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Page added on April 25, 2017

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Venezuela’s Complicated Crisis For Oil

Production

The cold logic of the oil market dictates that crisis usually equals profit. That’s because a crisis in oil usually means a supply crisis, as some large producing country becomes embroiled in war or civil unrest or sanctions or some other geopolitical mess.

The country currently occupying the unenviable position of being the likeliest source of a supply shock is Venezuela. The collapse in oil prices has savaged the country’s economy and brought political tensions to a head in the form of a constitutional crisis, mass protests and, particularly over the past week or so, looting and fatalities.

From the oil market’s perspective, the question is whether Venezuela’s intensifying problems will cause an outright collapse in its production, currently running at about 2 million barrels a day. It’s a bit more complicated than that, though.

Venezuela’s supply has slumped already:

Lost Decade
Venezuela’s output has fallen already by almost a million barrels a day since 2006
Source: BP, International Energy Agency
Note: Data for 2016 is an estimate, reflecting IEA data showing a drop of 220,000 barrels a day that year.

But so has domestic demand:

The Other Slump
By 2015, Venezuela’s oil demand had dropped 17 percent from its peak in 2013
Source: BP

Put the two together, and Venezuela’s surplus production compared to domestic demand looks like this:

Stability (Kinda)
Venezuela’s surplus oil production over domestic demand actually stabilized after 2013 even as production fell
Source: BP

So, as of 2015, Venezuela’s woes had taken down its production but, by dinging demand, meant excess oil available on the global market had stopped falling. The implication is that, despite the collapse to date, the worst of Venezuela’s shock to the oil market is yet to come.

Again, though, it’s complicated. Part of the issue concerns Venezuelan demand, which is hard to pin down on a timely basis. Philip Verleger, an energy economist who has been tracking Venezuela’s decline for some time, estimates demand there may have fallen another 10-15 percent in 2016.

At the midpoint, that would be another 85,000 barrels a day, offsetting roughly 30 to 40 percent of the International Energy Agency’s estimate of the decline in Venezuela’s oil production last year. On that basis, surplus oil available for the world market would have resumed its decline, falling to 1.81 million barrels a day.

That figure could really nosedive this year, though. If Venezuela’s production remains about 2 million barrels a day this year and demand falls, say, another 12.5 percent, then that would mean roughly 330,000 barrels a day taken off the global market. At just less than 1.5 million barrels a day, Venezuela’s surplus would have dropped to its lowest level since 1986.

The question is whether demand collapses even faster. Here are the International Monetary Fund’s forecasts for Venezuela’s economy. They aren’t pretty:

Negativity
Venezuela’s economy went into free fall in 2015 and isn’t expected to resume growing in real terms for years to come
Source: International Monetary Fund
Note: Change in GDP at constant prices. Data for 2016 onward are estimates.

To get a sense of what the puts and (many) takes in that chart mean for the size of the Venezuelan economy overall, here’s how they stack up on a cumulative basis:

Throwback
Venezuela’s economy is expected to end this decade at roughly the same size it was at the end of the 1990s
Source: International Monetary Fund
Note: GDP in real terms relative to 1996.

Given GDP is estimated to have fallen by 16 percent last year alone, and is then projected to shrink by another 12 percent over the following 3 years, Venezuela’s oil demand could keep falling at a precipitous rate, especially if civil unrest intensifies.

An economy that’s reverted to pre-2000 levels could mean demand slips below 500,000 barrels a day. True, the population has risen by almost 40 percent since 1996, but that’s no guarantee of rising demand: Oil consumption per capita fell by 19 percent between 2013 and 2015 alone.

Could oil production show any resilience in this scenario? That’s the big question. On the one hand, it seems hard to imagine it could, especially given the declines to date. On the other, Luisa Palacios, Head of Latin America macro and energy research at Medley Global Advisors, points out Venezuela’s oil production is scattered around the country and offshore. Meanwhile, its refineries can be militarized if necessary.

To be clear, barring an unforeseen jump in oil prices, Venezuela’s production can’t simply ride out this crisis. In particular, the increasingly heavy nature of Venezuela’s oil necessitates blending it with imported light oil — much of it from the U.S. — which requires payment in hard currency (see this).

But there is a plausible scenario whereby, before Venezuelan oil production slumps again, further economic collapse and perhaps a breakdown in internal fuel distribution unleashes a demand shock first. Venezuela’s tragedy isn’t just a wildcard for supply.

bloomberg



6 Comments on "Venezuela’s Complicated Crisis For Oil"

  1. Hello on Tue, 25th Apr 2017 2:12 pm 

    We can see how bad things need to get before there’s outright revolution. Pretty bad.

    So any hope for a right revolution in europe is pretty slim, till….it’s too late.

  2. dave thompson on Tue, 25th Apr 2017 5:24 pm 

    “the increasingly heavy nature of Venezuela’s oil necessitates blending it with imported light oil — much of it from the U.S.” THIS line is the tell, THE US wants a failed state of Veezuela, ever since Chavez thumbed his nose at US imperialism and hegemony.

  3. Plantagenet on Tue, 25th Apr 2017 6:15 pm 

    The Venezuelans decided to model their economy on the Cuban Socialist model and they’ve recreated it perfectly—-food shortages and local famine, violent repression of unions, complete lack of consumer goods, political prisoners government takeovers of factories and farms and the oil sector followed by collapsing production.

    They’ve even got a leader in Maduro who’s a nutter who claims to talk to birds and and likes to rant Marxist drivel for hours in his speeches. Venezuela has copied Cuba exactly!

    Cheers!

  4. dave thompson on Tue, 25th Apr 2017 6:34 pm 

    Planta, Cuba never had an oil field industry per say. Only imports. However, Cuba did kick out the imperialistic US Coca Cola run sugar industry and in turn the US almost started WWIII over it. Any place you see a country that goes against the US and it’s multinational banking/business interests for the rights of the people to self determine their own sovereignty the US will cut off as much as possible destroying the peoples lives and blaming “socialism”

  5. bobinget on Wed, 26th Apr 2017 6:07 pm 

    Today:

    ‘Foreign’ oil companies are withdrawing workers.

    “The two companies, as well as Chevron, hold minority stakes in 40 projects with state-run Petroleos de Venezuela, or PDVSA. Caracas depends on the limited revenues it gains from the projects to keep the government functional in this challenging financial period.

    Venezuela is South America’s largest oil exporter, but high extraction costs and low barrel prices have cut deeply into the nation’s government revenues, making it difficult to import much-needed foreign goods and medical supplies.

    Reuters reports that over a dozen people have lost their lives in clashes between police forces and protestors against leftist President Nicolas Maduro over the past few days. Others have died during midnight looting incidents.

    Maduro has accused demonstrators of plotting to topple his government. So far, none of the nations’ oil fields – located far from city centers – have been affected by the strife, though National Guard officers have fired tear gas in the capital, where several multinational oil companies base their operations.

    Norway’s Statoil has withdrawn between 5-6 foreign workers from Venezuela. The firm’s website said it employs 30 people in the country, though it is unclear how many of them are locals”

  6. Cloggie on Thu, 27th Apr 2017 4:13 am 

    Bye bye James Monroe.

    https://en.wikipedia.org/wiki/Monroe_Doctrine

    http://edition.cnn.com/2017/04/27/americas/venezuela-leaving-oas/

    Venezuela says it will split from OAS as unrest continues

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