The Fuse

Venezuela’s Missed Deadline on the Maduro Recall: What to Know

by Zachary Waller | July 27, 2016

Venezuela’s opposition called for nationwide protest today as the National Electoral Council (CNE) missed yesterday’s deadline to verify signatures provided by the opposition Democratic Unity Roundtable (MUD) and announce whether it could move forward with a recall push against embattled president Nicolás Maduro. With the MUD seeing this as a deliberate stall tactic aimed at avoiding a referendum, and Maduro accusing American “imperial aggression” of being behind the opposition push as his supporters lodge complaints against the recall, the ongoing crisis of stability in Caracas has reached a new height that will send shockwaves through the South American country and the region as a whole.

Central to the political chaos in Caracas is the state of the nation’s oil industry and its role in government. Since the oil price fell in 2014, Venezuela, a country heavily dependent on oil exports, has fallen into deep economic crisis, and is today experiencing near-daily anti-government protests and looting. Barely able to export enough oil to make payments on its large debt, the government has found itself without the cash to import adequate amounts of food, medicine, and other necessities. Opposition leader (and general secretary of the National Assembly) Henry Ramos Allup has accused Maduro and his United Socialist Party of Venezuela (PSUV) of being responsible for the crisis through mismanagement and corruption, specifically with regard to Petróleos de Venezuela, S.A. (PDVSA), the state oil company.

Change in Caracas

Without a buffer against low oil prices (one previously existed in the form of the Fund for Macroeconomic Stabilization, but Chávez raided and dismantled the fund), the government has been unable to continue the social programs through which it won the support of the people. As a result of this, the population has become increasingly unwilling to support the ruling PSUV and delivered the MUD a resounding victory in the 2015 general election, handing it 109 of 167 seats in the National Assembly.

The passing of July 26 without any announcement by the CNE has only served to heighten their suspicions about the integrity of the process.

Seizing upon popular discontent (70 percent of Venezuelans say they want Maduro removed from office), the MUD launched the effort to recall President Maduro earlier this year. Under Venezuelan law, a recall referendum must be held before the last two years of a president’s term in order to bring about new elections. Otherwise, a successful recall results in the vice president taking power. This is of particular importance as the deadline for a recall to spur new elections is January 10, 2017; presumably, the opposition would have a resounding advantage in any such election. The MUD recently presented the CNE with a recall petition containing almost 2 million signatures, well above the 200,000 required to begin the recall process. Opposition politicians have accused the CNE of dragging its feet certifying the signatures and believe the council may be trying to delay the recall long enough to retain the presidency for the PSUV. The passing of July 26 without any announcement by the CNE has only served to heighten their suspicions about the integrity of the process.

Deep reliance

Oil has played an important role in Venezuela’s politics since 1921, when the Barroso No. 2 well was drilled on the shores of Lake Maracaibo. In the late 1940s, as international oil companies (IOCs) began turning away from Venezuela and towards the Middle East, Venezuela sent delegations to the Middle East to defend its interests. These delegations laid the groundwork for what would (in 1960) become the Organization of the Petroleum Exporting Countries (OPEC), of which Venezuela is a founding member.

Venezuela nationalized its oil industry in 1976 and established PDVSA as the national oil company (NOC) in charge of the country’s oil resources. PDVSA operated with a large degree of autonomy until 2002, when then-president Hugo Chávez brought the company under strict government oversight after a general strike and installed managers loyal to him and the PSUV.

spending poverty

Under Chávista leadership, PDVSA has gone from being one of the world’s best-managed NOCs to one of the worst. It is bloated (employment more than tripled after Chávez took control), rewards people for loyalty instead of ability, and has failed to properly maintain its own infrastructure and facilities. As a result, Venezuela’s oil infrastructure literally crumbled, causing massive environmental damage and multiple accidents, some of which have resulted in worker fatalities.

This lack of investment can be partially attributed to the large sums of money PDVSA has paid to the government since Chávez took power (other factors include corruption and graft). In 2011 (the peak of the most-recent high-oil-price period), PDVSA paid the government $49.1 billion on $125.5 billion in revenue, of which $30.1 billion went directly to social spending and $19 billion went to taxes and royalties. $15.6 billion of the social spending went directly to social programs and $14.5 billion to FONDEN, a secretive government fund that has bankrolled everything from purchasing Russian jets to building public housing. This is in stark contrast to 2000 (before Chávez took control of PDVSA), when PDVSA paid the government $11.3 billion on $53.7 billion in revenue. Additionally, it is believed PDVSA provides even more money to the government unofficially, with some analysts claiming PDVSA has funneled hundreds of millions of dollars to the government off the books.

venezuela referendum vote

Production shortfalls lead to humanitarian crisis

As PDVSA has struggled, so has Venezuelan production. In 1998, the year before Chávez took power, Venezuela produced an average of 3.5 million barrels per day (mbd). Although Chávez passed away in 2013, Maduro, his successor, has largely left policy unchanged, and Venezuelan production fell to 2.2 mbd in June 2016.

As a result, Venezuela has fallen into deep economic turmoil (inflation is expected to approach 500 percent this year, GDP is plummeting, and the country has $130 billion of national debt it is struggling to pay back) and is unable to afford basic imports, leading to a humanitarian crisis of epic proportions.

Under the Chávez and Maduro governments, Venezuela has become extremely oil-dependent, with oil representing about 95 percent of export earnings and 25 percent of GDP in 2015 (compared to 60 to 70 percent of export earnings before Chávez came to power). Since the oil price dropped in 2014, Venezuelan oil revenues have fallen significantly. This, coupled with the country’s declining production, worsened the country’s economic woes, as PDVSA officially pays about 50 percent of its revenue to the government and, with company revenue falling 27 percent in 2015 alone, the government lost funding it had traditionally used to finance its ambitious social programs. As a result, Venezuela has fallen into deep economic turmoil (inflation is expected to approach 500 percent this year, GDP is plummeting, and the country has $130 billion of national debt it is struggling to pay back) and is unable to afford basic imports, leading to a humanitarian crisis of epic proportions.

inflation and gdp in venezuela

Increasing revenue

Hit hard by low oil prices, Venezuela worked with Libya, Nigeria, and Angola to push for OPEC production cuts, but was ultimately unsuccessful. Although it possesses the world’s largest proved oil reserves, Venezuela has been unable to match Saudi power at OPEC and has failed to convince the Saudis, Iranians, Iraqis, and Kuwaitis to stop increasing production, much less cut production.

Amidst the crisis, PDVSA chief and Oil Minister Eulogio del Pino has sought to increase production and generate more revenue for the government, but has been unable to do so. He has concentrated his efforts on the Orinoco belt—one of the world’s largest oil deposits—but might be better served by first focusing on repairing Maracaibo infrastructure. While Maracaibo’s reserves are significantly smaller than Orinoco’s, it would make greater economic sense for the country to invest in Maracaibo now (if del Pino can find investors—PDVSA’s own massive debt makes it nearly impossible for the company to invest in Maracaibo itself), as bringing existing Maracaibo infrastructure back online would ramp up production significantly faster than developing new fields. Additionally, the region has a break-even production cost of $10/barrel compared to $60/barrel in Orinoco, making it more economical as well. Unfortunately for Venezuela, Schlumberger, which provides the jack-up rigs critical to Maracaibo production, has decided to wind down operations in Venezuela after losing over $500 million due to currency devaluations. This has prompted del Pino to seek investment in Orinoco, as many foreign firms are interested in the vast returns Orinoco has the potential to generate, however far in the future that may be.

Hit hard by low oil prices, Venezuela worked with Libya, Nigeria, and Angola to push for OPEC production cuts, but was ultimately unsuccessful. Although it possesses the world’s largest proved oil reserves, Venezuela has been unable to match Saudi power at OPEC and has failed to convince the Saudis, Iranians, Iraqis, and Kuwaitis to stop increasing production, much less cut production. The Saudis have largely maintained output in the face of lower oil prices, while the Iranians are seeking to regain pre-sanction production levels, and the Iraqis and Kuwaitis simply want to increase market share.

Responsibility

Venezuela is in trouble. Thanks to years of government mismanagement of the oil industry and national budget, Venezuela was not prepared for the oil price drop and, as a result, simply does not have the money to provide its people with basic necessities. As we watch events like the recall process there unfold, it is abundantly clear just how much the country’s mismanagement of its oil wealth has contributed to the seriousness of the crisis.

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