We use the differential access to credit of oil firms in Venezuela’s Orinoco Basin to identify the economic effects of financial and oil sanctions on firm output. Using a panel of monthly firm-level oil production from 2008-2020, we provide estimates showing that financial and oil sanctions led to large losses in oil production among firms which had access to international credit prior to sanctions. The estimated effects explain around half of the output drop experienced in those firms since the adoption of sanctions, and argue that in the absence of sanctions, production in the Basin would be between three to five times its current level.
This paper uses new evidence from one of Venezuela’s largest oil-producing regions to assess the effect of financial and oil sanctions on the nation’s oil industry. The collapse over the past five years of oil output, which previously generated more than nine-tenths of the country’s export earnings, plays a central role in the country’s broader economic crisis. Lower export revenues from oil have led to a dearth of foreign exchange, causing the government to sharply cut back imports and triggering one of the largest economic contractions in contemporary world history.
Starting in 2017, the United States imposed increasingly tight restrictions on financial and trade-related transactions involving the government of Venezuela. The role of these sanctions in the country’s oil and economic collapse is a controversial issue. Using diverse quantitative methods, several research papers have identified large and significant effects of successive waves of sanctions. Other scholars have warned that there are multiple competing explanations, including prior lack of investment and mismanagement of the state-owned oil company, which could equally well explain the collapse.
To this date, all quantitative studies of the economic effect of sanctions on the Venezuelan oil industry have focused on the analysis of aggregate national oil production data. While the national data does show an acceleration of the rate of decline of oil production after each round of sanctions, this evidence is at best suggestive, given the multiple other potential determinants of industry performance. A key issue of discussion is how much of the effect can be attributed to the 2017 financial sanctions, which barred the state-owned oil company from borrowing or refinancing its debt, and how much to the 2019 oil sanctions, which impeded it from accessing specific export markets.
This paper’s contribution is to address these questions using a microeconomic data set which contains information on monthly oil production of specific firms in a region of Venezuela’s oil industry since 2008. This detailed data allows us to control for other potential factors that could also affect production at the national level. Concretely, it allows us to separate out the effect of any other variables that affect the whole oil sector at a given moment of time, as well as those that affect only specific firms. Doing so allows us to more precisely estimate how different firms vary in their reaction to economic sanctions.
Our statistical approach is based on the observation that there are significant differences in the degree to which firms in the country’s oil sector were exposed to international financial markets prior to sanctions. A large part of investment in the country’s Orinoco Basin – the area in which our study focuses – is carried out by joint venture arrangements in which private sector companies partner with PDVSA. Prior to sanctions, some of these joint ventures had entered special financing deals which allowed them to borrow from their foreign partners to fund ongoing investment projects. Our hypothesis is that in response to sanctions, the behavior of these firms with access to international finance was different from that of the rest of the sector, which lacked that access.
If the 2017 financial sanctions impacted oil production, we would expect the most-affected firms to be those that had access to financial markets prior to sanctions. For those firms, sanctions meant losing that access. In contrast, there is no reason for firms that lacked financial market access prior to sanctions to have been affected by sanctions. Therefore, we expect to see a faster drop in output, relative to their prior performance, in firms with prior financial market access than in the rest of the sample.
Indeed, we find such an effect. The effect is quantitatively and statistically significant and robust to alternative specifications. Firms that had entered special financing deals prior to sanctions suffered a much more rapid drop in growth in the post-sanctions period than those that had no such access. In our baseline estimates, sanctions explain between 45 and 54% of the observed drop in production in firms with financial market access. Somewhat counterintuitively, we find that firms with U.S.-based partners were more protected than firms where the partners came from other countries. One explanation of this may be the willingness of U.S. authorities to grant specific licenses exempting U.S.-based firms from sanctions.
Given that firms with financial market access accounted for around half of production in the Orinoco Basin prior to sanctions, the effect that we identify can account for around one-fourth of the observed drop in output in the region. This should be interpreted as a lower bound estimate of the effect of sanctions, as it captures the effect that works through one specific channel – that of access to credit markets via special financing vehicle arrangements.
In a different yet complementary interpretation of our estimates, sanctions barred the oil industry from a specific form of financing arrangements – namely loans from joint-venture partners with payment secured through control of export flows – that had proven successful between 2013 and 2017 and which the government would likely have chosen to continue extending to the rest of the sector. In that alternative scenario, we estimate that sanctions can account for around three-fifths of the decline observed in the region. We make no attempt to extrapolate our estimates outside of the Orinoco Basin. However, our estimates indicate that Orinoco Basin production would be between three to five times as high as its current level in the absence of sanctions. Only considering the additional Orinoco Basin production, our estimates indicate that Venezuela’s export revenues in the absence of sanctions would have been two to three times as high as they were in 2020.
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