Venezuela’s Oil Sector Grinds to a Halt

A recent report in Wall Street Journal notes that Venezuela is entering a post-oil era, and now produces only 10% of what it did two decades ago. From one of the original co-founders of OPEC to a sanctions-ravaged nation that’s also struggling with the coronavirus pandemic and endemic poverty.

The Current Situation

Over five million Venezuelans have found ways to leave the country in the past five years and the remaining population mostly lives below the poverty line. Gas shortages are common and many houses don’t have enough propane to cook food with their rudimentary propane tank stoves.

The biggest American company still operating in Venezuela is Chevron – which has been active in the country for almost a century – but the others took the exit door more than a decade ago when former leader Hugo Chávez amended their contracts to terms they did not agree with. Chevron will be closing up most of its in-country operations by December of this year due to increasing sanctions pressure which will also hit other key oil companies which have been helping Venezuela turn its crude oil into dollars.

Brief Historical Snapshot

In the 1970s, Venezuela had the highest GDP in South America, but still had festering poverty and income inequality between its booming upper class and everyone else. When military man and committed socialist Chávez took the helm in the late 1990s he distributed oil income to the people and subsidized the cost of gas to make it cost almost nothing.

Chávez also strengthened ties with Cuba and by 2006 he began using legislation and contract amendments that hiked royalties to make doing business in Venezuela unprofitable in order to force foreign oil firms to turn over their wells to the state oil behemoth Petróleos de Venezuela SA (PdVSA). Most did turn over control and summarily left the country.

Corruption by government insiders and a failure to really pay attention to the vast oil infrastructure under PdVSA control led to a revenue decline and after Chávez’s death in 2013, the global oil price drop in 2014 delivered the knockout punch to the Venezuelan economy.

Chávez’s successor Nicolás Maduro — facing ongoing US and Western efforts to install Juan Guaidó as president in his stead including by new US envoy to Venezuela and war criminal Elliott Abrams — has taken action to get around sanctions by selling to allies like Cuba and getting help from Iran, as well as cracking down strongly on domestic dissent. The Trump Administration put a $15 million bounty on Maduro several months ago.

As some turn against Maduro and blame him for the poverty and political repression in the country, others support his government more strongly and agree with him that Western imperialism is at the root of Venezuelans’ suffering.

Income Implosion

The Venezuelan government is now faced with taking in significantly less money than it has in the past, with their lack of input to OPEC quickly being made up by other members and rising US refinery production quickly offsetting any Venezuelan gap.

Cars, buses and trucks are seen much less on the roads now that gasoline is being sold at near market prices. Despite plans to fix the industry, so far it continues to suffer under sanctions and the Venezuelan economy is in ruins. Private industry was significantly weakened by government seizures and policies and

Has the Bolivarian Revolution Lost Popular Support?

Problems of getting enough food, electricity, running water, medicine, medical care and the loss of the good times under Chávez have certainly taken their toll, and the growth of opposition groups in the country can’t only be ascribed to foreign meddling, but also as a reaction to the dire situation in the country, rash of extrajudicial killings and a lack of coherence within the ruling United Socialist Party.

Many farmers aren’t even harvesting most of their fields, since there’s not enough gas to get it to market in the cities and many essential workers are also having trouble getting to work because of the cost of gas. Maduro is facing international isolation on an intense scale, and the US is still working hard to put Guaidó in charge via a “transitional government” structure that would sponsor transparent elections.

Chávez formed a strong base of support through an authoritarian military-led socialist government, but without the economic underpinnings to sustain support it’s fair to say that Venezuelans are far from united around the current government.

Status Quo and Collapse

If the status quo continues, full collapse is possible and more emigrants rushing to leave is a likely scenario. If allies can help get Venezuela’s government through this time and money from drugs and black market mines flows sufficiently along with a heavy hand by security forces that stay loyal then collapse could be averted. Still, if nothing is done it is fully possible Venezuela will become a power clash between many different groups and see increased intervention from Russia and Cuba.

Another option is for Maduro to use the US transition mechanism to bargain for time, talk more to the opposition and buy himself time. This could also be used by Washington as a way to slowly oust him from power and bring about regime change, although it could also lead to the current government digging in its heels even further or leading to a cobbled together government of Chávista (including anti-Maduro Chávistas such as Somos Venezuela “We are Venezuela” who have grown disillusioned with his government) and opposition elements trying to keep the country together as it continues to buckle under sky high inflation that neared 10 million percent by the end of last year.

What Does the Future Hold for Venezuela?

Another option US analysts consider possible is for a temporary government to be set up that would hold fair elections where Maduro, Guaidó and others could run for office in return for lifting sanctions and helping out financially with the country. Armed colectivos enforcing government dogma must also be disarmed in order to prevent chaos breaking out.

The truth is that cynicism against US involvement in Latin America and world affairs has become so high – for partly valid reasons – that bad actors around the world are able to exploit fear of change or transition to cling to power. In order to truly believe in a free or fair scenario, the current government and array of opposition groups would have to trust in a range of conditions including justice and an independent judiciary that will be there for the victims of the current government and inclusion of as many different voices as possible who will agree to non-violent and non-corrupt involvement.

For such trust to happen, however, the regime would have to see more of an upside to relinquishing a grip on power than to holding on, which is quite unlikely at this point.

The current disintegration of Venezuela’s oil economy is part of a broader portrait of a country in collapse.