Contents

Rock Bottom?

The level of disaster unfolding in oil-rich Venezuela defies logic. Inflation was 800% in 2016, about 25% of the economy has been wiped out in the last three years, and basic goods like milk and toilet paper, and medicines like penicillin and aspirin, are hard to come by. In a recent poll by the country's four biggest universities, a shocking 93% of respondents said they felt they did not have sufficient income for daily food. Meanwhile homicide rates are some of the highest in the world.

There is no evidence that 2017 will be any better than 2016, with some economists suggesting inflation might in fact double this year. Of course, difficulties in obtaining official figures and a constantly changing exchange rate system make any calculation of this variety very complex. The slight glimmer of hope is that the overall situation probably can't get any worse, although the decision by the Supreme Court on March 29 to remove the powers of Congress and grant them to itself (subsequently amended) might indicate otherwise.

Though the reasons for the mess are manifold, most blame the crisis on the economic and political model put in place by President Nicolás Maduro since he assumed office in 2013 - which might be categorized as a more ideological, less democratic extension of the policies implemented by the late Hugo Chávez.

"The collapse in Venezuela's economy started well before the collapse in oil prices," economist Alejandro Grisanti said during a recent presentation at Rice University.  "This is something about an economic model, and the restrictions put in place by Maduro."

While it would be erroneous to say that the plunge in oil prices witnessed since 2014 is the sole reason for the catastrophe, it is equally important to emphasize that the oil industry's demise - not helped by sinking prices, and which includes falling production, fleeing capital, organized crime, macroeconomic imbalances, decaying infrastructure, and the fact that the state oil company (PDVSA) has been turned into an agent of social spending - certainly exacerbates the frailty of the country.

By the same token, oil will inevitably play an important role in helping Venezuela regain its footing - which makes an analysis of this nature highly important.

Venezuela is an oil country. An OPEC nation, some 95% of export revenue and half of all government income comes from oil. As is often stated, due to recent extra-heavy oil finds in the southern part of the eastern Orinoco River Basin - the so-called Orinoco Belt - Venezuela also has the largest oil reserves on planet earth. And even though most of its approximately 300 billion barrels in proved reserves are extra-heavy, it still has the largest reserve base of conventional oil in all of South America.

Despite this, in mid-March, gasoline became yet another list of goods in short supply in the country, with lines snaking around gas stations across the country. It is the perfect image to illustrate the depths to which the country has fallen.

One slight glimmer of hope is the fact that the oil industry has undergone a degree of liberalization recently in response to the crisis, which while many years late, does provide a new narrative to explore, and will be one of the focal points of this report.

Figure: Production
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Figure: Oil Prices
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