Who has placed Venezuela in crisis?

Who has placed Venezuela in crisis?

Lorenzo Colantoni
The country appears to be the first and biggest victim of the prolonged low prices. The situation, however, is much more complex, and the oil industry is just one factor and partly also a victim

Completely empty supermarkets, frequent blackouts, public offices forced to remain closed except for 2 half-days a week to save energy, even the Coca-Cola factory has halted its activities because it has run out of sugar. All in the one country with the largest oil reserves in the world: Venezuela seems to be the first and biggest victim of the prolonged low prices. The situation, however, is much more complex, and the oil industry is just one factor and partly also a victim.

Instability and great uncertainty: the political and economic framework

The country is experiencing one of the toughest crises it has ever faced, due to the combination of years of poor administration with a series of chance events. A particularly severe drought has reduced the generation of hydroelectric power, which supplies 73% of the country’s electricity. This, combined with low oil prices and a particularly acute agricultural and manufacturing crisis over the last 3 years, has thrown the country into chaos. President Maduro this year declared a state of emergency, giving him significant powers, and taking desperate measures: water and electricity are rationed, the government has requested the closure of over 100 shopping centers to save energy, and the President himself has even strongly advised women not to use hairdryers and other household appliances. The situation, however, is perhaps exacerbated by the work of Maduro himself. In October 2015, the President continued to insist on linking the bolivar, the Venezuelan currency, to the dollar, begun in 2003. As a result, he obtained a rampant inflation, such as to cause Lufthansa to suspend flights as of June 2016, and resulting in an equally flourishing black market. With an average inflation of 159% and growth at -10%, estimated by the IMF for 2015, in October, goods such as a movie theater ticket cost the equivalent of $60 officially, and $0.54 on the black market. The faults of the Venezuelan government, however, are much larger, and structural for the economy of the country, and the exploitation of oil resources has been the first to suffer.

The causes of the fall in oil production

Venezuela’s energy crisis was not, in fact, mainly due to the collapse in oil prices, but is the result of years of poor management. Gonzalo Escribano, director of the climate and energy program at the Real Instituto Elcano in Madrid, commented by blaming a combination of policies that have devastated local production through large politicization, unsustainable subsidies (not only in the energy industry), and an excessive political use of oil. Escribano presents many examples, and all have contributed to the inability to create an environment conducive to investments. For instance, the price of oil which was blocked for 20 years, forcing the government last February to increase fuel costs by 6,000%. This is the case of significant amounts of oil donated to Cuba and other Caribbean countries or sold at extremely favorable prices to consolidate the Venezuelan influence, under the 2005 Petrocaribe initiative, among others. The politicization of the entire oil industry chain, the significant Venezuelan national debt and its deteriorating economy have made the country increasingly less attractive for the foreign investments needed for both production and exploration, and their maintenance. This has therefore triggered a vicious circle: the refineries have started to become obsolete and are frequently stopped as in the case of El Palito, or have simply not been completed, such as Santa Inés, which should have entered into operation in 2012. This has affected the exploitation of large, but not high-quality, resources; Venezuelan oil is primarily ‘ultra-heavy oil’, extremely dense and therefore requiring to be mixed with lighter oil, which on several occasions Venezuela has had to import from countries such as Algeria, as it was unable to refine enough. In addition to all this is gas, which the country has often imported from Colombia, not due to a lack of resources, which abound in both conventional and non-conventional form, but due to an inability to develop the industry: a situation that has prevented the creation of electricity generation through gas, leading to a great dependence on hydropower and a risk of blackouts due to drought, which occurred in recent months and as early as in 2014, and on several other occasions. According to Escribano, when oil prices collapsed, Venezuela was simply no longer able to support the bad management of the past.

An uncertain future and a decline that is difficult to stop

The future of Venezuela is far from certain, with a present marked by stark contrasts between the parliament, controlled by the opposition, and Maduro’s government, as well as by the growing tension in the country, where the latest demonstration for a referendum against the President ended in heavy clashes against the police, as well as other previous demonstrations due to the scarcity of food, the availability of which is now running out. In a country known for the brutality of its police operations, civil war is currently a real danger. The solution needs a political compromise, if possible, which will influence and be influenced by the oil industry. The inability to attract investment has led to a declining production, with, according to OPEC, 30,000 bl/day less on average from 2014 to 2015 and a further critical decrease as of March 2016, of almost 170,000 bl, compared with the average in 2014, at a total of 2.32 mbl/d. This, combined with low oil prices, will have further effects on both the political and economic level. On the one hand, Venezuela’s influence in the Caribbean, in the so-called Bolivarian countries, such as Ecuador and Nicaragua, and, in general, the whole of Latin America, depends on the availability of Venezuelan oil. Lower production, increased consumption (due to the scarcity of hydroelectric power) and a growing need for money reduce the importance of a country that has based its foreign policy on oil, resulting in a transformation of the geopolitical balances in the region. In terms of the economy, a good part of the Venezuelan debt was funded in the past by loans from China, to be repaid in oil. These were, however, established when oil prices were over $100/bl: now under $50, the amount of oil needed to repay the loans has more than doubled. The current situation in Venezuela makes it increasingly difficult to obtain further loans, given its inability to increase production and an extremely limited economic diversification. 95% of exports from Venezuela are, in fact, in the form of oil, which accounts for 25% of the country’s GDP. Oil is therefore neither the cause nor the main result of the current crisis, but a valid barometer of Venezuela’s economy and politics. An indicator that, perhaps, had it been read carefully and in advance, could have helped to prevent a crisis whose solution seems distant.