House hearing on Venezuela’s collapse March 2017

“The economy of Venezuela is largely based on the petroleum sector and manufacturing. Revenue from petroleum exports accounts for more than 50% of the country’s GDP and roughly 95% of total exports” (wiki).

[ This is a summary of the 2017 House hearing “Venezuela’s tragic meltdown’. According to representative McCarthy, collapse in Venezuela has already happened: “ By most standards, Venezuela has collapsed. At this point, it is about preventing open civil strife in the country”.

Like North Korea, Venezuela has 30 million potential refugees.  Already one million have moved to Colombia. Europe is worried about the 800,000 to 1 million Venezuelans with European Union passports arriving.

The biggest problem, declining oil production, can’t be fixed. And it’s a problem for the U.S. too, since we get nearly 10% of our oil from Venezuela. 

Oil decline is why North Korea, Syria, Yemen, Iraq, Egypt, Nigeria and other countries are failing, plus climate change.  Until oil and consequently oil revenues decline, Middle Eastern and other nations could buy their way out of a lack of food and water and other goods by being able to afford to import them. 

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Alice Friedemann  author of “When Trucks Stop Running: Energy and the Future of Transportation”, 2015, Springer and “Crunch! Whole Grain Artisan Chips and Crackers”. Podcasts: Derrick Jensen, Practical Prepping, KunstlerCast 253, KunstlerCast278, Peak Prosperity , XX2 report ]

House 115-13. 2017-3-28. Venezuela’s tragic meltdown. U.S. House of Representatives.

What will happen if there’s a collapse?

Steve Hanke, Institute for applied economics, Johns Hopkins University

In a collapse scenario, neighbor Colombia would experience the most severe direct repercussions. This is of great concern to US interests in South America. While Colombia has made important strides in strengthening state institutions and expanding sovereignty throughout the countryside, it is still in a very fragile place.

Globally, a collapse in Venezuela would likely produce three sets of disruptive effects: financial panic amid an increased chance of debt defaults, oil market volatility from the loss of Venezuelan oil exports, and a deepening of already complex security challenges regarding transnational crime.  A collapse would significantly heighten concern about a debt default. With Chinese and Russian state enterprises extending critical loans to Venezuela, both these governments have financial leverage. We do not know the fuII details of their bilateral financial arrangements. But it seems plausible to assume that Chinese and Russian government-linked companies could make claims on Venezuela’s oil assets in the context of a default. Such claims could also include U.S.-based Citgo.

Commercially, a collapse would roil international oil markets and create challenges tor importers of Venezuela’s oil. A disruption of Venezuelan oil exports to the United States would have a substantial commercial impact, in particular along U.S. Gulf Coast.  From 2000 to 2016, Venezuelan oil exports to the United States declined roughly 50% — from1.54 million barrels a day to 796,000barrels a day, according to the United States Energy Information Agency. Venezuelan oil now makes up 9% of total US. imports.

For global security, a collapse would provide an important opportunity window for the numerous criminal actors operating in-country. Narco-trafficking interests have penetrated the highest levels of the government and military, police corruption severely undermines the capacity to tight organized crime and reduce the astonishing murder rate of 70 per 100,000, and security forces are seriously hampered in their effort to safeguard borders because informal economic mafias exercise de facto control. In a situation of civil strife, the various criminal actors would likely expand their influences over illicit economies and state institutions.

The United States should continue contingency planning efforts for two possibilities: debt default and a migration crisis.

Collapse also means less oil for the United States. Venezuela provides 9% of our oil today.

Steve Hanke, Institute for applied economics, Johns Hopkins University

Venezuela has the largest proven oil reserves in the world, and not surprisingly produces one major product, oil. Oil production is carried out by a state-owned oil company, Petroleos de Venezuela, S.A. (PDVSA). PDVSA is so poorly ru1 and its proven oil reserves arc exploited so slowly as to render the value of its reserves worthless (Hanke, 2017).

Despite sitting on the world’s largest oil reserves, Venezuela’s oil production has fallen below 2 million barrels per day (bpd). That is down from 3.5 million bpd when Chavez took over the country. According to PDVSA’s 2015 audited financials, Venezuela uses 580,000 bpd domestically for fuel and power plants. Most of that is sold at less than a penny a gallon– at a total loss -leaving just 1.4 million bpd for export.

Of that remaining exportable 1.4 million bpd, 579,000 bpd go to China. The problem being that Venezuela receives no cash for those exports. China has loaned Venezuela over $60 billion dollars (65% of all its investment in Latin America) and Venezuela has already spent all that money and repays that loan by sending crude to Beijing.

With 580,000 bpd being burned domestically at a loss and 579,000 bpd going to China for free to repay loans, Venezuela is left with just 800,000 bpd to export for hard cash. The bulk of that goes to the USA, where according to the Energy Information Agency, Venezuela shipped 719,000 bpd to the U.S. in December, making us their largest customer- and the largest consistently paying customer. To keep it simple, rounding up to 1 million bpd for cash sale at Venezuela’s average price so far in 2017 of $45 a barrel (Venezuela’s mix of heavy oil trades at $10 below Brent and WTT), Venezuela is realizing just $45 million per day. $45 million per day in a country of 31 million is less than $1.50 per person.  And that is before the actual costs of producing the 2 million bpd which is conservatively $10 a barrel).

Mr Duncan.  We are at a critical point in Venezuela’s history. Severe widespread shortages in food, electricity, medicine, and the basic goods in what was once the richest country in Latin America have led to starvation, the highest infant mortality rate in the world, and horrific conditions in the hospitals. Today, Venezuela is on the edge of a complete meltdown. The country has the highest inflation rate in the world, a falling GDP, its oil company PDVS, is not generating enough revenue, and the Venezuelan currency is worthless. Gross economic mismanagement, widespread corruption throughout the government, and an erosion of democracy, rule of law, and human rights in the country have led Venezuela to its sad state today. Americans should take note, Venezuela is a case study for the failures of socialism [my comment: and oil decline].

Venezuela has the largest oil and second-largest gold reserves in the world. But, incredibly, under President Maduro’s tenure—and dating back to President Chavez’s tenure—the country has become practically a failed state. Last year, the economy shrank by almost 17%. This year, the International Monetary Fund estimates that inflation will in (1) crease to over 1,600%. The poverty rate is the highest in four decades and the homicide rate is at a 35-year high.

Those who can afford to leave are fleeing in droves to Colombia, and Brazil, seeking food and medicine. In the U.S. Venezuelans make up the largest percentage of asylum requests to the United States, with those numbers growing by 150% since 2015, according to the United States Department of Homeland Security. If the crisis in Venezuela continues, we could all have a situation on our hands where we are faced with massive refugee flows and public health threats from rising numbers of malaria and diphtheria cases in Venezuela, and those do not respect borders.

Venezuela’s PDVSA continues to creep along, but corruption and low oil prices have led to slower output. This situation has the potential to greatly impact gas prices here at home, as the United States is the third-largest importer of Venezuelan oil.

The recent news that PDVSA received a $1.5 billion loan in exchange for giving Russia’s state-owned oil company Rosneft 49.1% of its shares in CITGO is problematic for U.S. interests. Should Venezuela default on its debt obligation to Rosneft, the Russians would become the 2nd-largest foreign owner of U.S. refining capacity and thereby take control of a critical U.S. energy infrastructure, including three U.S. refineries and a network of pipelines.

Maduro and his cronies continue to get richer as they traffic money and drugs, while doing nothing to help billions of suffering people. Instead of focusing on the economy, Maduro is staging mock military exercises and stoking fears by spreading propaganda of a U.S. led invasion. Press reports show that of the 800,000 businesses that operated under Chavez, nearly 600,000 have shut down.

Maduro’s tactics are making it next to impossible to survive. With the recent sanctions of Vice President Tareck El Aissami under the Kingpin Act, it has become clear that Venezuela’s Government is acting as a narco-state and facilitating the shipment of narcotics throughout the region.

Steve Hanke, Institute for applied economics, Johns Hopkins University

The United States is keeping the lights on in Venezuela.

Allowing Venezuela to fall further into the hands of drug kingpins — with close relationships with Cuba, Iran, Hamas, Hezbollah, Russia and China — intent on doing us harm while sitting on top of the world’s largest oil reserves must not be an option.  Confirmation that coca cultivation spiked to 188,000 hectares -a level unseen in two decades -is very alarming.

The collapse of the public health system has been much worsened by the government’s incompetence and its criminal refusal to accept international humanitarian aid. The Maduro government talks about foreign invasion. They reject the foreign invasion of the Red Cross to assist this humanitarian crisis.

Venezuela experienced 28,000 killings and violent acts throughout the country in 2015. Caracas is the most violent city on Earth, with a murder rate of 120 per 100,000 inhabitants.

There are 1 million refugees in Colombia alone. Venezuela is a large country, 30 million people, bordering Brazil, Colombia, Guyana, and with a coast in the Caribbean.

In Europe, governments in Italy, Portugal, and Spain are casting a watchful eye over events. There are between 800,000 and 1 million Venezuelans with European Union passports. The overwhelming majority of these passport holders are from these three countries.

The bottom line is, well, what should the U.S. actually do in terms of policy? I would strongly advise no meddling, no direct meddling, forget the regime change kind of rhetoric that is so common in certain circles in Washington.

Mr. HANKE. If there is an increase in the price of a barrel of oil, in the short term PDVSA, the state-owned oil company, might actually move from a negative cash flow—they are spending more money than they are actually taking in right now. So they are running a negative cash flow. And they are exploiting their proven reserves at a very slow rate, and the rate is so slow, actually, that the reserves are actually worthless. And the reason they are doing that is that they haven’t been able to maintain their production capacity or expand it.

So if the price goes up my models show that oil prices will probably reach $70 a barrel by the end of the year, which is quite a bit above the $50 now.  That would be helpful, but it is just going to be a Band-Aid on PDVSA. It will help them. The bleeding will slow down, but they will keep bleeding. This is the worst run state-owned oil company in the world.

Mr. Putin and Mr. Sechin both wrote their graduate theses on using oil as a geopolitical tool. And some of the decisions that Rosneft has made have not been economically rewarding, but they have given them access and control of important markets all over the world, including our allies in Germany, making them the third-largest refiner now in Germany.

Mr. SIRES. We have been hearing about Venezuela being on the verge of collapse for the last few years.

Mr. HANKE. It has been going on for a long time. Even when I was President Caldera’s adviser, things were deteriorating massively, and that is why he brought me in to see if something could be done. It turned out he didn’t have the political power at the time to make some of the changes that would have probably corrected the situation.




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4 Responses to House hearing on Venezuela’s collapse March 2017

  1. mynamett says:

    The reason Venezuela is collapsing is because tar sand are net energy negative. In order for them to produce oil, they have the take energy from the real economy ( for example manufacturing) and transfer it to oil production. Venezuela is now starving itself to death just to produce oil from tar sand. From my point of view, Venezuela is the best proof that tar sand are net energy negative.

    Venezuela has prove that we need to change the economical system from a monetary transaction to energy transaction. Every energy transaction should be recorded so we can manage what is left better.

  2. Warren says:

    The reason for the crisis in Venezuela is not oil decline, but an unexpected drop in the price of oil. If oil prices had staid above 70$ a barrel or gone higher Venezuela would be in a much better state. I’m not saying that oil decline isn’t an issue but you seem to have this crisis all backwards.

    An unexpected surplus of oil driving down prices caused the Venezuelan economy to fail. Obviously it’s more complicated than that, but still, if the price of oil had continued to go up Venezuela would be in a much better position. The problem isn’t that Venezuela doesn’t have enough oil left to sell, it’s that it can’t make enough money off it’s (very large) oil reserves because of a surplus of oil on the world market. That’s why Venezuela is pushing OPEC to cut production. Oil decline would actually help big oil producers like Venezuela, in the short to medium term anyway.

    • energyskeptic says:

      Warren, you’re right short term. But after oil decline begins within the next 1 to 10 years, or at best a bit longer than that if there is a massive world-wide depression that forces people to cut back on energy use, their Heavy Oil has a very low EROI. Once we make the money / energy transition as money becomes worthless and energy everything, the low EROI will be a big problem, same for tar sands, fracked oil, and very deep offshore oil. Time will tell.

    • energyskeptic says:

      The problem is also that the very heavy oil there has a very low energy returned on invested, lower every year as the best stuff has already been exploited. Oil decline will not only come from geological depletion, but economics – not enough invested, politics – corruption, producers no longer exporting but keeping the oil in country for their own people, terrorism, attacks on oil tankers in the chokepoints, from revolution / civil war, and so on.