Dr. Mamdouh G.Salameh is an international Oil Economist. He is one of the world's leading oil experts and visiting Professor of Energy Economics at ESCP European Business School in London. His research interests are oil and energy economics and geopolitics.
(1) We are concerned that Venezuela seems to have conducted some oil trading with China in recent months. Are these transactions temporary or the Venezuelan government has had a more clear and long-term plan? If the two countries want to further cooperate in energy, what are Venezuela's demands?
(2) What is the attitude of local Venezuelan residents towards Chinese enterprises? Do they welcome enterprises like PetroChina to build infrastructure and strengthen trade between the two countries?
The late Canadian Prime Minister Pierre Trudeau was once quoted saying about the United States that “living next to you is in some ways like sleeping with an elephant. No matter how friendly and even-tempered is the beast, if I can call it that, one is affected by every twitch and grunt”. For Venezuela, sitting on the world’s largest proven oil reserves next to the world’s largest consumer of oil must be a cause of worry. No matter how Venezuela’s neighbour is good and neighbourly, it must still cast some envious eyes on the country’s unbelievably huge oil wealth.
Since the discovery of oil in great quantities in the Arab Gulf region, the United States has been ogling Middle East oil. The United States has even based its Central Command in Qatar to ensure that it controls global oil supplies on the premise that whoever controls these supplies and oil’s shipping lanes and chokepoints controls the global economy. I have argued in my book (Over a Barrel, 2004, p.191) that the invasion of Iraq in 2003 was undoubtedly about oil. Even the veteran ex-chairman of the US Federal Bank Alan Greenspan has admitted in his memoirs (The Age of Turbulence, 2007, page 463) that the Iraq war was largely about oil. And who was the most fanatical architect of the invasion of Iraq and the fiercest advocator of regime change other than John Bolton, who later became the former National Security Advisor to former US President Donald Trump.
The United States imposed the most atrocious sanctions against Venezuela in January 2019. John Bolton openly said on national TV at the time that “the sanctions will make a big difference to the United States economically if we could have American oil companies really invest in and produce the oil capabilities in Venezuela. It would be good for the people of Venezuela. It would be good for the people of the United States. We both have a lot at stake here making this come out the right way. A decimated oil industry in the nation with the largest proven oil reserves in the world would appear to serve some alternative interests beyond democracy and human rights.” There you have it.
There are two conflicting views about the current crisis in Venezuela. One is of an authoritarian regime led by Nicolas Maduro clinging to power against the wishes of popular forces arrayed around the now defunct self-declared interim President Juan Guaidó.
The second is of Venezuela facing a coup aiming at regime change backed by US imperialism with clear designs on the country’s huge oil reserves which are the world’s largest estimated at 303 billion barrels and growing.
The fact that this is a home-grown crisis is not lost on the Venezuelan people. While extremely critical of the corruption and bureaucracy that pervade the government, people still express the willingness to rise up against the perceived threat of “Yankee imperialism”. After all, it was the Bolivarian revolution that liberated countries of South America from Spanish oppression.
The only region that could significantly increase oil output on top of market expectations is Latin America which has the world’s second biggest proven oil reserves estimated at 328 billion barrels (bb) or 19% of total global reserves. And within that region, Venezuela is the only game changer. Venezuela alone accounts for 92% of Latin America’s proven oil reserves. However, the United States Geological Survey (USGS) estimates that there may be more than 513 bb of extra-heavy crude oil and bitumen deposits in Venezuela’s Orinoco belt region.
Venezuela, a founding member of OPEC, benefitted greatly from high oil prices since 2002. Oil revenue accounts for 95% of the country’s export revenue, providing the hard currency needed to purchase consumer goods, virtually all of which are imported.
With high oil revenues, the government heavily subsidised the prices of basic staples and provided significant social services. But government spending began outpacing the oil revenue in 2010 and the Venezuelan economy started to decline precipitously following the collapse of worldwide oil prices in 2014 from roughly US$105 to $41 a barrel.
The drop in oil prices was only part of the problem for the Venezuela’s state-owned oil company, Petróleos de Venezuela, S.A. (PDVSA).The country’s oil production has been consistently declining over the past decade due to lack of maintenance and investment. In 2016, Venezuela produced only 2.4 million barrels a day (mbd). This has now dropped to an estimated 1.0 mbd by the end of 2020.
The source of PDVSA’s troubles is having to spend most of its funds on financing government expenditure including spending on social programmes. As a result, its spending has consistently exceeded its profits in recent years. Venezuela produces virtually nothing aside from oil. With a limited capacity to import, the country has experienced increasingly painful shortages in basic foods and medicines.
The Failure of US Sanctions
Despite their harshness, US sanctions failed miserably to effect a regime change in
Venezuela and to cripple the country’s economy and crude oil exports thanks to help from China, Russia and Iran.
China and Russia who between them are owed more than $30 bn worth of investment have defied US sanctions and continued to do everything within their capacity to prevent a collapse of Venezuela’s economy. Moreover, China has been
Providing technical help to enable the country’s oil industry to raise its crude oil production and its refining capacity while Russia has been helping with the selling of Venezuela’s crude oil clandestinely around the world. Iran on the other hand, has been shipping diluents to Venezuela to enable its oil industry to convert the extra-heavy crude into a lighter crude for transport and refining. One of the fastest growing destinations of Venezuelan crude oil exports has been China.
China’s Oil Involvement in Venezuela
Under the cloak of Washington’s indifference, Venezuela under the late Chavez made steady progress in cementing strategic relations with China, which is eager to establish a strong presence in a key, mineral-rich South American economy. China has funnelled money and expertise into Venezuela’s oil industry.
In the last eighteen years, China has increased its presence in Venezuela’s oil industry dramatically. Bilateral trade between China and Venezuela has grown very significantly from $85.5 million in 1999 to about $15.7 bn in 2014, making Beijing the country’s second largest trading after the United States at the time. Venezuela’s trade with China represents 15.8% of its total trade.
During the decade-long boom in oil prices that ended in 2014, Venezuela borrowed nearly $50 bn from China that it agreed to pay back in crude and fuel deliveries to state-run Chinese companies. The South American country repaid in oil: It supplied China with millions of barrels a year, amounting to about 5% of China’s total oil imports.
Today, Venezuela owes China $20 bn in oil shipments. PDVSA has fallen months behind on shipments of crude and fuel under oil-for-loan deals with China. The fall in crude prices has made the oil-for-loan agreements more onerous. Because loan payments were negotiated when crude prices were higher, the agreements require PDVSA to ship more oil in order to continue servicing the debts at the same rate.
Still, Chinese officials and businesspeople want to maintain long term ties if for no other reason than Venezuela's huge oil reserves and China's continuing need for diverse oil trade partners.
In 2015, Venezuela exported $34.3 bn of which $24.9 bn was crude oil and $5.57 bn of refined products and imported $27.5 bn, resulting in a positive trade balance of $6.82 bn.
Facing the highly intrusive US sanctions, Venezuelans would welcome investments and aid from around the world. China’s support and investments are particularly welcome by the Venezuelans who see them as life-saving for both their economy and oil industry. They particularly appreciate the fact that China has been defying US sanctions as it does with Iran both to help a friend in distress and also to ensure that its investments are safe.
Dr Mamdouh G. Salameh is an international oil economist. He is one of the world’s leading experts on oil. He is also a visiting professor of energy economics at the ESCP Europe Business School in London.
Interviewer: Li Yuxuan
Interview date: December 29, 2021