Q&A of the Day – How Venezuela's Future Will Impact Oil & Gas Prices
Each day I feature a listener question sent by one of these methods.
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Today’s entry: @brianmuddradio If Venezuela produces what its capable of producing how much oil is it and what would it do for prices?
Bottom Line: It’s one of the most important questions as it pertains to what the future for Venezuela looks like, what the quality of life for Venezuelans could be, and also for whether American companies will choose to invest the untold billions of dollars needed to ramp up operations in the country once again. It also carries with it the possibility of creating greater price stability and affordability in the oil and gas markets permanently. The first part of the question is easy to answer, the second part is a bit more complicated...let’s dig in.
Venezuela holds the world's largest proven oil reserves, at over 300 billion barrels, highlighting the strategic importance of the country which has most recently been aligned with China, Russia, Iran, North Korea, Cuba and Nicaragua. By way of comparison, Saudi Arabia – the country with the second largest proven reserves has 267 billion barrels of oil it’s yet to tap. As for the United States, we have 47.7 billion proven barrels of oil reserves. In total, Venezuela's oil represents 17% of the world’s total known oil supply. But what Venezuela has in reserves is barely being touched these days.
While Saudi Arabia produces approximately 10 million of the 85 million barrels of oil produced worldwide per day... Recent daily oil production in Venezuela, based on OPEC data, is approximately 900,000 barrels per day. It illustrates in part the significant disconnect between Venezuela's potential and actual output. It’s a massive decline from historical levels, down from over 3 million bpd in the late 1990s/early 2000s – prior to the nationalization/confiscation of the entire industry by Hugo Chavez’s regime. Output has slowly and steadily declined ever since due to underinvestment and mismanagement by the state-controlled entity.
It is worth noting that geographical differences and crude quality differ significantly between Saudi Arabia and Venezuela that can impact output levels, in other words it’s not a given that Venezuela could necessary rival the daily Saudi output despite having larger reserves. At the same time, newer technology and operational efficiencies could likely lead to even greater production capabilities today compared to nearly thirty years ago.
Let’s say conservatively that Venezuela were simply brought back up to the production standards that existed at peak production in the late 90’s. Here’s what that would look like:
- Short-term (1–2 years): Analysts estimate 1.4 million bpd is rather easily achievable with up to 2 million bpd in optimistic scenarios, by quickly ramping up existing operations – mainly by Chevron which is the lone U.S. company exporting Venezuelan oil
- Medium-term (up to five years): Restoring previous production levels of about 3 million bpd
- Long-term (over five years): Up to 4 million bpd, slightly exceeding previous peak production.
All of those outcomes require billions in new investment to achieve with estimates into the hundreds of billions to achieve the long-term targets. So, what would that mean for the oil market and gas prices?
Venezuela's current output represents only about 1% of the daily production. Over the near-term, that can increase to about 1.6% with about 5% possible with longer term commitments in place. So that’s the quantifiable part of this question. The more challenging question is what the longer-term impact would be on prices.
Without getting into the weeds regarding the different types of crude and different prices based on quality, price outcomes would be a factor of the amount of demand for petroleum products and also whether other oil producing nations would consider lowering daily production to offset an increase in energy supply from Venezuela as OPEC has been known historically to do to prop up energy prices. While those are unknowns until we get there, obviously having greater capacity in Venezuela would improve the potential outlook for lower prices and price stability overtime. Moreover, if Venezuela’s policy interests were aligned with U.S. interests, it’s likely the case that the country wouldn’t be inclined to toe the OPEC production guidelines. In other words, the U.S. through our own production and Venezuelan imports would likely have all the energy we need independent of other operating levels.
Prices would depend on those factors along with the value/strength of the U.S. Dollar in the future. With that said, if all other factors were equal to what we see in the marketplace today, if Venezuela were producing at what’s known to be able to be achieved, gas prices, for example, would decrease by approximately 20% from current levels based on what are known as elasticity models. Based on current usage/demand and prices – it could bring annualized savings of over $400 per household in today’s dollars.