group, which in alliance with Russia controls around 40pc of world oil supply. Venezuela signed Opec’s original charter in Baghdad in 1960 alongside Iran, Iraq, Saudi and Kuwait.

This year, Venezuelan oil minister and Máduro loyalist Manuel Quevedo is due to take over the revolving presidency of Opec – traditionally an important role for coordinating cooperation amongst the cartel’s 14 members.

However, his status grows ever more uncertain as opposition leader and self-appointed alternative president Juan Guaidó draws throngs of disgruntled supporters to his cause.

Although Guaidó’s “shadow government” lacks control of the military and a legitimate cabinet of ministers, the 35-year-old leader of the National Assembly has moved swiftly in his attempt to seize control of the nation’s crucial oil riches. He ordered congress this week to nominate a new board of directors at PDVSA and its US refining subsidiary Citgo.

US sanctions will help his strategy by choking off Máduro’s access to oil revenues, the president’s final source of income to prop up the regime. The US Treasury Secretary, Steve Mnuchin, said this week: “If the people in Venezuela want to continue to sell us oil, as long as the money goes into blocked accounts, we will continue to take it.”

However, sanctions could prove sensitive if a spike in prices pushes up the cost of gasoline for American motorists, a raw nerve for the grassroots supporters of Trump’s government. Analysts agree regime change could still take months.

“The Trump administration appears to be making a major bet on squeezing Venezuela economically to accelerate regime change, which for the oil industry could eventually bring sanctions relief, foreign investment and a return to production growth. But this hinges on cooperation from the Venezuelan military, the leaders of which continue to support Máduro

‘Moscow could play a critical role in determining the trajectory of the crisis that is facing Venezuela’

despite signs of cracking at lower levels,” wrote S&P Global Platts Analytics in a research note.

Sanctions have had mixed results for Trump elsewhere. Legislation introduced last year targeting Iran raised concerns in the market about potential supply shortfalls until the US introduced temporary waivers for several major customers of its crude. However, these dispensations will expire soon further tightening an already constricted oil market and potentially pushing up prices.

Máduro may also find an ally in Russia’s President Vladimir Putin. Venezuela gives Moscow access and influence in America’s back yard.

“The duration of the sanctions regime will ultimately hinge on Máduro’s staying power and Moscow could play a critical role in determining the trajectory of the crisis. Russia has extended multiple multibillion-dollar financial lifelines to the country, enabling the cashstrapped national oil company to avoid a catastrophic default that would have resulted in asset seizures by creditors,” warned Helima Croft, head of commodity strategy at RBC Capital Markets in a research note.

Venezuela’s oil industry has suffered a staggering decline of fortunes over the last 20 years amid chronic mismanagement, systemic corruption and continual political acrimony. Its proven reserves are by some measures thought to be the world’s largest at almost 300bn barrels.

By comparison, Saudi Arabia holds just under 270bn barrels. Venezuela’s total petroleum reserves could be much greater, especially in its rich Orinoco basin.

In theory, a new government could turn things around quickly. Reform of the oil sector would deliver an economic dividend and a boost to supply. But unless the country can attract investment from international oil companies its potential will be constrained.

Despite its embarrassment of oil riches, Venezuela’s economy is in free fall. The IMF estimates that GDP has collapsed by 50pc since 2013. Meanwhile, oil production – its main source of hard foreign currency earnings – has plummeted. “Hyperinflation and outward migration are also projected to intensify in 2019,” said the fund in its latest assessment of the region’s prospects.

“Evolving political developments add another layer of uncertainty to the country’s outlook.”

Output will now keep falling because of sanctions pushing up the cost of production. S&P Global Platts estimates total daily output could drop to 1.15m barrels per day – a decline of 175,000 – by the end of the year. A separate survey of Opec output figures conducted recently by Platts paints an even bleaker picture with Venezuela at 1.17m barrels per day in December.

Máduro’s regime has no means of replacing this lost revenue and instead faces a slow and agonising death by economic strangulation.

Instead of being among Latin America’s most prosperous nations, Máduro has unleashed a catastrophe on his own people. His failure to take advantage of Venezuela’s wealth in natural resources is nothing short of a tragedy.

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