We examine why Venezuela’s oil-based economy is falling apart despite the fact that global oil prices have recovered.
Cereal-maker Kelloggs became the latest multinational to pull out of Venezuela this week. Management blamed the economic crisis unfolding in the Latin American nation.
Despite holding one of the world’s largest reserves of heavy crude oil, Venezuela cannot feed its people.
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Hyperinflation, along with a $70bn bond default means that basic food and medicine can’t be imported. The military has been put in charge of food distribution, and the government is running out of cash.
But despite the near economic collapse, President Nicolas Maduro is standing for re-election. The United States, the European Union and 15 of Latin America’s biggest countries have already said they will not recognise the result.
The country’s sole source of income is oil, but even the industry is in meltdown.
The oil price recovery has done little to help Venezuela. The Organization of the Petroleum Exporting Countries (OPEC) says oil production is down to a 30-year low of around 1.4mn barrels a day.
And troubles are mounting for Venezuela’s state-run oil company PDVSA as lawsuits over unpaid bonds are bubbling. This week, the Caribbean Island of Curacao ruled that US oil major ConocoPhillips could seize assets owned by PDVSA.
The market has already absorbed the idea that Venezuela increasingly will no longer be a key player within OPEC and that all production will systematically continue declining.
Venezuela uses refineries on the Island of Curacao to store a significant portion of the oil it exports to its foreign markets. Direct sanctions on the oil sector are also a possibility.
“Until now, a perception within markets has been that Venezuela pays late, but pays,” explains Diego Moya-Ocampos, senior analyst for the Americas for IHS Markit.
“Few creditors have dared to initiate or file legal actions against Venezuela to try to seize assets. Instead, they’ve preferred to look behind the scenes from some sort of payment agreement. After Conoco and the recent actions of these days, we’re seeing a more aggressive stance and less patience from creditors trying to seize Venezuelan assets, and certainly, no one wants to be the last in line.”
Moya-Ocampos believes that even though global oil prices are increasing, “the market has already absorbed the idea that Venezuela increasingly will no longer be a key player within OPEC and that all production will systematically continue declining.”
“The issue of the economy doesn’t seem to be a priority for President Maduro. He’s just focused on trying to maintain power … but as we speak, the economy is likely to contract at least 15 percent this year,” says Moya-Ocampo.
“Inflation’s already the highest in the world and will likely continue escalating, shortages of food and basic goods will likely continue intensifying, and with oil production continuing to decline, the government has increasingly less room to manoeuvre. We’re not seeing any signs of Maduro’s administration sending any indication that they’ll radically change the direction of the economy.”
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