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I think we can all agree that, absent a war or some deliberate strategy, a 14 percent drop in a country’s oil production in the space of one year is not a good thing. Even worse, though, is a 29 percent drop.
These two realities, both undesirable, were presented for Venezuela in OPEC’s latest monthly report, out recently. The oil-exporters’ club publishes two sets of production figures for each member: namely, what countries report themselves and a consensus figure from secondary sources.
In Venezuela’s case, something very interesting happened in December. While secondary sources estimated a drop of 82,000 barrels a day in the country’s output, Caracas said it was 216,000 barrels a day. This chart showing the month-to-month changes in Venezuela’s output over the past year from the two sets of figures shows you just how weird that is.
The independent figures show output dropped by 276,000 barrels a day between December 2016 and December 2017 (that’s the 14 percent drop). The official figures show an astounding collapse of 649,000, roughly equivalent to losing Argentina’s entire output.
Fatih Birol, executive director of the International Energy Agency, characterized the drop in Venezuela’s oil production as the biggest unplanned one in history.
That Venezuela’s oil output is collapsing isn’t in doubt. It’s worth noting that while December’s discrepancy stands out, the 2017 decline in the official numbers overtook the drop in the secondary numbers on a cumulative basis back in April:
Notably, though, December’s savage drop took the official level of production below the secondary estimate — to 1.62 million barrels a day versus 1.75 million, respectively — for the first time.
The timing makes this interesting. In late November, Major General Manuel Quevedo was suddenly appointed both oil minister and head of state-oil company Petróleos de Venezuela SA. This tightening of government control over the country’s vital industry, coming alongside a purge, raises bad memories of similar moves by former president Hugo Chávez that resulted in strikes and a loss of much of PdVSA’s technical expertise; output dropped by about 300,000 barrels a day between 2001 and 2003.
Equally, though, new leaders inheriting bad situations have an incentive to kitchen-sink the figures in the hopes of gaining credit for subsequent stabilization. Francisco Monaldi, a fellow in Latin American energy policy at Rice University’s Baker Institute, says Quevedo appeared on television claiming production had collapsed to 1.5 million barrels a day but was already recovering to almost 1.9 million. Monaldi adds that he still hears the collapse is ‘massive’ but also suspects figures for January might show slight improvement, especially as Baker Hughes reported an increase in the number of rigs operating there that month, up from 40 to 50. As so often, the truth likely lies somewhere in between those two figures that OPEC published.
Taking the midpoint of the two figures and comparing it to the supply cuts agreed in late 2016, Venezuela’s compliance level is now above 400 percent. Factoring in the wildcards of Libya and Nigeria, OPEC’s net cut versus the baseline agreement stood at around 910,000 barrels a day in December. Venezuela accounted for four out of every 10 of them. The rally in oil prices owes something to economic growth, OPEC’s maneuvering, and speculative zeal. Increasingly, it also rests on sheer misery in this one corner of the world.
—Bloomberg
Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal’s “Heard on the Street” column. Before that, he wrote for the Financial Times’ Lex column. He has also worked as an investment banker and consultant