Oil and Unrest in Venezuela after the Death of Hugo Chavez

by Katherine Bennett

Despite holding the largest oil reserves in the world and the promise of oil wealth, Venezuela faces consumer good shortages, power outages, private property confiscations, an estimated +50% inflation rate and one of the highest murder rates in the world. Given these conditions, Venezuela in early 2014 was a powder keg waiting to erupt.

In early February 2014, protests broke out in western Venezuela. Students took to the streets in response to poor security measures in a court case concerning the assault of a female student. These demonstrations turned violent. Students were arrested, prompting protests demanding the release of the arrested protesters. Tensions increased and, during what began as a peaceful march in Caracas, three people were shot and killed. This second wave of protests, which started as a cry to free the imprisoned students, expanded to include a number of social grievances. This expansion included the aforementioned issues of high inflation, high murder rates, lack of consumer goods, insufficient police efforts, as well as an increased desire for more media transparency. Some called for the resignation of President Nicolas Maduro. While the Venezuelan protests may be business as usual to outsiders, the death toll continues to climb – currently at 36 confirmed deaths as of this writing. The protests are the largest seen in over 10 years.

The delicate political-economic model in Venezuela cannot exist without oil revenues, accounting for roughly two thirds of the government’s annual take, according to Bloomberg News. According to OPEC statistics, Venezuelan oil accounts for 95% of the country’s export earnings. The World Bank estimates that Venezuelan oil and gas rents are 30.5% of its GDP. Clearly, oil is an essential part of the Venezuelan economy; it is necessary to examine the effect of oil on the current economic trajectory as well as its impact on civil protests.

Energy Profile of Venezuela

Venezuela holds 297.6 billion barrels of oil, or 17.6% of the world’s total reserves, according to BP Review of Energy, 2013. Of these reserves, 220.0 billion barrels are located in the Orinoco Belt. Significant projects are underway to take advantage of the central Venezuelan oil rich belt. Orinoco Belt needs an estimated $236 billion through 2018 for development. The International Energy Agency reports that though Venezuela may exaggerate its daily oil production, they are within the top ten oil producers and exporters in the world.

According to OPEC statistics, Venezuelan oil accounts for 95% of the country’s export earnings and the World Bank estimates that Venezuelan oil and gas rents are 30.5% of the country’s GDP.

In 2011, according to the Energy Information Agency, the US accounted for 40% of Venezuelan oil exports, the Caribbean 31%, China 10%, other Asian nations 9%, Europe and other 10%. The exports to the US peaked in 1997 at 1.8 million bpd, the same year Venezuelan production peaked, before Hugo Chavez came to power and took control of the national oil company, Petróleos de Venezuela, S.A. (PDVSA). Since 1997, U.S. imports of Venezuelan oil have decreased; recently this decrease can be attributed to the US shale revolution. In 2013, the US imported about 750,000 bpd, the lowest since 1985. At its peak, Venezuela produced 3.7 million bpd in 1997 and today Venezuela produces approximately 2.5 million bpd per day. Given these oil trends, how does Venezuela manage the oil it does produce and what is the link between oil and the recent protests?

Venezuela’s Oil Puzzle

The first piece of the Venezuelan oil puzzle is the role of cheap gasoline. The inexpensive gasoline in present day Venezuela is a continuation of former President Hugo Chavez’s tactic to pacify the population and reward the oil rich nation’s citizens. Before Hugo Chavez seized power in 1997, the conditions inside Venezuela were changing, largely due to the global oil market, with the weaknesses of Venezuela’s formerly democratic regime exposed during the oil shocks of the 1970s. Without oil revenues, social services could not be provided to the Venezuelan people and the government could not support its citizens. This era saw the beginning of the rise of Chavez. Riots in the capital of Caracas in 1989 broke out because the government attempted to raise the price of gasoline. Known as Caracazo or “big smash in Caracas,” the riots resulted in 200 civilian deaths, with some reports claiming the death count to have been well over 2,000.

Due to the low gasoline prices, demand is uninhibited. The domestic refineries cannot keep pace with the demand so they are forced to import 80,000 bpd of refined oil products.

Such a precedent serves to warn current President Maduro not to raise gasoline prices. Today, gasoline prices are 5 cents per gallon, and less than a penny per gallon on the black market. In perspective, filling the tank of an SUV costs less than the price of a candy bar. According to Rafael Ramirez, PDVSA President and Minister of Energy and Petroleum, the break-even price of gasoline in Venezuela should be $1.62/gallon to achieve a balanced budget. Cheap gasoline prices as a means to pacify the people have not prevented protests. Around 800,000 barrels per day of gasoline and diesel fuel are consumed domestically. The people demand cheap gasoline and it has not prevented the protests, illustrating that Maduro has since lost whatever political capital had been gained from instituting artificially low gasoline prices.

Due to the low gasoline prices, demand is uninhibited. The domestic refineries cannot keep pace with the demand so they are forced to import 80,000 bpd of refined oil products. That Venezuela, the nation with the largest oil reserves in the world, has to import oil products, points to massive inefficiency. From the daily production of 2.5 million bpd, 800,000 bpd are not earning any real or political profits, which, if this were the only program, would leave Venezuela with only 1.7 million bpd left over.

In a gesture similar to the cheap gasoline policy, Chavez attempted to woo his neighbors in his Petro-Caribe program. Venezuela supplies heavily subsidized oil to Haiti, Nicaragua and Cuba, with about half of these supplies going to the latter, in total 200,000 bpd. Also, Citigo, the refinery branch of PDVSA in the US supplies about $400 million of heating oil to Americans in poverty. Over 4 million barrels over 9 years, or about 200,000 bpd are supplied as part of this strategy.

Finally, the Chinese ‘Loans for Oil’ deals with Venezuela further decrease the amount of available profitable oil by approximately 300,000 bpd. According to Bloomberg, the Chinese have loaned $40 billion to Venezuela since 2008, and are being paid back in oil rather than Venezuelan bolivars – further winnowing down Venezuela’s available supply that could secure higher profits elsewhere.

How Does Unprofitable Oil Relate to the Recent Unrest?

Considering domestic oil consumption for gasoline of 800,000 bpd, PetroCaribe’s 200,000 bpd, Citigo donations of 200,000 bpd and exports to China of 300,000 bpd, and you have a sum of 1.5 million bpd that is not profitable. Of its approximate daily production of 2.5 million bpd, Venezuela is left with only 1 million bpd to sell on the oil market. A decrease in the amount of marketable oil is not in itself a reason to incite protest. However, since oil is such a significant part of the budget of Venezuela, a decline in marketable oil results in the inability to provide basic goods and services, which does provoke protests.

The combined factors of decreased production, decreased exports to the US, high domestic and regional subsidies, and ‘Loans for Oil’ deals with China all result in less marketable oil and less revenues for accommodating the citizens.

Of the marketable 1 million barrels of oil, UN Statistics estimate they generate $58 billion. This $58 billion accounts for 95% of all foreign revenue of the Venezuelan state. The country cannot support the 30 million people of Venezuela on this budget and cover other expenses. Imports alone were $77 billion in 2012. Venezuela also has debt to consider before it can even think of investing in new oil developments or other aspects of their economy.

The protests are in response to poor living conditions caused in part by the inability of the Venezuelan government to subsidize goods and services for its people. Whatever stability the government was previously able to maintain through oil revenues was curbed when it lost marketable oil volumes. The combined factors of decreased production, decreased exports to the US, high domestic and regional subsidies, and ‘Loans for Oil’ deals with China all result in less marketable oil and less revenues for accommodating the citizens. More than a mere connection, oil is the backbone of the Venezuelan economy. When oil profits are disrupted, the economy is disrupted and thus the stability of the people is disrupted, which in this case, has led to protests.

Conclusion

Due to the current unrest, investors are hesitant to bring their business to Venezuela, opting rather to invest in more stable and profitable locations or simply follow the Chinese model of ‘Loans for Oil’, which further prevents hard currency from entering the budget. According to Forbes writer Christopher Helman, one possible trajectory for Venezuela’s immediate future will be lack of foreign investment. In this case the government would run out of currency to pay debts and import goods, trading partners would not ship, the subsidies would have to stop and the investors would be reluctant to return. Whether or not Maduro is ousted, Venezuela will have to earn back investor confidence and change its oil policies to prevent being trapped into providing cheap gasoline and unprofitable oil deals.

According to Forbes writer Christopher Helman, one possible trajectory for Venezuela’s immediate future will be lack of foreign investment. 

Oil is an integral part of every economic and political issue in present day Venezuela, and this current unrest is no different. The delicate political economic model in Venezuela cannot exist without a certain level of oil revenues. Unless Venezuela wants to continue down the current path of economic collapse, the government needs to secure additional incomes of hard currency. If this regime or a new regime would choose to continue to use oil to support its economy, the amount of marketable oil available must increase. One option – increasing domestic production for export – requires foreign investment, which would be possible but challenging given the unstable political climate. Another option would be to address the issues that the current oil production faces. This option includes raising domestic gasoline prices, discontinuing PetroCaribe, addressing refinery issues and allowing Chinese loans to improve the economic debt and inflation issues they were intended to cure. None of these solutions will be easy for Venezuela, but if and when the country can address its oil issues, it will be better apt to mend the problems that produced the unrest.

Katherine Bennett is an MA student in the ENERPO program at European University at St. Petersburg.

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