Venezuela’s Decline From Oil Powerhouse to Poorhouse to Madhouse

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Oil is at the center of the Venezuelan economy. It accounts for 95 percent of the country’s export revenues and bankrolls the regime of President Nicolas Maduro.

Now, with protests spreading across the country and the U.S. recognizing opposition leader Juan Guaido as the interim president, the situation in the country is becoming more unstable by the day. U.S. President Donald Trump is said to be considering imposing sanctions on imports of Venezuelan crude, a move that would hurt some American refiners as well as deal a fresh blow to the Latin American nation’s oil industry.

Crude oil production sinks in Maduro’s Venezuela

Barrels/day

Dec. 2002–Feb. 2003: General strike. Production collapsed and refineries in Venezuela shut down. U.S. refiners had to pay up to buy oil from elsewhere as Venezuela was unable to meet contracts.

Chavez

4M

Maduro

3

April 11, 2002:

Coup d'etat against

Chavez; Chavez re-instated

2

1

0

1917

2018

Dec. 2002–Feb. 2003: General strike. Production collapsed and refineries in Venezuela shut down. U.S. refiners had to pay up to buy oil from elsewhere as Venezuela was unable to meet contracts.

Chavez

Maduro

4M

3

April 11, 2002:

Coup d'etat against

Chavez; Chavez re-instated

2

1

0

1917

2018

Maduro

Chavez

4M

3

2

1

0

1917

2018

Dec. 2002Feb. 2003: General strike. Production collapsed and refineries in Venezuela shut down. U.S. refiners had to pay up to buy oil from elsewhere as Venezuela was unable to meet contracts.

April 11, 2002: Coup d’etat against Chavez; Chavez re-instated

Source: Pode, Memoria Petrolera and OPEC Secondary Sources

The decline in Venezuela’s oil production, which began under Maduro’s mentor Hugo Chavez, has accelerated in the past two years. As output plunges toward 1 million barrels a day, the lowest level in seven decades, the country is running out of cash to pay for food and medicine. Salaries can’t keep up with hyperinflation, last estimated by the IMF at an absurd 10 million percent. Living in a country where the price of food can change within hours prompted more than 1.5 million Venezuelans to flee the country in the past four years.

Venezuelans flee a country in crisis

Estimated migrant flows, by year

2015

About 166K Venezuelans in Spain

About 256K Venezuelans in the U.S.

Italy

U.S.

Mexico

Venezuela

Ecuador

Peru

Brazil

Chile

Argentina

2017

About 351K Venezuelans in the U.S., 37% increase from 2015

About 208K Venezuelans in Spain, 25% increase from 2015

Venezuela

In 2015, the Venezuelan population in Chile was around 8K. In 2017, the number jumped to more than 119K. That’s a 1,388% increase.

2015

About 256K Venezuelans in the U.S.

About 166K Venezuelans in Spain

Italy

U.S.

Mexico

Venezuela

Colombia

Ecuador

Brazil

Peru

Chile

Argentina

2017

About 351K Venezuelans in the U.S., 37% increase from 2015

About 208K Venezuelans in Spain, 25% increase from 2015

Venezuela

In 2015, the Venezuelan population in Chile was around 8K. In 2017, the number jumped to more than 119K. That’s a 1,388% increase.

2015

About 256K Venezuelans in the United States

About 166K Venezuelans in Spain

Italy

U.S.

Mexico

Venezuela

Colombia

Ecuador

Brazil

Peru

Chile

Argentina

2017

About 351K Venezuelans in the U.S., 37% increase from 2015

About 208K Venezuelans in Spain, 25% increase from 2015

Venezuela

In 2015, the Venezuelan population in Chile was around 8K. In 2017, the number jumped to more than 119K. That’s a 1,388% increase.

2015

2017

About 256K Venezuelans in the U.S.

About 166K Venezuelans in Spain

About 351K Venezuelans in the U.S., 37% increase from 2015

About 208K Venezuelans in Spain, 25% increase from 2015

Italy

U.S.

Mexico

Venezuela

Venezuela

Colombia

Ecuador

Brazil

Peru

Chile

Argentina

In 2015, the Venezuelan population in Chile was around 8K. In 2017, the number jumped to more than 119K. That’s a 1,388% increase.

Note: Estimates based on International Organization for Migration and American Community Survey’s calculation for 2016 and 2017 do not add data of refugees or asylum seekers
Source: International Organization for Migration and American Community Survey

The United Nations estimates there are 3 million Venezuelans living abroad, including some 2.4 million spread across Latin America and the Caribbean. Those seeking to leave the country who can’t afford black-market rates can face days-long lines to get passports.

The situation got worse in August 2017, when U.S. President Donald Trump imposed financial sanctions against Venezuela and its state oil company PDVSA in a bid to punish Maduro for the economic mismanagement and endemic corruption.

Crude oil imports from Venezuela decline

Barrels/day

India

US

China

March 2013

Nicolas Maduro takes office

1.5M

Oil price boom period

1.2

0.9

0.6

0.3

0

Jan. 2004

Dec. ’18

India

US

China

March 2013

Nicolas Maduro takes office

1.5M

Oil price boom period

1.2

0.9

0.6

0.3

0

Jan. 2004

Dec. ’18

India

US

China

March 2013

Nicolas Maduro takes office

1.5M

Oil price boom period

1.2

0.9

0.6

0.3

0

Jan. 2004

Dec. ’18

Source: India’s Ministry of Commerce, U.S. Energy Information Administration, Bloomberg

U.S. banks became more careful about giving credit to U.S. refiners to buy Venezuelan crude, fearful about a potential outright ban on imports. International oil companies operating in the country cut investments amid concerns that they would be seen in violation of sanctions.

China takes over

Venezuela sends less subsidized oil to its allies in the Caribbean, while China gets a bigger share

Energy Cooperation Agreements

Chinese Fund (crude and products)

600K

505K

300

86K

86K

0

2008

2016

Energy Cooperation Agreements

Chinese Fund (crude and products)

600K

505K

300

86K

0

2008

2016

Energy Cooperation Agreements

Chinese Fund (crude and products)

600K

505K

300

86K

0

2008

’16

Source: PDVSA annual reports

Venezuela’s dwindling production has reduced the country’s influence across Latin America. Where Venezuela once provided subsidized oil to neighbors, now it needs to hoard all it produces in order to be able to pay bondholders, as well as China and Russia, which have loaned almost $69 billion in the past decade in exchange for oil.

So far, the government’s solution was a selective default that’s estimated at $6.1 billion of international securities. Loans granted by the Chinese Development Bank and Russian oil company Rosneft Oil Co PJSC have been either renegotiated or paid with delays. A bond that PDVSA continues to pay is one secured by its interest in Citgo, its money-earning U.S. refining arm.

Short of cash, Venezuela pays its debts to China and India with oil. With output falling, Petroleos de Venezuela SA has starved its own refineries. While U.S. refineries are running close to their maximum, the ones in Venezuela are operating at less than a quarter of capacity. The result is fuel shortages, especially in the countryside, adding to the pain of Venezuelans.

Refinery capacity utilization

Oil price boom period

81%

80%

60

40

22%

20

0

1997

’18

Oil price boom period

81%

80%

60

40

22%

20

0

1997

’18

Oil price boom period

80%

81%

40

22%

0

1997

’18

Source: 1997-2016: Venezuelan government; 2017-2018: data compiled by Bloomberg

The maneuvers haven’t been enough to stop a fall in crude oil exports that pay debts and bring in necessary cash for the economy to function. Shipments fell by almost a quarter in the past two years.

Number of vessels loading Venezuelan crude oil

80

70

60

53

40

20

0

Jan. 2017

Dec. ’18

80

70

60

53

40

20

0

Jan. 2017

Dec. ’18

80

70

60

53

40

20

0

Jan. 2017

Dec. ’18

Source: Shipping reports, ship-tracking data compiled by Bloomberg

Lately, companies have been successful in using courts to force PDVSA to pay some debts. ConocoPhillips strong-armed PDVSA to agree to pay a $2-billion settlement—related to asset seizures carried out in 2007, under the late president Hugo Chavez—after obtaining court orders blocking the Venezuelan oil company from using its extensive network of oil terminals in the Caribbean. The court orders also prevented PDVSA from running its refinery in Curacao, which shut due to a lack of oil.

PDVSA agreed to pay Conoco, signing over cargoes of oil to the U.S. company to free up the terminals it needs to store and re-export crude and fuel oil.

Signs point to further trouble for the country’s oil industry. Even as Venezuela borrows another $5 billion from China to almost double oil production that’s fallen to a seven-decade low, analysts see output sinking further this year, to below 1 million barrels a day. The U.S. State Department has urged U.S. citizens to leave and President Donald Trump is said to be considering imposing sanctions on imports of Venezuelan crude, a move that would hurt some American refiners as well as deal a fresh blow to the Latin American nation’s oil industry.

In the longer term, a new regime could result in higher production if it welcomes back international oil giants to repair and expand its fields.