Apr 9, 2014 | 09:07 GMT

5 mins read

Venezuela: Politics Cloud the Chances of an Energy Sector Revival

Venezuela: Politics Cloud the Chances of an Energy Sector Revival

Editor's Note: The following is the third installment of a three-part series assessing the endemic risks of Venezuela's energy sector. Part 1 examined concerns over potential production disruptions. Part 2 examined the country's infrastructure vulnerabilities.

The stagnation of Venezuela's energy infrastructure is the backdrop for a social and political struggle that has been building for decades. Protests that have rocked the streets of cities from Caracas to San Cristobal since early February seem to be dying down, for the moment. However, this by no means indicates that Venezuela's troubles are over. The country is defined by its contradictions, and deep divisions exist even within seemingly united political groups. For the Venezuelan energy sector, this means that uncertainty will remain prevalent, limiting the government's ability to address key structural concerns.

Venezuela's unrest had long been simmering due to an increasing scarcity of basic goods, soaring inflation and deteriorating physical security throughout the country. But the current wave of protests truly gained traction on Feb. 12 when far-right opposition group Voluntad Popular attracted hundreds of thousands of people to the street, marking a significant escalation in the protests. The government responded forcefully, issuing an arrest warrant for Voluntad Popular co-founder Leopoldo Lopez and deploying security forces to contain unrest. Lopez turned himself in Feb. 18 and remains in custody. His political ally and partner, former National Assembly Deputy Maria Corina Machado, has remained free, though she was ousted recently from her legislative seat by National Assembly President Diosdado Cabello after traveling abroad with a Panamanian delegation to seek support for the opposition from the Organization of American States.

Meanwhile, the more pragmatic wing of the Venezuelan opposition has distanced itself from street-level confrontations and refrained from pushing for the outright resignation of Venezuelan President Nicolas Maduro's government. Instead, opposition leaders such as Miranda state Gov. Henrique Capriles Radonski, Mesa de la Unidad Democratica leader Ramon Guillermo Aveledo and Fedecamaras President Jorge Roig have called for — or have at least remained open to — direct negotiations with the government. Fedecamaras (Venezuela's chamber of commerce) has vocally demanded specific economic concessions from Maduro, including the repeal of a law regulating retail prices.

These divisions within the opposition have made it possible for the government to selectively engage with opposition leaders while resisting demands to resign. The most serious negotiations appear to be the direct discussions between the government and Fedecamaras. However, while Fedecamaras is pushing for higher-level negotiations, with the Roman Catholic Church as a mediator, the Maduro government has brought in members of the Union of South American Nations to serve as mediators, an option the opposition finds unacceptable. 

Economic Context

The most notable changes appear to be in how the government approaches economic policy. The recently implemented Sicad II currency exchange mechanism overlaps with and addresses some of the business community's concerns. More important would be possible changes in government spending and subsidies. Officials have acknowledged that electricity rates will have to rise, because the government can no longer afford to subsidize 80 percent of the cost of the utility. Raising the extremely low cost of gasoline is also under discussion. 

But increasing prices in Venezuela will be challenging. A liberal reform package implemented in 1989 by former Venezuelan President Carlos Andres Perez in collaboration with the International Monetary Fund sparked widespread riots in Caracas, forcing Perez to rapidly roll back the changes. The Caracazo, as the wave of protests was known, continues to define Venezuelan politics to this day as fears of widespread public violence underline the political dangers of backing away from populist policies. Some change will be necessary as high spending commitments, combined with struggles associated with declining exports of crude oil, have led the government to use monetary expansion to finance expenditures. This in turn is a partial but important driver of inflation, which reached 56 percent in 2013. 

At the same time, Maduro is still in the process of consolidating control over the country, just a year after the death of his predecessor and mentor, former President Hugo Chavez. The greatest potential threat to Maduro comes from a loss of legitimacy with the base of support that drove Chavez's ascendance and has kept the chavistas in power ever since. A loss of support from Venezuela's poorer populations could worsen the unrest and force the military to step in against Maduro. But if the president does not make the difficult economic decisions that could negatively affect his base of support, widespread economic deterioration is likely. In short, he faces a loss of political power whether or not he implements reforms.

How Political Uncertainty Undermines the Energy Sector's Future

All of this uncertainty, combined with the legacy of nationalization left to Maduro by Chavez, has made foreign investors wary. This bodes ill for Venezuela at a time when tens of billions of dollars are needed to revitalize the energy sector. Venezuela's oil is particularly cost-intensive to develop, and as production in the Maracaibo basin declines and the Orinoco basin becomes more important, difficulties will increase. Any new major investment will likely need to include multibillion-dollar upgrading facilities to significantly increase Venezuela's production capacity. Best-case scenarios suggest it would take tens of billions of dollars and 5 to 10 years before a real reversal in Venezuela's energy fortunes would be seen.

As a result, the degradation — or at best, stagnation — of the energy sector can be expected to continue until there is a regime change in Caracas. A coalition government in which Maduro and his fellow chavistas permit legitimate opposition leaders to participate more thoughtfully in decision-making is possible, but such a balanced outcome would be difficult to achieve. It is more likely that the Maduro administration will continue to face regular bouts of street unrest as the opposition tries to position itself to influence government decisions. The government will struggle to implement price hikes, not only because of political opposition but also due to the sheer inefficiency of the Venezuelan government. And while Petroleos de Venezuela has been able to borrow billions of dollars for the energy sector over the past year, a recovery in the industry is unlikely in the foreseeable future.

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