Oil-rich Venezuela mired in uncertainty

After 16 years of radical left-wing rule, Venezuelan politics is changing. The opposition has won a two-thirds majority in congress, and after his very narrow win in 2013, president Nicolás Maduro, who would otherwise stay in power until 2018, could now face a recall referendum. Whether he retains his grip on power, leaves peacefully or struggles with the opposition could determine the fate of Latin America’s largest oil sector.

With shortages of food and even toilet paper, an epidemic of violent crime, inflation at more than 100 per cent and the economy shrinking by 10 per cent this year, the Bolívarian Republic is paying the price for years of mismanagement, rampant corruption and now tumbling oil prices. Even if Mr Maduro hangs on, the opposition’s super-majority will allow them to replace judges and election officials, and perhaps pressure the ruling party for better policies.

When Mr Maduro’s predecessor, the mercurial Hugo Chávez, was elected in 1999, Venezuela produced 3.1 million barrels of oil per day, behind only Saudi Arabia and Iran in Opec. Now, that has slumped to less than 2.4 million barrels per day, Opec’s sixth-largest.

Venezuela’s resource-nationalist policies not only constrained its own output, but inspired a wave of similar policies elsewhere, pushing oil prices to record highs. Living in a fool’s paradise where refuelling a car with petrol costs less than filling its tyres with air, Venezuela’s leaders bought political influence with petrodollars and accumulated heavy debts even in the good times.

Now, Venezuela is following rather than setting the trend. Its elections appear to mark the end of a leftist, resource-nationalist phase in Latin American politics. Mauricio Macri, the new centre-right president of Argentina, has replaced Cristina Fernández de Kirchner, who nationalised Repsol’s YPF oil subsidiary. Dilma Rousseff of Brazil is mired in a corruption scandal centring on the stumbling state petroleum company Petrobras. Mexico is opening its oil sector, which was nationalised back in 1938, to international investment. The United States has even restored diplomatic relations with Cuba after 54 years.

Change in Venezuela could be good or bad news for other oil producers. A new, more competent government could fix up the oil sector, streamline the state oil company PdVSA – which has been turned into a vehicle for social work – and attract international investment, as Mexico is doing. The exodus of skilled oil-workers to countries such as Colombia and Canada could be reversed. The country holds one of the world’s largest oil resources, the extra-heavy crude of the Orinoco Belt. Increasing Venezuelan output would further test Opec unity, keep prices low, and extend the current slump.

However, the governing United Socialist Party (PSUV) continues to have strong support and controls many of the levers of power. In late 2002, an anti-Chávez general strike shut down Venezuelan oil exports almost completely. Under an ideologically purged PdVSA, the same could happen again but in favour of the PSUV.

Economic reform will be painful – Venezuela will probably default on some debts, the official exchange rate will have to be heavily devalued, government spending will be slashed, petroleum giveaways to neighbouring countries eliminated, and subsidies reduced. This could easily trigger unrest.

Greater openness to international oil companies will attract predictable condemnation from leftists at home and abroad. But, at a time that they have plenty of opportunities and limited capital, foreign oil companies will want to be assured that their investments will not be nationalised again if the political winds shift. They have seen this game before in Argentina, Bolivia and Ecuador, among others.

A prolonged struggle between the PSUV and opposition could therefore hamper Venezuela’s oil output even further, providing some relief for other producers. The voters’ choice hopefully means a better life for Venezuelans of all classes. But the road there will be bumpy, and the oil market has to digest another source of uncertainty.

Robin Mills is the head of consulting at Manaar Energy and the author of The Myth of the Oil Crisis

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