Venezuelan Petrol: Black Gold or the Devil’s Excrement ?

“Ten years from now, 20 years from now, you will see [that] oil will bring us ruin.” When former Venezuelan diplomat, Juan Pablo Perez Alfonzo, spoke those words in the 1970s, his statement was predictably greeted with puzzlement, at a time when Venezuela was experiencing its first oil boom, which quadrupled government revenues.

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Venezuela’s fall from grace would be influenced by two deciding factors: fiscal mismanagement — epitomised by the injection of billions of dollars into unsustainable projects during the administration of Carlos Andrés Pérez (1974-1979)— and increasingly rampant corruption. Despite promises to transform Venezuela into a developed nation, the end result was increased inflation, along with food scarcity, and civil unrest. Sound familiar?

Enter populist and quintessential Latin American caudillo Hugo Chávez—the former coup-plotter was elected president in 1999 by  promising poverty mitigation, and elimination of corruption. Generous welfare programs, called misiones, were funded under the auspices of an oil boom, which commenced in 2004 and yielded historically-high levels of revenues. More concretely, between 1999 and 2014, Venezuela received roughly $1 trillion in oil income, and an average of $56 million annually compared to the yearly $15.12 million oil revenues during the administration of Rafael Caldera (1993-1998).

The current picture of Venezuela is bleak at best. Annualised hyper-inflation reached 784.5% in November. Despite four minimum-wage increases instated this year alone by the regime of Nicolás Maduro, the real value of the average Venezuelan salary is expected to fall 373.9% in 2017, compared to the expected 7% average increase across Latin America. Moreover, according to the poll Encuesta de Condiciones de Vida (Encovi), it is estimated that poverty currently affects 73% of Venezuelan households.

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An opposition supporter with a giant 100-bolivar note with the word “Hungry” written on it seen at a gathering to protest against the government, in Caracas on August 8. Credit: Carlos Garcia Rawlins/Reuters

To make matters worse, in a country where oil accounts for roughly 96% of exports, Venezuelan crude oil production has shrunk considerably in recent months due to shortages of spare parts, mismanagement, and sporadic power outages. The number of oil rigs in the country has fallen by 25% in the last 12 months up until September, and, for the first time in its history, Venezuela has resorted to importing light crude from the United States to make its own heavy crude suitable for export.

Keystone XL, Iranian Sanctions, and Oil Discovery in Neighbouring Guyana: Trouble in Caracas

When Donald Trump snatched a surprising victory in the November 8 U.S. presidential election, Venezuelans had reason to panic. With the triumph of the demagogic leader came the revival of the Keystone XL Pipeline—an oil duct which would carry crude oil from Alberta to the United States—and with it a project that would wean the American economy off oil from sources outside North America, most notably the Middle East, and Venezuela. Considering that both the incumbent Canadian prime minister Justin Trudeau and the American President-Elect Donald Trump have voiced support for the pipeline project, the approval of Keystone XL seems within the realm of possibilities–a threat that could “have a devastating effect” at the “worst moment” for Venezuela according to economist José Toro Hardy.

That Keystone XL could essentially enable Canada—already accounting for 45% of total crude imports in the U.S.— to dethrone Venezuela from the U.S market, is ominous for two reasons. Primarily, Venezuelan oil represents 20% of total American crude imports, and the United States is one of Venezuela’s main markets. Additionally, Venezuela’s oil needs to be refined to be sold, and with Keystone, percolates the possibility of losing access to the U.S. Gulf’s refineries. That would mean investing more money domestically on oil refineries, which, at the present moment, is simply a chimera due to the state-oil company, PDVSA’s possibility of defaulting on its debt obligations, and the myriad of other policy challenges that should take precedence in a state facing chronic food and medicinal shortages, hyper-inflation, and crumbling infrastructure.

Read the full piece here.

This article was originally posted in The McGill International Review. MIR is a a student run IRSAM publication about international relations.

Luca Loggia

Policy Intern at InPRA
I'm a third-year honours student in political science at McGill University. My core interests are Canadian foreign policy, and Venezuelan politics. However, Latin America as a whole is a region propitious for political analysis due to the recurring patterns of populism, caudillismo and the link between leftist rhetoric and nationalism