Caracas Chronicles

Why regular folks have no access to fuel in the country?

A conjunction of old and new facts explains the situation; refineries in Venezuela, all state-owned, are practically shut down. Big refineries like Amuay, Cardón, El Palito and Puerto La Cruz have suffered serious maintenance and disinvestment complications for a long time, along with a lack of qualified personnel—so much that it’s common to hear awful news about accidents at the facilities. The historical ties with refineries in Aruba and Curaçao apparently came to an end last year. The steady decline in production of medium and light crudes in the country certainly has something to do with the problem, as well as the lack of gasoline additives that need to be imported in the middle of restrictions imposed by the Department of Treasury of the United States against Petróleos de Venezuela (PDVSA) since 2017. Another important element is the government policy on subsidies that has caused great losses to PDVSA, consequence of fuel smuggling to neighboring countries.

The truth is that the price of fuel’s been lower than its production costs, and more recently it’s been lower than its importation costs, amid an economic recession in which local gas consumption has been gradually reducing since 2013.

This brief outlook wouldn’t be complete without the energy cooperation agreements signed by Venezuela with countries in Central America and the Caribbean, that have allowed small nations to secure oil and fuel supplies in very favorable financial conditions.

And when we thought that things couldn’t get any worse, the quarantine and fuel shortage came in tandem, and now there’s little to none fuel supply.

Is fuel smuggling still a relevant factor in understanding its shortage in the local market?

It’s too early to provide a conclusive opinion since these are current and unfolding events. But economic incentives to smuggle fuel to neighboring countries have apparently vanished, at least for now. One could argue that, in recent times, selling gas in the black market in Venezuela is very rewarding, so there would be no need from an economic perspective to go abroad for profits out of these illegal dealings. Prices in this new black market have substantially increased over the past few months and they’re now higher than those found in neighboring countries. This harsh supply problem was first seen in the states of Táchira, Mérida and Zulia, western Venezuela, a couple of years ago, but now it’s all over the place.

The truth is that the price of fuel’s been lower than its production costs, and more recently it’s been lower than its importation costs.

Opportunities for fuel smugglers have changed because the market itself changed. Now it would perhaps be better to bring fuel from other countries, illegally of course, and sell it at inflated prices in Venezuela. 

How much do U.S. sanctions have to do with it?

U.S. sanctions have certainly had an impact on PDVSA’s operations and overall performance, but it’s difficult to assess such impact in quantity measures. This doesn’t mean that its performance was adequate before, but it has worsened. The secondary sanctions by the Department of the Treasury in February and March over Rosneft Trading and its affiliate TNK Trading International, aren’t only a big blow against the sale of Venezuelan crude oil in the global markets, they also create very difficult conditions for importing gas and other oil products. As a response to such sanctions, Rosneft recently left its active role in the country and stopped supplying gas to the Venezuelan market with no substitute companies in sight. Other companies aren’t permitted to sell fuel to PDVSA, or they simply don’t want to expose themselves.

Remember that Venezuela and the U.S. were close allies for years as far as the oil industry is concerned, and now PDVSA isn’t allowed to acquire goods, services, technology and financial support from the U.S.; the most important refineries were built by Shell, Mobil and Exxon back in the old concessions’ era with help of large global engineering and construction firms. Thus, in the U.S. there should be a number of people familiar with operation and technical details of these refineries.

On the other hand, the Venezuelan regime lost control of Citgo last year, a PDVSA subsidiary. In different political circumstances, this refining company operating in the U.S. would probably have been able to deliver some gas to Venezuela during this drought.

Is the government going to increase the price of fuel?

The economic model sustaining fuel prices is more than exhausted. Besides, PDVSA doesn’t have any resources left to continue with such a burden into the future. This is a company with a huge financial and commercial debt dealing with all sorts of issues, in a low price scenario for crude oil and falling production.

An increase in the official price of fuel is likely coming soon. We can see that the government has already done some other price increases in public utilities, such as electricity and garbage collection, even though such increases have had a relative mild impact in industrial, commercial and household consumers.

Charging fuel in foreign currency might not be the solution in the short term, because the key difficulty nowadays is that the fuel offer itself is extremely low.

Can the government charge for fuel in dollars and guarantee its supply? 

Charging fuel in foreign currency might not be the solution in the short term, because the key difficulty nowadays is that the fuel offer itself is extremely low. There are no legal limitations to charging in dollars, in accordance with the Decree enacted by the National Constituent Assembly (ANC) in 2018 abrogating the Exchange Regime Law, although we all know that the ANC statues are under high scrutiny due to sound legitimacy and legality questions. In addition, the Exchange Agreement N° 1 of that same year enables the parties to contractually agree that their obligations be paid in certain foreign currencies, which certainly ratifies the provisions of the Central Bank Law of 2015.

Now, if the government decides to follow the path of dollarizing the economy putting aside the bolivar, we’d see fuel charged in dollars for sure. In any event, that’s not coming any time soon, and U.S. sanctions have something to do with it. Another alternative would be fixing the price in dollars following the official exchange rate of the Central Bank but keeping the bolivar as payment currency for end users.

What steps need to be taken in order to have a regular fuel supply in Venezuela, as it was the norm not so long ago? 

The reform of the Venezuelan legislation on the internal market of fuels is a must under free-market principles. Such revision has to give room to a comprehensive participation of the private sector in importing fuel with competitive prices, affording reasonable returns to investors after their costs are recovered. To this end, it’s mandatory to amend the Presidential Decree N° 1,648 of 2002 and the Law for the Reordering of the Internal Market of Liquid Fuels of 2008, to: (i) Allow the entry of imported fuels by private enterprises–which is something of extreme urgency; and, (ii) Set up a free market for distributing and selling fuels, in which PDVSA competes in equal conditions with private international and national companies with recognized technical and financial qualifications. Accordingly, Venezuela has to go ahead with new regulations establishing a free market in the activities of supply, storage, transportation, distribution and dispensing to end users. The Oil Ministry, in fixing fuel prices, should use international prices as a reference, using a flexible and transparent method which entices private involvement. These prices might be fixed using band systems or other schemes that take into consideration the investments and profitability of the business.

A more aggressive legal reform to completely open up the internal market, allowing private parties to fix fuel prices, would require a modification of the Hydrocarbons Law to repeal the provision that gives the Oil Ministry absolute power to determine such prices.

Fuel imports must also consider the recovery of national refineries because such facilities are necessary to convert crude oil into by-products. This will require a well designed plan for the medium term, as a priority of the Venezuelan State with the support of top-class private companies. Oddly enough, the Hydrocarbons Law of 2001 in force, does admit private ownership of refineries without the requisite of state intervention.

It’s absurd to even suggest that the country, an OPEC founder with massive oil reserves, and a refinery complex which was once the envy of all first world countries, will become a net importer of fuel. These refineries were built since the 1940s, when Venezuelan governments put a great deal of pressure on the multinational oil corporations to refine oil domestically.

Gas imports don’t stand any political or economic analysis, considering that the country is unable to produce fuels for its own internal market.

What will the near future bring? 

Different media sources are following up on the multiple schemes that PDVSA would be using for the purpose of securing offshore gas supply, even though the official information is very limited. It seems like the government is trying to solve the huge problem in its hands, at least in the short term, despite its ineffectiveness so far. The oversupply of gas in the global markets due to the abrupt fall of energy consumption, specially in industrialized countries, in the midst of low prices, should enable PDVSA to import fuel. At least that’s a logic assumption.

There’s a lot of uncertainty over this matter and the immediate future looks like one of severe shortage of fuel in the local market with very harmful effects for companies, institutions and individuals.

You can read this story in Spanish on Cinco8.