In the lobby of the building where Iván Freites works, a photograph of an oil rig covers one wall. Emblazoned across it is the Venezuelan flag and a quote from former president Hugo Chávez. “We want Venezuelan oil to bring peace and love,” it reads.
Mr Freites, a union leader at PDVSA, the state oil company, would like that too. But having seen the Chávez government and subsequent regime of Nicolás Maduro plunder the oil producer, strip it of investment, sack experienced managers and replace them with military officers, he no longer thinks that outcome is possible, at least not for now.
“I’ve worked at PDVSA for 35 years and I’ve never seen anything like this,” he says. “What we need above all is to get our democracy back.”
The parlous state of PDVSA, which oversees the world’s largest energy reserves according to the US Energy Information Administration, helps to explain the depth of Venezuela’s collapse and why it finds itself in the eye of a political storm.
Corruption and mismanagement have seen Venezuelan oil output, which accounts for 90 per cent of legal export revenues, plummet to its lowest level in three quarters of a century. The economy has halved in five years, a contraction worse than those in the Great Depression or Spanish civil war. Rates of hyperinflation, meanwhile, are similar to those in Germany in 1923.
The brutal recession has sparked an exodus comparable with the flight of Syrian refugees. More than 2m of Venezuela’s 30m population have fled since 2015. With the UN estimating 5,000 departures each day, another 2m could have left by the end of 2019.
It has turned the country into a major source of regional instability. Latin American neighbours, especially Colombia, are struggling to cope. As the oil industry implodes and exacerbates the plight of Venezuelans, the international community increasingly believes something must be done. The burning question is: what?
From the start of his presidency, Donald Trump made Venezuela a US foreign policy priority, alongside North Korea and Iran. “President Trump started on day one — literally on day one — asking about Venezuela,” says Fernando Cutz, a former Trump White House adviser, at a recent seminar at the Wilson Center in Washington. “It was a priority of his from the very start.”
The US, alongside Canada and Europe, has since levied sanctions on officials accused of corruption and human rights abuses. Last month, Mr Trump hinted again at the possibility of invasion. “All options are on the table,” he said. “The strong ones, and the less than strong ones. Every option — and you know what I mean by strong.”
Regional leaders and diplomats are usually the last to support such belligerence. But Luis Almagro, head of the Organisation of American States, believes no option should be discarded. “The entire premise of ideas such as ‘responsibility to protect’ is that we must act before we are counting the dead,” he has said.
Venezuela in freefall
1.2m b/d
Venezuelan oil output in September, its lowest since the 1940s. Some analysts estimate it could fall as low as 700,000 b/d by the end of the year
450,000 b/d
Volume of oil that Venezuela earns cash on — most is sent to China and Russia to pay debts, shipped to Cuba or fed into its domestic fuel market
$300bn
Volume of money estimated to have been stolen or misappropriated from the $1tn Venezuela earned during the commodities boom
Amnesty International has called Venezuela’s human rights crisis “unprecedented” and five Latin American countries, alongside Canada and France, have asked the International Criminal Court to investigate Mr Maduro for crimes against humanity.
All the while, Mr Maduro repeats his mantra that the US is subjecting Venezuela to “economic war”, and wants to get its hands on the nation’s oil. Few believe him. And given PDVSA’S shrinkage, there is currently not much of an oil industry to seize.
“Leave Maduro be for the next year and you’ll see where that level of production goes to. The US really doesn’t have to do much,” says Raul Gallegos, a Venezuela analyst at Control Risks.
Ever since it was discovered in Lake Maracaibo in the 1920s, oil — or “the devil’s shit” as one energy minister called it — has dominated the country’s economy. Venezuela was a founding member of Opec and when President Carlos Andrés Pérez nationalised the industry and founded PDVSA in 1976, it pumped over 3m barrels a day.
Today, the figures speak for themselves. Production has halved in six years and dropped by a third in the past year alone. Rig counts, an indicator of future production, are at historic lows, pointing to further declines. In September, Venezuela pumped just 1.2m b/d, its lowest output since the 1940s. Although most analysts consider 1m b/d to be a floor given its joint ventures with foreign producers, some believe output could drop as low as 700,000 b/d by the end of 2019.
“It is one of the worst collapses in history,” says Francisco Monaldi, a fellow in Latin American energy policy at the Baker Institute.
PDVSA’s demise has rippled through the country. The biggest refinery, Amuay, is running at 20 per cent capacity, Mr Freites says. The smaller Cardón, El Palito and Puerto La Cruz refineries barely function as PDVSA struggles to deliver mixing chemicals and crude to these sites.
With less oil being refined, blackouts are common. “There are towns and villages that go five or six days without electricity,” Mr Freites says. Gasoline is also in short supply. “I’ve just been to fill up my car and I waited in line for an hour,” he says. “That’s quite normal.”
PDVSA itself is on the brink of financial collapse. It has defaulted on all its bonds except a 2020 issue because, if it fails to pay that, PDVSA risks losing Citgo, its US refining asset, which has been pledged as collateral.
The scale of the theft and mismanagement that lie behind PDVSA’s collapse has been prodigious.
In 2015, Jorge Giordani, a former planning minister, estimated that of the $1tn that Venezuela received from the windfall of the commodities boom, two-thirds was spent on social programmes. The rest, around $300bn, was stolen or misappropriated.
In one recent case, a judge in Andorra charged 29 people, including two Venezuelan former deputy energy ministers, with a scheme to launder $2.3bn allegedly stolen as kickbacks from company contracts with PDVSA.
This August, US investigators revealed another scheme to launder $1.2bn of PDVSA funds. According to court documents seen by the FT, the plan involved companies in Spain and Malta, money launderers from Portugal and Uruguay, a German financier, unnamed US and British banks, fake mutual funds, Miami real estate, Russia’s state-owned Gazprombank and a shell company in Hong Kong.
Some elements of the swindle, recorded by a whistleblower wearing a wiretap, read like a Quentin Tarantino movie. On one occasion, a Venezuelan businessman opened proceedings in Caracas by placing his handgun on the table and pointing to a German Shepherd dog at his feet with an electronic “shock collar” around its neck. The businessman held the remote control.
The effects on the broader economy of such thuggery have been disastrous. As oil exports have collapsed, imports have crashed 80 per cent in six years to $11.1bn from $66bn in 2012, levels not seen since the 1940s. Scarcities of basic goods have prompted anger, spontaneous demonstrations and flows of refugees in ever greater numbers.
On the face of it, the situation cannot continue. Economic reforms announced by Mr Maduro in August have done nothing to tame hyperinflation, still running at nearly 500,000 per cent a year. The International Monetary Fund forecasts that gross domestic product will shrink by 18 per cent this year, 5 per cent next, and continue to shrink steadily after that.
Allies such as China, which has loaned Venezuela $60bn in return for oil over the past decade, seem reluctant to lend more. When Mr Maduro travelled to Beijing in September, his finance minister claimed China had agreed to lend a further $5bn. But Beijing has never mentioned the loan.
Nonetheless Mr Maduro, who survived an assassination attempt in August, faces no immediate political crisis at home. With the help of Cuban advisers, he appears to control the military and is set to win what will certainly be rigged municipal elections in December. The following month he will formally begin another presidential term — the consequence of a sham election victory in May.
There is increasing talk in Europe and around the Americas that any eventual solution to Venezuela’s quagmire lies with Havana — long the main counsel to Caracas. But diplomatic attempts to pry Cuba away from Venezuela have failed so far. Spain has also suggested re-opening dialogue between the government and the opposition. But the prospect of fresh talks having any success are dim.
That puts more drastic options on the table.
One US plan involves ending its purchases of Venezuelan oil. Such a ban would push up US pump prices — something Mr Trump will want to avoid before midterm elections on November 6, although Mr Cutz says the White House estimates it would add just 5-7 cents to the gallon.
Yet the impact on Venezuela would be devastating. That is because after it has sent oil to China and Russia to pay debts, shipped oil to Cuba and fed its domestic fuel market, the country earns cash on only about 450,000 b/d of its exports, a third of production. As much of 80 per cent of those sales are to the US.
PDVSA’s collapse has since made such action moot. “The guy who’s doing the best job at sanctioning himself is Maduro. He’s essentially destroyed the oil sector,” says Mr Gallegos.
That leaves the even more extreme idea of invasion. As Francisco Rodríguez, a Venezuelan economist at New York-based Torino Capital, says: “The idea of a military intervention has gained support . . . evolving from its previous status as a fringe position.”
But China and Russia would oppose any attempt by the UN Security Council to authorise intervention. Nor does the idea cut much ice in the region, which has opposed it.
Moreover, Venezuela is not Panama, which the US invaded in 1989 aided by US troops stationed in a local army base. Venezuela is twice the size of Iraq and has 100,000 civilians organised into heavily-armed local pro-government militias. The Pentagon opposes the idea.
“Intervention faces legal challenges in the UN and elsewhere, but more importantly it is unrealistic given the scope and scale that would be necessary,” says Shannon O’Neil, a senior fellow at the Council on Foreign Relations.
The key question in Venezuela comes back to: what can be done now to pre-empt an even worse situation later?
Diplomacy is not entirely dead. Bob Corker, chairman of the US Senate Foreign Relations Committee, met Mr Maduro in Caracas in October. “One option is to keep doing exactly what we’re doing,” he suggested on his return. “And there maybe is another option or two,” he added, without elaborating.
But the diplomatic track requires patience. In the interim, hopelessness leads more Venezuelans to flee, and more still to indulge the fantasy of a Trump-led invasion.
“The world has plenty of time to wait for a peaceful and democratic solution,” says Ramón Muchacho, an exiled opposition leader. “The people who do not have that time are Venezuelans . . . especially those who are dying.”
Crude Output fall lifts prices but markets fear further drop
The magnitude of the collapse in Venezuela’s oil output over the past four years has rarely, if ever, been seen in a country at relative peace.
Traders in the market compare it to the type of drop normally associated with wars or violent revolutions, rather than the slow motion crash witnessed in the Latin American country, as two decades of economic mismanagement came to a head.
When crude prices were still above $100 a barrel in 2014, the revenues it produced were enough to just about glue Venezuela’s oil industry together, with the country producing 2.4m barrels a day or roughly 3 per cent of global supply.
But after prices tumbled, the extent of Venezuela — and PDVSA’s — problems emerged, with the whole system threatening to unravel.
Venezuela is now producing at about half its 2014 level, with many analysts expecting its output to fall below 1m b/d before the year is out. For the world markets the impact has been profound, with the lost barrels equivalent to the entire production of Opec members such as Libya.
Venezuela’s travails have provided a consistent prop for prices since the oil market began its recovery in 2016, with Brent crude reaching $86 a barrel earlier this month.
Unfortunately for Venezuela, the price jump appears to have come too late. The rot within PDVSA is so profound that its output has continued to fall, leaving the market nervous about a further loss in supply.
Refineries in North America and elsewhere have scrambled to find alternative barrels, while other Opec countries have raised production to compensate. Venezuela is viewed by analysts as one of the biggest risks to oil market supplies in 2019. In a tight market, the world needs Caracas’ crude more than ever. David Sheppard
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