Expert Analysis of the Global Macro Events & News affecting the Indian Markets

WEEKLY SYNOPSIS

The Politics of Oil 

We have by now established that oil is a slippery business and ironically enough, oil creates much friction around the world. A litre of oil costs much less than a gram of gold, but the black gold retains its lustre as ever. It’d be accurate if I said the global economy runs on oil dynamics. Oil is the most dangerous weapon that every economy wants to get a hold of. However, think of this: you have the most valuable weapon but are barred from using it. You’d do whatever it takes to break that spell, won’t you? Well, that’s my story today. This week, I am talking about a nation that has the largest reserves of the world’s most valuable asset – oil (obviously) but is banned from leveraging it.

Dive into data: I know you are curious to know which country it is. Look at it yourself with this chart which shows proven oil reserves by country.

Let’s start with some quick facts: :

• Venezuela – a small country in Latin America holds the world’s largest oil reserves. 
• In 2019, the US put sanctions barring the trade of oil, gas, and gold with Venezuela.
• Venezuela is run by an autocratic government led by Nicholas Maduro.
• UAE and Russia, two major oil suppliers have cut their supplies leading to shortages.
• Russia-Ukraine and Israel-Palestine conflicts have further complicated the oil business.
• Last week, the Biden administration lifted the sanctions. 

With these facts, I have laid down a gist of everything for you but we don’t stop here. These facts might seem absurd and confusing, so let me connect the dots for you. 

The Wails of Venezuela 

As always, this too is all about politics. I’ll take it from the top. Venezuela, which has been producing oil since 1914 discovered the largest of its oil deposits in 1922. Cut to 1950, Venezuela became one of the world’s wealthiest economies leveraging its reserves. In 1960, OPEC – Organization of the Petroleum Exporting Countries was established with Venezuela as a founding member. Everything was going great for the country until 1980, the year Iraq invaded Iran and got a hold of its oil reserves. Oil prices then went down and Venezuela’s control over oil diluted. 

Dive into data: This infographic lays out the historical export data of Venezuela through four decades.

Yet, oil started picking up and Venezuela reformed under the socialist leadership of President Hugo Chavez. However, Chavez’s death was a turnaround for the country as next came autocracy with President Nicholas Maduro. Venezuela has been on a downward path since.

Dive into data: As Maduro took office, the economy started shuffling. Sanctions had not even been introduced until then and yet, look at these figures which clearly depict how the Venezuelan oil industry has been struggling under his leadership. 

The Story of Sanctions 

In a 21st-century world where most nations are democratic (to say at least), autocracy is highly condemned. So is Nicholas Maduro’s government. Since 2013, when Maduro came into power, multiple nations have been imposing sanctions against trade relations with Venezuela but the largest of these came in 2019. Started with discussions during Obama’s presidency, the first was taken in 2017 when Trump imposed restrictions on trading in markets. But, the real shift came in 2019. The Trump administration imposed sanctions completely restricting oil, gas, and gold trade between America and Venezuela. This was a move to further condemn the violation of the fair electoral process by Maduro. But then, Maduro didn’t flinch, and here’s the result of that. 

Dive into data: Venezuelan exports went from 1,400,000 barrels per day in December 2018 to 600,000 in December 2021. That is a massive decrease. 

Let’s talk about the present now. Last week, the US lifted the sanctions. You must be curious why. That’s exactly what I am talking about next. 

Oil Dynamics of the World

Russia and Saudi are some of the largest oil suppliers and a good part of the globe gets their oil from these countries. Now back in 2022, when Russia invaded Ukraine, it was highly condemned. Additionally, it cut its supplies to the world. And then came the supply cuts from Saudi earlier this year. This created a bit of havoc for oil prices as the prices lost all stability. The US economy, much like other economies, factors in oil and the instability made Biden take a step towards freeing up more oil reserves. From where you’d ask? Venezuela, obviously! 

Dive into data: This chart shows how oil prices have been largely unstable of late because of multiple reasons like supply cuts from UAE and Russia and the Israel-Palestine conflict. 

The situation called for a solution. Thus, Biden and Maduro have been in conversation since 2022 and now have finally come to an agreement. The deal is that the US lifts all its sanctions on trade with Venezuela and Maduro conducts wholly democratic elections with equal opportunity to all participants and international surveillance. It hasn’t been even a fortnight since this deal was made public but the world is now hoping for stability in oil prices. This deal has only been made for six months and will be revoked if Maduro fails to keep his part of the promise.

Is This a Real Win for Venezuela?

Venezuela is definitely rejoicing but the country currently lacks the required infrastructure to make use of its reserves. This is as big of a win for the US as it is for Venezuela, maybe even more so. Because even though the sanctions have been lifted, Venezuela still needs huge amounts of investments to be able to export larger volumes of oil. 

Dive into data: These metrics show how the Venezuelan economy has been going down and I think we all agree, it’s sad to see this in the 21st century. 

One immediate benefit is that the central bank of Venezuela will now be able to retrieve 3 billion dollars from overseas accounts which were stuck until now because of the sanctions. However, reform is now needed for the Venezuelan oil industry to come back to life. It needs privatization, a huge inflow of funds, and many new refineries. 

Stability will be a much-needed relief but here’s the real question – when can we see it? The answer is a little gloomy as it is going to take some time for prices to get back on track but I hope the country soon sees the light of democracy.

Sources and References: Bloomberg, Financial Times, Latinometrics, Statista, GIS Reports

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Green Portfolio is a SEBI Registered (SEBI Registration No. INH100008513) Research Analyst Firm. The research and reports express our opinions which we have based upon generally available public information, field research, inferences and deductions through are due diligence and analytical process. To the best our ability and belief, all information contained here is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable. We make no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results obtained from its use.