The Fuse

In Venezuela, Maduro’s Grip Threatened as Oil Industry Breakdown Continues

by Paul Ruiz | @pmruiz | January 23, 2019

Venezuela’s government veered closer to collapse on Wednesday as an opposition leader declared himself the country’s legitimate president. Juan Guaido, a Venezuelan engineer and president of the opposition-led National Assembly, said in a webcast that he was invoking a constitutional amendment allowing for the legislative head of government to lead a caretaker government until new elections can be held.

The United States promptly recognized Guaido as the leader of “the only legitimate branch of government duly elected by the Venezuelan people,” The White House said in a statement. “The people of Venezuela have courageously spoken out against [President Nicolas] Maduro and his regime and demanded freedom and the rule of law.”

Amid risks of armed insurrection and active street protests, the question may not be if Maduro will lose power, but when. Maduro was dubiously elected in 2013 following the death of predecessor Hugo Chavez. In 2014, the country entered an economic recession as gross domestic product declined 3 percent on the year. Venezuela has since experienced multiple years of hyperinflation, food shortages, unemployment and mass migration. Its credit rating collapsed and forced the government to utilize alternative avenues of financing, such as an oil-backed cryptocurrency.

2018 was the worst year on record for the country’s economically and strategically important oil industry, and observers think production will decline even further.

Despite having the world’s largest petroleum reserves, oil production also collapsed. In December 2018, Venezuela produced 1.25 million barrels per day (Mbd), 390,000 barrels per day less than the previous year. 2018 was the worst year on record for the country’s economically and strategically important oil industry, and observers think production will decline even further. At the Argus Americas Crude Oil Summit in Houston, Mike Wittner, managing director and global head of oil research for investment bank Société Générale predicted the country’s crude output would fall to less than 1 Mbd by year-end 2019. In late October, IEA forecasted Venezuelan production to bottom out in the mid-2020s before beginning a gradual recovery back up to 2.5 Mbd by 2040. These forecasts of a slower rate of decline may turn out to be optimistic.

Maduro’s Fork in the Road
Venezuela’s unfolding political chaos presents a fork in the road for the current regime. Maduro’s government will either ride out this current storm of protests and armed rebellion and sustain the status quo, or fall under a coup led by the country’s centrist opposition. Maduro’s government has so far maintained its grip on power, surviving several small-scale attacks – most recently in August, when Maduro escaped injury after a drone exploded near him during a public speech.

But there are signs that the latest developments could imperil the current government. Today, leaders from the governments of Brazil, Chile, Argentina, Canada and the United States among others recognized Guaido as the legitimate head of state. Several skirmishes between protesters and the military have been reported across the country. And in response to American recognition of the current party opposition, Maduro reportedly “broke off relations with the United States,” ordering U.S. diplomats to leave the country within 72 hours.

Maduro nevertheless retains control of the military and state security apparatuses—the central arbiters for dictating control of the country in past revolutions. Besides threats to their lives, Maduro and his allies also have many other reasons to fear an uprising. Extradition to the United States in connection with international drug trafficking crimes, human rights abuses, and state-directed corruption are all possible if he, or his allies, lose power.

While heavy crude oil like Venezuela’s can be procured elsewhere, replacing it is at minimum an inconvenience for a refinery system that is configured to process large quantities of Venezuelan heavy crude.

Venezuela’s announcement that it would cut ties with the United States also preempted the Trump administration’s likely decision to sanction the country’s crude oil exports. In December, Venezuela exported roughly 500,000 barrels per day to United States Gulf Coast refiners, who have seen their imports of Venezuelan heavy crude shrink as production declines and more existing exports are diverted to Russia and China. U.S. Gulf Coast prices for Venezuela heavy crude oil rose dramatically on Wednesday, with the price of Mars Sour (a U.S. heavy blend) climbing to a five-year high premium versus WTI. While heavy crude oil like Venezuela’s can be procured elsewhere, replacing it is at minimum an inconvenience for a refinery system that is configured to process large quantities of Venezuelan heavy crude.

For his part, Guaido has not proposed many reforms to the state oil industry. His party, Popular Will, supports democratic reforms and fair elections. Its platform, “The Best Venezuela” opposes nationalization and calls for the country to become the world’s leading producer and exporter of oil. Should the situation in Venezuela deteriorate to the point of a change in government, the productive potential for Venezuela’s oil industry is likely to be more positive compared to the status quo.

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