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Venezuela’s OPEC Headache

The steep drop in the price of oil we have seen the past few weeks threatens to have profound political consequences. It provides a welcome respite to strained economies that import fuel, but at the same time it puts pressure on countries heavily dependent on exports, such as Saudi Arabia, Iran, and Russia. Most analysts ...


The steep drop in the price of oil we have seen the past few weeks threatens to have profound political consequences. It provides a welcome respite to strained economies that import fuel, but at the same time it puts pressure on countries heavily dependent on exports, such as Saudi Arabia, Iran, and Russia.

Most analysts agree that few countries will be as adversely affected as Venezuela. The drop in the oil price has exposed deep cracks in the Venezuelan "socialist" model. The country faces soaring budget deficits and increased scarcity. Even before the price of oil dropped, it was already in a recession that was exacerbated by the world’s highest inflation rate.

The shift has also highlighted the deep chasm that exists between Venezuela and its oil cartel partners.

Venezuela was one of the founding members of the Organization of Petroleum Exporting Countries (OPEC). During its 54-year history, Venezuela has played a crucial role in brokering agreements between its partners, many of whom bring to the negotiating table deep-rooted historical antagonisms.

But now, it seems as though Venezuela has become marginalized from the cartel’s dynamics. Venezuela has been the lone voice calling for action to stop the world’s slumping oil prices from falling further. Its partners have simply ignored the call. Both Saudi Arabia and Kuwait responded by saying that lowering output to raise prices would be ineffective and was out of the question. Iran soon followed the same line, while other members have said the issue should be discussed at a regularly scheduled meeting at the end of November.

Venezuela has long been a hawk when it comes to defending high oil prices. The country’s populist model is based on maximizing oil rents and distributing them among the population in exchange for political support. This has translated into minimal investment in oil production capacity. Surprisingly, the country holds the world’s largest oil reserves, but it is only the world’s 13th-largest oil producer.

The model may be good for winning elections, but because of it, the country is barely making ends meet. Last year, the budget deficit was a whopping 11.5 percent of GDP, according to consultancy Trading Economics. Its patronage model requires maintaining or even increasing oil prices because the country cannot adjust to lower oil prices by selling more oil. Spare capacity in Venezuela’s oil industry is nonexistent.

Stagnant production levels also mean that Venezuela is not interested in raising oil production quotas inside OPEC, since it cannot take advantage of any increase in its allotted amounts. Since at least 2006, Venezuela has consistently opposed increasing official quotas. In fact, this past June, the cartel agreed to hold production quotas steady before prices began to drop, with Venezuela gleefully announcing the agreement.

A few weeks later, the bottom fell out. Oil prices began to slide, mainly due to several factors: weak demand in the developed world and in China, rising production from U.S. shale producers, an unexpected rebound of production in war-torn Libya and Iraq, and an apparent strategy by Saudi Arabia to increase output in order to lower prices and prevent a continued loss of market share to new producers.

The bureaucrats in Caracas panicked and Venezuela called for an emergency meeting of OPEC. Its cartel partners have rebuffed the request.

Venezuela’s ally in the quest for higher prices has traditionally been Iran. Both countries share tight capacity and an even tighter budget restriction, so both have traditionally pushed for tighter quotas. This time around, Iran is joining other OPEC countries in saying that an emergency meeting is not necessary. It has even hinted that a scheduled meeting at the end of November will not see significant action to contain the fall in prices.

The drop in oil prices could not come at a worse time for the government of President Nicolás Maduro. Opinion polls show the majority of the country blames the administration for its numerous problems: the world’s highest inflation rate, one of the world’s highest murder rates, and growing scarcity of everything from deodorant to medicine. According to local pollster IVAD, 58 percent of Venezuelans think Maduro should resign.

Venezuela’s policy of raising public debt in recent years is making a tough situation even tougher. In the last few years, Venezuela signed loan agreements with China that were to be paid with shipments in oil barrels. As oil prices slump, Venezuela has to send more barrels to China in order to keep up with payments. This means fewer barrels of oil are available to sell at market prices.

Both the government of Hugo Chávez and of Maduro made strict adherence to OPEC quotas and maintaining influence within the cartel to ensure everyone else does a cornerstone of their foreign policy. In 2000, a recently elected Hugo Chávez embarked on a tour of OPEC nations to invite them to a Leadership Summit in Caracas, the second one the cartel had ever hosted. Shortly after, oil prices began to rise. Chávez’s dynamic presence in world capitals made some believe he alone was responsible for discipline in the cartel and, indirectly, for the rise in oil prices. Good times were seemingly his doing. As the oil markets begin to unravel, Venezuelans are probably wondering why his successor does not share the Comandante‘s magical touch.

In a rare press conference a few weeks ago, Maduro said that oil prices will inevitably come back up, and that he was not worried. He should be. Venezuela has little in savings and no leverage with other oil producers; its citizens are bracing for tough economic times. All they can do is hope for a rebound.

Juan Nagel is the Venezuela blogger for Transitions, editor of Caracas Chronicles, and author of Blogging the Revolution. Read the rest of his posts here.

 Twitter: @juannagel

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