The oil market will soon feel the heat of turmoil in Venezuela

The oil market will soon feel the heat of turmoil in Venezuela

After a long period of stasis, the situation in Venezuela is moving towards its denouement. The next few months will be dangerous for the country and, despite the market’s apparent indifference to what is happening, could produce even more volatility in international oil prices, The Financial Times concludes in its article The oil market will soon feel the heat of turmoil in Venezuela.

The recognition by the US, Canada, the UK and others of Juan Guaidó as Venezuela’s legitimate leader marks the beginning of the end for the 20-year rule of the Bolivarian revolutionary movement under Hugo Chávez and Nicolás Maduro. So far the oil market has shrugged off the issue, with the Brent crude oil price barely moving over the last week. The market has become so accustomed to Venezuela’s problems that further internal turmoil in the country has come to seem irrelevant. That complacency may be misplaced.

The Financial Times states that with food shortages and soaring inflation, Venezuela needs a change of government, but the transfer of power to Mr Guaidó will not come easily. President Maduro retains the support of army leaders. The longstanding popular hostility to the US will no doubt be whipped up. And American sanctions on Venezuelan exports are unlikely to have any serious effect. Oil is easily traded and there is no shortage of buyers ready to purchase whatever Venezuela can produce — provided the discounts are deep enough. Mr Guaidó and his colleagues in the National Assembly have the legitimacy that comes with having been elected, but they may not have the forces required to secure power. It is hard to imagine the US or anyone else sending in troops, and even harder to see foreign intervention of any sort succeeding in a country still soaked in nationalism.

The most likely outcome is continued internal conflict which could slip into open fighting, with the risk of a further exodus of refugees (which could destabilise Venezuela’s neighbours) and of skilled workers seeking a more stable life elsewhere.

The oil industry will not be immune from such disruption. Oil output was down to 1.5m barrels per day in December, continuing the fall from the peak of almost 3.5m barrels per day reached in 1998 before Chávez came to power. Strikes in the oil producing regions or a campaign of organised sabotage could reduce production still further. That would lead to a further decline in exports and the loss of revenue needed, among many other things, for the repair and upgrading of the country’s oil infrastructure. It is now perfectly possible to envisage exports halving from current levels to half a million barrels a day in the next few months.

Global oil markets can cope with such a fall. US shale production continues to rise and numerous countries are ready and able to provide extra supplies. The problem is that events in Venezuela cannot be isolated from what is happening elsewhere, according to The Financial Times. American sanctions on Iranian exports are beginning to bite and have taken around 1m barrels per day off the market. Over the next few months, the exemptions on trade, which permitted Iranian exports to countries such as China and India, will come to an end. In addition Libya and Nigeria are still producing below their potential for a mixture of political and technical reasons.

A change of government in Venezuela would lead to more investment and the return of international companies to Caracas. But the rundown nature of the industry and the loss of skills within the state company PDVSA mean that any turnround will take a long time.

The risk is that over the coming months, as civil tension increases, the oil industry will become a focal point of conflict in Venezuela, taking significant volumes of oil off the market for a considerable time. A combination of events around the world, mostly driven by politics rather than by any fundamental shortage of resources, could then produce a period of price instability. The world oil market could absorb a further fall in exports from Iran. It could cope with the loss of more of Venezuela’s current exports. But it is hard to see how it could cope with the loss of both without a significant impact on prices.


Vestnik Kavkaza

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