Venezuela is the for­got­ten loser of 2018

Given its re­sources, the coun­try should be one of the rich­est in Latin Amer­ica

The Star (St. Lucia) - Business Week - - FRONT PAGE - The writer is an en­ergy com­men­ta­tor for the FT and chair of the King’s Pol­icy In­sti­tute at King’s Col­lege London BY NICK BUT­LER FT EN­ERGY COM­MEN­TA­TOR

There have been many un­ful­filled ex­pec­ta­tions and dis­ap­point­ments in the en­ergy mar­ket dur­ing 2018. At the begin­ning of the year I listed four is­sues for read­ers to watch

There have been many un­ful­filled ex­pec­ta­tions and dis­ap­point­ments in the en­ergy mar­ket dur­ing 2018. At the begin­ning of the year I listed four is­sues for read­ers to watch.

• Re­new­ables, de­spite con­tin­u­ing price

falls, have failed to break through. Hy­dro­car­bons re­main en­trenched as the dom­i­nant source of en­ergy sup­ply.

• China’s shift to a lower car­bon

econ­omy has slowed down. Coal use has in­creased again af­ter two years of de­cline and, as a re­sult, emis­sions have grown.

• The po­lit­i­cal sit­u­a­tion in Saudi Ara­bia

has not been sta­bilised and the killing of jour­nal­ist Ja­mal Khashoggi in Turkey has only served to re­mind the world of the dan­gers of the con­cen­tra­tion of power in the hands of Crown Prince Mo­hammed bin Sal­man.

• Per­haps the only true suc­cess story

has been the con­tin­u­ing ex­pan­sion of shale pro­duc­tion in the US — lift­ing to­tal US oil pro­duc­tion by 2m bar­rels a day year on year, ac­cord­ing to the lat­est of­fi­cial fig­ures. That surge in out­put has con­trib­uted to the per­sis­tence of low prices — at just over $60 a bar­rel for Brent it is slightly lower than 12 months ago.

But an­other de­vel­op­ment de­serves note. Nearly 20 years af­ter Hugo Chávez came to power, Venezuela has con­tin­ued to de­cline. Oil out­put is down from over 2.2m b/d in Jan­uary to some 1.1m b/d in Novem­ber. That rep­re­sents a fall of over 68 per cent from the coun­try’s peak pro­duc­tion of al­most 3.5m b/d in 1998.

The econ­omy is shrink­ing but the coun­try has so far re­fused to pro­duce eco­nomic data on gross do­mes­tic prod­uct or in­fla­tion de­spite re­peated re­quests and po­ten­tially a ma­jor de­fault on Venezuela’s sov­er­eign debt. The coun­try’s in­abil­ity to pay bond­hold­ers could lead to it los­ing over the next few months of one its main as­sets — the in­ter­na­tional trad­ing com­pany Citgo.

What should be one of the rich­est coun­tries in Latin Amer­ica, given its ex­ten­sive oil and min­eral re­sources from gold to baux­ite and di­a­monds, is now one of the poor­est. Ba­sic sup­plies and food are scarce and, as well as an ex­o­dus of tal­ent, there is a grow­ing refugee cri­sis as peo­ple try to es­cape to neigh­bour­ing coun­tries such as Colom­bia and Brazil. Ac­cord­ing to a re­cent paper from Brook­ings, there are al­ready more than 3m Venezue­lans liv­ing out­side the coun­try, in­clud­ing a mil­lion in Colom­bia.

The ex­o­dus in­cludes the des­per­ately poor but also skilled work­ers and tech­ni­cians on whom the econ­omy de­pends. Within that group are many of those who built the state oil com­pany PDVSA but are flee­ing the cor­rup­tion and mis­man­age­ment that now dom­i­nates the com­pany.

What is left of the econ­omy only keeps go­ing as a re­sult of loans from Rus­sia, in re­turn for which Moscow is be­ing al­lowed to es­tab­lish a mil­i­tary base in the coun­try and cash-for-oil deals with the Chinese.

But there has been no regime change. Ni­colás Maduro remains in power. One rea­son for that is re­pres­sion led by the pres­i­dent’s al­lies in the mil­i­tary. The other is the fact that Venezuela has ceased to mat­ter very much to the global oil mar­ket. The US no longer de­pends on Venezue­lan oil im­ports. In­ter­na­tional com­pa­nies would love to re­turn but will make no se­ri­ous in­vest­ments while the cur­rent gov­ern­ment remains in power.

If oil were scarce, the pres­sure for in­ter­ven­tion — es­pe­cially in Wash­ing­ton — would be in­tense. But the mar­ket has dealt with the loss of Venezue­lan ex­ports and a sig­nif­i­cant cut back in Ira­nian sup­plies be­cause of US sanc­tions with­out blink­ing.

For much of the year I thought events in Venezuela would shape the mar­ket and push prices up. I was wrong. The global sur­plus of oil sup­ply is pro­found even though de­mand con­tin­ues to grow.

It is hard to see this bal­ance chang­ing in 2019. The oil mar­ket has learnt to man­age with­out Venezuela. That means the coun­try’s po­lit­i­cal prob­lems are un­likely to be al­tered by ex­ter­nal in­ter­ven­tion. The next “Bo­li­var­ian rev­o­lu­tion” will have to come from within, driven per­haps by des­per­a­tion as oil pro­duc­tion de­clines fur­ther and pos­si­bly by a grow­ing re­luc­tance on the part of the Chinese to in­vest fur­ther in a bank­rupt regime. Un­til that hap­pens the al­ready tragic sit­u­a­tion in Venezuela can only de­te­ri­o­rate fur­ther.

I wish Venezuela a hap­pier New Year and all read­ers the com­pli­ments of the sea­son.

If oil were scarce, the pres­sure for in­ter­ven­tion es­pe­cially — in Wash­ing­ton would — be in­tense

Venezuela’s eco­nomic cri­sis has led to a grow­ing refugee cri­sis and an ex­o­dus of tal­ent © AP

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