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Lessons from Venezuela’s Dangerous Slide

 
Venezuela is a petroleum giant. In addition to holding the world’s largest proven oil reserves, it is the second-largest net oil exporter in the Western Hemisphere (behind only Russia, who straddles both hemispheres) and a major supplier of oil to the United States. Through its national oil company, Petróleos de Venezuela, S.A (PDVSA), billions pour into the state’s coffers annually, supplying the massive social apparatus the country uses to feed and clothe its people. With the price of oil hovering at record lows and global demand growth showing little energy, Venezuela is in serious trouble. Estimates from Securing America’s Future Energy (SAFE) and Roubini Global Economics show that to meet its domestic spending obligations, Venezuela requires a per-barrel price of $120-125 on the global oil market, among the highest out of the OPEC member countries. Made worse by an already painful economic recession—as well as the fact that the heavy crude that that comes from Venezuela’s reserves fetches a price slightly below the Brent global benchmark—the country is now struggling to provide the most basic goods, including essential medicines and food. The country’s growing instability means maintaining the Maduro regime’s status quo is becoming an increasingly unlikely possibility. Dwindling foreign reserves and growing debt have fed the discussion over a potential default, the political consequences of which would be huge for the already precarious government. Less able to import essential goods, visions of last year’s violent protests have resurfaced, riots that left dozens dead.

The question facing president Nicolás Maduro now is how to get food back onto Venezuelan tables while dealing with its creditors, of which there are many. In several high-profile deals, China has given the country roughly $50 billion since 2007, mostly in exchange for oil, as part of an effort to break into Latin American markets. Today, nearly half of Venezuela’s over 500,000 barrels per day to China (over a quarter of its total exports of 1.9 mbd) go towards payment on these loans. This means around 13 percent of all Venezuelan exports are servicing Chinese loans, no small amount. Moreover, a $9 billion bond payment due at the end of 2015 will put the Maduro government to the test when it needs it least—during midterm elections. Venezuela’s struggles highlight a persistent worry across the board for oil exporters. Major producers Iran, Iraq, Algeria, Libya and Venezuela all require a Brent crude oil price of more than $105/bbl to run balanced budgets. This same group of nations is usually the most hawkish on calling for historical swing producer Saudi Arabia to cut production in order to maintain higher prices. With the Kingdom refusing to give up market share during the current period of low prices—perhaps as a way to pressure U.S. shale producers, Iran, or even Russia—concern is growing that dropping revenues could lead to social unrest in those countries without significant cash reserves to weather the slump. Venezuela, for now, is the most drastic example of what can happen when exporting nations rely too heavily on oil revenues for government spending and do not hedge appropriately. In traditionally uneasy areas like Iraq and Libya, similar situations are a major national security concern for the United States and its allies, and can lead to supply disruptions and greater regional instability. Major oil consumers like the United States should be mindful that the Venezuelan story is in part the result of the inherently volatile global oil market, and violent oscillations in price are capable of causing serious economic harm to even the largest economies.