The Oil Crisis That Can’t Be Stopped

Venezuela is “suffering the worst economic depression ever recorded in Latin America.”

By Nick Cunningham, Oilprice.com:

Venezuela’s oil production fell by another 52,000 bpd in February from a month earlier, according to OPEC’s secondary sources data.

That put Venezuela’s oil output at 1.548 mb/d for February, down 100,000 bpd since December, down 600,000 bpd from 2016, and down 1 mbd from 2004. Output will almost certainly continue to head south for the foreseeable future. The uncertainty, then, is only over how bad things might get.

“Production is collapsing in a way rarely seen in the absence of a war,” Francisco Monaldi, fellow in Latin American Energy at the Baker Institute for Public Policy at Rice University, wrote in a new report published by the Atlantic Council. “The country is also suffering the worst economic depression ever recorded in Latin America.” GDP shrank by 16.5 percent in 2016 and 12 percent in 2017. The IMF predicts the economy will contract by another 15 percent this year.

The Atlantic Council report points out the roots of the country’s oil production problems. Former President Hugo Chavez sacked thousands of workers after a strike in 2003, decimating much of the company’s technical expertise. He partially nationalized some oil projects a few years later, leading to the exodus of ExxonMobil and ConocoPhillips from the country. Meanwhile, revenues from state-owned PDVSA were diverted for social policies, which, while they helped reduce poverty, left little for the oil company to reinvest in its operations. Output eroded steadily over time.

Falling production is compounded by the fact that Venezuela only takes in revenue on a portion of its exports. More than half of what it produces is already earmarked for China and Russia, or otherwise sold to the domestic market at a loss because of price controls. That means that out of the 1.8 mb/d that Venezuela produced in November 2017, PDVSA was only generating revenues on about 850,000 bpd in November, the Atlantic Council report concluded.

Worse, the production losses are set to continue. Half of the country’s output comes from joint ventures between PDVSA and international companies, but because PDVSA is way behind on payments to these companies, activity is taking a hit. Private firms are scaling back their operations and declining to make further investments. The rig count in the country has fallen by nearly a third since 2014.

That’s a notable problem because output from the joint ventures had held up better than production that came solely from PDVSA’s operations. With the joint ventures now suffering from declining output, overall production is in a freefall.

Another problem is that a lot of the recent production declines have come from conventional oil fields. Heavy oil production is also falling, but has done so at a slower rate. That means that over the past few years, Venezuela’s production mix has become relatively heavier, which is less profitable and harder to process (and requires imported diluents).

Production is expected to fall to something like 1.4 mb/d this year, according to various forecasts, although there is deeper downside risk. The U.S. has reportedly been considering stronger sanctions against Venezuela, whether in the form of financial sanctions, or perhaps a ban on U.S. diluent heading to Venezuela, or even a ban on Venezuelan oil imports into the U.S.

The removal of Secretary of State Rex Tillerson by the Trump administration and replacing him with current CIA Director Mike Pompeo could also result in an escalation of action against Venezuela.

The financial screws from Washington and Brussels are making things a lot worse for the Venezuelan government. “Buyers are trying to find alternative sources to Venezuela’s supplies, and banks are unwilling to give letters of credit to PDVSA,” the Atlantic Council report concluded. “As a result, Venezuelan exports to the United States, which had been relatively stable for the previous four years, collapsed in 2017.” Because PDVSA had higher margins in the U.S. market, trying to reroute oil shipments will cut into revenues. Selling oil to India or China is possible, but will require steep discounts and higher transportation costs.

A default on debt this year seems likely. Venezuela has less than $10 billion in cash reserves and over $8 billion in maturing debt. A major default could lead to the seizure of PDVSA’s oil shipments, which would plunge the company – and the country – into a much deeper crisis. “These conditions indicate a bleak scenario for 2018 and for the immediate future of Venezuela,” Francisco Monaldi wrote in the Atlantic Council report.

Through all this mess, President Nicolas Maduro seems undeterred, and has announced elections for May. And while China and Russia are unlikely to throw the country a lifeline in a major way as they have in the past, because their state-owned oil companies are taking on a larger role in the country, they could market Venezuela’s oil exports as a way to ensure the oil continues to flow. Even in a pessimistic scenario in which western oil firms exit the country, and Venezuela’s oil production plunges to about 1.2 mb/d, “that may still be enough to sustain an internationally isolated authoritarian government,” Monaldi wrote in the Atlantic Council report. By Nick Cunningham, Oilprice.com

Just as the gasoline market is opened to competition, Mexico becomes one of the worst places in the world for fuel theft. Read… Petro-Plunder Rages in Mexico, Costs Surge 
 

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  35 comments for “The Oil Crisis That Can’t Be Stopped

  1. Rob
    Mar 16, 2018 at 12:53 pm

    They need Bernie Sanders to school them on how socialism is done

    • Harrold
      Mar 16, 2018 at 4:52 pm

      We need to send Bain down there to show us how succesful a leverage buyout and restricting can be!

    • Paulo
      Mar 16, 2018 at 5:26 pm

      US politicians like to call Canada a socialist country, too. However, we produce almost 5 million B/Day and remain the USA’s largest energy supplier.

      The fault isn’t socialism, it’s corruption, failing populism, and a lack of accountability. Kind of like___________ :-) (I was going to say tax cuts and tariffs, honest).

      Norway did pretty good getting the oil out, too.

      Have a good weekend, all. regards

  2. Mar 16, 2018 at 2:07 pm

    Perhaps diverting the energy into electricity and then opening the country to bitcoin mining would be a solution?

  3. Tan Nguyen
    Mar 16, 2018 at 2:11 pm

    Maybe 4 years from now will be a good time to invest in Venezuela

  4. interesting
    Mar 16, 2018 at 2:31 pm

    “The financial screws from Washington and Brussels are making things a lot worse for the Venezuelan government”

    could somebody explain why it us the US government and Brussels is doing that? What did Venezuela do that requires financial screw application?

    • GSH
      Mar 16, 2018 at 3:53 pm

      Venezuela nationalized lots of foreign companies operations/properties over the years and now they are being sued for compensation and are subject to international sanctions.

      • Javert Chip
        Mar 16, 2018 at 8:00 pm

        Whoa!

        International sanctions. Holy cow!

        That means…what? We’re talking about sanctioning people who don’t even have toilet paper?

    • normansdog
      Mar 16, 2018 at 4:33 pm

      They voted for a socialist government – that is usually enough to get you nuked.

  5. cdr
    Mar 16, 2018 at 3:20 pm

    This is a great lesson in economics.

    To the contrary of professional economists (and gold enthusiasts) … printing money excessively is only a necessary condition for hyper inflation or any kind of inflation, it’s not a sufficient condition.

    Hyperinflation requires the ruination of the intrinsic wealth of the nation in addition to a runaway printing press.

    Venezuela is toast. The EU is next.

    • thejerkstore
      Mar 16, 2018 at 7:09 pm

      Use to travel quite a bit to Venezuela in the early 2000’s they were very cosmopolitan and earned the reputation of being the “ugly American” of SA. My how things have changed.

      Wife is Colombian, when the Venezuelans were making a run for the border my sister in laws told me they welcomed them since it’s their sister country. Now that their system is being overrun and they are making a dent in wages they are singing a different tune.

      https://www.zerohedge.com/news/2018-03-14/venezuelas-inflation-surges-new-high-7428

    • Bill
      Mar 16, 2018 at 10:27 pm

      EU next? Only if they systematically destroy, a la Venezuela, all their productive assets & people. More than 50% of V-industry is shut down.

    • JoePlateau
      Mar 17, 2018 at 5:55 am

      Not sure that unlimited money printing is not the only condition necessary for a hyperinflationary economic collapse. Money is information guiding sensible economic decisions, and if you destroy it by printing, you destroy the economy with it.

      I agree that EU is next. EU is richer than Venezuela, so destruction takes longer, but the ECB is trying hard enough.

    • Gandalf
      Mar 17, 2018 at 6:51 pm

      I believe that another key factor required for hyperinflation is that other countries no longer have confidence in your currency and exchange rates for your currency collapse. This makes the cost of imports skyrocket and is probably the leading edge that starts the hyperinflation in a country. This where the health of a country’s overall trade balance has a huge role.

      Japan has more monetized debt per GDP than almost any other industrialized country in the world, which means it is creating massive amounts of fiat money every year, and yet nothing happens. Why?
      Japan fundamentally is a frugal society, and usually runs a net positive trade balance every year. Its trade balance with the US is always a net positive. With those US dollars it can buy all the oil and energy and raw materials it needs. Domestic producers of food stuff are strictly protected by tariffs and thus food is expensive at home in Japan – but the Japanese don’t ever want to become dependent on buying foreign food stuff, especially rice.

      The U.S., EU, and China also run up large amounts of debt, so they are printing money also. But the EU and China, like Japan, usually run a net positive trade balance.

      Only the US runs up both a huge deficit and a huge net negative balance of trade. And it has been doing that since the early to mid 1970s continuously. How is it that the rest of the world lets us do that without setting off hyperinflation?

      Simple. The US won WWII and had the most powerful economy on Earth while everybody else’s economy was in ruins for the next 30 years, and so the US dollar became the world’s reserve currency. Everybody wants to sell us their stuff and they are all willing to take the US dollar, still.
      It’s as if the Greatest Generation, through a great blood sacrifice, had won and bequeathed to us, the later generations of Americans, this magical heirloom, a global credit card with no expiration date or monthly payments.

      Except of course, sooner or later, that expiration date and those monthly payments are going to show up.

    • Otto Maddox
      Mar 18, 2018 at 1:21 am

      Wishful thinking there cdr….hyperinflation requires a loss of confidence in the currency, not some mumbo-jumbo about intrinsic wealth.

  6. 2banana
    Mar 16, 2018 at 3:56 pm

    Bite the hand that feeds you…

    “Because PDVSA had higher margins in the U.S. market, trying to reroute oil shipments will cut into revenues. Selling oil to India or China is possible, but will require steep discounts and higher transportation costs”

  7. Javert Chip
    Mar 16, 2018 at 7:57 pm

    Reading that “Venezuela is “suffering the worst economic depression ever recorded in Latin America” is like reading there might be gambling in Las Vegas.

    Latin America has a long history of vacillating between governments that kill their citizens to governments that impoverish citizens. All this in an area of incredible natural resources & beauty. Argentina was one of the 10 richest countries in the world during the early twentieth century.

    • wkevinw
      Mar 17, 2018 at 1:10 am

      Yes, at one point Argentina was richer per capita than the US.

      As one post indicated, it looks like you need “corruption” coupled with “socialism” to get this kind of collapse. The style of socialism that gets practiced in these places turns into a dictatorship- like lots of other countries; even Russia, which you might say, practices more of a form of “capitalism” at this point,- you might call Russia a dictatorship.

      Public/government corruption is very hard to overcome- no matter the form of government or economy.

      The American system, while far from perfect, does have the separation of powers and other government structures that minimize this. However, the US does have its issues with corruption as well.

      Good luck to the Venezuelan people. What a mess.

      • 91B20 1st Cav (AUS)
        Mar 17, 2018 at 2:15 pm

        good observation, wkevinw. at my normal risk of veering off-topic, my worry these days (in fact of the last couple of decades), is the greatly-growing ignorance/discounting by average and not-so-average (fill in your favorite apparatchik here) Americans of the concept and sanctity of the equal separation of powers. Perhaps it comes from too-many years of parking our toddlers in front of a ‘safe-to-view’ Disney (or similar) media production where the overwhelming form of governance is-royalty. What subliminal effect of hundreds of hours of this subtle indoctrination have on young minds when introduced years before they attend classes in American civics and history? Or perhaps the wish for a single strong leader lies stronger in the human psyche than the desire to engage in the pain-in-the-a** hard work of participatory democracy in our republic. The older I get, the more questions I have about human nature (a moving part of machine that always seems to be behind the curve in the analysis of economics). (Thank you, as always, Wolf-if you edit this response out, I understand completely).

  8. Marc
    Mar 16, 2018 at 8:38 pm

    I keep reading about Venezuela’s socialism as the problem. It looks more like communism. If you review communism’s history, the first thing it does in any country is to destroy the economy, with no care about the results on the people.

    • d
      Mar 16, 2018 at 10:48 pm

      Venezuela’s problem is GROSSLY INCOMPETENT Corrupt, leftist taker Dictatorship.

      I have no time for leftist socialist, however it is wrong to blame them for something they are not responsible for.

      Its like calling the current chinese administration Communist.

      The reality is, that today china is run, buy, and for, a group of ccp mafia clans, making it a Mafia State Dictatorship.

      Now under Boss of Bosses, XI, for life.

      • 91B20 1st Cav (AUS)
        Mar 17, 2018 at 2:21 pm

        check. May we all have a better day.

      • Coaster Noster
        Mar 17, 2018 at 7:27 pm

        What is the difference between a “leftist dictatorship” and any other type of “dictatorship”? Its leaders disparage the USA?

        • d
          Mar 17, 2018 at 9:24 pm

          “What is the difference between a “leftist dictatorship” and any other type of “dictatorship”? ”

          Leftist Dictatorships are based in ENVEY and Vengance, as well as Theft.

          They always seek to take everything from those who were successful (so wealthy) before (No Matter the reason they were successful) so they leave a much bigger mess behind.

          As opposed to Rightist Dictatorships, who will take from anybody who is not a clan member.

          But generally try to keep the means of production and sustenance, (Which enhances their wealth) working. So leaving behind means of improving and continuing the society much more easily.

          Translated:

          When you kick out Rightist Dictators there wont be much but what is there will work and there will be people with the knowledge and brains to work it.

          When you kick out leftist Dictators ther will be nothing left but S(*T and nobody with anything in the way of knowledge or Education to work it anyway (Soviet Russia being an exception, as the Soviets at least educated their people in the Sciences and Trades).

        • d
          Mar 17, 2018 at 9:26 pm

          Plenty of leaders other than Dictators Disparage the USA and wrightly so.

    • Coaster Noster
      Mar 17, 2018 at 7:21 pm

      I recall a book from the 1960s (while at university) “Communist Societies of the United States”. In the 19th century, we had a lot of communism in the United States, typically characterized by a charismatic leader gathering followers, setting up a ‘communal’ system and all it implies, and usually dissolving after one generation. Once the charismatic leader is gone, human greed and frailties take over. The whole thing breaks up (except, the Oneida Society, which became a modified success.)

      Nixon should have handed a copy of that book to Khrushchev at the so-called “Kitchen Debate”…”Hey, Nikita, been there, done that, doesn’t work!” (Big grin) “Knock yerself out!”

      Since the days of Lenin, all the so-called “Communist” governments have been nothing more than criminal enterprises, using phrases and “theory” to mask dictatorial regimes. Slapping a three-pointed Mercedes star on the hood of your Hyundai i10 does not give it Mercedes functionality and engineering, and calling a government “Socialist” or “Communist” does not create any of the beneficial functionalisms, just a smokescreen for criminal activity.

      • d
        Mar 17, 2018 at 11:53 pm

        Difference between stalin, xi, and putin.

        Putin. Unlike xi and stalin, is not pretending to be running a “Communist” State.

  9. Charles
    Mar 16, 2018 at 8:46 pm

    I don’t understand why Venezuela would lack expertise in oil production when it is friends with China and Russia. I thought Russia had a lot of experience with Rosneft. I am assuming China does to with CNOOC.

  10. Bill
    Mar 16, 2018 at 10:06 pm

    Oil would be $30 a barrel if they had their act together and were producing. Venezuela is the designated socialist screw-up. Fuck ’em.

    What’s ahead? Can you say “d-o-l-l-a-r-i-z-a-t-i-o-n”?

  11. normansdog
    Mar 18, 2018 at 9:24 am

    Well, I really like Wolfstreet, lots of interesting articles, but there are a lot of really wild comments here, and an astonishing lack of basic understanding of what happened to the Venezuelan economy. I was also really disappointed to see so many “socialism is evil” and “American capitalism is good” koolaid drinkers here.
    The American population really is the most heavily indoctrinated and brainwashed group of human beings on the planet. Goebbels would have been amazed had he lived to see it.

    • cienfuegos
      Mar 18, 2018 at 1:19 pm

      +10

  12. audrey jr
    Mar 18, 2018 at 5:32 pm

    …the “Baker Institute for Public Policy at Rice University” As in James Baker, the guy whose son was busted in Texas for running cocaine and given a slap on the wrist as punishment despite the fact that Reagan had already implemented the “mandatory minimum” draconian sentencing laws? Wow. Not sure I’d buy a pig in a poke from that group of ‘economist/politicians.

    • Mar 18, 2018 at 6:59 pm

      I don’t remember that. Could you cite a source? Thanks.

      The guy’s full name is James A. Baker III

  13. George McDuffee
    Mar 28, 2018 at 8:53 pm

    Is the current Venezuelan collapse any worse the the Argentine collapse of 2001/2?

    In both cases the economies seem to have been driven back to barter.

    Are the economic sanctions being imposed because of “deep government” resentment over the refusal of Chavez, Kirchner, and the other national leaders refusal to accept W. Bush’s kind offer to expand NAFTA to include Latin America?

Comments are closed.