Venezuela is undergoing some of its worst moments. This disaster is so huge, that what was at one point one of the largest and most powerful oil companies in the world (PDVSA), is now practically bankrupt and has more problems, including extracting oil. Is the oil company with the largest reserves in the world having problems extracting it? Yes. Venezuela is undergoing a true catastrophe, which is not only an economic one. It is, above all, humanitarian. Such a huge disaster that in recent years it has caused between three and four million Venezuelans to flee the country. That is, more than one in ten inhabitants. And the truth is this is not a novel development. According to the latest statistics, 87 percent of the population is below the poverty line. On top of that, 60 percent of Venezuela’s population is not only poor, they live in extreme poverty.
Venezuela is burning down, according to data from the Venezuelan Social Conflict Observatory; in 2017 almost 10,000 protests were registered throughout the country, more than 27 a day. And what is even worse: according to information from the former Attorney General Luisa Ortega; since 2015 the police, the National Guard, the army and the different intelligence services have killed more than 8,000 people. Of course, most of them were in opposition to the regime. Crisis, hunger, violence, repression everything indicates that Venezuela will soon undergo a refugee crisis of colossal dimensions. Because let us be honest, things are not looking bright at all.
For years, the ‘Bolivarian revolution’ of Chavez, Maduro and company had a great ally. And it is not Cuba, Russia or any other country, but oil: the black gold that financed the ‘revolution’.
For years, the ‘Bolivarian revolution’ of Chavez, Maduro and company had a great ally. And it is not Cuba, Russia or any other country, but oil: the black gold that financed the ‘revolution’. For a long time, the huge income this raw material brought, financed all of the regime’s policies, paying no heed to the consequences. That is to say, factories were closing and foreign investment was fleeing the country. But it did not matter because they had petro-dollars. However, all of that is about to end. Yes, Venezuela has a lot of oil, but one thing is having oil and another is being able to exploit it. Nevertheless, the negative thing is that PDVSA, the national oil company, is practically about to collapse.
The fall of PDVSA
Petroleum of Venezuela, PDVSA, was created by government decree in 1976, to integrate all the oil assets the State had nationalized. This company soon became a world-class colossus. The reason is that this company has the largest reserves on the planet: there are more than 300 billion barrels of oil certified, more than the reserves of Saudi Arabia, the Emirates, Russia or any other oil power.
It is true that Venezuelan oil does not have the highest quality, but that does not matter. We are talking about a huge amount of resources, almost 20 percent of all known world reserves. Well, the fact is that the PDVSA peaked in production in 1998, a year before Hugo Chávez came to power, at which time PDVSA was extracting three and a half million barrels per day. Since then, things have changed a lot. By the year of Hugo Chávez’s death in 2013, production had decreased by one million barrels per day, one million less? Could it be that Hugo Chávez’s Bolivarian government did not like oil? Could it be part of a twisted plan to diversify the Venezuelan economy? Well, the answer remains a big no.
Quite the opposite. Hugo Chávez wanted to increase production to five million barrels. The problem was that, they simply were not able to do it. But if you think that the commander’s results were bad, you have not seen anything yet. Since Nicolás Maduro came to power, production has sunk to 1.8 million barrels. That means that, while countries like the US have doubled their production, Venezuela produces half as much oil as when the revolution began. And if you think that is the worst of it, think again. The future looks a lot grimmer. Now, at this point, one may be wondering, what is going on with PDVSA?
The PDVSA’s history has been the story of a disaster foretold. The best example is that of the Paraguaná refining complex, which consists of three crude oil refineries and is one of the three largest complexes of its kind on the entire planet. For years, it was Venezuela’s industrial pride, the crown jewel. However, today it barely operates at 15 percent capacity and all kinds of accidents tend to happen. At the end of October, also in the Paraguaná refining complex, the Amuay refinery spilled over 200,000 gallons of gasoline into the bay; a few days later, another refinery in the complex, the Cardon refinery suffered a fire that the firemen could barely contain, because they did not even have foam to fight the flames. And so on and so forth.
The truth is that most of the oil company’s facilities are in terrible condition. However, the perplexing question remains, how do you think they reached this point? Well, the Chavez government always saw PDVSA as a kind of dairy cow from which they could get all the resources they needed for their ‘Bolivarian revolution’. The problem is that the oil industry requires lots of investments, investments that the Venezuelan government simply did not want to make. Even with the fact that it indebted PDVSA to the brim. The company is indebted by 90 billion dollars. A fortune so big that Venezuela could have even bought multinationals like Goldman Sachs, Nike or Siemens.
Now that is a lot of debt. But do you think that is all? Not even close. They also used the company to plug-in, place and hire thousands and thousands of supporters, friends and family members from which PDVSA lost even more resources. And if that were not enough, the Chavez regime also placed unskilled and inexperienced personnel in management positions, while dismissing and driving away thousands and thousands of experienced employees because of their political beliefs. Yes, this is how PDVSA has run out of money and out of human resources. One can understand why oil production is dropping. Of course, the consequences of all this are terrible for the country.
Oil is essential for the Venezuelan economy, especially because there is no other industry left standing. Their dependence is so great that oil generates 95 percent of all foreign currency profits, in dollars, for example. And these currencies, are what Venezuela needs to be able to import food, medicine, gasoline – yes, today Venezuela has to import gasoline – or anything else.
As oil production keeps plummeting, the country has to import fewer things. Since Venezuela is literally producing nothing and has to import everything, the dwindling oil money is no longer enough to pay all the bills. When you spend more money than you make, money goes away and that is precisely what is happening to Venezuela, which according to some calculations, barely has 10 billion dollars in foreign reserves which is their lowest number in 40 years. This means that when the money is gone, they would not be able to import anything else than what they can buy with what they make from the oil, which is decreasing. Do you see the problem? Until now, Nicolás Maduro’s government has tried to buy time by resorting to international markets to issue debt at scandalous rates, sometimes as high as 40 percent. Obviously, issuing debts with implicit rates, interests of 40 percent can only mean future ruin. And in any case, that is actually no longer a possibility. In fact, both the Venezuelan government and PDVSA are incurring defaults, that is, they are not paying their debts. Another route they have attempted was that of the Chinese rescue, and the Chinese answered and placed more than 23 billion dollars in loans on the table. But everything has a limit, and they are no longer willing to continue giving more money for nothing.
Oil is essential for the Venezuelan economy, especially because there is no other industry left standing. Their dependence is so great that oil generates 95 percent of all foreign currency profits.
The situation, is so desperate that the Cuban government has decided to seize the 49 percent that PDVSA held in a Cuban refinery as compensation for unpaid debts. Not even Cuba trusts the Maduro regime. It was all of this that led to the latest Chavista event: the Petro.
The Venezuelan Crypto-currency
With every day that passes, the Venezuelan government has less access to foreign currency, which is obviously a huge problem, because without foreign currency they cannot import. But, based on this problem, an idea came up: Crypto currency is in fashion, so why not launch their own crypto-currency. This is where the Petro comes in and of course it is a very particular currency among other things, because it is controlled by Maduro’s government.
Under these conditions, would anyone be willing to invest a single euro, a single dollar in this new crypto currency? Or in other words, would you put your money in the hands of the Venezuelan government? Seems doubtful, precisely because no one in their right mind would do such a thing, the Venezuelan government has had to back this particular crypto-currency with oil. That is, each Petro will be guaranteed by a barrel of oil from the Venezuelan oil reserves; reserves that are of course underground. In this way, the Petro’s value is apparently linked to the value of this raw material. Does that sound better?
Well, there is a catch in all this because we cannot forget a detail; a very, very important detail. The oil reserves are also under the control of the government. And I wonder, do you really think that this government is going to exploit those reserves? And even if they did, do you think they would really back the Petro? And what about the support rate? Would the resources generated, not be spent? Would they not impose restrictions or regulations that would benefit them? And above all, why would they take the risk of investing in Petros? Another important point is that the Petro is not convertible. That is to say, even though it is supposedly backed by oil barrels, you can never exchange it for the barrel or for any title that proves a right over those barrels.
According to Francisco Monaldi, Professor at the Rice University’s Baker Institute in Houston, ‘the Petro is a crypto-currency that is not crypto that is backed by reserves that are not reserves. That can only be monetized with a production that is collapsing and issued by a government that is in default and has no dollars’. The Petro does not seem to be anything more than a last-ditch attempt to gain time and try to obtain the greatest possible number of dollars by taking advantage of the popularity of crypto-currencies, and perhaps of capital laundering because who would put the dollars on the table?
The Petro is a crypto-currency that is not crypto that is backed by reserves that are not reserves. That can only be monetized with a production that is collapsing and issued by a government that is in default and has no dollars’.
The fact is that if this crypto does not work, and that looks like the most plausible scenario, Maduro’s regime will only have three options. First, accept some kind of internal revolt and leave power one way or another, which seems very difficult; second, use an even tougher hand and condemn Venezuela to an even greater humanitarian disaster; or third, try to get the Chinese and Russians to buy the country’s national resources in mass and by all means, such as refineries, oil and many other raw materials. That is to say, become a kind of colony by selling at a loss each and every one of the crown jewels so that the regime’s elite can continue to enjoy their standard of living. Nicolás Maduro and company are still in power, and it hardly seems like Venezuela will have a better future.
is a graduate of School of Economics, Quaid-i- Azam University Islamabad. His area of expertise include the Middle East, European Affairs and political economy. Currently, he is working as an Operations Associate at CSCR.