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6 Reasons Why What's Going On In Venezuela Matters

By: Benzinga
Posted: 3/6/2014 10:51:00 AM
Referenced Stocks:

Abigail Field, Benzinga Staff Writer

Venezuela's Hugo Chavez died a year ago today, and the country still isn't coping well.

Major civil unrest is challenging Chavez's replacement, President Nicolas Maduro, and investors need to keep a wary eye on the situation.

Why Venezuela matters: oil

If Venezuela's current civil strife expands to its massive oil sector, markets will react very quickly. Venezuela is Latin America's largest oil producer, and is nearly tied with Saudi Arabia for the largest proven reserves in the world. Last, America is its biggest customer (despite our very public political differences, which recently involved tit-for-tat expulsion of diplomats).

Near-term risk is small

Reuters notes that the location of the oil production and distribution facilities makes it unlikely Venezuelan oil will be hurt in the near term. Moreover, to date, the opposition has not made oil production a target nor would it be easy for it to do so. The facilities' leadership is aligned with the government, and the government claims to have contingency plans to defend the facilities.

Reasons to keep watching the situation

The last big Venezuelan oil strike came during a period of major social unrest over who would run the country. Skyrocketing inflation, food and good shortages, and violent crime are stoking the current protests, and the protesters' demand is regime change. Though they haven't targeted the oil yet, the protesters have proven their willingness to disrupt the economy to achieve their ends, setting up roadblocks that thwart the distribution of goods.

Ominously, the opposition appears to be fracturing even as it grows. The once undisputed leader of the opposition, Henrique Capriles is no longer clearly in charge. Nor is more radical rival, Leopold Lopez. Lopez currently sits in jail for his role in the protests. Capriles warned Reuters, "The protests right now have their own force and spontaneity. They're not led by anyone. The government is underestimating the discontent, and making out it's just one level of society".

What would the impact on oil markets be?

If the protesters successfully disrupted Venezuelan oil, expect a big impact on the price of crude. At least, that's what happened last time. In December 2002, opponents of then-President Hugo Chavez took control of the Venezuelan oil industry and largely shut it down. It was the second oil strike that year; the earlier one had been connected with a coup attempt that displaced Chavez for two days.

A study by the Energy Information Administration found the December 2002 Venezuelan shutdown increased the price of crude by $10/barrel from $27 to $37, and particularly impacted supplies in the United States.

No end to the protests in sight: Maduro is no Chavez

The foiled 2002 coup attempt notwithstanding, Chavez governed for more than a decade and remained very popular when he died from cancer March 5, 2013. Venezuela's current President Nicolas Maduro has not enjoyed similar support, even though he was Chavez's chosen successor and has used Chavez-esque populist tactics, like fining companies for alleged price gouging.

Reflecting his relative lack of political gifts, Maduro won election by less than two percent, and the opposition insists the election was stolen. Indeed, unless something dramatic happens to address the economic drivers of the protests, it is hard to see how the rising unrest ends short of major violence by Maduro or the ouster of Maduro.

Maduro's changes - too little, too late?

Maduro could make meaningful change if he so chose; the Venezuelan parliament gave him the dictator's power to enact laws with a wave of his pen. He recently tried to address one aspect of the economic crisis: the black market in dollars. The markets, at least, reacted favorably. No sign the protesters have even noticed the effort.

Bottom line: investors must keep alert for signs these protests will impact Venezuelan oil.

Below is a list of key dates for understanding the current protests and economic risks in Venezuela: