When Hugo Chavez died in March of last year, oil markets barely reacted—a somewhat surprising development considering that Venezuela’s national oil company, Petroleos de Venezuela (PDVSA), was completely under the thumb of the Chavez regime and had experienced years of mismanagement and decline under his leadership. Now, with protests ravaging the country, the implications are unclear for global oil markets.
Prior to the 1990s, Venezuela was largely seen as an exception to the “resource curse” theory, which suggests that oil wealth fosters corrupt and dictatorial regimes. Chavez changed that, turning Venezuela’s oil resources and Petroleos de Venezuela into a piggy bank from which to bankroll his “21st
Century Socialism” experiment. In the decades since, he became the villain of the oil industry, trashing contracts with foreign oil companies, expropriating lands and seizing equipment from IOCs unfortunate enough to be operating under his auspices. This has deterred international companies from cooperating with PDVSA, and upstream investment has suffered as a result.
Since 2005, the nation’s oil production has entered inexorable decline. The powers-that-be funneled oil revenues into social programs rather than the continued upstream investment needed to ensure PDVSA’s success. As a result, Venezuela’s production has fallen in both absolute and relative terms, currently down nearly one-third from its highest points, and now accounts for less than half of all South American oil production.
Venezuela is also an OPEC member, and the country’s oil revenues account for 95 percent of the nation’s export earnings; the oil and gas sector represents roughly 25 percent of GDP. That’s not quite as severe as some Middle Eastern producers, but it’s still an unhealthy dependence.
Far from becoming less dependent on oil—as has been a government mantra for years—Venezuela is now almost exclusively reliant on it. Other industries are shuttered in the country’s slow-motion economic meltdown. The current protests are fueled not only by suspect political developments—such as President Maduro being given “decree powers” to issue laws without Parliament approval— but the lack of jobs and basic food supplies.
All this is of greater concern as weeks of violent protests have led to the deaths of at least 13 people and raised doubts about what the unrest could mean for importers of Venezuelan oil, such as the United States. Investors remember that ten years ago protests disrupted oil production and interrupted flows of Venezuelan crude to the United States. Despite frosty diplomatic relations with Venezuela, it is one of our top five suppliers of foreign oil. According to EIA, the United States drew 12 percent of net petroleum imports from Venezuela in 2013.
Protests are currently focused in the nation’s cities and away from oil production and refining centers. Thus far, protest leaders have not called for marches on oil facilities, although this could change in a heartbeat. To guard against that threat, Caracas has upped the military presence and security at vulnerable installations. During the Chavez regime, the different oil unions merged into a single organization that is currently led by socialist, pro-government workers that have generally expressed support for Maduro’s government. Since the ongoing protests
are against the inefficiencies and violence perpetrated by the Maduro regime, it would be logical for protestors to focus on the oil industry, which supports Marudro both ideologically and financially.
Furthermore, the current situation is reminiscent of the 2002-2003 crisis, during which Venezuelan oil workers went on strike. The strike came during a period of major social unrest over who would run the country. This time around, skyrocketing inflation, food and good shortages, and violent crime are stoking the current protests, and the protesters' demand is regime change. Though they haven't targeted oil yet, the protesters have proven their willingness to disrupt the economy to achieve their ends, setting up roadblocks that thwart the distribution of goods. They could view going after the oil industry as the next logical step in this sequence of events.
Ominously, the opposition appears to be fracturing even as it grows. The once-undisputed leader of the opposition, Henrique Capriles, is no longer clearly in charge. Capriles warned Reuters
, "The protests right now have their own force and spontaneity. They're not led by anyone. The government is underestimating the discontent, and making out it's just one level of society.”
U.S. Oil Imports Lean on Heavy Oil Producers
There’s no telling what this slow-burn will mean for the Venezuelan oil industry in the short term, but one thing is clear: if it reduces flows of Venezuelan crude, the United States is very likely to feel the impact in spite of the shale boom. The reason is simple: the United States is producing massive amounts of light-tight oil, but most of its refineries are optimized to produces heavy-sour crude. While imports of light oil have fallen dramatically, the U.S. still relies heavily on steady inflows of heavy-sour, the variety sold by Venezuela.
A study by the Energy Information Administration
found that the Venezuelan oil shutdown in December 2002 increased the price of crude by $10/barrel from $27 to $37, or 37 percent, and particularly impacted supplies in the United States. Due to our continued reliance on imports of heavy crude oil, consequences could be similar if protesters turn their sights to the oil sector.