Why Venezuela has become a ‘fight over who controls the state oil company’

With a power struggle raging between its government and a constituent assembly called by the ruling party, Venezuela has become a fight over who controls the state oil company, a lucrative commodity-producing entity whose…

Why Venezuela has become a ‘fight over who controls the state oil company’

With a power struggle raging between its government and a constituent assembly called by the ruling party, Venezuela has become a fight over who controls the state oil company, a lucrative commodity-producing entity whose units have served as pawns in some of the most violent political disputes in recent years.

The government of Nicolas Maduro took control of the nation’s oil wealth in 2014 by expropriating majority stakes of oil companies working in the country. Oil majors such as Royal Dutch Shell and Occidental Petroleum have since returned to work, and the partially privatized companies are still supposed to support the president’s government, which provides about 96 percent of Venezuela’s foreign exchange earnings and billions of dollars in debt payments each year. But there’s been an unequal distribution of foreign reserves.

“The Venezuelan government has an absurd theory that the energy industry is the country’s only economic asset,” says Cristina Lozano, the president of the US subsidiary of Petróleos de Venezuela, S.A., known as PDVSA. “And that’s an assumption we don’t think they really believed.”

The loss of profits from the now-fractured oil industry has been deepened by the economic collapse of Venezuela, which is home to the world’s largest oil reserves. Even as the country’s trade blockade has crippled imports and increased domestic fuel scarcity, PDVSA has kept pumping crude oil, providing Maduro the cash he needs to serve his campaign promises. In 2018, he more than doubled his campaign spending from the previous year to nearly $20 billion, an investment from a repressive regime that includes at least 15 violent death squads that targeted opponents and opposition supporters alike in an 18-month campaign.

“We have a dictator who is running away from the elections that he’s letting slip away from his grasp,” opposition leader Juan Guaidó told voters as he formally declared his candidacy on Friday for a Jan. 23 “national referendum” on political reform. “He must go.”

President Barack Obama said last September that US sanctions intended to starve Maduro’s government of funding for critical services such as health care and food were not meant to destabilize the government. The sanctions target nearly all of PDVSA’s central bank accounts in Caracas and 20 of its subsidiaries.

But they haven’t produced the desired result, Lozano says. The management of the central bank account, which was supposed to be progressively depleted to pay domestic suppliers as well as PDVSA’s own debt obligations, has been frozen by the federal government. Foreign suppliers had been paying for goods like coffee, rice and cement, whose physical shipments, before the energy expropriations, were booked for PDVSA’s coffers, so that the political crisis could have been dealt with while oil production remained high.

The final shortfall came when Venezuela – under intense financial pressure – unilaterally repurchased the contracts for corn from the US firm Cargill for the price of its original price of $3.43 a bushel. The government could ill afford the cost of buying all 7 million bushels of wheat needed, as the country already imports almost all its staple food. Even now, the value of each bushel is pennies on the dollar. With the additional costs of a customs impost of $16.59 and imports of rice, sugar and other staples, “it’s not plausible that we could keep pace with the prices coming out of this grain,” Lozano says.

The company has taken advantage of unpermitted reimportation of products from Argentina, Bolivia and other countries to keep corn, rice and even oil from starving the domestic market, Lozano says.

The effect of what PDVSA’s image department calls the “oil warfare” is a state within a state. As supplies dwindle, filling the gasoline filling stations of Caracas with socialist slogans and stacked tanks. The air is filled with the sounds of anger, foreboding and cynicism, from the hundreds of thousands of Venezuelans who’ve left the country, to the daily uprising against President Nicolas Maduro who punctuates the noon news with red houseflies.

But by controlling the petroleum, Maduro can shape the nation and keep the Petro app running.

Leave a Comment