You may feel effects of Venezuela’s crisis at the pump

The crises in Venezuela — humanitarian, political, security and financial — seem to be reaching a point of no return. In this environment, it’s important to consider the implications in the short and medium terms. The greatest impact falls on Venezuelans themselves, but the impact on OPEC, oil markets and the U.S. shows how dynamic the situation is.

Venezuela was a leader in what became OPEC as far back as 1960. For decades, until the mid-1970s, the oil industry in Venezuela was run by multinational oil companies operated under decades-long concessions. This came to an end in 1976 with a “soft” nationalization. The concessions were approaching the end of their contracts; the foreign companies were compensated and allowed to continue to work under technical service agreements. 

{mosads}The professionals they trained became the leaders of the new industry. As a young banker, I was directly involved in securing the supply chain for Exxon and its successor company, Lagoven. The outcome was not what the multinationals preferred, but it was a workable solution.

In subsequent years, PDVSA, the country’s holding company for energy assets, rationalized the 16 foreign operators down to four national operating companies.  They wanted to maintain a spirit of competition while simplifying the legacy assets of many companies. In its early years, PDVSA maintained a reputation for professionalism and independence. 

That eroded even before former Venezuelan President Hugo Chavez, as the allure of such tremendous resources was more than politicians of either party could resist. Ultimately, PDVSA became a single entity and operator, nominally under the control of a government ministry.

Under Chavez and President Nicolas Maduro, PDVSA became a vehicle for directly achieving commercial, political and social objectives. Its cherished autonomy was lost. When PDVSA professionals went on strike in 2002-03, Chavez fired 18,000 of them (40 percent of the workforce). Many left the country, finding themselves as far away as the oil sands 500 miles north of Calgary, Canada.

The politicization of PDVSA only grew, even though multinationals again had a role under restrictive contracts. Production growth slowed and reversed, which was an issue in even in a $100-oil-price environment. That’s because much of Venezuela’s low-viscosity, high-sulfur oil sells for a steep discount.  

When prices collapsed to the $30s and $40s, the oil-dependent government could no longer support the economy. The infamous range of shortages grew to include toilet paper and pharmaceuticals. The heavy-handed government crushed the private sector it couldn’t coopt.

ExxonMobil and ConocoPhillips had already been forced out in contractual disputes, and recently, Chevron exited because of the security situation.

A strength of PDVSA had been its refining subsidiary, CITGO, with a major refinery in Corpus Christi and a U.S. retail network. This assured demand for their crude. But as financial pressure grew, PDVSA drew down loans from China and Russia, secured by assets. Goldman Sachs scarfed up billions of dollars of bonds in the secondary market. 

A deep reduction of Venezuelan crude exports would be significant because Gulf Coast refineries, such as CITGO’s, are configured to run these heavy, sour crudes.  Billions of investment dollars would be required to shift toward the light, “sweet” crude the U.S. is now producing in places like North Dakota. 

To some extent, growing imports of Canadian heavy oil will substitute for Venezuela, and Mexico has been a steady source. For U.S. consumers, a sudden drop in Venezuelan imports could disrupt markets and spike gasoline prices for a while. Fortunately, we are approaching the end of the summer season when gasoline consumption is traditionally at its highest. Refiners can schedule maintenance in view of market conditions.

Unless Venezuelan exports are dramatically cut for a period of time because of domestic chaos, OPEC will still be challenged to maintain prices because of increased supplies from Iraq and Nigeria, as well as growing production in the U.S.  

This means that the greatest burden will fall on Venezuelans. A rupture of the political system in Caracas will create a need for a transition government in which rivals — unified in opposition to Maduro — can find common ground to address the myriad problems. They should welcome back Venezuelan oil industry professionals ousted by Chavez, negotiate the right contractual balance with multinationals and find long-term solutions for their debt to China and Russia. 

They will need to regain a reputation for professionalism and reliability. It will be no easy task.

Bill Arnold is a professor in the practice of energy management at Rice University’s Jones Graduate School of Business. Previously, Arnold was Royal Dutch Shell’s Washington director of international government relations and senior counsel for the Middle East, Latin America and North Africa.

The views expressed by contributors are their own and not the views of The Hill.