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South American leaders attend Hugo Chavez’s funeral. From left to right: President of Argentina Cristina Fernández de Kirchner, President of Uruguay José Mujica, and President of Bolivia Evo Morales. Credit: Office of the President of Argentina via Wikimedia Commons
By Alejandro Urrutia Rodriguez
The death of Venezuelan President Hugo Chavez will have various political, social, and economic implications in Venezuela and worldwide. His petrodollars filled the Venezuelan coffers and sponsored his socialist revolution for years – even though oil production has fallen 25% since 1998 and oil shipments to the U.S. declined from 49 million to 31.9 million barrels per year. This decline in oil production, even though important to the future of PDVSA and the Venezuela oil and gas industry, never seriously affected the political strength and standing of Chavez due to the fact that the prices of oil from 1998 to 2012 had an 11-fold increase. However, now that Hugo Chavez is gone there are a lot of questions that could potentially affect the global oil and gas market.
The first and most important issue is the future of the oil market in Venezuela. In 2010 OPEC claimed “Venezuela’s Orinoco Oil Belt contained tar sand deposits equivalent to around 300 billion barrels of oil– enough to fulfill current world demand for 10 years.” But even though Venezuela has the largest oil reserves in the world, Hugo Chavez’s dependence on PDVSA left the NOC with just US$11 billion – 9% of its income – to fund future operations (compared to Pemex’s 17% and Brazil’s Petrobras 29%).
This trend, which is not expected to change despite the death of Chavez, is of great concern to the US and other oil exporting and importing countries because it could have strong implications on global oil prices.
This is the case because despite the fact that Chavez has passed away, Chavismo is still alive; therefore, many analysts believe that his policy of depending on oil revenues to foster social programs at home and abroad will continue, leading to a continuation of a decrease in Venezuela’s oil production. If this is case – as is expected – global oil supply would decrease and oil prices would increase because demand would not change. This decline could have a negative impact on American and Western economies, since there would be less supply. This is a great opportunity for Mexico to step up its production and fill in the vacuum left by PDVSA’s decline because the US and other Western nations will need to import oil, and since the US is currently seeking to become energy independent in a North American context, Mexico must capitalize on Venezuela’s continuous expected decline.
However, this potential opportunity for Pemex and the Mexican oil and gas industry depends on the political future of Venezuela – which is expected to hold elections in the next 30 days. Whatever the outcome, if the newly elected Venezuelan president decides to open up the market and allow the return of foreign companies such as Exxon-Mobil and ConocoPhillips, the potential for oil production increase would rise, leading to a higher global oil supply and lower oil prices. This could have a potential negative effect on Mexico’s oil exports since potential oil companies could start focusing on Venezuela, even though PDVSA is not going to be turned around overnight and many energy analysts believe the political transition will most probably lead to similar style of government.
Despite the various implications the death of Chavez will have on Venezuela and various other oil exporting and producing countries such as Mexico, Saudi Arabia, Brazil, the USA, and multiple European countries, analysts are not expecting a short-term drastic change because “the full impact of his death may not be felt until Venezuela picks a new leader — one who might choose a course different from Chavez – and his oil policies are clearly defined and implemented.”
For the meantime, the status quo will be maintained; oil production in Venezuela will continue to decline, oil exporting countries will fill in the vacuum left by the Venezuelan oil production decrease, and Mexico has the potential to benefit from the United States’ growing hesitation to import oil from ideologically different minded countries such as Saudi Arabia and Russia.
Alejandro Urrutia Rodríguez is the editor of the annual publication Mexico Oil and Gas review. He studied history at Boston University and frequently writes about international affairs.