Venezuela Could Benefit Big from Spike in Oil

Although political turmoil in the Middle East has caused much trouble for consumers all over the world, recent events could benefit the Venezuelan government’s global influence on oil …

Although political turmoil in the Middle East has caused much trouble for consumers all over the world, recent events could benefit the Venezuelan government’s global influence on oil supply. See the following article from Money Morning for more on this.

Libya turmoil continued this week as Col. Moammar Gadhafi’s troops tried to chase rebel forces out of cities housing key oil facilities. The pro-government regime wants to regain cities with oil operations, many of which rebels took over in the first days of fighting.

Attacks Wednesday also destroyed one oil facility’s diesel oil storage tank and pipeline. Shukri Ghanem, Libya’s de facto oil minister and the chairman of Libya’s National Oil Corp., said no major oil installations were damaged in the explosion, but the fighting has disrupted a number of oil and natural gas facilities around the country.

Libya’s oil exports have fallen to 500,000 barrels a day from 1.6 million since the country’s conflict erupted, according to Ghanem. Libya hopes to resume fulfilling its oil contracts as soon as the political crisis subsides.

The oil supply strain has pushed oil prices higher in recent weeks. Oil prices slipped yesterday (Thursday), but remained in the triple digits, trading around $102 a barrel on the New York Mercantile Exchange. Brent crude futures contracts in London traded at $114 a barrel.

The "energy markets are flying blind for the moment, with prices very much held hostage to the goings-on in the Middle East," Edward Meir, senior commodity analyst at MF Global, wrote in a note.

The Mideast crisis and its oil price impact have many wondering what’s in store for other countries’ economies and oil producers. The following question from a reader in Venezuela addresses that topic.

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Here in Venezuela we are watching the changes in the Middle East countries as a powerful change in the oil business. How do you think that can impact the Latin America economy? And what about oil producers in Venezuela?

Marcial Andres Barrios Covaro

Oil prices have already skyrocketed this year in Venezuela, South America’s largest oil exporter. So far this year, the average price for Venezuela’s oil is $87.29 per barrel, far above the $40 per barrel the government budgeted for 2011 and higher than the previous record of $86.49 set in 2008.

Oil provides 95% of Venezuela’s export income, making the country’s economy extremely reliant on oil prices. The oil industry is dominated by state-run oil company Petróleos de Venezuela S.A. (PDVSA).

"Latin American economies continue to be sensitive to energy prices," said Money Morning Contributing Writer and energy expert Dr. Kent Moors. "While Venezuela in particular will reflect the OPEC approach, since it is a member, its production moving forward is governed by heavy oil from the Orinoco. This requires a greater emphasis on technology not controlled by Caracas and will increase the overall cost of the crude produced. Now at prices above $100 a barrel, the increased costs can certainly be absorbed (the same can be said for production from Canadian oil sands)."

The Orinoco Belt is a section in the southern strip of the Orinoco River Basin in central Venezuela. It boasts a heavy crude oil supply and has been estimated to eventually produce 2.1 million barrels of oil a day. Venezuela last year awarded stakes to private companies to develop the resources.

Evaluating the impact of higher oil prices requires more than a look at Venezuela’s oil producing capability.

"Two other elements, however, also come into play — political stability and the overall condition of the Venezuelan economy," Moors said. "The latter becomes a more pronounced issue as inflation continues to accelerate."

The country’s soaring inflation rate is the highest in Latin America. Prices rose 1.7% in February, bringing the 12-month total inflation rate to 28.5%. The government set a target of 23% to 25% for 2011.

Overall, Venezuela stands to benefit from the Mideast conflict if oil-importing countries increase reliance on other exporters, including Latin American and Caribbean nations.

"On balance, the longer MENA (Middle East North Africa) problems remain, the better ought to be the opportunities for sourcing crude from other regions," said Moors. "That would certainly seem to favor North and South American production. And if the Cuban offshore reserves are as large as some believe them to be, the PDVSA-led Petrocaribe initiative may benefit significantly."

Petrocaribe is an oil alliance created in 2005 between Venezuela and Caribbean nations, where countries can buy oil at market value from Venezuela, but only need to supply a percentage of the total cost up front. The rest can be paid through a financing agreement with interest, or be paid partly in commodities. The agreement’s goal is to provide oil for a fair price to nations that don’t have a state-controlled entity overseeing the resource.

Venezuela has invested in Cuba’s oil industry and through the Petrocaribe agreement would profit from any oil discoveries in the region.

This article was republished with permission by Money Morning.

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