How Venezuela's Oil Industry Collapsed

How Venezuela's Oil Industry Collapsed

Reprinted from the FT – 24/08/2020

The country’s oil industry was once the envy of the region, but after decades of mismanagement and corruption, the sector is facing ruin. The FT’s Andean correspondent Gideon Long asks what went wrong.

Our story begins in the new world in Venezuela, where mounting oil riches are bringing modern benefits to its capital, Caracas. And as slum dwellings make way for towering new housing projects, Caracas presents a study in civic progress and the western way of life.

Venezuela’s oil industry was once seen as the region’s crown jewel. But years of neglect and mismanagement have decimated a sector that used to supply 10 per cent of the world’s oil. Now it musters less than half a percentage point. Yet even by its own recent standards, Venezuela’s latest oil industry output is shocking.

Data released by Opec showed that the country, once the largest exporter of oil in the world, produced around 370,000 barrels per day in June.

This is an unbelievable collapse. I mean, we’re going back to the production that Venezuela had in the 1930s and, in per capita terms to early ’20s. So, it is really astonishing for a country that has some of the largest oil endowments in the world.

So how did it come to this? There are essentially two reasons: mismanagement and US sanctions. In 1960, Venezuela was one of the five founding members of Opec and the only one outside the Middle East.

When President Carlos Andres Perez nationalised the industry and founded state-owned oil giant PDVSA, Venezuela was pumping 3m barrels per day. And the money rolled in. Oil revenues helped build one of Latin America’s most modern capitals and created a thriving middle class.

In 1999, a military officer, Hugo Chavez, became Venezuela’s president and launched the Bolivarian Socialist Revolution. He benefited from a commodities boom that lasted until 2014. The president spent much of it on social projects to help the poor, but a lot was squandered.

Before Hugo Chavez there was an oil opening that brought in all the big oil companies to the country. They invested a lot of money and added about 1.1m barrels of capacity.

And so, the combination of this new oil coming from these private companies with the oil price boom hid to the country that the national oil company was being destroyed.

After an oil strike that ended in 2003, Mr. Chavez sacked 18,000 workers, many of them highly skilled. From then on appointments at PDVSA were often political. After Mr. Chavez’s death in 2013, Nicolas Maduro took office.

Soon after, the oil price crashed. The economy went into a tailspin and has never recovered. More than 5m Venezuelans have left. Those who have stayed face shortages of food, fuel, and medicine. Mr. Maduro has been forced to import petrol from Iran as he struggles to keep the nation afloat.

Against this backdrop, US President Donald Trump has imposed crippling sanctions. In January 2019, Washington targeted PDVSA to deprive Mr. Maduro of cash and force him from power. At the time, the US was the biggest buyer of Venezuelan oil. Now it does not buy any and is pressuring other countries to follow suit.

Today Treasury took action against Venezuela’s state-owned oil company, PDVSA to help prevent their further diversion of Venezuela’s assets by former President Maduro. The United States is holding accountable those responsible for Venezuela’s tragic decline.

The Maduro regime has struggled to get around the sanctions, hence the drop in output. Caracas blames the US for the industry’s collapse. But the truth is that it was well underway beforehand. Production had already fallen by 50 per cent in the two decades before 2019. Sanctions have exacerbated the decline, but they did not cause it.

In April, Mr. Maduro appointed a new oil minister and a new head of PDVSA. And they have a plan to turn things around. But with oil prices now hit by coronavirus and the slump in the world economy, there seems to be no way back for Venezuela. A return to the heady days of the 20th century looks impossible.