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Maduro’s squandering of Venezuela’s oil wealth is a tragedy

Venezuela should be a global oil-exporting superpower. Instead, the Marxist junta ruling the country teeters on the brink of complete economic collapse, with hyperinflation reminiscent of Weimar Germany and the chances of a political coup d’état in Caracas rising every day.

Despite its enfeebled state, Venezuela punches above its weight in oil markets. Uncertainty over its supply has helped to push up prices by almost 20% since the start of the year. That’s because many refineries in Texas and Louisiana – America’s fuel-producing engine – are configured to process Venezuela’s heavy blend of crude.

The country supplies about 50% of the oil used by the southern states’ plants dotted around the Gulf of Mexico. Finding suitable alternatives at short notice won’t be easy.

“Crude oil production in Venezuela, and especially exports to the US, are expected to drop in response to the growing political crisis and the US implementing new sanctions against its state-run oil company, PDVSA,” said Ole Hansen, head of commodity strategy at Saxo Bank.

Daily shipments to the world’s largest economy have slumped below 500,000 barrels, down from over 1.2 million b/d a decade ago, according to the Energy Information Administration. US President Donald Trump’s decision to slap punitive sanctions on state-controlled oil giant PDVSA is a further economic hammer blow aimed at Nicolas Maduro, his Venezuelan counterpart.

The embargo comes at a tricky time for oil markets and consumers. Saudi Arabia is pushing its partners in OPEC to implement deep output cuts the cartel agreed last December in order to boost depressed global prices. Venezuela is a founding member of the production group, which in alliance with Russia controls around 40% of world oil supply. Venezuela signed OPEC’s original charter in Baghdad in 1960 alongside Iran, Iraq, Saudi and Kuwait.

Back then, Venezuela’s people were among the most prosperous on the planet.

This year, Venezuelan oil minister and Maduro loyalist Manuel Quevedo is due to take over the revolving presidency of OPEC – traditionally an important role for coordinating among the cartel’s 14 members. However, his status grows ever more uncertain as opposition leader and self-appointed alternative president Juan Guaido draws throngs of disgruntled supporters to his cause.

Although Guaido’s “shadow government” lacks control of the military and a legitimate cabinet of ministers, the 35-year-old leader of the National Assembly has moved swiftly in his attempt to seize control of the nation’s crucial oil riches. He ordered congress this week to nominate a new board of directors at PDVSA and its US refining subsidiary Citgo.

US sanctions will help his strategy by choking off Maduro’s access to oil revenues, the president’s final source of income to prop up the regime. US Treasury Secretary Steve Mnuchin said last week: “If the people in Venezuela want to continue to sell us oil, as long as the money goes into blocked accounts we will continue to take it.” However, sanctions could prove sensitive if a spike in prices pushes up the cost of gasoline for American motorists, a raw nerve for the grassroots supporters of Trump’s government. Analysts agree regime change could still take months.

“The Trump administration appears to be making a major bet on squeezing Venezuela economically to accelerate regime change, which for the oil industry could eventually bring sanctions relief, foreign investment, and a return to production growth. But this ultimately hinges on co-operation from the Venezuelan military, the leaders of which continue to publicly support Maduro despite signs of cracking at lower levels,” wrote S&P Global Platts Analytics in a research note.

Sanctions have had mixed results for Trump elsewhere. Legislation introduced last year targeting Iran raised concerns in the market about potential supply shortfalls until the US introduced temporary waivers for several major customers of its crude. However, these dispensations will expire soon, further tightening an already constricted oil market and potentially pushing up prices.

Maduro may also find an ally in Russia’s President Vladimir Putin. Venezuela gives Moscow access and influence in America’s back yard.

“The duration of the sanctions regime will ultimately hinge on Maduro’s staying power and Moscow could play a critical role in determining the trajectory of the crisis. Russia has extended multiple, multi-billion dollar financial lifelines to the country, enabling the cash strapped national oil company to avoid a catastrophic default that would have resulted in asset seizures by creditors,” warned Helima Croft, head of commodity strategy at RBC Capital Markets in a research note.

Venezuela’s oil industry has suffered a staggering decline of fortunes over the last 20 years amid chronic mismanagement, systemic corruption and continual political acrimony. Its proven reserves are by some measures thought to be the world’s largest at almost 300 billion barrels. By comparison, Saudi Arabia holds just under 270 billion barrels. Venezuela’s total petroleum reserves could be much greater, especially in its rich Orinoco basin.

In theory, a new government could turn things around quickly. Reform of the oil sector would deliver an economic dividend and a boost to supply. But unless the country can attract investment from international oil companies its potential will be constrained. Resource nationalism remains a potent political totem on the streets of Caracas.

Despite its embarrassment of oil riches, Venezuela’s economy is in free fall. The IMF estimates that GDP has collapsed by 50% since 2013. Meanwhile, oil production – its main source of hard foreign currency earnings – has plummeted. “Hyperinflation and outward migration are also projected to intensify in 2019,” said the fund in its latest assessment of the region’s prospects. “Evolving political developments add another layer of uncertainty to the country’s outlook.”

Output will now keep falling because of sanctions pushing up the cost of production. S&P Global Platts estimates total daily output could drop to 1.15 million b/d – a decline of 175,000 – by the end of the year. A separate survey of OPEC output conducted recently by Platts paints an even bleaker picture with Venezuela pumping just 1.17 million b/d in December.

Maduro’s regime has no means of replacing this lost revenue and instead faces a slow and agonizing death by economic strangulation. Instead of being among Latin America’s most prosperous nations, Maduro has unleashed a catastrophe on his own people. His failure to take advantage of Venezuela’s wealth in natural resources is nothing short of a tragedy.

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