Key Takeaways:
Nicolás Maduro is likely to solidify his control despite contested election results and international pressure, leading to further political instability in Venezuela and potential worsening of the business environment.
The ongoing crisis is expected to further cripple Venezuela’s state oil company, PDVSA, exacerbating its financial troubles and reducing global oil supply, which could result in higher global oil prices.
The US is likely to reimpose or increase sanctions, worsening Venezuela’s economic situation. Meanwhile, China and Russia continue to support Maduro, complicating the geopolitical landscape.
The crisis in Venezuela could destabilize the broader Latin American region, increase migration, and impact global energy security, with potential spill over effects into global conflicts and energy alliances.
Overview
Venezuela remains politically isolated, with further instability highly likely for the remainder of 2024, as Maduro continues to resist both internal and external pressures to relinquish power.
The results of the July 28 elections in Venezuela have been highly contested due to the lack of transparency in the vote count, with no evidence released to support Maduro's declared victory. Venezuela’s authoritarian President Nicolás Maduro declared victory for a third term; although the US have declared opposition politician Edmundo González Urruti as the rightful winner. However, the highest court ruled on August 22, that Maduro had won the disputed election.
Venezuela holds the world's largest oil reserves with proven crude oil of 303,008 million barrels. On August 28, Maduro made significant changes to his cabinet, namely bringing new leadership to the oil, interior and finance ministries. This situation has profound implications for the country’s state oil company Petróleos de Venezuela, S.A. (PDVSA), a critical actor in the global oil supply chain.
The US Position
Since the early 2000s, PDVSA has been in a state of decline, largely due to mismanagement, corruption, and the impact of US sanctions. The US has imposed targeted sanctions on individuals and entities since 2005 for antidemocratic, criminal or corrupt actions. The Trump administration imposed sectoral, financial and governmental sanctions which exacerbated a humanitarian and economic crisis that led to 7.7 million people fleeing the country.
The Biden administration had introduced a sanctions relief package to incentivise the Venezuelan government to implement free and fair elections, but in April 2024 rolled much of this back due to antidemocratic practices by Maduro’s officials. While the Venezuelan bond market has recovered by almost 10 cents on the dollar since the US’ October 2023 decision to lift its ban on trading on secondary-market bonds, the slump since the election contest is expected to continue. A complete reversal of the sanctions relief, along with new sanctions by the US and other Western governments is likely if Maduro maintains power. This would almost certainly deepen the slump.
International Positions
The European Union, as Venezuela’s fourth largest trading partner, has joined calls for an assessment of the election’s conduct. Conversely, China and Russia have openly supported Maduro and his claimed third election. Both China and Russia have invested heavily in Venezuela's oil sector due to its strategic importance, and their continued support is critical to PDVSA's survival. The company's over-reliance on trade deals with China and Russia, in exchange for loans and other financial aid, has further strained its financial resources and has increased its dependency while diminishing its bargaining power.
KSG assesses that shifts in the global energy alliances could occur if Maduro continues to face continued political opposition. Brazil has led calls for talks between Maduro and the opposition, and Brazil’s leadership within BRICS means that Maduro will be pushed towards conciliation to fulfil his expressed interest in joining BRICS. Relations with Nigeria were consolidated earlier this month, with the Petroleum Ministry signing a deal with Nigerian company Veneoranto Petroleum Ltd., The Technical-Economic Feasibility Agreement will initiate the development of the Barracuda area, located in the Gulf of Venezuela, as well as the agreement to promote the development of the Boca de Serpiente area, northeast of the state of Delta Amacuro. KSG interviews reveal Maduro expects a productive increase of approximately 30% to 40%, potentially positioning Venezuela as a significant gas-exporting country. This new agreement ensures Venezuela’s exportation of gas for the first time in history to Trinidad and Tobago also.
Effects on Oil Prices and Business
Chevron Corp., which has had a presence in Venezuela since 1923, is the sole American company directly involved in extracting and selling Venezuelan oil. In 2023, it restarted importing heavy crude oil from Venezuela to the US, though the deliveries represent less than 1% of the US refinery processing capacity (approximately 20 million barrels per day). Chevron has permission to export oil to settle PDVSA’s debt arrears to the company under US General License No.41. However, Chevron is barred from paying royalties to PDVSA. US officials are unlikely to make changes to Chevron’s licence.
The global oil price remained low despite the US reimposition of sanctions in April. However, KSG assesses that further sanctions will potentially lead to a deepening decline of Venezuelan oil production.
On August 30, blackouts at Jose, Venezuela’s largest oil terminal (representing approximately 70% of export capacity), causing a full pause in operations. The Maduro government blamed the opposition for sabotaging the energy grid without evidence and the countrywide blackouts are expected to ease in the coming days. More such disruptions may continue with stretched infrastructure and political conflict in the region. If instability and blackouts continue in one of the most highly urbanised countries in South America amid ongoing street protests, then businesses are likely to suffer. Venezuela is already ranked 188th of 195 countries by the World Bank for doing business in, and with the failure of an expected regime change, many are likely considering leaving the country.
In addition, Maduro has already threatened US oil and gas companies operating in the Stabroek Block in Guyana with aggressive rhetoric and a Venezuelan military buildup. KSG assesses that the pressure on Maduro to resign will likely lead to a worsening business environment which coupled with a decline in oil revenues will lead to a fall in gross national income.
Effects on PDVSA
The current political crisis has only accelerated Venezuela’s decline. PDVSA’s oil production has plummeted from over 3 million barrels per day (bpd) in the early 2000s to less than 700,000 bpd in 2023. The company is heavily indebted, with limited access to international credit markets due to sanctions. PDVSA's revenues have been severely impacted by the collapse in oil production and the reduced ability to sell oil on the global market.
Forward Look
KSG assesses that Maduro is likely to consolidate his power over the coming months with increased oppression, blaming US sanctions, and increasing the militaristic rhetoric against Guyana. While the current trajectory points towards continued decline and international isolation, the potential for regime change or conflict escalation cannot be ruled out.
Continued conflict between Maduro supporters and the opposition protesters across Venezuela throughout August will likely lead to a further exodus of skilled workers, leading to a deterioration in PDVSA’s operations. This instability is likely to lead to a decline in oil production and PDVSA’s efficiency. This would have a significant impact on global oil supplies, leading to a sharp spike in prices. While this would greatly benefit oil-producing nations at a distance from Venezuela such as those in the MENA region, the loss of control of a Founder Member of OPEC will likely interrupt and delay the organisation’s decision-making on production quotas.
Many American companies are likely to stay in a holding pattern awaiting signs of stabilisation while maintaining a limited presence but additional physical security at assets will be needed during expected violent clashes. To mitigate risks associated with Venezuelan oil, companies should consider diversifying their supply sources and investing in alternative energy projects. Companies should engage with key stakeholders, including governments and international organisations, to influence the diplomatic efforts aimed at resolving the Venezuelan crisis and maintaining global energy security resilience through the offer of behavioural incentives such as sanctions reductions.
The spillover effects of conflict in Venezuela could destabilise the broader Latin American region, leading to increased migration flows and potential conflicts in neighbouring countries. The international community, particularly the United States, may feel forced to intervene, either through further sanctions or covert operations.
If Maduro remains President, Venezuela will have to continue to rely heavily on support from Russia and China. This will stretch their resources focused on the Ukrainian War and preparations for a potential conflict in the South China Sea, although the effects on Russian resources will be far more significant.
In the unlikely event that a deal with the opposition is reached and Maduro can share power to the satisfaction of the US, then sanctions are likely to subside and political stability may return. If this does occur, then the proposed economic reforms offered by the current opposition may be put in place to create a favourable business environment. However, if the deal allows Maduro to retain the presidency then the rhetoric against Guyana is likely to continue.
In the potential yet unlikely event of Maduro’s removal, KSG wargaming showed that there would likely be a political vacuum that would lead to extreme civil disruption and a hostile economic environment. This will most likely involve significant military operations in the country, including over the control of the oil reserves of Venezuela.