The case for Venezuela is astonishing, to say the least. How can a country with the largest proven oil reserves in the world be going through some of the most crippling economic crisis ever seen? Venezuela is a country in crisis and while protesters are being killed for opposing the government and citizens are fleeing the country looking for opportunities, the state continues to lose more of its grip in the industry that was once able to squeeze in its fist. Back in 1998, Venezuela reached its peak production at 3.5 million barrels per day, a number that even at today’s standards could be considered respectable and would have Venezuela within the top ten producers worldwide. That happened to be the year in which Hugo Chavez was elected president and after he decided to fire almost twenty thousand employees out of Petroleos de Venezuela (The state oil company) and replace them with less experienced but loyal to his government operators, things went downhill, to say the least.
Most of Venezuela’s reserves come from an area called the Orinoco Belt. The oil here is called extra-heavy crude and it is extremely expensive to produce, but after prices surged past $100 dollars a barrel, this reserve became feasible for extraction and Venezuela surpassed Saudi Arabia by having the largest proven oil reserve in the world. This development urged Venezuela to allow foreign companies to invest billions of dollars into the extraction of these reserves since the country didn’t really have the means to produce the oil themselves at a rate that would maximize profits and truly take advantage of their full potential. The oil industry is fickle and can be greatly impacted by many external factors; this means that companies can risk a lot when investing but also earn a lot when oil prices go up.
As oil prices rose in the early 2000’s the local government decided they wanted a bigger piece of the pie than they had agreed to initially and decided to ask the foreign companies to change the deals they had. While some agreed to these changes, others refused and their assets were expropriated. At this point, the country had not only fired its own experts but also pushed away the majority of foreign expertise that could truly produce its massive oil reserves.
The problem only became worse from there, because even though the production was high and Venezuela has accumulated a huge amount of wealth due to exploiting their resource, they were also neglecting the large investment that was necessary in order to keep the pace up and eventually get to a point in which they could manage their own production or create deals that were beneficial for their investors as well as themselves. It does not matter how much oil you have if you cannot produce it and do not have the expertise to find ways to do it.
Producing the oil is only one problem; another completely different issue is the transportation of the crude outside of the country. Venezuela’s tankers are outdated and do not meet some of the regulatory standards to sail the high seas. This means the country has to outsource the transportation of their own product and in some cases acquire extremely high debts with other countries to do so.
Russia and China are some of the countries that have borrowed money to Venezuela with promises of payment in oil and fuel. Concerns today point towards the possibility of Venezuela defaulting on its debt.
Many people wonder what will happen if the situation with Venezuela continues to worsen and how will that impact the oil industry. In this moment things are rather dire as the government recently forced a local American General Motors plant to fire over two thousand local workers and it has set its sights on Movistar, a Spanish telecommunications company by claiming the company supports opposition leaders.
Back in April, more than 20 tankers carrying over 7 million barrels of fuel were held off at the coast of Venezuela waiting to deliver their goods due to what seemed like the lack of payments.
In this moment things can go in many different directions. If the struggle continues and it escalates, the consequences could be terrible for the people of Venezuela, as they will most likely face violence and even more shortages. As far as the oil industry goes, OPEC would allow for production to slow down and prices to raise, something that would pretty much benefit everyone producing at this point.
Another possibility would come from the deposition of Nicolas Maduro, something that could go either way depending on who the successor is after him. Someone with his same views will only delay the situation even further and force the oil market to continue waiting. If someone with different views comes to power, perhaps Venezuela could go back to trying to diversify its economy and allow foreign investors to once again make deals with the country. This could mean revamping the country’s infrastructure and finally putting an end to the crisis.
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* Featured Image courtesy of Cristóbal Alvarado Minic at Flickr.com