The Venezuelan Economy After the US Ends General License 41 for Chevron

By Franco Vielma  –  Mar 20, 2024

Since the cancellation of General License 41, which favored the activities of the U.S. company Chevron in Venezuela, most economic analyses have resulted in pessimistic forecasts about the immediate future of the Venezuelan economy.

Other, more balanced interpretations converge on a common assessment: it is highly likely that this measure will affect the country’s economic activities, but it will not necessarily replicate the adverse conditions that unfolded in 2019, the crucial year of “maximum pressure.”

But this premise must be analyzed from two perspectives. The first relates to the objective conditions of the current Venezuelan economy. And second, the capacity of the State, specifically PDVSA, to meet the conditions imposed by the end of License 41.

The economy of 2025
The realization that 2025 is not 2019 lies in simple elements that are evident in the Venezuelan economy and that were not on the table six years ago.

• The existence of a consolidated foreign exchange market. In recent years, this has contributed to slowing the devaluation of the bolivar, thereby controlling inflation. During 2019, currency depreciation was very rapid, with the subsequent cycle of the highest hyperinflation on record.
• In 2019, most of the foreign currency available in the exchange system came from Venezuelan state interventions, with no private sector suppliers. The situation has changed considerably since the consolidation of the current system. By last October, the state provided 33% of the foreign currency, while the remaining majority was supplied by private entities.
• Until 2019, the economy was governed by a system of regulated prices, and shortages were prevalent, largely driven by the dwindling availability of foreign currency due to illegal sanctions. By 2025, the end of regulations has contributed to an increase in the supply of goods and services, with a full national supply.
• According to the national executive branch, domestic food production has grown considerably, reaching 97% supply and a boom in domestic brands and products whose supply chain is not affected by primary sanctions—although secondary sanctions mechanisms have. These conditions did not exist in 2019, when the state’s strangulation impacted the entire economy.
• The surge in new private investment in large companies and the emergence of SMEs in commerce and services—colloquially known as “entrepreneurship,” both formal and informal—is fueled by capital not directly associated with oil revenues, making the economy more resilient to the decline in foreign currency flows caused by the end of General License 41.
• The Venezuelan state has built a new tax collection base. In 2020, the state collected the equivalent of $1.571 billion in dollars. By the end of 2024, that figure reached $12.119 billion. Clearly, the state’s budget base is less vulnerable to the decline in foreign currency revenue.

These conditions allow us to assume, superficially, that everything could then go well enough despite the end of License 41. But that would be a false conclusion.

Chevron’s agreement with Venezuela, which regulated the transnational corporation’s operations in the country, involved contributions to the exchange rate system in order to meet its obligations in local currency. And this creates a significant vulnerability resulting from the cessation.

According to economist Leonardo Vera, “Chevron is putting $200 million a month into the foreign exchange market that wouldn’t otherwise exist.” Other analyses suggest that the amount was $150 million.

Economist Luis Oliveros also stated that “we would once again have inflation of more than 100% by the end of 2025, and an exchange rate far below current levels.”

These forecasts, whether exaggerated or not, are based on the basic premise that while the Venezuelan economy has become resilient, it still has vulnerabilities, and the critical macroeconomic crux lies in the continued link between the flow of petrodollars and the exchange rate system.

What lies ahead for Venezuela from this point? What strategy has the national government proposed?

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A new economic contingency
Several of the dire assessments of the Venezuelan economy could confuse any foreign reader because they imply that Chevron is the crux of our entire economy, which is not true at all.

Chevron currently represents an average of 230,000 barrels of oil per day (bpd) from Venezuela to the United States, paid for at market prices. However, this sales volume does not represent a net income for the country. The corporation obtains benefits as a partner and also retains a portion of these profits to collect PDVSA’s debt.

These elements suggest that, in terms of cash flow, the decline will not be dramatic with Chevron’s withdrawal in April. In fact, as Representative Jorge Rodríguez, president of the National Assembly, pointed out, the withdrawal of the US company now exempts Venezuela from paying its debt to the multinational. Thus, the less revenue to collect, the less debt to pay.

At this point, the crux of the future of oil production at the expense of the North American company emerges. This company is a minority partner of PDVSA in several fields in the country and has also provided diluent that has leveraged the recovery of current production.

According to President Nicolás Maduro, Venezuela pumped 1,058,000 barrels per day in February. According to this data, Chevron’s share of the country’s total oil production does not exceed 25%. What will happen then with activity in these fields and with the flow of diluents to sustain operations?

Francisco Monaldi, a professor at Rice University (United States), a Venezuelan oil expert, and a frequent staunch critic of Chavismo, presented his view on this matter, arguing that “the drop in production due to Chevron’s departure from the country would not, in principle, be catastrophic… It doesn’t have to fall drastically,” he commented. Monaldi estimated the drop at about 100,000 barrels per day, half of what Chevron produces today, he said.

Most analyses that agree on the decline in production fail to mention the possibility of PDVSA partnering with other actors, domestic or foreign, to intervene in the fields left behind by the transnational corporation, as well as in other developments where production is recovering.

This opens up new possibilities and scenarios:

• The national government will surely direct its strategy toward maintaining the operations of the fields with Chevron’s participation. Therefore, we should expect new agreements and new alliances from PDVSA.
• Venezuela currently places approximately 650,000 barrels per day of crude oil on the international market through alternative mechanisms to licensing. In other words, PDVSA has not stopped evading the blockade; on the contrary, it has become more adept at these methods than it was years ago. The flow of crude oil into this alternative market will have to be addressed in a timely manner, as it will be crucial to maintaining current pumping levels.
• One of the advantages offered by General License 41 was the sale of crude oil at market price. In contrast, crude oil released on the market alternately to the licenses is offered at discounts of between 25 and 30%. Venezuela could maintain these agreements with its trading partners or even change their terms to obtain higher net income in exchange for new concession agreements.
• PDVSA must continue its process of adapting to the blockade conditions. Consequently, the country could move toward new concessionary regimes that would facilitate the flow of investment under current conditions.
• PDVSA’s alternative commercial agreements to licenses include barter and the supply of goods, diluents, light crude oil, or crude oil derivatives—such as gasoline, naphtha, and diesel—to cover domestic needs. In this new scenario, PDVSA will have to act very creatively to access diluents or light crude oil that will allow it to maintain production levels above the 1 million barrels/d threshold.
• President Maduro has been emphatic in promoting the intrinsic capabilities of the national industry to sustain and increase production levels. He has launched the Absolute Productive Independence Plan to address this situation. The government is fully aware of the continued importance of the oil industry in influencing the economy as a whole.
• Due to the new conditions, PDVSA must ensure that new partners participate by making contributions to the national exchange system, as it is currently the central hub of macroeconomic dynamics affecting the population. If other companies wish to fill the gap left by Chevron, this is not limited to oil fields. It is also necessary to maintain the exchange system with adequate feedback and flow of foreign currency to mitigate the variables of devaluation and inflation derived from the exchange rate.

The long-winded question
The future of the Venezuelan economy in the coming months rests on two premises, very simple to describe but difficult to implement in practice. Sustain and, if possible, increase oil production; and, secondly, provide feedback to the exchange rate system with private contributions, including from private companies involved in the oil industry.

Both elements would guarantee the path of economic growth this year. They are inherent to the flow of state resources, the behavior of the exchange of goods and services—the growth of non-oil activities—and the sustainability of foreign exchange and monetary activity, which is of great significance for the economy in 2025.

While the measures to be implemented must be implemented in the very short term, the Venezuelan economic situation, under blockade, must be recognized as a long-term issue. There are no magic bullets, nor are there any excuses to wait. The solutions lie in the realm of decision-making, opportunity, and the creative development of responses to this new situation.

 

(Chicago ALBA Solidarity)