Venezuela’s Oil Problems Abound
From 2013 until now, Venezuela’s GDP has dropped 35%, and GDP per capita rates are down 40%. Sunken oil prices are a main factor in Venezuela’s economic collapse, both events as bad as any in recent history. A major producer and exporter, Venezuela’s problems ripple across the global oil market. The U.S. accounts for 40-45% of Venezuela’s crude oil exports, although an increasing amount is going to all-important China and India. In total, Venezuela’s state-run oil firm, PDVSA, exported about 45 million barrels of crude in September 2017, down from over 60 million barrels in February 2016. Venezuela’s oil available for export is at its lowest level since 1989. The lost revenue devastates: oil sales are 50% of Venezuela’s GDP and 95% of its export revenue.
Let me offer some hope, while Venezuela’s oil exports to the U.S. have been crushed by the U.S. shale oil production boom, the U.S. refinery system is still based on processing the heavier crudes that come from many of our longtime suppliers, like Venezuela (explaining why U.S. crude exports have been booming, here). Extra Heavy and Bitumen hydrocarbons reserves in Venezuela’s Orinoco can have API gravity of just 8-10°, compared to over 40° for the U.S. shale plays, here.Indeed, since expensive extra processing is required, Venezuela’s oil is also sold globally at a discount. Question the veracity of OPEC governments doing their own appraisals, but BP does have Venezuela leading the world at about 300 billion barrels of proven oil reserves, with the resource surely being much larger. Global oil prices were up 8-10% in October and are now at their highest levels since mid-2015.
Already very low, Venezuela’s crude oil quality has been dropping. A lack of funds has limited PDVSA’s ability to process and therefore sell its heavier grade. There has been a shortage of chemicals and equipment to properly treat and store oil, so facilities get shutdown or production is rushed to avoid delays. Exacerbating, a flood of other factors like a fleeing workforce, U.S. sanctions, food shortages, uncontrollable inflation, and violent protests have all left the government simply unable to respond. Policy blocks petrodollars from coming in: PDVSA delivers some 40% of its oil to China and Russia as payment on more than $50 billion in loans.
Unfortunately, Venezuela is indicative of the chronic underinvestment and mismanagement in oil development that has continued to plague South/Central America, where shady governments are stealing away the birthright of the citizens. Forbes has Venezuela has the 10th most corrupt country in the world. This is a huge global problem because of the region’s great potential to supply: South/Central America holds 20% of the world’s proven oil but accounts for only 7% of demand. The global oil market needs this oil because more demand is ongoing, as I document here.
Venezuela has accounted for 3-4% of global oil supply, and illustrating its importance: it’s believed that strong enough U.S. sanctions on Venezuela would add $6-8 per barrel to prices. As the International Energy Agency points out here and I document here as well, the 3-year low price environment has had the underreported effect of discouraging new upstream investment in future oil supply: a price spike might be closer than initially realized – perhaps as early as 2020.