No laughing matter: crises grip oil producers

Three unpopular presidents from big oil-producing countries walk into a bar. The bartender starts fixing their regulars, a Caipirinha, a Mojito and a virgin White Russian. “I´ll take mine to go,” one of the beleaguered presidents says. Which president was it?

We don´t know the punchline yet, but the recent fireworks in Brazil suggest it could be Michel Temer. The former vice president who took over for ousted president Dilma Rousseff a year ago, Temer ushered in an austerity campaign and economic reforms that have just started to lift Brazil out of a deep recession. Now a surreptitious recording suggests he encouraged the payment of hush money to make sure he remained above a colossal corruption probe that has engulfed the country and state-controlled Petrobras since 2014. Temer vehemently refuses to resign, but his political allies are slipping away and more and more Brazilians are demanding new elections. The tumult has cast a shadow over a series of upstream licensing rounds that major oil companies have been awaiting since 2015.

Then again, the punchline could also go to Nicolas Maduro, who might want to imbibe his Cuban beverage outside of Venezuela. Violent protests have all but paralyzed Caracas and other Venezuelan cities. Around 50 people have died since early April. The unrest has pulled the plug on any hope of new credit and accelerated a decline of the Opec country’s oil industry. No international deal to restrain production, however lengthy, will be enough to pull Venezuela from the swamp of its own making. But the longevity of the Castro regime in Havana, and the timid international response to the Venezuelan government’s crackdown, suggests that the Maduro regime could muddle through for years. The man in Miraflores is so far showing no sign of giving in to the protesters’ demands for general elections, freedom for political prisoners, a restoration of the powers of the national assembly and humanitarian aid.

Then there is Donald Trump. Washington’s wee-hours Tweeter faces growing scrutiny for alleged ties between his campaign and Russia. Multiple investigations have become a growing distraction even as the administration pushes ahead with regulatory rollbacks celebrated by the oil patch.

US shale oil production proved resilient in the wake of the 2014 oil price collapse, a trend that won’t go away even if Trump ultimately does. That’s not the case in fellow non-Opec producer Brazil, where delays in upstream investment would slow or even reverse sub-salt production growth. And even if Venezuela’s steadfast opposition swept into power tomorrow, much of the reservoir damage wrought by years of underinvestment is irreparable. What can be salvaged will take years to revive. Brazil and Venezuela between them account for around 4mn b/d of crude production, or about 5pc of global supply.

There’s no joke about it. Three of the western hemisphere’s leading oil producers are gripped by palace crises, a reminder of the geopolitical risks to the oil market that we’re more used to seeing in the Middle East. Meet you in the bar!

 

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