Modern economies function in a similar manner to ecosystems. Independently enterprises relying upon each other to provide goods which they add value to – either through further processing, transporting to new markets, or selling to consumers. This system works because no single entity dominates the system and any single piece which fails has its places taken by another that can operate more efficiently. However, the system breaks down when an economy becomes reliant upon a single industry and that industry fails. This is what is happening in Venezuela and the effect may well become worse as problems cascade down creating major system failures.

The government looting of the state-owned PDVSA oil company has left it basically bereft of cash causing a string of problems. Unpaid obligations have led to a shortage of lighter fuels which the company need to blend with its heavy oil. Obligations to domestic creditors are forcing the PDSVA to export more fuel for refining, leaving domestic refineries idle. The lack of domestically produced gasoline means more must be imported, further straining state financing and causing further looting of the PDSVA.

The decreased capacity of the PDSVA to produce the nation’s main export which is its source of cash is exacerbating shortages in vital supplies such as food and water. According to the Wall Street Journal these shortages are starting to reach the nation’s security forces which are the only thing keeping the current government in power. If the government loses control of its security apparatus and the nation spirals out of control there is no telling what the impact would be upon the nations oil production capability.

If the nation continues its steady, albeit rapid decline in production the market will have time to absorb the Venezuelan share of the market. However, if the state suddenly collapses all bets are off. If Venezuela’s production capacity were suddenly to drop to 50% or less of its current levels that would essentially double the size of OPECs production cut. While unlikely, if that scenario were to play out the consequences for the oil markets would be severe.