Can a Venezuela Revolt Impact Oil Prices?Uprisings or social unrest in geopolitical hotspots can affect the price of oil and other commodities. In Venezuela, the eleventh largest producer of oil in the world, a social revolt would likely impact the price of oil in the United States and around the world. According to the U.S. Energy Information Administration (EIA), Venezuela produced roughly 2.7 million barrels of oil per day in 2013.

In 2014, Saudi Arabian financial ministers said that the world would not see prices of $100 per barrel some time. For oil-rich nations that rely on oil revenues to finance their social welfare programs, changing oil economics threaten their future. In the Western Hemisphere, nowhere is this more evident than in Venezuela, which relies on oil production for 96 percent of its hard currency income. This article outlines the possibility of a social revolt in Venezuela and whether a social uprising might impact the global price of oil. (Related Oil Prices Pushing Venezuela to Collapse?)

Venezuela’s Energy Sector Can’t Break Even

As mentioned above, Venezuela depends on oil for 96 percent of its hard currency economy and requires a price of $117 to $140 per barrel to break even in their financial budgets. With oil prices falling below $50 in August 2015 and near 6-1/2 year lows, Venezuela’s failing social contract has seen the country experience a dearth of basic goods, soaring inflation, and widespread government crackdowns that have attempted to curb unrest. Recent incidents including the imprisonment of Caracas’ mayor and at least 13 deaths have only fueled greater opposition and protests.

In the past, political protests have shaken the nation’s energy sector. Workers who opposed former Venezuelan President Hugo Chavez organized a two-month long strike in 2002-2003. As a result, the nation’s production fell from an average three million barrels per day to only 25,000 barrels. From October 2002 to February 2003, West Texas Intermediate (WTI) crude oil spot prices increased from a monthly average of $28.84 to $35.83, according to the EIA. Meanwhile, average Brent spot prices, rose from $27.54 to $30.61. The strike coincided with the ramp up to the U.S. invasion of Iraq in 2003, although prices fell after the invasion and the Venezuelan strike ended.

Venezuela’s most recent unrest have left its oil industry relatively unscathed. One reason for this is geography. Most of the protests have taken place in Caracas and other large Venezuelan cities while its oil fields are in remote regions like Orinoco belt, Lake Maracaibo and the eastern state of Monagas. In addition, the nation’s refineries are also relatively remote, spread along the country’s Caribbean coast. And in case protestors decide to spread their message to the oil fields (which they have not so far), the government has also placed military protection around its oil facilities.

While the current social unrest is disruptive to the country, a factor that may exert a greater influence on oil prices is the nation’s nationalized oil company and economic policies that deter investment and encourage corruption and poor financial allocation. (Related: Oil Prices Pushing Venezuela To Economic Collapse?)

What’s Really Wrong with Venezuela?

Venezuelan President Nicolas Maduro believes that the ongoing dive in oil prices has been part of a conspiracy between Saudi Arabia and the United States to punish political foes. “What is the reason for the United States and some U.S. allies wanting to drive down the price of oil?” Venezuelan President Nicolas Maduro asked in a speech on the country’s national television channel in October 2014. Maduro's conclusion? “To harm Russia.”

Improved technology has made extracting more oil at lower prices easier. And exploration and new methods of extraction, like fracking, have opened up major new sources of oil. In the United States, supply (largely bolstered by oil from fracking) outpaced demand in 2014. This is the primary reason why oil prices took a nose dive.

In contrast to new technologies and efficiencies in other parts of the world, Venezuela’s energy sector is remarkably inefficient from both a capital and operational perspective. This is unfortunate given that the nation currently sits on the second largest proven reserves in the world--roughly 270 billion barrels. The nation’s oil-rich Orinoco Belt could contain up to 513 billion barrels of crude oil, according to the U.S. Geological Survey. This heavy oil–composed of high levels of hydrocarbons that are denser than water, including from petroleum, coal tar and similar materials, requires significant capital and technological advancement to extract.

These production costs will provide a challenge for Venezuela. The country’s decision to nationalize foreign assets has all but destroyed any interest from large energy companies with technological expertise from entering the country. Any firm that is interested in developing more long-term projects such as the Orinoco heavy-oil belt must sign a risk-production sharing agreement with the national oil company, Petroleos de Venezuela SA (PDVSA). These unfriendly contracts force private companies to take on all exploration costs, but share production and profits with the Venezuelan government.

In addition, any company interested in producing oil in Venezuela can only operate marginal or low-yielding fields, again through a project with the national oil company. Over the last decade, production has stagnated, refinery accidents are common, and the state-run giant's budgets have grown less transparent, more politicized and debt ridden.

The Bottom Line

Venezuela may be oil rich, but falling confidence in its energy company could lead to production problems long before any protests could. Declining production due to inefficiencies is more likely to affect oil prices than today's mass protests. Venezuela represents the eleventh-largest oil producer in the world, pumping roughly 3% of the global commodity supply, according to the Energy Information Administration. Although just 4% of the global supply comes from this South American country, any political unrest that disrupts its producing companies could easily impact the global price of oil. (For more about diversity of global oil nations, read Not All Oil Economies Are Created Equal.)