Venezuelans Losing out on Oil

As if in some game of political dominoes, the government of Venezuela is the latest target of young, educated protesters demanding an end to the regime-in-residence. Venezuelan students and young professionals are emulating Ukraine, which recently managed to topple its repressive president. Both governments were accused of suppressing freedom of speech, denying basic public services to their residents, and squandering significant natural resource endowments. Venezuela’s protests are far behind Ukraine’s in terms of civil disobedience, although public dissent against President Nicolás Maduro is steadily increasing. While the uprising in Venezuela searches for solid footing, global markets are holding their breath.The government of Venezuela wields a powerful tool in its control of the state’s energy reserves. President Maduro is unlikely to give up this revenue-producing gem and give in to public demands. Greater political unrest is likely to occur. This instability in Venezuela is a threat to not only Latin America, but to the global economy as it tries to climb out of the recent financial crisis.Venezuela’s government manages the largest reserves of oil and natural gas in the world. The state-owned energy company, Petroleum of Venezuela (PdVSA), controls over two hundred billion barrels of oil in its Orinoco oil belt in central Venezuela. In addition to its oil reserves, PdVSA also possesses almost two hundred trillion cubic feet of natural gas reserves, second only to the United States. PdVSA also has the largest refining capacity, making it the most capable provider of usable petroleum to the global economy .Despite its vast reserves, the production process is inefficient, and investment projects to improve production technology are either heavily mortgaged or suspended due to insufficient funds. Venezuela’s current level of production is roughly equivalent to Iraq’s, at around 2.5 million barrels per day. The rising instability in Venezuela is likely to cripple production and decrease PdVSA’s supply of oil to the global market. The price of oil has gone up $10 per barrel, from $92 to $102, since the protests have reached the world’s stage. PdVSA needs to resolve its lack of profits in order to reinvest in the company’s production technologies, but this is not likely to occur while President Maduro has control of the government.President Maduro’s administration – which has sought to emulate policies of the late Hugo Chavez – is chiefly responsible for PdVSA’s lack of investment funds. These policies eliminate much of the potential profits from the company’s daily oil production. The government subsidizes the company’s sales of 800,000 barrels per day to the domestic market. PdVSA also does not collect much revenue on exports to the Caribbean due to Hugo Chavez’s Petrocaribe policy, which is an agreement to ship subsidized oil to Cuba, Jamaica, Haiti, and Nicaragua. Additionally, the company is in debt to China on an investment loan worth about 300,000 barrels per day. The siphoning does not stop there. President Maduro absorbs much of PdVSA’s actual revenues, and combined with heavy inflation, has used the revenues to pay off lengthy bills, such as the government’s public debt, regional allies, political allies, union leaders, and PdVSA’s executives. Most egregiously, the government’s ballooning fiscal deficit and police guard are being financed with oil revenues, meaning that it is using oil revenues to suppress its opposition. Overall, PdVSA loses roughly $50 to $60 billion a year of the $90 billion in potential revenue from oil sales.Protesters in Venezuela are aware of this gross abuse of government power to implement harmful economic policies. In a recent Gallup poll of Venezuelan residents, 62% of those polled thought the economy was getting worse. The rising public dissent can be attributed to PdVSA’s losses; without them, the revenues would be able to fund government services for its citizens instead of fighting them. However, as previous uprisings have shown, President Maduro is likely to absorb more revenues from PdVSA to keep his supporters happy and suppress his opponents.The recent production boom in the United States that has buoyed the supply of oil in the global economy has helped cushion the blow of Venezuelan instability. However, the energy renaissance in the United States will not last forever, and the Western Hemisphere and China will eventually have to rely on Venezuela’s energy supplies for economic growth. In its current situation, however, PdVSA is in no financial state to provide a steady supply of oil to the global market. The state-run energy company will continue to operate at severely inefficient levels until either President Maduro reforms the economy or the country collapses, with the latter being the most likely. President Maduro desperately needs public support, and PdVSA needs its profits restored. The Maduro government should therefore act to rein in state spending of PdVSA’s limited revenues by transitioning to equity control of the company. Furthermore, President Maduro must repeal PdVSA’s trade agreements with former allies of Chavez. In the event that the government is overthrown, the new government must prioritize investing in an efficient PdVSA.