Energy Fact & Opinion: Venezuela Attempts to Regain Balance

Facts:

• Venezuela’s government is highly petroleum dependent and in recent years has received nearly half of government revenue from oil exports. Prolonged low prices have devastated the country’s finances and depleted its foreign exchange reserves to the point that Venezuela’s government has begun selling its gold reserves and taking a number of additional steps to shore up its finances.
• Along those lines, on February 17, Venezuela raised the official price of standard 91-octane gasoline by more than 14 times—from 0.07 bolivars per liter (under $0.04 per gallon, among the lowest in the world) to 1 bolivar per liter ($0.60 per gallon). The government also raised the price of premium 95-octane gasoline by 60 times to cut import costs and encourage consumers to switch to less-expensive 91-octane gasoline.
• Low prices have encouraged domestic consumption, which accounts for just under a third of an estimate of 2.69 million barrels per day of production (which some analysts regard as a generous figure), as well as the unnecessary consumption of premium gasoline, which requires the importation of expensive inputs.
• President Nicolás Maduro is also currently attempting to renegotiate Venezuela’s debt to China— based on $65 billion in loans since 2007—which it is currently servicing through crude oil shipments. Because of the decline in petroleum prices, these shipments would need to total around 774,000 barrels per day to keep up with Venezuela’s obligations, though exports are estimated to be closer to 500,000 barrels per day.
• In another cost-saving measure, in mid-January national oil company PDVSA informed its joint venture partners in the Orinoco heavy oil belt that they would need to begin paying for the naphtha they import to dilute that oil into a form that can be sold and exported, contradicting the terms of their contracts.

Opinion:

Venezuela’s gasoline price hike, while in line with the actions of other oil-exporting economies who have reformed domestic gasoline subsidies in the face of the oil price decline, is just the latest in a string of economic and political reforms coming out of the embattled Maduro administration. In recent weeks, President Maduro has replaced his economic vice president after only five weeks on the job, created a military oil service company, and instituted an economic state of emergency contrary to the wishes of the opposition party. While subsidy reform is certainly in Venezuela’s economic interest, the prices remain well below market level and will not be nearly enough to reverse the stiff economic headwinds facing Venezuela. The IMF projects Venezuela’s economy will shrink by 8 percent this year, after its 10 percent decline last year, and inflation could reach over 700 percent. Even if Venezuela is able to restructure its debt with China, that only accounts for one-third of Venezuela’s overall debt. Barclays estimates that at $32 per barrel of oil for 2016, Venezuela would have to use 90 percent of all its oil revenue earnings to service its external debt. The economic and political crisis in Venezuela seems to be reaching a tipping point where default seems all but inevitable and political consequences seem likely.

To stave off collapse, the Maduro government is attempting to regain control over its finances and renegotiate Venezuela’s commitments to domestic consumers, international lenders, and foreign oil companies. Their reactions will have a hand in shaping Venezuela’s trajectory. Although Venezuela is not the oil-producing powerhouse it once was in terms of global volumes, it still produces as much as 2.69 million barrels per day and supplies the United States with roughly 800,000 barrels per day of crude and product. It is too early to tell what consequences a further economic and political collapse in Venezuela would have for regional and global markets.