Drop in Venezuela investment could have impact on world’s oil supply

Venezuela’s oil crisis goes far beyond a simple problem of low prices and threatens the world’s supply of oil because of mismanagement of the country’s state-run oil company, a new report from Columbia University concludes.

Oil production in Venezuela, which boasts the world’s largest oil reserves, has plunged to alarmingly-low levels, the report found, worsening the country’s dire economic crisis that already has led to food and medicine shortages.

As the world price for oil declined, other oil-producing countries have increased production to make up for the lower price. But lack of investment, deteriorating infrastructure and poor planning at the state-run Petroleos de Venezuela (PDVSA) has seen oil output decrease by 230,000 barrels a day, making such a response impossible.

Absent a political resolution to the current crisis, the author warned that Venezuela could represent a growing supply risk for oil markets well into 2017.

“Clearly, Venezuela is at the core of the downward adjustment in global oil supply triggered by the oil price drop,” wrote Luisa Palacios, a fellow at the Center on Global Energy Policy and author of the study. Palacios is also the head of Latin America macro and energy research at Medley Global Advisors in New York.

Oil is critical to the Venezuela’s economy. It accounts for 96 percent of export income. Shrinking production means even less crude available for sale, intensifying the already-dire economic situation that has caused rioting in the streets and raised calls for the impeachment of Venezuelan President Nicolás Maduro.

Venezuela is not the only oil-exporting country suffering from the oil-price collapse, but Palacios said in an interview that the political crisis in Venezuela has left the government unable to engage in the kind of policy and long-term investment decisions needed to reverse the production decline.

Investments made today in the oil industry wouldn’t likely affect production for three years, Palacios said. She estimates that Venezuela’s oil production is declining anywhere from 15 to 20 percent a year because of the lack of investment.

“It’s a vicious cycle,” Palacios said. “For Venezuela to solve its problems in its industry there needs to be a normalization of economics, politics and the financial situation. I don’t see this happening unless the political crisis gets solved.”

Crude hit a one-month high this week over concern of a prolonged low oil-price may drive major producers to reconsider a production cap. Crude oil is currently trading at about $46 per barrel, less than half its price in mid-2014. But that’s still much higher than its lows of about $26 per barrel in February.

This story was originally published August 16, 2016 at 12:01 AM with the headline "Drop in Venezuela investment could have impact on world’s oil supply."