Why is Venezuela oil rich, but cash poor?
April 19, 2017
An economic system aimed at freeing Venezuelans from poverty and a corrupt government is now starving them.
Food subsidies, higher education enrolment and access to healthcare were touted by long-time leader Hugo Chavez as evidence that his socialist revolution was a success. However, Chavez' time in office from 1998 to 2013 also launched two developments that lie at the root of Venezuela's current economic crisis: the expropriation of the oil industry in the name of nationalization and the expansion of import-based goods.
Nicolas Maduro, his handpicked successor, continued this trend when he took office in 2013.
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Venezuela is facing the worst economic crisis in its history and the lowest oil production - only 2.5 million barrels a day - in 23 years. Here's a look at five key points to understanding what went wrong.
1. How Venezuela can be oil rich, but cash poor
A lack of economic diversification lies behind Venezuela's economic woes.
According to OPEC's 2015 figures, Venezuela has the most proven crude oil reserves in the world, with over 300 billion barrels. That puts it ahead of Saudi Arabia (266 billion barrels), Iran (158 billion barrels) and Iraq (142 billion barrels).
Even though oil does not automatically equal cold, hard cash, the Venezuelan government has spent its money as if it did. A lack of transparency complicates determining exact figures on spending. What is clear, however, is that Chavez put black gold at the center of his economy: over 90 percent of Venezuela's exports and roughly half of the government's revenue come from oil.
When oil plummeted from $115 (107 euros) a barrel in 2014 to nearly half that, Venezuela's GDP shrank by 10 percent. The cost of a barrel of oil has been hovering around $50 since last year.
2. Oil without expertise is worthless
Oil prices don't tell the whole story. Chavez's approach to profiting from oil - which has been worsened by his successor - can be summed up by one word: mismanagement.
Petróleos de Venezuela (PDVSA), Venezuela's state-run oil company, staged a strike in 2002 after a coup failed to remove Chavez from power. In return, he fired roughly 18,000 of its personnel. The move marked the beginning of an intrusive approach to running state oil.
In 2006, Chavez began another dangerous trend: minimizing investments in infrastructure and maximizing control of oil fields. Production declined without cutting-edge technology from foreign companies, not to mention supplies, like natural gas injections to extract oil.
Last year, Caracas imported 50,000 barrels of light crude oil just to prepare heavy crude oil for export. Without it, Venezuelan oil is useless.
3. Tankers can't deliver
Maritime law only allows vessels to sail the high seas if they meet environmental standards. Venezuela's crude-stained, aging tankers don't.
The PDVSA has a backlog of cleaning bills it can't pay. According to a recent Reuters report, the wait for some tankers lasts up to two months.
Scrub-downs aside, the ever-increasing likelihood of a Russian shake-down has given PDVSA even more cause for concern. In October, Russian state-owned shipping conglomerate Sovcomflot, which provides 15 percent of Venezuela's tankers, refused to release a vessel with Venezuelan oil over outstanding shipping fees. The bill: $30 million.
Venezuela owes money across the world as it defaults on payments for new tankers in Iran and shipyards in Portugal. Reports that PDVSA missed a $404-million payment in November - on bonds maturing in 2021, 2024 and 2035 - have further worried investors. The company denied the reports, attributing the delay to a technical issue.
4. Russia and China bankrolling Venezuela
The biggest concern right now is that Venezuela will default on sovereign debt.
Moody's changed the outlook for Venezuela in 2016 from stable to negative in light of the "high probability" of a default.
International banks have long kept their distance from Caracas, which has imposed currency controls that require businesses to buy their money not through private banks, but through the government.
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In 2014, Venezuela borrowed nearly $50 billion from China and an estimated $5 billion from Russia when oil prices were more favorable. The deal was to pay back creditors in oil and fuel. A Reuters report in January, citing internal documents, said that shipments were delayed by up to 10 months.
Unable to extract more oil, much less ship it quickly, PDVSA has few options to increase its cash flow - making a sovereign debt crisis for the oil-dependent country more likely.
5. How this crisis could spill into the US
A name heard often in connection with Venezuela's crisis is Citgo. PDVSA bought the Houston-based refiner in the 1980s.
In late 2016, Venezuela's state-oil company used nearly half of its shares in Citgo as collateral for loans it received from Russian-company Rosneft.
Although financial experts have questioned the likelihood of Russia taking over Citgo if PDVSA defaulted on the loan, US lawmakers aren't so sure. In April, Republican and Democratic lawmakers in Washington warned President Donald Trump of the unusual business dealings. According to their letter, Russian involvement in the Houston-based company could pose a problem to US national security.
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The only silver-lining of Venezuela's political crisis is the prospect of snap elections. Opposition-led demonstrations might strain Maduro enough to leave office before 2019. Signs of a political shift toward economic diversification and a willingness to open its markets to foreign companies could bolster market confidence - and save Venezuela from drowning in its own oil.