What Hugo Chavez's Death Means For Venezuela's Oil Market

What Hugo Chavez's Death Means for Venezuela's Oil Market

Hugo Chavez, president of Venezuela, passed away last week in Caracas. For 14 years he reigned over the South American nation with an iron fist; now,  investors are eager to see if his successor will be able to reverse the dramatic decline in oil exports that has taken place over the past decade.

While most analysts agree that Chavez's death could result in near-term political uncertainty, which could bring further turmoil to Venezuela's oil sector, others believe that in the long term, any new government will be motivated to focus on promoting and rebuilding the sector.

The potential value of the Venezuelan oil sector is phenomenal, with the country's Orinoco Belt holding the world's second-largest reserve of tar sands and also the world's largest conventional oil reserve, according to BP's (NYSE: BP,LSE:BP) Statistical Review of World Energy 2012.

Questionable energy policies

Chavez's time in charge proved punishing for the country's once-thriving oil industry. Despite boasting 18 percent of the world's proven oil reserves, the largest share for any one country, Venezuela's annual output has fallen by more than 20 percent since 1998, to 2.5 million barrels per day, according to The Wall Street Journal.

Many put the decline down to Chavez being elected president, at which time he immediately increased state control of the oil sector. His questionable energy policies led to a scenario whereby heavy domestic oil subsidies drove domestic oil consumption up from 36 percent to 47 percent of the total energy mix in the last decade, reducing the amount of crude available for the country to sell into the global market.

With the former president relying heavily on oil revenues to fund government spending, state-owned Petroleos de Venezuela (PDVSA) became a prime example of underinvestment, mismanagement and inefficiency, effectively kept afloat by loans from the Chinese government. Since 2006, the company's debt has climbed 10-fold, to $34 billion, and despite relying on the sector's income to fund his famous social programs, Chavez reinvested relatively little back into the sector.