While the collapse in oil prices since mid-2014 has stressed the economies of the majority of oil exporting nations, Venezuela stands out as one of the hardest hit among its peers. After a decade of some of the most favorable economic conditions in the nation’s history thanks to a relatively prolonged period of strong oil prices and low international interest rates, the country was already in difficult economic straits before the oil price drop over the past year.
President Hugo Chávez (1999–2012) used the income from high oil prices to dramatically boost domestic consumption and to increase his power at home and abroad, while building up foreign debt and without generating any significant rise in productive investment. His successor, Nicolás Maduro, has been unwilling to take the tough decisions that the situation demands, with disastrous economic consequences. The country is more dependent on oil than ever, but the oil industry is in poor condition with production declining and margins thinning. Since 2013, oil policy has become more pragmatic and investor friendly, but it is unlikely to bring significant results in the short term. The problematic trends in the oil sector are hard to reverse when oil prices have significantly declined and the country is strapped for cash. Still Venezuela’s extraordinary resource endowment offers significant opportunities if the country can be politically stabilized and the institutional and policy environment improve.
This paper provides an examination of the difficulties facing Venezuela in light of its dependence on revenues from the oil exports and the issues facing the energy sector, which have become more acute in the lower price environment seen over the past year. In short this paper finds:
Venezuela’s oil production has declined more than 350,000 barrels per day (b/d) since 2008 to around 2.6 million b/d. Critically, exports have declined even more, because domestic consumption and smuggling have been increasing and thus the exportable surplus has been falling. Net exports have fallen to close to 1.8 million b/d, and shipments that generate cash flow are significantly smaller due to the heavily subsidized sales to some Latin American and Caribbean countries and the loan repayments to China. In 2013–2014, Venezuelan state oil company PDVSA got cash flow from only about 1.4–1.5 million b/d. Higher value conventional oil production is also falling, and only output from lower value extra heavy oil is rising.
PDVSA was in bad financial shape even before the oil price collapse, and since it began it has become much worse. The company will probably have to cut investments in real terms at the time it needs them the most. PDVSA’s financial debt has dramatically increased, and other liabilities have also grown significantly. The cash flow deficit of PDVSA in 2015 can be projected at between US$12 and 20 billion depending on the price of oil and the exchange rate used to estimate it.
Under these stressful conditions, the government has become much more pragmatic and it is trying hard to create the conditions to boost foreign investment in oil and gas. PDVSA is also pushing for measures to improve its cash flow. The subsidized sales to Caribbean and Latin American countries have significantly decreased in 2015, the cash flow that returns to the company from the oil sent to China in repayment for loans has increased, there is a public discussion about raising the gasoline price, and the company is asking to be allowed to increase the amount of dollars that it sells at the more depreciated exchange rate.
Overall, attracting investment in a low oil price scenario is going to be difficult due to a variety of above-ground challenges that remain present, including the lack of credibility of the institutional framework, the cash limitations of PDVSA, the macroeconomic and political instability, the widespread crime and corruption issues, and the over-reached capacities of PDVSA’s human resources. Total production is most probably going to remain stagnant in the short term and is highly unlikely to increase significantly in the next two to three years.
Venezuela’s macroeconomic crisis will likely get worse for lack of adjustment in an election year. There is even a small probability of hyperinflation and a much higher probability of debt default in 2016. Political instability may increase. The legislative elections should produce a majority for the opposition that could intensify the confrontation and might lead to a push to recall the president in a referendum in 2016–17.
