Another blow for Venezuela

Last week in Doha, many of the world's major producers of crude oil tried, but failed to agree to freeze production, in order to stabilise and eventually increase prices. It was an outcome that will have long term implications for the Americas and in particular Venezuela.

The April 17 meeting involved 18 countries which together account for more than 50 per cent of global crude oil production, including most members of the Organization of Oil Producing Countries (OPEC) and many other major non-OPEC producer states. It took place largely at the urging of Venezuela, Russia and Saudi Arabia.

For Venezuela and Russia in particular, the freeze was strategic in its intent.

For them it was not just about limiting production to January 2016 levels and improving the political and economic resilience of producer nations by stabilising their much diminished income from oil and gas; but was also about enabling the possible emergence of new broader, more powerful global bloc of hydrocarbon producers.

Before, and in preparation for the meeting, Latin American oil producing nations, led by Ecuador and Venezuela, had established a new sub-hemispheric group built on a common regional position supported by Bolivia, Colombia and Mexico, countries which are not OPEC members. Brazil did not participate as it had said that a production freeze would contradict its oil policies.

At a meeting on April 8 in Quito, the five countries had agreed, with reservations from Mexico, to create a single Latin approach to global hydrocarbon policy, and to endorse an output freeze in conjunction with the OPEC and non-OPEC members attending the Doha meeting, as well as other positions that might bolster international crude oil prices.

This approach coincided at an international level with Russia's broader strategic objectives, and Moscow's belief that it had secured the basis for an agreement involving both the Saudi and Iranian governments.

Russia saw not only the possibility of stabilising and improving its revenues from oil and gas at a time when its economy has been severely hit by sanctions following its annexation of Crimea, but the opportunity to extend its influence in the Middle East and in other parts of the world including Latin America and the Caribbean.

The Doha meeting was not the first attempt to freeze production levels. In February a similar encounter had taken place. Then, Russia, Saudi Arabia, Venezuela and Qatar had agreed to freeze production, but said that the arrangement was contingent on other producers joining in, something that Iran had said that it was not prepared to do.

The Iranian Oil Minister, Bijan Zanganeh, had rejected the idea as "ridiculous" because its interest lay in regaining market share following its agreement at the UN on nuclear energy, as it was seeking to double present production levels of around 2m barrels per day. Despite this, Russia appears to have been confident that a deal was possible.

As it turned out, if any such arrangement existed, it fell apart.

At the last minute Saudi Arabia reversed its position, reflecting the power now wielded by the country's 30-year-old Deputy Crown Prince, Mohammed bin Salman.

The decision reportedly reflected the new strategic foreign policy being pursued by the Deputy Crown Prince which in part relates to maintaining oil production, but is also linked to something more fundamental; the religious schism between Shia Iran and Sunni Saudi Arabia and the related proxy wars they are fighting against each other in Yemen, Palestine, Syria.

Venezuela has a different narrative, observing after the meeting that the outcome was the result of intense pressure from the United States on Saudi Arabia; but whatever the reason, the assumed agreement broke down literally as a draft text was all but agreed.

What this suggests is that there is now little near-term likelihood of a production limiting agreement; that trust within OPEC is now badly, perhaps irreparably, broken; and the outcome that OPEC and non-OPEC members in Latin America had hoped might give them a single stronger voice, is all but dead.

When it comes to Caribbean region, it is hard to hide that what happened in Doha was a significant setback for Venezuela, which continues to struggle with an escalating domestic economic crisis caused by the dramatic fall in oil revenues, government mismanagement, and a tense and escalating standoff between President Maduro and the country's opposition-led National Assembly.

For Caracas, first stabilising and then achieving an increase in the world oil price had been seen as essential.

Speaking before the Doha meeting, the country's Oil Minister, Eulogio Del Pino, had said: "What's at play here is the defence of our product, the right of oil producers to have an equilibrium price, a price that justifies investments and this shouldn't be left in the hands of speculators."

From Mr Del Pino's previous comments an equilibrium price is about US$60 per barrel, although President Maduro has suggested that US$100 per barrel is fair.

Irrespective, some of the world's largest oil trading houses, hedge funds and analysts expect anyway that crude oil prices will stabilise at around US$45 to US$50 per barrel as the year goes on, as demand gradually come to outstrip supply. However, the failure to agree in Doha means that there is now the strong likelihood that many producers will pump more oil to maintain revenue, ensuring weak or unstable prices.

Venezuela, however does not have the same luxury. Its production, according to OPEC figures, is declining, the infrastructure that supports its industry is in danger of failing, and the country's economy appears to be in free fall experiencing shortages of almost all essentials and an inflation rate projected by the IMF to increase to 1,642% in 2017.

Most of the Caribbean continues to depend on Venezuela for its energy needs, despite the growing interest in renewables. President Maduro has made clear that come-what-may he is committed to maintaining the PetroCaribe arrangements and to developing new investment ties with the region, for instance to bring ashore Venezuelan oil and gas in Trinidad.

For this reason, what happened in Doha has a wider importance.

The failure to agree to freeze production brings into focus the sustainability of the present PetroCaribe pricing structure and Venezuela's longer-term ability to meet its well-intentioned investment promises. It demonstrates again how vulnerable a fragmented Caribbean is to the strategic decisions of others if it fails to consider and prepare for what may be over the horizon.

David Jessop is a consultant to the Caribbean Council and can be contacted at
david.jessop@caribbean-council.org

Previous columns can be found at www.caribbean-council.org April 22nd, 2016