The Fuse

Oil Looms Large Over Venezuela’s Constitutional Crisis

by Matt Piotrowski | August 01, 2017

Venezuela’s death spiral continues. On Sunday, in a sham election, the South American country voted to institute a Constituent Assembly that will write a new constitution. This process will jail critics, crush opposition legislators, and establish an authoritarian government run by President Nicolas Maduro.

Venezuela, an OPEC producer, has the largest proven crude oil reserves in the world, but can’t even feed its own people.

Venezuela, an OPEC producer, has the largest crude oil reserves in the world, but can’t even feed its own people. The situation will only worsen (it needs $117 per barrel to balance its budget). The country has fallen apart as a result of corruption and ineptitude, but even more so because of its over-reliance on oil as a revenue source. Some 95 percent of the country’s export revenue comes from oil. As a result of overspending during the period of high prices followed by oil market weakness from 2014 through the present, Venezuela has seen its economy collapse in a spectacular fashion. Inflation has soared well over 700 percent and protesters have taken to the street on a regular basis. All petro-states have suffered from the three-year weak price environment, but Venezuela’s trials are on a more severe level, providing a prime example of the worst effects of the resource curse and how oil fuels exploitation in producer states.

The election has been condemned by most of the international community and the United States has promised “strong and swift actions.” Last week, the U.S. imposed targeted sanctions against 13 current and former officials who are close to the government last week. On Monday, the U.S. announced sanctions against Maduro’s U.S. assets but has so far stopped short of imposing any oil-related measures. One other option is to cut off crude oil imports from Venezuela, but such a move may cause economic harm to the U.S. as pump prices would likely spike. As of now, the U.S. takes in roughly 700,000-800,000 barrels per day (b/d) from the OPEC country, or about 10 percent of imports. Gulf Coast refiners, most notably Citgo plants that are partly owned by Venezuela’s PDVSA, would have to look elsewhere for heavy crude barrels. On the flip side, in Venezuela, further decline in oil revenues amid an embargo could inflict more pain on the country’s citizens.

One option for the U.S. is to cut off crude oil imports from Venezuela, but such a move may cause economic harm as pump prices would likely spike.

Other options include the U.S. not allowing crude and refined exports to Venezuela. Even though Venezuela produces roughly 2 mbd of oil, PDVSA still needs to buy light crude to dilute its heavy volumes at its facilities in Curacao. Furthermore, the country’s refining capacity is old and decrepit from years of neglect and therefore takes close to 100,000 b/d of refined products from the U.S.

Further instability in Venezuela appears to be a given. The opposition will likely harden in its resistance, while Maduro will further consolidate his grip on power. As long as the situation is in flux, the country’s 2 mbd of crude oil production will remain at risk of going off line or declining.

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Amid high crude inventories and strong non-OPEC supply growth, led by U.S. shale, the global oil market is not experiencing a geopolitical premium due to Venezuela. But the continued deterioration of the country’s production, which has declined by more than a third since the beginning of last decade, will keep Caracas as a major flashpoint for years to come, and reflect the overall unreliability of corrupt petro-states.

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