The International Energy Agency marked the passing of Venezuela’s President Hugo Chavez by adding its voice to a wealth of editorials pointing to a neglected oil industry which has sapped the country’s output and capacity.
In its latest monthly oil market report, the IEA warns of a “further degradation” of the state oil company PDVSA should Chavez’s policies live on under his hand-picked successor Nicolas Maduro. The IEA also predicted that the country’s net capacity will increase less than 8% over the next five years.
Critics of Chavez have always criticized his pouring funds into the poor and giving away more in oil diplomacy rather than investing in infrastructure to ensure a sustainable oil industry. As the watchdog for the energy interests of some of the world’s biggest oil consuming nations, perhaps it’s not surprising that the IEA underscores this view.
Clearly, Venezuela’s oil industry under Chavez suffered with severe under-investment, one of the main reasons for its 23% slide in production volumes since 1999. But should a post Chavez government be that concerned?
Venezuela has already benefited from its loss of production as the erosion of OPEC’s own spare capacity helped to support global oil prices.
Its appetite to turn that around, even under new administration, may be limited. After all, the country’s most recent experience with opening the oil industry to foreign investment in the “Apertura” of the 1990’s saw fast-growing output coincide with $10/b oil prices.
Although Chavez surely had no intention of further hurting the county’s oil production when he “purged” PDVSA of a third of its workforce in the 2002-2003 strikes, a decade down the road and the reasons for lamenting the outcome seem somewhat less clear.
Firstly, Venezuela’s world-beating undeveloped reserves are still in the ground. While much has been made of potential permanent damage to reservoirs and a loss of recoverable reserves, little confirmation of this has materialized. The main prize, the Orinoco’s super-heavy crude, still lies relatively untouched.
Secondly, the world doesn’t really need more of OPEC’s oil, not right now. The pace of global economic recovery remains glacial and US tight oil is booming. OPEC production fell to a 12-month low of 30.34 million b/d in January, still some 600,000 b/d above actual demand, according to the IEA.
Venezuela under Chavez was a successful hawk in OPEC, always pressing for tighter quotas to support oil prices which it needs to fund its massive social spending programs. While it’s hard to gauge the trade-off between output and prices levels on the country’s finances, there seems no reason for Venezuela to change its stance on the cartel’s output targets.
In the short term at least, the country may not need to worry about its production levels as long as fears over instability in the Middle East and North Africa help keep oil prices over $110/barrel. And for those who have benefited from Venezuela’s fortuitous oil revenues the most, it is the short-term gains which may be enough to keep them believing.