Venezuela: Oil shock and economic catastrophe

Oil has permeated every aspect of Venezuelan life since pumping began in 1914, but mismanagement has fuelled a crisis.

Oil drills are seen in Maracaibo Lake in Venezuela's oil-rich Zulia state in this 2006 file photo [Leslie Mazoch/AP]

Lake Maracaibo, Venezuela – Data released from the Organization of Petroleum Exporting Countries showed that Venezuela suffered its largest monthly oil-production decline in a decade last month.

The OPEC data released on Monday means more trouble on the way for ordinary Venezuelans struggling to survive the unfolding economic disaster.

Oil is Venezuela’s lifeline. Ever since it was first pumped in 1914, oil has found a way of permeating every aspect of Venezuelan life. Initially it helped the backward, malaria-infested Caribbean nation out of poverty, and decades later nurtured a culture of easy wealth. 

Over the past two decades, selling at record-high prices, oil fuelled from president Hugo Chavez’s self-styled Bolivarian Revolution. Sky-high prices meant the folksy and larger-than-life leader could promise anything – from the eradication of poverty to “interplanetary peace”.

And now – because Venezuela relies on oil for 95 percent of its revenue, and imports almost everything it consumes – the drop in the price of oil is challenging the government of the late Chavez’s chosen successor, President Nicolas Maduro.

 Venezuela opposition clash with police, demand recall referendum

Of all major oil producers, low prices have hit Venezuela hardest. But it is the drop in production that will probably deal the country the biggest blow.

OPEC reported a May decline of 120,000 barrels a day with total production now at 2.37 million barrels a day (mbd).  

OPEC reported that founding-member Venezuela was producing 2.52 mbd in February. In 2015, output had averaged 2.65 mbd. Five years ago, it was a little more than 3 mbd. 

The drop in production is alarming, but it’s the inability to capitalise on the previous oil windfall and raise production that seems particularly staggering.

In an interview conducted in 2011 with Rafael Ramirez, the then-minister of energy and president of state-oil company PDVSA, the staunch Chavez loyalist projected production would reach 4 mbd by 2015 and 6 mbd by 2019. In the decades to come, production targets were even more impressive.

His optimism was well-founded. Venezuela sits atop the highest proven reserves of oil in the Orinoco Faja region.

“According to the US Department of Geology, with the technology that is now available, we will be able to extract 45 percent of the reserves, and this means that the recoverable reserves in the Faja are 511 million barrels – which is an extraordinary number,” Ramirez said.

Since Chavez rose to power, oil companies from Russia, Brazil, China, India and the United States, among others, have invested in the 55,000-square kilometres of tar-like crude. And yet, production dropped.

A home for Sofia: A single mother’s struggle in Caracas

Analysts say a lack of investment in basic infrastructure, an inability to pay contractors, and an overall change in the way business was conducted are at the crux of why Venezuela and the PDVSA have failed.

The lack of maintenance is glaringly evident on Lake Maracaibo, in the most western state of Zulia, where the country’s once-booming oil industry first began.

On a recent trip there, local fishermen took Al Jazeera out on the lake and showed areas where bubbling water signalled leaking gas. The ageing pipes that lie underneath the murky waters have been all but abandoned – and it shows.


“Imagine a bowl of spaghetti,” said Nana Romero, a 49-year-old fisherman, describing one of the oldest oil operations in the world.

Nana also described an ecosystem so polluted from oil bursting out of ripped pipes that he can no longer sustain his family on what he catches. His nets often drag more oil than fish.

“We used to catch at least a hundred fish, now we barely go home with a dozen,” he said. 

Nana said he and his friends have complained to PDVSA, but the company that once prided itself in a zero-accident record – and was considered by many the best-run state oil company in the world – has kept largely mum.

For Igor Hernandez, professor of energy at IESA in Caracas, this attitude is yet another sign of how devastating the change in Venezuela’s oil industry has been.

“All of a sudden the strategy was not about productivity, and revenue began to go to non-oil related sectors,” said Hernandez.

In the nearby town of Bachaquero, Nana’s disappointment is shared by workers within the oil sector. Many of their complaints mirror the country’s problems: lack of food, power outages, and crime. For others, PDVSA has failed them at a deeper level.

“We were promised better contractual terms. We are having to fight for better wages, and just simply to get into the official payroll. It was supposed to happen four years ago, and we are still waiting,” said Jose Vargas.

Al Jazeera first met Vargas at a rally in Caracas in early 2015. He had been brought in government-owned buses along with dozens of other workers to march in support of President Maduro.

China to invest $20bn in struggling Venezuela

Wearing red overalls and battered construction helmets, Vargas and his friends promised loyalty to the government that had given them free high-school education through “Mision Ribas”.

Programmes such as Mision Ribas were the backbone of the Chavez revolution. They were also the sort of initiatives that created the “new” PDVSA, miles apart from the traditional business model that the oil giant had followed in the years before Chavez’s ascent to power.

In Chavez’s “Socialism of the 21st Century”, oil was “for the people” and PDVSA was the cash-cow that funded their needs.


‘They’re weak because there’s no food’ – Malnutrition rates rise in Venezuela

Revenue from oil went less and less to increasing productivity or ensuring production, and more and more to building houses for the poor, distributing subsidised food to state-owned markets, and funding social programmes such as the one that gave Vargas an education.

Politically, this was an extremely popular approach among the public, but according to critics it meant the state oil company was unable to capitalise on the decade-long oil boom and exploit the Faja, or even maintain the mature fields of Lake Maracaibo.

“What you have now is a company that favours loyalty above technical expertise,” said a mid-level oil engineer who spoke on condition of anonymity for fear of reprisals. “A lot of the personnel that had the specialised knowledge felt disappointed and left to work in Canada, Colombia or Saudi Arabia.”

According to the engineer, PDVSA is so politicised these days that in the company “every Friday is a red Friday”, in honour of the colour Chavez chose as the banner of his political movement. 

“We are made to wear red to show our allegiance to the government party. The few times I haven’t I can feel colleagues glaring,” he said. “The irony is that things have gotten so bad with them in control that even they are leaving.”

Repeated Al Jazeera requests for comment from PDVSA went unanswered.

The engineer described a situation in the Faja where delicate oil fields, which required sustained and regular pumping, were overexploited.

Maduro’s image cracks under protest pressure

“Production in the field of Furriales declined because of mismanagement. They forced production and it’s all but collapsed,” he said.

Venezuela is, according to the IMF, the worst-managed economy in the world. It also has the highest inflation and an equally worrisome problem of crime.

The government has introduced rolling blackouts in most of the country to try to curb an energy crisis. It has also shortened the working week among public sector employees to two days.

An overall shortage of food means that people have to queue outside food shops for as long as eight hours. These kilometres-long lines snaking around neighbourhood blocks have become the most overt manifestation of a country in deep economic crisis, and one that could be long-lasting.

Venezuela is also one of the worst places to conduct business, and recently referred to as “a man-made catastrophe”, but its unbelievable wealth of resources also means things could change quickly.

If it does, however, it could be because transnational corporations re-enter the country to pump oil – the very reason Hugo Chavez said he needed to transform PDVSA.

 Behind Venezuela’s looming collapse – Counting the Cost

Source: Al Jazeera