Venezuela, OPEC, and Coming Shocks for the Global Energy Industry
by Nathan Heath ’20, Senior Research Associate and Political Risk Analyst
Note: This article was completed in August 2019.
For nearly a decade, Venezuela has been the dominant oil power in Latin America. The country’s revenues from its rich petroleum reserves, now believed to be the largest in the world, have bolstered Caracas’s political and economic power in the region. Venezuela’s oil wealth has also attracted the attention of outside powers, some of whom have sought to limit the country’s resource power in order to fulfill their own strategic energy goals. The sanctions regime led by the U.S. has slashed Venezuela’s oil exports, sending waves through global oil markets and signaling the possible of both short- and long-term shocks for OPEC.
Oil accounts for 95% of Venezuela’s oil wealth, and at the turn of the 20th century, the country produced 3 million barrels per day (bpd). Sanctions have substantially reduced production levels in 2019. Crude oil output in March averaged 740,000 bpd, April saw a modest recovery to 780,000 bpd, and May forecasts suggest another decline to 675,000 bpd. The U.S. has historically been the top importer of Venezuelan oil, importing over 60,000 bpd at Caracas’s peak level of production in 1998. However, nearly two decades of deteriorating U.S.-Venezuelan relations have led to a steady decline in Caracas’s oil exports to the U.S., reducing those numbers to 19,573 bpd by January 2019. With the imposition of strict sanctions, U.S. imports fell to 8,096 bpd in February and to 0 in March and April.
Venezuela’s own ongoing economic crisis has compounded the shocks to its oil industry. President Nicolas Maduró’s surprising decision to name General Manuel Quevedo as head of the country’s state-owned oil company Petroleos de Venezuela SA (PDVSA) in December 2017 resulted in organizational shocks such as severe punishments for workers making mistakes, purging of existing leadership to appoint Quevedo’s National Guard to management positions, and frequent embezzlement of company funds by executives. If PDVSA mismanagement wasn’t already bad enough, Venezuela’s economic practices as a whole have also steadily weakened the country’s oil economy. Maduró’s decision to maintain Chavez-era policies of price ceilings and foreign currency controls drove inflation up by 1300% just between November 2017 and 2018, and the IMF forecasts 1,000,000% inflation for 2019; PDVSA has also lost almost 50,000 workers in four years.
U.S. sanctions have further aggravated Venezuela’s oil crisis, as tight restrictions on the country’s petroleum industry have resulted in shocks to the quantity, revenues, and quality of oil, as well as gasoline shortages across Venezuela. The country’s oil production is now at its lowest in 15 years. 2019 forecasts suggest that sanctions could also deprive Venezuela of $6.8 billion in oil revenues. Additionally, sanctions have limited Venezuela’s access to fuels and diluents necessary for producing high quality oil. Major producers such as Exxon-Mobil, BP, and most recently the Spanish oil giant Repsol have ceased operations in Venezuela. Despite the country’s recovery to output of 933,000 bpd in July 2019, sanctions have still forced the Maduró regime to turn to neighboring states such as Colombia for refinery fuel or to Russia for production assistance. Shocks from the sanctions are also being felt in everyday Venezuelan life in the form of gasoline shortages. Cardon, home to the country’s second largest refinery, has shut down due to technical issues, and production in the oil-rich Orinoco Belt region has dwindled to 169,800 bpd since the beginning of May. Currently, gas shortages are causing long lines in the border states of Zulia and Bolivar and the central states of Aragua and Carabobo.
Venezuela’s position as a high-producing OPEC member has caused geopolitical shifts among the world’s leading petroleum producers. Relying on Caracas’s status as the founding member and 3rd highest oil producer in OPEC, Maduró has sought the cartel’s support against U.S. sanctions, seeking to shore up support for his cause among member states who have previously used energy embargoes as a foreign policy strategy against the U.S. (a key example of OPEC’s punitive economic power is the 1970s oil embargo in retaliation for U.S. support of Israel in the October/Yom Kippur War of 1973). Despite Maduró’s pleas, OPEC has refused to alter its neutral stance on Venezuela’s crisis. The organization’s membership has its own interests at play. Saudi Arabia and the UAE want to use Venezuela’s weak bargaining position to bring it under the Arab umbrella; combined with Russia’s petroleum power, a Venezuelan-Arab oil alliance could significantly dent Tehran’s production power. And this isn’t the first time that Venezuela has clashed with OPEC decisions. In 2015, for example, Caracas opposed the Saudi-led decision to cut production on the grounds that the Venezuelan economy desperately needed to pump more oil in order to sustain high revenues.
Nevertheless, OPEC faces significant risks from Venezuela’s oil crisis. Cartel production continues to fall following extension of a January agreement to cut output out of concern that U.S. sanctions on Iran and Venezuela would cause a surplus weakening prices. Simultaneously, low output of heavy sour crude oil, crucial to maintaining crude oil quality in the global market, is raising concerns for both OPEC and its competitors (a severe heavy sour crude shortage has negative implications for U.S. oil refineries). Moreover, OPEC competitors such as the U.S. and China are challenging the cartel’s production power, as U.S. shale production is at an all-time high and Chinese petrochemical initiatives are bolstering Beijing’s power as an energy supplier. The total impact of Venezuela’s oil crisis remains to be seen.
In the short-term, Venezuela’s position in OPEC is not likely to improve. The cartel has its own priorities that run counter to the goals of the Maduró regime – chiefly, the economic threat posed by U.S., Russian, and Chinese energy production; the Sunni Arab rivalry with Iran; and most importantly, concerns over global production levels. Record-high U.S. shale output, skyrocketing revenues for both Rosneft and Gazprom, and Beijing’s foray into petrochemical production are worrying OPEC power players such as Saudi Arabia, the UAE, and Kuwait (as a side note, GCC goals for alternative energy production such as Saudi Crown Prince Mohammed bin Salman’s Vision 2030 are now taking a backseat in light of concerns that the various shocks to the oil market require maintaining high production levels). Similarly, the Sunni Arab oil powers want OPEC neutrality on the U.S. sanctions against Venezuela because they depend on Washington’s support against Iran and also hope to bring Caracas into their sphere of influence as part of the bloc against Tehran. OPEC’s greatest concern, however, is a worldwide surplus in oil production with the potential to drastically shrink global revenues. Accordingly, the cartel is unlikely to support measures leading to increases in Venezuela’s oil production.
There are also long-term implications for the current Venezuela-OPEC relationship. The cartel’s neutrality may have consequences for oil production both in the Western Hemisphere and around the world. Venezuela holds the world’s largest oil reserves and has long been the leading oil producer in Latin America. But regional shifts are now occurring, thanks to Venezuela’s failed economic policies and Washington’s own agenda to punish the Maduró regime with sanctions while increasing the U.S.’s own oil production levels. In Latin America, Venezuela’s spiraling production levels have enabled a wider distribution of oil power. Colombia and Brazil have both increased oil production, and Guyana may well be the world’s richest country soon thanks to recent discoveries of expansive oil reserves. The U.S. may become the dominant oil power in the Western hemisphere due to President Trump’s reversal of Obama-era environmental policies, leading to high oil production and, more specifically, record-high output of shale. Furthermore, despite Russia’s pivotal role in Venezuela’s oil production and its military and political backing for Maduró, Moscow is capitalizing on sanctions against Venezuela to export high amounts of crude oil and shale to the U.S. Increasing oil production from these non-OPEC members threatens to substantially diminish the cartel’s market share in the Western Hemisphere.
Beyond the Western Hemisphere, OPEC’s power is threatened by both Russian and Chinese geopolitical maneuvering. Russia’s increased involvement in Middle Eastern affairs in support of Iran and Syria is owed in large part to Moscow’s priority on securing access to the energy sources and water routes of the Caspian and Black Seas. Over time, Russia’s own production power (newly energized thanks to intermittent relief from U.S. sanctions) and its support for Iran threaten to diminish OPEC’s power either by decreasing the cartel’s market share or causing further internal divisions within the organization. China’s oil production power is also increasing, thanks to the domestic demand for energy driving Beijing’s quest for energy sources in the East and South China Seas, as well as the country’s foray into the petrochemical industry. If Chinese projects its growing oil power in East Asia with the same vigor as its other areas of economic dominance, OPEC’s share in the region could take a significant hit, and its deficit to China will only grow with time as the Belt and Road Initiative expands Beijing’s global economic power. Moreover, Russia and China will happily bring Caracas further into their sphere of influence as OPEC neutrality and Western sanctions alike continue to isolate the Maduró regime, and energy agreements between Venezuela, China, and Russia are a likely consequence of Beijing and Moscow’s increasing power in Venezuela.
In the short-term, OPEC’s policy of neutrality on U.S. sanctions against Venezuela is benefitting the organization in light of its strategic goals to avoid a global oil surplus and contain Iranian power. However, the cartel will need to re-evaluate its policy towards Venezuela’s oil economy if it wants to shore up its market share and overall production against the long-term risks of losing global market share, particularly in the Western Hemisphere and East Asia. The geopolitics of oil is changing thanks to the explosive growth of energy production in the Great Power nations and their allies, so maintaining strong relations with Venezuela should be a priority for OPEC.
Photo courtesy of Reuters.
