Plunging oil production in Venezuela is causing a national economic and humanitarian crisis that could tip the global oil market “decisively into deficit,” according to a report published Thursday.
Venezuela's President Nicolas Maduro is clinging to the hope that his oil-backed cryptocurrency, the petro, will help deliver “everything out country needs” — despite critics claiming the experiment is doomed to fail.
At the same time he appears to be ignoring warning signs about the country’s oil production.
"Within the OPEC countries, the biggest risk factor is, and will likely remain, Venezuela," the International Energy Agency said in its closely-watched monthly report.
Oil production in Venezuela has plummeted in the last two years, with the U.S. Energy Information Administration claiming production is 300,000 barrels a day less than in 2017.
OPEC cut back oil production in recent years to boost the price of oil after 2014 collapse, but now the unplanned drop in Venezuela’s oil production could cause a shortage of oil.
"Without any compensatory change from other producers it is possible that the Latin American country could be the final element that tips the market decisively into deficit," the report said.
Venezuela has suffered hyperinflation following the 2014 collapse of oil prices, leaving the government, which sits on the world’s largest oil reserve, unable to subsidize imports and struggling to pay its foreign debt.
The IMF projects that inflation will reach 13,000 percent this year.
On the ground, citizens are struggling to buy basic food and supplies, while the country’s minimum wage has been increased 21 times since Maduro took charge in 2013 — most recently on March 1.
And things are likely to get worse for Maduro and Venezuela if the U.S. Senate confirms Mike Pompeo as Rex Tillerson’s replacement at the State Department.
“Pompeo will likely align with more hawkish voices in the administration calling for stepped-up sanctions, including those that would further restrict Venezuela's ability to export crude and further curtail the regime's revenue,” Helima Croft from RBC Capital Markets told Axios.
Despite the worsening crisis, Maduro has continued to boast about the petro, which he believes will help the country circumvent crippling international sanctions.
He told the members of the United Socialist Party of Venezuela last week that the money raised from the sale of the petro would form part of a wider “economic solution” and would strengthen the country's “monetary sovereignty, to make financial transactions and overcome the financial blockade.”
Maduro claimed Wednesday the pre-sale of the digital coin had been a huge success, raising $5 billion from 83,000 investors in 127 countries. However, there is no proof this is true.
A report from the Brookings think tank hammered the petro project, saying it would likely fail and in doing so would harm the legitimate use of cryptocurrencies in general, contributing “to the idea that cryptocurrencies facilitate fraud.” It also said that if successful the petro could spur other countries to follow suit.
“Other countries may feel emboldened to act more aggressively if economic sanctions can be thwarted through cryptocurrency sales.”
The Treasury has already warned U.S. investors that buying the petro would violate sanctions. This week Florida Senator Bill Nelson sent a letter to Treasury Secretary Steven Mnuchin demanding to know what the department was doing to prevent Maduro from raising funds via the petro — and whether it needs new power to counter cryptocurrencies being used in this way.
Cover image: Venezuelan President Nicolas Maduro gestures as he arrives for the military exercises at Fort Tiuna in Caracas on February 24, 2018. (FEDERICO PARRA/AFP/Getty Images)