In many ways, Big Oil is having a bad year so far in 2021. In January, a new American administration took office and rejoined the Paris Climate Accord. In the European Union, momentum continues to build for implementation of a carbon border adjustment tax. And in just a single day in May, Big Oil lost three important battles: Chevron investors demanded emissions cuts from the company, Shell was ordered by a Dutch court to accelerate its plans to reduce emissions, and a group of activist shareholders at Exxon replaced several directors on the company’s board in an effort to quicken the company’s transition to clean energy. Despite these headwinds, every oil company is still having a better year (and a better decade) than Venezuela’s state-owned oil enterprise: Petróleos de Venezuela, S.A (PDVSA).
On paper, PDVSA should be positioned for success. Venezuela controls the world’s largest proven reserves of crude oil. The company also owns Citgo, a US subsidiary which operates three of America’s largest oil refineries and produced 15 billion gallons of gasoline in the United States in 2015. And yet Venezuelan oil revenues in 2020 were less than 3% of what they were a decade earlier. The regime in control of Venezuela’s government has squandered its resource endowment through mismanagement and repressive policies which have incurred harmful sanctions.
The current crisis has roots in the early 2000s, when President Hugo Chavez installed loyalists at the head of PDVSA management and waged a two-month battle with striking oil workers in the country. In the years that followed, Chavez would nationalize oil fields and fund anti-poverty programs with oil revenues from surging prices for crude oil. After Chavez’s death in 2013, his protégé Nicolas Maduro came to power and continued these policies, though in a less hospitable global oil market.
Crude oil prices have fallen precipitously since Maduro’s ascent to power. Lower oil prices represent an existential threat for a petrostate whose oil sales make up 99% of all export earnings.
Venezuela’s GDP shrank by two-thirds between 2014 and 2019, hyperinflation runs rampant, and over 90% of Venezuelans live in poverty. The music has stopped on the Chavez-Maduro approach to economics.
To hold onto power, Maduro stacked the Supreme Court with loyalists in 2015 and created an illegitimate parallel legislature to change the country’s constitution. Venezuelans have repeatedly attempted to oust Maduro through protest and the ballot without success. The regime responded with violence—killing and imprisoning political opponents after a controversial 2018 election which kept Maduro in power.
The United States responded to the violence by recognizing the opposition leader as the legitimate president and implementing potent sanctions. These sanctions combined with years of corruption inside PDVSA have halted Venezuela’s oil market. With sanctions making it difficult to fund operations, production now trickles out of wells that once flowed. Venezuela must often barter for goods rather than directly selling what little oil it produces. Venezuela even attempted to launch a Petro—a cryptocurrency to bypass US sanctions and raise money.
President Biden has continued to apply sanctions but there is no end in sight for the crisis in Venezuela. The UN Refugee Agency estimates that over five million Venezuelans have fled the country in recent years and sadly that number is expected to grow.
Beyond the human toll of the current tragedy, a downstream tragedy awaits Venezuelans: the loss of time and opportunity. The global economy is entering an inflection period as markets and companies plan for a future economy that does depend on oil for energy and transportation. There is a narrow window in the next twenty years for petrostates to leverage their natural resource endowments to diversify their economies. Saudi Arabia’s sovereign wealth fund is an example of this foresight—planning for a day when oil cannot pay the bills.
Venezuela should be investing PDVSA’s oil revenues in securing future prosperity for its people rather than lining the pockets of the Maduro regime. Maduro will be gone one day. The only question is whether there will still be time for Venezuela to rebuild before global energy markets have moved on.