Venezuela's Growing Risk to the Oil Market

Lead PI: Luisa Palacios

Unit Affiliation: Center on Global Energy Policy (CGEP)

August 2016 - Ongoing
South America ; Venezuela
Project Type: Research Outreach

DESCRIPTION: Venezuela is facing profound social and political crises, creating the circumstance of a potential catastrophe to come. Beyond the humanitarian concerns that exist, Venezuela has become a supply risk for oil markets, not only because of the multiple operational challenges it has recently faced but also due to the spiraling impact of the steep oil production declines already suffered this year. An important supplier of oil to the United States and China, Venezuela’s oil production declined by almost 230,000 barrels per day during the first six months of 2016. In this new report, author Luisa Palacios ('95 SIPA), a senior managing director at Medley Global Advisors, head of Latin America Macro and Energy Research and a Fellow at the Center on Global Energy Policy, explores the increasing risks posed by the troubles in this OPEC nation’s oil patch and the unprecedented economic, social and political crisis.

OUTCOMES: Key Findings
• Losses in oil production have yet to translate into a commensurate fall in oil exports, due to the heavy toll taken by the country’s economic collapse on domestic demand. But the stability of exports in the first half of the year mask a deteriorating trend with June exports already more than 300,000 b/d lower than last year’s average. Despite all the headline noise about Venezuela, the most severe risks to oil markets thus still lie ahead.

• The stress brought about by the oil price crash on national oil company PDVSA’s finances lie at the heart of the oil production challenge.

• The cash-flow situation of PDVSA is so critical that even a steep cut in its dollar transfers to the government could not keep it from falling into arrears with key oil service providers. The company has also had some trouble paying for its critically needed imports of light crude oil, used to blend with the ultra-heavy grades that make up a growing share of production.

• Finally, PDVSA and the oil industry do not exist in a vacuum; they are deeply affected by the country’s unprecedented economic, social, and political crisis.