Venezuela chaos: The biggest threat to cheap oil
Already in an economic and humanitarian crisis, Venezuela’s oil production — the country’s sole lifeline for revenue — has hit a 13-year low.
Oil prices are currently around $45 a barrel, a dramatic drop from about $110 two years ago. The main reason for the low prices is that there’s too much supply globally. However, the line between oversupply and a shortage in the oil market is thin, and Venezuela could tip the scale in the opposite direction.
Venezuela is the biggest “wildcard out there,” said Matt Smith, director of commodity research at ClipperData. “The economy there is spiraling out of control. The fear is that oil production could be the next shoe to drop.”
While the rest of OPEC is ramping up production, Venezuela is retreating, despite the fact that it has the largest proven oil reserves on the planet.
Venezuela pumped 2.1 million barrels per day in June, down about 30% from 3 million barrels a day in 2008. June’s oil output was also down by 12% from the year before.
However, Venezuela’s oil exports during the first half of this year were flat compared with the year before, according to the Columbia report.
That means the impact of the trouble in Venezuela hasn’t really been felt, yet.
Venezuela faces major challenges if it wants to keep shipping oil. Its state-run oil company, PDVSA, owes a few billion in debt this fall and many believe it won’t be able to pay.
PDVSA has asked its bondholders to exchange short-term debt, which it would have to pay soon, with long-term debt, which it can pay later out. But it’s a tough sell to bondholders and would be a pricey deal for PDVSA.
Related: Venezuela ships oil to Jamaica for food and medicine
Two leading American companies, Halliburton () and Schlumberger ( ), which provide oil services, announced earlier this year they would cut back operations in Venezuela due to unpaid bills. According to Baker Hughes, Venezuela’s rig count has declined by nearly one-third over the past year.
Even without that recent pullout, Venezuela’s production has shrunk over the long term. That’s because the country has failed to make the expensive yet critical investments in its aging energy infrastructure. Without that, oilfields naturally decline. Columbia pegs Venezuela’s natural decline rate at a painful 15% to 25%.