By Dotun Ibiwoye, Correspondent
‘Por qué vamos a relegar diariamente’? I’m very sure this would be the question in the minds of the 40 million Venezuelan bewildered residents.
The meaning of the Spanish sentence is: ‘Why are we going into relegation daily’?
Wonders will never end. It is really unimaginable in all human comprehension for a country like Venezuela with the proven oil reserves, recognized as the largest in the world, totaling 297 billion barrels (4.72×1010 m3) as of 1 January 2014, to have hyperinflation hitting 80,000% per Year in 2018.
In early 2011, then-president Hugo Chávez and the Venezuelan government announced that the nation’s oil reserves had surpassed that of the previous long-term world leader, Saudi Arabia.
OPEC said that Saudi Arabia’s reserves stood at 265 billion barrels (4.21×1010 m3) in 2009.
It’s no news that Venezuela’s economy has been very bad for some years now, but the news is that, today Tuesday March 26th, 2019, Venezuela streets are empty after a second total blackout in a month!
Venezuela’s government told workers and school children to stay home on Tuesday as the second major blackout this month left the streets of Caracas mostly empty and residents wondering how long power would be out amid a deepening economic crisis.
President Nicolas Maduro’s Socialist government, which blamed the United States and the opposition for the previous power cut, said an “attack” on its electrical system caused the blackout that first hit on Monday. The outage shuttered businesses, paralyzed the country’s main oil export terminal, and stranded commuters.
In eastern Caracas, several dozen people unable to work in stores and offices were boarding a bus toward the poor hillside community of Filas de Mariche, where residents said services were worse than in the city center.
The blackout came amid tensions with the United States over the weekend arrival of Russian military planes, which led Washington to accuse Moscow of “reckless escalation” of the country’s political crisis.
Russia, which has major energy investments in OPEC member Venezuela, has remained a staunch ally of Maduro, while the United States and most other Western nations have endorsed opposition leader Juan Guaido.
Citing the constitution, Guaido in January assumed the interim presidency, saying Maduro’s re-election last year was fraudulent. Maduro says Guaido is a U.S. puppet attempting to lead a coup against him and has blamed worsening economic difficulties on sanctions imposed by Washington.
Power had returned to many parts of Caracas by noon on Tuesday, but businesses remained idle and few pedestrians were walking the streets. Those who went to work because they had not heard that the workday had been canceled were returning to their homes.
“How am I supposed to find out, if there’s no power and no internet?” said dental assistant Yolanda Gonzalez, 50, waiting for the bus near a Caracas plaza. “Power’s going to get worse, you’ll see.”
Countless dilemma
In the fourth quarter of last year, the International Monetary Fund (IMF) said in a report forecasting that one of the worst hyperinflationary crises in modern history, Venezuela, will further deepen.
In an update to its World Economic Outlook released at the Fund’s annual meeting in Indonesia, the Washington-based lender estimated that consumer prices in Venezuela would rise 1,370,000 percent in 2018, up from a July projection of 1 million percent.
Venezuela’s economy has steadily deteriorated since the crash of oil prices in 2014 left it unable to sustain a socialist system of subsidies and price controls.
In July, the IMF compared the hyperinflation in Venezuela to that of Germany in 1923 and Zimbabwe in the late 2000s.
The collapse has led to shortages of food, medicine and other basic goods, and prompted an exodus of Venezuelans that has overwhelmed neighboring countries.
The IMF noted that the economy would contract 18 percent in 2018, consistent with its July forecast, and 5 percent in 2019.
How did the Oil Industry commence?
According to Robert Rapier of Forbes Magazine , Venezuela’s oil production reached an all-time high in 1970 when the country produced 3.8 million barrels per day (BPD).
In 1971, Venezuela nationalized its natural gas industry, and began taking steps to nationalize its oil industry. The oil industry was officially nationalized in 1976.
At that time, the Venezuelan state-owned oil company Petróleos de Venezuela S.A. (PDVSA) was formed.
Between 1970 and 1985, oil production in Venezuela experienced a decline of over 50%. But then production there once again began to grow.
In 1997, as it sought to attract foreign investment and develop the heavy oil in the Orinoco Belt, Venezuela opened up its oil industry to foreign investment.
By 1998, Venezuela’s oil production had recovered to 3.5 million BPD, nearly reaching its former high. In 1999, Hugo Chávez began serving as President of Venezuela.
During the Venezuelan general strike of 2002–2003, Chávez fired 19,000 employees of PDVSA and replaced them with employees loyal to his government.
Venezuelan oil production 1965-2018
Venezuela has the largest proved oil reserves in the world. But most of Venezuela’s proved oil reserves consists of extra-heavy crude oil in the Orinoco Belt. The Orinoco contains an estimated 1.2 trillion barrels of oil resource (not to be confused with proved reserves).
This oil is particularly challenging to produce, which is why Venezuela invited international oil companies into the country to participate in the development of these reserves. Companies like ExxonMobil, BP, Chevron, Total and ConocoPhillips invested billions of dollars in technology and infrastructure to turn the extra-heavy oil into crude oil exports.
The challenges in producing this oil require significant capital investment. These investments are risks on the part of the oil companies making them, but they will pay off if oil prices rise.
Causes of the Decline
In 2007, oil prices were rising, and the Chávez government sought more revenue as the investments made by the international oil companies began to pay off. Venezuela demanded changes to the agreements made by the international oil companies that would give PDVSA majority control of the projects.
ExxonMobil and ConocoPhillips refused, and as a result, their assets were expropriated. (These expropriations were later ruled to be illegal, and compensation was granted to both companies).
So there are two related causes that have resulted in the steep decline of Venezuela’s oil production, despite the country’s top rank in proved reserves.
The first is the removal of expertise required to develop the country’s heavy oil. This started with the firing of PDVSA employees in 2003 and continued with pushing international expertise out of the country in 2007.
Second, the Chávez government failed to appreciate the level of capital expenditures required to continue developing the country’s oil. This was in no small part due to inexperience among the Chávez loyalists that were now running PDVSA.
When oil prices were high, Chávez funneled billions from the oil industry into the country’s social programs. But he failed to reinvest adequately in this capital-intensive industry.
Following the 2007 expropriations, Venezuela’s oil production went on a steep decline.
In 2018, Venezuela’s oil production fell to 1.5 million BPD, a decrease of more than 50% below 2006 levels.
