NEW YORK (Bloomberg) -- The long decline in Venezuela’s oil production is becoming a supply risk for international markets, according to a report by Columbia University’s Center on Global Energy Policy.

 

Exports from the holder of the world’s largest crude reserves fell more than 300,000 bopd in June, compared with the 2015 average, according to the report written by Luisa Palacios, a senior managing director at Medley Global Advisors LLC. While Venezuela’s output has been declining all year, the impact is only now being felt on international markets because previous losses were offset by slumping domestic oil demand amid an unprecedented economic recession.

 

“Venezuela will represent a growing supply risk for oil markets in 2017,” the report said. “While on average crude oil exports in the first half do not yet show an important decline from the same period a year ago, the latest data point to a deteriorating trend.”

 

Venezuela has been hit hard by the two-year slump in crude prices. Its economy is expected to shrink 10% this year, the largest contraction in more than a decade, while consumer prices rise more than 700%, according to the International Monetary Fund. The nation’s output dropped to a 13-year low in July as international oil services companies scaled back their activities after state-run Petroleos de Venezuela SA fell more than $1 billion behind in debt repayments.

 

Falling Consumption

 

Venezuela’s crude production in July dropped to 2.15 MMbpd, compared with an average 2.4 MMbpd last year, the International Energy Agency said on Aug. 11.

 

As the nation’s economy contracted, domestic demand for oil dropped by more than 100,000 bpd last year compared with 2014, the Columbia University report said, citing data from the Ministry of Oil and Mining. While it’s possible that Venezuela’s domestic consumption will keep falling, there are signs the lower production is now affecting exports, it said.

 

Venezuela’s strategy of focusing on the expansion of oil production in a region called the Orinoco belt is also bringing in fewer dollars. The heavy crude is less desirable to refiners and typically sells for less than lighter grades of oil that are easier to process into fuels, such as gasoline.

 

The Venezuelan crude basket, based on an average of all crudes handled by the state oil company, widened its discount to West Texas Intermediate, the U.S. benchmark, to about $9/bbl on Aug. 12, compared with about $1 a year earlier.

 

Blending the heavy oil with higher-priced light crudes purchased from other exporters can make it more marketable, but is a costly option for a country that’s on the brink of debt default, the report said. Should credit concerns prevent Venezuela from importing the light oil it needs, net exports could fall by another 300,000 bpd, the Columbia report said.

 

“The continuation of this strategy will significantly eat into the government’s oil rent, and thus its ability to export its way out of this crisis,” the report said.

 

Venezuela’s is renewing efforts to get the Organization of Petroleum Exporting Countries and nations outside the group to cooperate. Oil minister Eulogio del Pino met his Iranian counterpart in Tehran Sunday, although the Persian Gulf nation hasn’t decided if it will attend a meeting of producers to discuss stabilizing prices on the sidelines of an energy forum in Algiers next month.

 

“Venezuela was already having economic problems when the oil price was at $100/bbl,” so a price recovery is unlikely to solve its predicament, according to Columbia’s report.