OXFORD INTERNATIONAL MODEL UNITED NATIONS

XV ANNUAL CONFERENCE

3RD – 5TH NOVEMBER 2017

OPEC STUDY GUIDE

CONTENTS

Topic A: Aftermath of the Venezuelan Political Crisis -Introduction ............................ pg 3 -Topic History .......................... pg 4 -Discussion of the Problem .... pg 6 -The Future ............................... pg 9 -Points Resolutions Should Address........................pg 10 -Further Reading ...................... pg 10 -Bibliography ............................ pg 11 Committee Directors: Cristina Abellan Bustos Email address cristinaabellan.eis@gmail.com Dominic Weatherby Email address dominic.weatherby@spc.ox.ac.uk

ORGANIZATION OF THE PETROLEUM EXPORTING COUNTRIES (OPEC)

Aftermath of the Venezuelan Political Crisis

A Message from your Directors:

Dearest delegates,

We are Dominic and Cristina and we are more than delighted to be your Chairs for the OPEC Committee at OxiMUN 2017.

We expect fierce but friendly competition, fine diplomacy and constructive thinking to be able to tackle the most pressing issues that OPEC currently faces.

We expect you all to be able to represent your countries’ policies and illustrate the real-life international relations of this group of countries. Moreover, we would like to remind you that this Study Guide intends to serve as an indicator of what you should be aiming for, however, you are expected to conduct your very own research regarding the topic and your respective countries.

Lastly, the Dias would like to emphasize that the most important thing is for you to learn and enjoy both the committee sessions and the social events. We cannot wait to meet you in November!

Best, Dominic and Cristina

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TOPIC A: AFTERMATH OF

THE VENEZUELAN

POLITICAL CRISIS

Introduct ion

Venezuela is currently the country with the largest proved reserves of crude oil with roughly 302.25 billion barrels.1 This accounts for the 24.8% of all the crude all proven reserves of OPEC members. Venezuela provides OPEC with approximately 2 billion barrels of oil every year,2 but there has been a decline in the last years due to the economical and political crisis the country has been suffering.

The main issue OPEC faces nowadays is how can we ensure that the Venezuelan government will continue to provide the amount of barrels needed to sustain the market prices if there is a violent war outbreak in the country. Additionally, the committee is also concerned with the aftermath of the crisis, namely, how can the production and contributions of Venezuela to OPEC be ensured if there is a government change.

1OPEC Share of World Crude oil Reserves 2Brew, G., (2017) ‘Is OPEC Counting to Much on Venezuela’s Sanctions?’ OilPrice.com.

Venezuela faces a 741% inflation approximately (numbers change depending on the source of origin, government or opposition).3 Moreover, the national currency, the Bolivar, has been devaluating over the last two years at unprecedented rates. Just to give an example, in May 2017, one US dollar was worth 2,000 Bolivars. In September of the same year, it was worth almost 3,400 Bolivars, an increase of the 70% in just four months.4

These factors together with high corruption indexes have led the country to a violent situation in which civilians demonstrate every day in the streets against the government and the military. In July the death toll of the Venezuelan protests reached the hundred victims, mostly civilians.

In this situation, Venezuela finds itself at the verge of a civil war between the government and the majority of the citizens, who support the different opposition groups. Were a civil war

3Trading Economics: Historical Venezuela Inflation Rate 1973-2017. 4Banco Central de Venezuela: Tipos the cambio de referencia.

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situation be reached, it is unclear how the enormous crude oil reserves would continue to be exploited. This could importantly affect the worldwide prices and break the balance achieved with the pact OPEC countries reached earlier this year to cut oil production and supply and, thus, increase prices.

History o f the Committee

The Organization of the Petroleum Exporting Countries (OPEC) is a permanent, intergovernmental Organization created in 1960 by the Five Founding Members: Iraq, Iran, Kuwait, Saudi Arabia and Venezuela. Later on, ten more countries joined the organization but Indonesia suspended its membership in 2016. Thus, the current members are: Algeria, Angola, Ecuador, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela.

The main aim of OPEC is “to co-ordinate and unify petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry”.5

In the most recent years, OPEC has been concerned with economic uncertainties

5Brief History of OPEC; OPEC Website.

and escalating social unrest around the world, factors which have affected the demand and supply of oil. In 2014, the organization faced a main challenge when the oil prices fell dramatically due to speculation and a supply surplus.

TOPIC HISTORY Venezuela became part of OPEC in 1960 as a Founding Member. In the 1970’s, OPEC encouraged a wave of nationalizations of the oil industries of its countries, including Venezuela, which did so in 1974.6 The government then created the state oil company Petróleos de Venezuela S.A. (PDVSA). Since then, the national government has been in charge of the oil production, something that has benefitted OPEC.

In 2003, and with the rise of the oil prices, the Venezuelan government invited international oil companies to participate in the development of the oil reserves. Four years later, once the new technologies of extraction began to create profits, the government either expropriated or re-negotiated the agreement conditions with the international oil companies so that the PDVSA could have a bigger share of the profit.

6Colgan, J. D. (2014) The Emperor Has No Clothes: The Limits of OPEC in the Global Oil Market’, p. 613.

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Clearly, it would not be the first time that a conflict (be it international or national) affects the supply and demand of oil controlled by OPEC and the organization is required to react. One example of this is the oil embargo that OPEC imposed to the United States on 1973. One of the two main reasons was that the United States was to provide financial assistance to Israel in the Yom Kippur War. Then, the Arab members of OPEC responded by halting exportations to the Unites States and further allies of Israel.

Timel ine o f the Current Venezuelan Cris i s

In April 2013 President Hugo Chavez died of cancer, Nicolás Maduro was appointed as President interim until elections happened. Maduro won the elections later that year and his mandate kicked off with severe economical and social distress in the country.

In 2015, for the first time in twenty years, the opposition won the majority in the National Assembly. Since that same moment, the government of Maduro started delegitimizing the Assembly.

In February 2016, Maduro announced a new devaluation of the currency and, for the first time in 20 years, there was a rise in the petrol prices.

In March 2017, the government unilaterally assumed the legislative powers of the National Assembly.

Massive demonstrations that were already ongoing intensified.

The next month, the opposition leader, Henrique Capriles was banned from taking office for the next 15 years. Later that same month, the army vowed loyalty to the President, making it clear that the clashes between the Army and the civilians would continue.

In May 2017, Maduro approved a new Constitution that would concede him more powers as a President. As a response to that and the general social unrest, the United States imposed sanctions against the Supreme Court judges. In June the President placed the Army on high alert due to the intensification of the protests and strikes.

In August 2017 the United States imposed new sanctions as a response to the increase in the tensions. In September the United Nations stated that “Venezuela may have committed crimes against humanity”. Later on that same month talks between the government and the opposition with the mediation of the Dominican Republic among others. Despite the fact that the government side

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sees the talks as successful, the opposition is disappointed with them.

DISCUSSION OF THE

PROBLEM How has the cr i s i s a f f e c t ed o i l product ion?

Venezuela is the country more likely to be a source of supply shock nowadays. The political and constitutional crisis has mainly economical

reasons. Thus, it the political crisis and the issues with oil production affect one another constantly due to the high dependence on oil exportations of the Venezuelan economy.

There are some factors that can affect the production and the possibility of it collapsing. The first factor is, of course, the production levels themselves. These levels have been steadily decreasing around one million barrels a day since 2006. Since 2015, these decrease levels have been doubled.7

Another of the features affecting is the decline in the demand of oil in Venezuela. Since 2013, Venezuela’s oil demand has decreased a 17%, from 815

7 International Energy Agency Country Profile Venezuela.

thousand barrels a day to 678 thousand barrels a day.8

As said before, the political scenario is influence by the economical situation and vice-versa. Thus, the last feature that needs to be considered is the economy, which has been falling uncontrollably since 2015.9 Moreover, it does not seem to be any closer to recovery.

Within the economical factors mentioned, it is worth noting that the current hyperinflation of Venezuela is around 741%. Moreover, the debt Venezuela is facing is of 7.2 billion dollars, while their foreign reserves rise only to 20.4 billion dollars.10 These two features translate in Venezuela constantly running out of cash, since money is worth less and there are less foreign reserves (most of them in the form of gold).

All these factors influence one another inevitably. It is difficult to say nowadays how the country’s economy will evolve due to the multiple variables involved.

Nevertheless, a supply shock situation is possible in the future if there are no social, politic and economic improvements.11

8 BP 9 CIA World Factbook 10Al Jazeera News 2017: ‘Venezuela's worst economic crisis: What went wrong?’. 11 Denning, L. (2017) ‘Venezuela's Complicated Crisis For Oil’.

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N

Economic Impl i cat ions for OPEC

The option of having a broken Venezuela in economic terms is a possibility. That point could be reached through two main roads, though, they are not mutually exclusive. The first of the ways is the outbreak of a proper civil war. This event would cause production to be halted, either because the workers would not go to their work places or because the oil exploitations would be completely sealed by the Army to ensure their protection. The second possible reason is that workers decide to stop going to their work places because it would be too dangerous for them, they would not get their salaries or they decided instead to demonstrate in the streets instead.

Venezuela’s economy relies on oil production and exportation on a 90%, if no oil is produced, if the production levels are too low or the prices are too low, Venezuela will collapse.

OPEC has been going through a period of approximately two years in which cuts to oil production have been necessary in order to have competitive market prices. To reach this point, negotiations between both OPEC and non-OPEC countries have been necessary. The balance reached is fragile so small variations can cause big damages.

Furthermore, OPEC has proved to be resistant to geopolitical tensions and events. Nevertheless, a catastrophe as big as the crush of Venezuela, the country with the largest oil reserves in the world, would definitely cause major disruptions in the oil prices.12

There are two main factors that need to be taken into account aside from the main economic concerns: speculation and political implications.

12 Ibid, note 2.

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Speculat ion

Oil prices are very sensible to speculation, be it economic or political. With the current Venezuelan crisis there is already a framework for speculation.

With the evolution of the conflict, speculation will only become more intense, no matter if the events lead to talks or the final eruption of the revolution.

It would not be the first time that OPEC is faced with speculation. The last time it happened, prices fell dramatically and an intervention was needed. It was also the beginning of the economic crisis that morphed into a social revolution in Venezuela. The organization cannot afford something like this to happen again.

It is true, however, that if speculation takes the opposite direction prices would rise and that would benefit the organization. This would entail a demand projection smaller than the real one, thus supply would fall short and the prices would have to rise to reach the equilibrium point.

Pol i t i ca l Impl i cat ions

First of all, it cannot be forgotten that OPEC is dealing in this topic with a highly politicized situation. Therefore, whatever measures OPEC decides to take need to be thought about carefully since they will be sending an international political message.

On the other hand, OPEC is more than an economic organization. The benefits and exclusivity that this organization offers to their members is bigger than profit.

OPEC has already been accused to be a cartel before. If the Venezuelan crisis has to be handled through new cuts in production, this point of view could spread within the international community. This would give the organization a bad name and a questionable reputation, something OPEC is sceptic about.

Moreover, a situation like the one described could lead to tensions with the non-OPEC members who have oil shares in the market, since they would also be directly affected by the misbalance.

Politics would also enter in play to decide what country/countries would fill the production gap left open by Venezuela. What is more, what would the situation between OPEC and Venezuela be at that point in time is something the organization must discuss beforehand.

Overall, politics are one of the causes of the crisis and will be one of the aftermaths of it. OPEC needs to be strategic when it comes to deciding what measures to take in order to have gains and not losses or political confrontations in this regard.

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THE FUTURE

The Pol i t i ca l Future o f the Venezuelan Cris i s

As it has been shown in the sections before this one, it is still uncertain what will happen in Venezuela. All the options are open until now, however, analysts say that if there is not a big change in the government actions, a civil war is more than possible.

Regardless of the evolution of the crisis in itself, given the situation and characteristics of the country in question, the oil market will suffer with every movement as speculation will become more and more important.

There are multiple options that OPEC should consider and prepare itself for beforehand. Namely: What will OPEC do if Venezuela stops producing oil completely? What will OPEC do if there is a civil war and the government loses control of the oil fields?

Points OPEC should take into account

Out of all the unpredictable twist of events possible, probably the most concerning one is how should OPEC react if the Venezuelan government loses control over the oil fields.

As already mentioned, Venezuela is the country with the largest proved reserves of crude oil nowadays. If the government

would lose the control of the oil fields that would would have two main implications:

- The people exploiting the oil fields (in case of any) would not respond before OPEC if the government is still technically in power. Thus, OPEC would lose these resources that were once taken for granted.

- In case of the halting of exploitation of the oil fields, it is unclear the amount of time Venezuela would not be able to produce oil. It could be a matter of days, months or even years. Therefore, the question at this point is how would OPEC deal with the supply shortage so that it would affect the least possible the markets.

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POINTS RESOLUTIONS

SHOULD ADDRESS

• The alternatives OPEC could take given different cases:

o Large reduction/complete halting of the oil production in Venezuela.

o Exploitation of the oil fields by other parties other than the government in case of escalation of the conflict.

• How will OPEC cover the production gap, bearing in mind that it is impossible to predict for how long will Venezuela be going through the struggle.

• How will the supply cut deal reached both within the OPEC members as well as the non-members producers will be affected.

• How should OPEC deal with speculation in the markets.

• Should OPEC take any political steps in this matter, if yes, which ones.

FURTHER READING

Due to the novelty and constant developments on the topic, it is difficult to find scholarly sources on it. Delegates will have to rely mainly in legitimate newspapers and blogs focused on the oil markets.

It is therefore very important for delegates to remain attentive to the news up to the days of the conference, since the situation might drastically change.

Some news articles and resources that can be useful:

• OPEC webpage and news bulletin. • International Energy Agency

graphs on oil production, supply, demand… as well as a focus on the same points applied to Venezuela.

• Oil Price.com: Crisis In Venezuela – A Lesson From Saudi Arabia

• Oil Price.com: As Oil Markets Tighten, Geopolitical Events Matter Again.

• The Guardian: Recession, retrenchment, revolution? Impact of low crude prices on oil powers.

• Forbes: OPEC Blinked, But Is It Too Late?

• (In Spanish) El Nacional: Venezuela, la potencia petrolera que no tiene gasoline.

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BIBLIOGRAPHY

- Al Jazeera News 2017: ‘Venezuela's worst economic crisis: What went wrong?’. To be accessed on http://www.aljazeera.com/indepth/features/2017/05/venezuela-worst-economic-crisis-wrong-170501063130120.html. Accessed on 25/09/2017.

- Banco Central de Venezuela: Tipos the cambio de referencia. Accessed on 23/09/2017.

- BP Webpage.

- Brew, G. (2017) ‘Is OPEC Counting too Much on Venezuela’s Sanctions?’. OilPrice.com. To be accessed on http://oilprice.com/Energy/Crude-Oil/Is-OPEC-Counting-Too-Much-On-Venezuela-Sanctions.html. Accessed on 23/09/2017.

- CIA World Factbook.

- Colgan, J. D. (2014) ‘The Emperor Has No Clothes: The Limits of OPEC in the Global Oil Market’. International Organization 68: pp. 599-632.

- Denning, L. (2017) ‘Venezuela's Complicated Crisis For Oil’.

Bloomberg Gadfly. To be accessed on https://www.bloomberg.com/gadfly/articles/2017-04-25/venezuela-s-oil-crisis-not-just-a-supply-shock. Accessed on 22/09/2017.

- International Energy agency on Venezuela.

- OPEC Webpage: OPEC Share of World Crude Oil Reserves 2016. To be accessed on http://www.opec.org/opec_web/en/data_graphs/330.htm. Accessed on 21/09/2017.

- OPEC Webpage: Brief History of OPEC. To be accessed on http://www.opec.org/opec_web/en/about_us/24.htm. Accessed on 22/09/2017.

- Trading Economics: Historical Venezuela Inflation Rate 1973-2017. To be accessed on https://tradingeconomics.com/venezuela/inflation-cpi. Accessed on 25/09/17.