OPEC’s decision last week to leave production output unchanged has left some member countries reeling. While large producers in the cartel like Saudi Arabia and Kuwait continue to weather the storm as oil prices continue their downward plunge, other countries are facing an increasingly grave situation at home. Venezuela, in particular, seems to be at risk of troubles at home caused by the low price of oil.
Oil makes up around 95% of Venezuela’s exports and is the primary source of its foreign currency reserves. The International Monetary Fund estimates that Venezuela needs global prices to stay at least above $120 a barrel in order to stay afloat, but as they dipped below $70 Monday for the first time since 2010, many in Caracas are beginning to seriously worry about the country’s future, reports CNBC.
Earlier this year, anti-government protests flared as Venezuelans started to feel the effects of the economy’s 60% inflation and currency controls that have generated scarcity of basic needs such as toilet paper and toothpaste. Many believe that the situation will only continue to worsen as the country’s economy is expected to contract 1% in 2015, according to the IMF.
As oil prices continue to fall, Venezuela will have no options aside from increasing taxes, imposing price controls and possibly eliminating gasoline subsidies for Venezuelans in order to keep from defaulting. This possibility has many experts concerned.
Diego Moya-Ocampos, a senior political risk analyst at IHS, said “this scenario increases the threat of a new wave of strong anti-government protests in Caracas and key urban centers. Demonstrations can escalate into road blocks and confrontations between security forces and protesters.” Moya-Ocampos also said that protest could escalate as they did in 1989 when fuel price increases unleashed bloody riots.
Venezuelan President Nicolas Maduro has tried to reassure Venezuelans that declining oil prices will not affect social programs. He said, “If we had to cut anything back on our budget, we would cut extravagances, we would cut our own salaries as high officials, but we will never cut one Bolivar of the money that goes to education, food, housing, the missions of our nation.”
Recent polls show Maduro’s popularity has dropped to a record low.
Venezuela’s oil revenue could face another threat aside from declining prices: approval of the Keystone XL Pipeline bill could further damage Venezuela’s exports. Congressional Republicans have said that Keystone will be one of the key focuses of their energy policy once Congress returns to session next year, and that they plan to see it pass soon. If the bill is approved, the pipeline could mean that crude from Canada would replace the crude oil currently imported from Venezuela by the U.S.
As OPEC continues to keep production at the same level, and the U.S. looks for new ways to meet its energy demands, the future of Venezuela’s incredibly oil-dependent economy looks dangerously unstable. If the country is unable to find a way to balance its books, many experts like Moya-Ocampos think we might see more anti-government protests in Caracas and other major cities in Venezuela.
Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. The company or companies covered in this note did not review the note prior to publication. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.