Oil-Black Future: What if Oil Output Keeps Dropping?

Photo: RunRunes

I was asked in a conference:

“What happens if the U.S. decides to apply sanctions to oil purchases from Venezuela?”

I replied:

“What happens if Venezuela runs out of oil to export to the U.S.?”

Sounds crazy, but let’s see what has been happening thus far:

When president Chávez took power in 1998, Venezuela produced some 3,400,000 oil barrels per day. If the ongoing oil opening had been completed, oil production would have reached five million barrels per day in a few years. However, the Revolution was against the process and did everything it could to stop it. They succeeded.

Instead of five million barrels per day, OPEC reports that, according to “direct contact with the government“, Venezuelan oil production for December 2017 was just 1,621,000 bpd. The same report shows an output drop of 216,000 bpd in December, 118,000 bpd in November and 130,000 bpd in October.

The aforementioned figures show a catastrophic situation in our main industry. Throughout 2017, oil output in Venezuela dropped by 649,000 bpd, which represents almost 40% in a single year. To understand the magnitude of the drama, it’s enough to say that after nationalization Venezuela took approximately 20 years to increase oil production to the levels “rojos rojitos” destroyed in our year. Dear God!

On the other hand, oil prices recovered throughout 2017, which could ease the gravity of the situation. In fact, Brent Crude prices rose from $55 to $68 per barrel. The Venezuelan offer reached $61.35 per barrel, some $5 more.

There are two sad considerations to make in this respect. The first is that the aforementioned price hike is largely a consequence of the fact that markets believe OPEC to be complying with the output cuts they’ve promised. Sadly, the top output cutter in OPEC is essentially Venezuela. An example suffices: in December, when our production dropped by 215,000 bpd, Saudi Arabia (the biggest OPEC producer) increased their own by 80,000 bpd. The vacancy we’re living in the market is being filled by others.

The aforementioned price hike is largely a consequence of the fact that markets believe OPEC to be complying with the output cuts they’ve promised.

The net effect of the price hike in our case is negative: assuming that we were selling our entire production (which we aren’t) we’d be getting $5 more on those 1,621,000 bpd we still produce, an additional $8,105,000 in daily revenue. But we’d stop getting $61 on those 649,000 bpd that we stopped producing, a drop of $38,816,150 in daily income. If we multiply it by 365 days, we’ll understand the magnitude of the debacle.

But let’s get back to the original matter, our oil exports to the U.S. By 1998, when Chávez won the election, our shipments to that nation amounted to approximately 1,750,000 bpd. We were the first foreign hydrocarbons supplier in the U.S., and historically the surest one too.

Now, according to figures from the EIA (U.S. Energy Information Administration,) Venezuela’s oil exports to the U.S. dropped to 416,000 bpd in 2017, in other words, more than 76%; but the bulk of the dollars we still get comes from there. Venezuela changed the American market for other markets in Asia (specifically China) where, by the way, it’s hard to compete due to a simple matter of geography and distance.

If the massive collapse goes on, we couldn’t discard the likelihood that our oil production could drop by another 600,000 bpd. I doubt such a drop can be stopped by military maneuvering. We’d then have to ask ourselves the worrisome question opening this article:

What happens if Venezuela runs out of oil to keep exporting to the U.S.?

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