BY: TANNER KENNEY
In recent weeks, Petróleos de Venezuela, S.A. (PDVSA) – the state-owned oil and gas company – has been late in paying its bills to creditors and debtors, alike. As a result, the organization has seen cargo ships filled with valuable petroleum-based products destined for its shores stuck in ports throughout the Caribbean as their dispatchers await their contractual compensation. Additionally, major international oil and gas conglomerates like ConocoPhillips have begun seizing PDVSA assets in the region in order to recoup losses from both former President Hugo Chavez’ nationalization of on-the-ground oil and gas resources in 2007 as well as the recent depression of oil prices throughout the world.
However, these financial struggles are of no great surprise to observers as Venezuela’s oil-based economy has been faltering for years. Following Chavez’ demise, the nation has seen little cohesion between its government and the populous it controls under the rule of President Nicholas Maduro as it attempts to silence dissidents and consolidate power. These economic and social justice concerns have combined to devastate the quality of life of all Venezuelans whilst creating an environment of trepidation amongst international investors, thus begging the question – is this the end of the single-commodity society?
Nations such as Norway that have historically relied upon oil and gas revenues to generate economic strength and influence throughout the world have mobilized their vast resources through sovereign wealth funds to stabilize their economies, create socially stimulating programs, diversify holdings, and – perhaps most importantly – prioritize environmental conservation and protection in order to sustain growth and prosperity for the generations to-come. Furthermore, they have recognized that oil and gas exploration has a finite life of profitability and is unsustainable as a national economic backbone.
“Venezuela has the world’s largest proven oil reserves, and oil accounts for almost all exports and half of state revenues.” (Heritage Foundation)
This instability greatly affects oil prices around the world as traders have begun focusing “on geopolitics rather than fundamentals” in predicting the future movements of commodities markets. So, when nations pin their annual and/or national budgets to rapidly-fluctuating oil and gas prices, they can find themselves in situations where balance sheets are so far in the red that they cannot print currency fast enough to keep up with inflation, let alone make good on existing debts to oil and gas majors.
It is in this scenario that Venezuela currently finds itself, coupled with the fact that oil prices are so low that PDVSA cannot break-even developing its world-leading reserves – the nation’s feedstocks are too heavy for refinement in-country while any profits made exporting, refining, and re-importing Venezuelan crude are lost in transportation fees. Again, the economic impact of this impasse can be felt throughout the world as the United States must turn to other producers in order to fill the void left by Venezuela’s inability to export crude for refinement, for the foreseeable future.
Moreover, any further reduction in oil and gas prices could push the Venezuelan economy past the brink of failure into total collapse, even with behind-the-scenes support from the Russian government via Rosneft. Given the United States’ withdrawal from the Iran Nuclear Deal coupled with a predicted growth of energy development, a collapse of the Venezuelan oil and gas industry could send oil prices into a tailspin, making any amount of economic recovery in the nation seemingly impossible. However, this could also negatively affect the American economy, as well, as the European Union begins to debate paying Iran in Euros for its energy as opposed to the U.S. dollar.
Of course corruption is partly to blame for PDVSA’s struggles, but it is not the only factor in the equation and the holistic diversification of the national economy must be prioritized and directed with great care in order to both mitigate and reverse the damage that has already been done. Therefore, it will be necessary for Venezuela to target additional sectors within which jobs can be created such as the agriculture, education, services, and tourism industries in order to protect against further over-reliance on O&G revenues.
But this discussion must not hinge on dollars and cents – the health and wellbeing of the people of Venezuela are paramount to that of its oil and gas industry. The Venezuelan people are important citizens of the world today and they will continue to be in the future, a testament to the devastation that can be wrought by a government on its constituents. In Venezuela, the government must transition to one where transparency is key, even if it chooses to maintain an authoritarian structure, in order to prevent the repetition of the mistakes made by PDVSA.
Tanner Kenney is an energy and media professional with a background in journalism and received his M.S. in Global Affairs, Environment & Energy Policy from NYU’s Center for Global Affairs. Recently, Tanner has focused on the advocacy of sustainable development through renewable energy technologies, transportation efficiency, and inclusive public policy.
Photo Credit: Descifrado
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