Venezuela Oil - Will U.S Sanctions Backfire? - Eaglesinvestors

Venezuela holds one of the biggest reserves of heavy crude oil in the world. However, the country could barely feed its people. Why ? in today’s article we will discuss and analyze Venezuela oil history and the fluctuation in prices over time. We will discover how the oil industry in Venezuela has affected its people and make reference to some recent news.

A Brief History of the Venezuela oil industry

venezuela oil

The oil production in Venezuela reached an all-time high in 1970 as the country produced 3.8 million barrels in a day (BPD). In 1971 Venezuela started taking steps to nationalize its oil industry. In 1976 their oil industry was officially nationalized. With this progression, came the establishment of the Venezuelan state-owned oil company called Petróleos de Venezuela S.A. (PDVSA).

Oil production in Venezuela declined over 50% between the years 1970 and 1985. However, it then started to grow once again. In the attempt to develop the heavy oil in the Orinocco Belt as well as attract foreign investors, Venezuela opened its oil industry to foreign investments in 1997.

Venezuela oil production recovered by 1998 almost reaching its former high at 3.5 million BPD. In 1999, Hugo Chávez started service as President of Venezuela. For the duration of the Venezuelan general strike between 2002–2003, Chávez dismissed 19,000 employees of PDVSA and replaced them with employees that were loyal to his government.

Note

As mentioned before Venezuela has the biggest proved oil reserves in the world. However, a majority of Venezuela’s proved oil reserves comprises of extra-heavy crude oil in the Orinoco Belt. Moreover, The Orinoco contains approximately 1.2 trillion barrels of oil resource; this is not to be confused with proved reserves.

This oil is specifically difficult to produce. Hence, Venezuela invited international oil companies to participate in the development of these reserves in the country. Companies such as ExxonMobil, Chevron, BP, Total and ConocoPhillips made billion-dollar investments towards the technology and infrastructure that would turn the extra-heavy oil to crude oil exports.

The challenges faced in the production of this oil require significant capital investment. Those investments are risks for the oil companies making them. Nevertheless, they will pay off if oil prices go up.
On that note let’s look at the Venezuela oil prices.

How does oil price affect Venezuela’s economy?

venezuela oil

Oil price is one of the most severely watched trends in economics. This is because it affects the economies of every nation in the world. Other countries, like the United States, are economically better off when oil prices are low. The United States imports a lot more oil than it exports. Moreover, its citizens consume oil and gas at a much higher rate than any other country in the world. Due to the fact that the U.S. purchases more oil than it sells, and also because gas constitutes a major budget item for most U.S. citizens, a decrease in oil prices generally improves the U.S. financial picture.

Generally

Countries that depend on oil exports to fuel their economies that are not amongst the largest consumers of oil in the world have a unique relationship between their economic health and oil prices. Even though it upholds an inverse relationship with the United States economy; Oil price and Venezuela’s economy ultimately move in lockstep. When oil prices rise, Venezuela delights in good economic times. However, When oil prices fall, economic disaster arises for the South American country.

Oil consists of 95% of Venezuela’s exports as well as 25% of its gross domestic product (GDP), therefore high prices benefit the country’s economy

Recent Venezuela oil news

Sanctions placed on the oil giant of Venezuela by the US – will it backfire?

The Trump administration has announced sanctions against Venezuela’s state-owned oil giant company PDVSA. These new U.S. sanctions on PDVSA not only put more pressure on Venezuelan President Nicolás Maduro’s government but on some U.S. refiners as well that depend on crude imports from the country.
As it stands Venezuela is currently in the middle of a political deadlock between two men who claim to be the legitimate presidents of Venezuela. There is Nicolás Maduro, who was re-elected president last year in May (2018), and opposition leader Juan Guaidó. Therefore this move may anger Maduro and make him want to cling tighter to his power.

We will not go into the details of that predicament!

venezuela oil

The sanctions are quite complex, but they come down to this. All PdVSA assets such as cash and property within the United States are frozen. Any cash earned from transactions with the U.S stays detained in an inaccessible account until a point when Maduro hands over control of the company to a democratically elected leader or Guaidó. Nevertheless, refineries can still import Venezuelan crude under the condition that the profits do not go to Maduro’s regime.

If the economy deteriorates even further than it has, the Venezuelan leader can put the blame on the US sanctions. He may even regain some favor among elites. Specifically, he needs the support of the military leadership in order to stay in power.

Maduro needs a good fall guy.

Millions have escaped the country because of the crippling economic downward spiral. Inflation has skyrocketed. Hunger rates are high. And diseases that were thought to have vanished from Venezuela have awakened a new health crisis. Of course, all of these issues among others have made Maduro very unpopular.
Even though Maduro cannot raid the oil giant’s funds for his benefit, everyday citizens of Venezuela will be greatly affected. At the end of the day, the company offers stable jobs and revenue for the social programmes of the country.

Final thoughts

I believe that a country must be able to use its natural resources to help its citizens. The issue with Venezuela’s approach was that it removed too much from the industry sacrificing its production growth ability. It is difficult to imagine that Venezuela’s oil industry will be able to recuperate without major reinvestment.

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