February 21, 2014 3:32 pm

Oil at the heart of Venezuela’s turmoil

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Students lie on the ground in protest for the student killed during the demonstration on the eve against the government of Venezuelan President Nicolas Maduro, in Caracas on February 13, 2014. Venezuela's government Thursday called for its supporters to rally against what it called fascism, a day after three people died and dozens were injured in violence at anti-government protests©Getty

At least six people have died in Venezuela’s street protests, with further clashes likely during marches planned this weekend. But amid the chaos, the Opec country’s oil keeps flowing – so far.

Indeed, even as anti-government protesters demanded President Nicolás Maduro’s resignation, Venezuela’s embattled leader took time off this week from blaming “fascists” and “US spies” to rally his socialist base another way. On Tuesday, he renamed the country’s biggest oilfield, the Orinoco Belt, after his mentor, Hugo Chávez.

“I’ve decided as of today to name it the Hugo Chávez oil belt. Do you agree?” Mr Maduro asked an oil workers’ rally. “Yes!” roared back the crowd.

To critics such as the protesting students and opposition leader Leopoldo López, a 42-year-old Harvard graduate arrested that same day on charges of arson and conspiracy, that honour is misplaced.

While Venezuela boasts the world’s largest energy reserves, “chávismo” has spectacularly mismanaged the oil wealth, creating the country’s current problems.

“The main problem for PDVSA [the state-owned oil company] is the government’s fiscal voracity,” says David Voght, managing director of IPD Latin America, a consultancy. “Venezuela has focused more on politics than efficiency in its oil sector.”

Siphoning off PDVSA’S investment funds to pay for social programmes has so far helped maintain government support. Most protests have been in better-off neighbourhoods around the country.

“For the protests to be effective, they must include the poor,” says former presidential candidate Henrique Capriles, a member of the opposition’s more moderate wing who cautions it is wrong to create expectations that the government is about to fall.

But scrimping on investment throttles Venezuela’s golden goose, increasing the likelihood of unrest. Less oil production means less money to spend on imports and thus greater shortages, while money-printing to fund a gaping fiscal deficit has fuelled inflation of more than 56 per cent.

Furthermore, much of Venezuela’s output is mortgaged. Production has fallen to some 3m barrels a day, from 3.1m a decade ago, according to official figures, of which 310,000 bpd pays off loans to China, about 400,000 bpd is sold to allies, such as Cuba, for sub-market prices or in barter deals, and about 600,000 bpd is used to meet heavily subsidised domestic consumption.

Investors are watching aghast as Maduro finishes killing off what had been Latin America’s golden goose

- Russ Dallen, Caracas Capital Markets

As a result, there is even less money to spend on imports. By way of illustration, Venezuela’s remaining 1.7m bpd generates about $58bn of revenues a year. In contrast, imports totalled $77bn in 2012, according to UN statistics.

“There will be a cut in total imports this year, about 15 per cent,” estimates Henkel García, a director at Econométrica, a Caracas-based consultancy. “The government and PDVSA, which are one and the same, are to blame.”

Such worries might be far away from the concerns of protesters who say plainclothes police have fired live rounds into crowds, or of Mr Maduro, who has lashed out at “fascist coup plots” while calling for military unity as the protests continued – a disturbing sign.

But, in the past, Venezuela solved similar cash crunches by issuing international bonds. That trick is harder to repeat now, given that Venezuelan bonds have posted the biggest losses in emerging debt this year. The country’s benchmark bond due in 2022 yields 18 per cent, almost twice the rate of equivalent Ukrainian bonds.

With foreign reserves of only $20bn, versus principal payments of $4.5bn due this year plus another $13bn of interest, bondholders increasingly wonder where they lie in the pecking order should the government re-prioritise imports over debt.

Rafael Ramírez, the energy and economy minister who is president of PDVSA, has sought to comfort investors, saying Venezuela “hasn’t failed nor will it fail to comply with any of its commitments with respect to its external debt”.

Still, the cash crunch leaves PDVSA with ever fewer resources to invest in its core business, which in turn leads to lower oil revenues, less imports and more disquiet, in a vicious circle.

“Investors are watching aghast as Maduro finishes killing off what had been Latin America’s golden goose,” said Russ Dallen, of Caracas Capital Markets, an investment bank.

The difference with 2002, when Venezuela suffered a larger street protests and a shortlived coup, is dramatic. Back then, the opposition held PDVSA, but even its control over the country’s energy resources failed to bring down the government.

Today, by contrast, amid growing talk about the precariousness of Mr Maduro’s position, the government controls PDVSA and is slowly running the economy into the ground by itself.

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