Rising oil prices in Venezuela: a way out?

Venezuela was once one of the richest countries in Latin America, blessed (or cursed) with more oil than any other nation on earth. But it is now mired in the worst recession in Latin America since 1980, and the prospects for an improvement are bleak. One fourth of the country's GDP was wiped out from 2014-16, poverty has increased from 48% in 2014 to 82% today, and inflation last year was 800%. A recent survey run by the country's leading universities found that 93% of respondents felt they didn't have enough money for daily food.

On the surface, there appears a glimmer of hope: oil prices are about 25% higher now than they were last year, and spending in the global oil business is on the rise. Will this do anything to bring Venezuela out of its mess? Probably not.

For one, the contraction in GDP in Venezuela began in 2012, long before oil prices starting tumbling from the lofty peaks seen under the late president Hugo Chávez. Secondly, Venezuela completely squandered the opportunity presented by the commodities boom; today, its oil industry is in a state of utter disrepair.

Production has fallen drastically, dipping below 2Mb/d last month – compared to about 3.5Mb/d when Chávez assumed power in 1999. But this is not the whole picture. Because of subsidized shipments to Caribbean nations, domestic fuel that is essentially given away, and past oil-for-loan deals with China, cash flow from this production is only worth about 1Mb/d, says Venezuela oil expert Francisco Monaldi (to put this in perspective: Saudi Arabia produces about 10 times that).

Meanwhile, most of Venezuela's best oil professionals have left the country, service companies aren't getting paid, and organized crime is increasingly problematic.

That said, as outlined in a recent Intelligence Series report, there has been a degree of liberalization in the Venezuelan oil industry of late. State oil company PDVSA is coming up with new schemes for payment (such as paying in oil), and they have said they will work to ease capital and exchange rate restrictions for companies operating in the sector. They have also showed a willingness to offer greater stakes in oil fields to foreign companies.

But is this a sign of desperation more than anything else?

Many see the move last week by the supreme court to suspend the powers of congress as driven by oil. Though the decision was subsequently amended, the hydrocarbons provision remained in place, allowing the state to now sell oil stakes to companies like Russia's Rosneft without legislative approval.

Though this is certainly a quick method to bring in cash, and though it might temporarily help the country stave off default – it has a US$2.05bn bond payment due next week – it will only add to the air of uncertainty in the oil sector. Basically, the catastrophic mismanagement of a country continues.

So it's not the oil price, but a change in government that will help reverse the hell many Venezuelans now live through.