The Fuse

Depressed Oil Markets Threaten Political Change in Venezuela

by Nick Cunningham | December 03, 2015

Venezuela is set to vote on parliamentary elections on December 6, a possible turning point that could create the first major cracks in nearly two decades of uncontested Chavismo rule.

Despite the rampant instability in the country, the chances of an oil supply disruption remain low.

A perfect storm is hitting Venezuelan President Nicolas Maduro all at once, with low oil prices at the center of the turbulence. The economy continues to worsen, the country’s foreign exchange reserves are dwindling, political repression is growing, and the public is becoming increasingly restless. The president’s popularity is slipping at an astonishing rate despite the stranglehold that his ruling party has over the country’s judiciary, media, and many other powerful institutions.

Economic freefall

The Maduro government is guilty of mismanaging the economy, but such problems were easily glossed over in the past when oil revenues were abundant. The collapse in crude oil prices has made Venezuela’s economic problems all too obvious.

Venezuela’s GDP contracted by 4 percent in 2014 and will fall by a staggering 10 percent this year, a sharper contraction than any other country in the world. Inflation is running at over 100 percent. On the black market, obtaining U.S. dollars often cost more than 100 times the official exchange rate of 6.3 bolivars to the dollar.

Ordinary citizens line up outside of grocery stores only to find a shortage of basic foodstuffs and household items. Public safety has also deteriorated to the point of crisis. Venezuela has the second highest murder rate in the world—over 25,000 people were killed in 2014.

“We have performance so negative it’s comparable to a country at war during a time of peace,” Jose Manuel Puente, an economist at Caracas’ Institute of Advanced Studies in Administration, told Bloomberg in an interview.

Oil is the key

Venezuela depends on oil for 95 percent if its export revenue. Even though plummeting oil prices have blown a hole in public finances, Venezuela’s oil sector has been struggling for years.

The state-owned PDVSA has presided over a long period of stagnation in oil production. Venezuela has lost almost a 1 million barrels per day (mbd) in oil production since peaking at 3.5 mbd in the late 1990s. The decline is largely the result of two factors. First, the former President Hugo Chavez purged PDVSA of thousands of experienced oil workers after the 2002-2003 workers’ strike, leading to a massive loss of technical expertise. Second, much of PDVSA’s revenues are used for social and political programs. These programs may have public benefits, but the diversion of resources has led to a shortfall of reinvestment into oil production.

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Chavez and his successor could ignore the mismanagement of PDVSA for much of the past decade because oil prices steadily rose and routinely traded in triple-digit territory between 2011 and the first half of 2014.

The Venezuelan government is desperate for a rebound in oil prices, and as a result, has become the most vocal opponent of OPEC’s current strategy of letting the market dictate prices.

The plunge in oil prices since mid-2014 has hit Venezuela especially hard, leaving it in worse shape than most of its fellow OPEC member states. To put the differing predicaments of OPEC members into context, consider the fact that Venezuela’s foreign exchange reserves have dropped below $15 billion, a 12-year low. Meanwhile, Saudi Arabia is sitting on $654 billion, a cushion large enough to wait out an extended period of low oil prices.

The Venezuelan government is desperate for a rebound in oil prices, and as a result, has become the most vocal opponent of the oil cartel’s current strategy of letting the market dictate prices.

Several times in recent months Venezuelan officials have pushed for an emergency meeting of OPEC members in order to stabilize prices. In October, Venezuela’s oil minister Eulogio del Pino called for a special meeting between OPEC and other oil producers, and also said that $88 per barrel is an appropriate “equilibrium price.” His calls so far have gone unheeded.

On the eve of the December 4 OPEC meeting in Vienna, Venezuela is scrambling to salvage some sort of favorable result. “Our minister Eulogio del Pino will put forth a very clear proposal to respect production ceilings…and examine a 5 percent cut in production,” President Maduro said on state TV. “The hour has come to put the oil market in order.”

Political Upheaval

With the government’s budget hollowed out from the collapse in crude oil prices, President Maduro is running out of options. Maduro’s approval rating has plummeted to just 22 percent, and opinion polls suggest the opposition is headed toward an overwhelming victory on December 6.

But victory is far from assured. Maduro has promised—or threatened—to do “whatever it takes” in order to win. In late November, an opposition politician was murdered. Also, earlier this month, the governor of the state of Miranda was shot when attempting to hold a campaign rally. The opposition blames both events on gangs that are supported by the ruling party, although Maduro denies any involvement.

Ominously, Maduro said in October that he would not “surrender the revolution.” When asked how he would respond to an opposition victory, Maduro said he “would govern with the people, always with the people and the civil-military union.”

Maduro’s intimidation and oppressive control of the airwaves may be yielding some results. His approval rating has ticked up in the final days before the election, but is still far below what is needed for a victory.

Whatever the results of the December 6 parliamentary election, Venezuela’s fortunes are unlikely to turn around.

Whatever the results of the December 6 parliamentary election, Venezuela’s fortunes are unlikely to turn around. Oil prices will likely stay depressed in the near term, and President Maduro may not receive much help from OPEC in tightening the market. A budget shortfall, billions of dollars in maturing debt, and a toxic political atmosphere will leave Venezuela in a state of crisis throughout 2016.