Venezuelan turmoil poses little oil threat—for now

After a month of escalating protests against Venezuela's socialist government, there's little sign that calm will be restored any time soon. But, there's little sign that the turmoil on the streets of this major OPEC oil producer will spill over into global oil markets—so far.

The death toll rose above 25 this week following three more fatal shootings as protesters, dug in behind barricades made of tree trunks, burning tires and blocks of concrete, battled soldiers in Caracas. Across the country, thousands have turned out in major cities in rallies for and against President Nicolas Maduro in now-daily clashes.

Protests like this one in Caracas on March 12, 2014, pose a big challenge to the leftist government.
Juan Barreto | AFP | Getty Images
Protests like this one in Caracas on March 12, 2014, pose a big challenge to the leftist government.

Soaring crime, surging inflation and widespread shortages of basic staples—from sugar to toilet paper—are putting pressure on Maduro, who succeeded the late Hugo Chavez and narrowly won an election last April. But the government this week repeated its resolve to put down the uprising.

"I'm going to take drastic measures against these sectors who are attacking and killing the people," Maduro said in a speech Wednesday.

As it struggles to quell the street violence, the government is fighting an even tougher battle to reverse the economic slide that has left the oil-rich country deep in debt and inflicted with rampant inflation and widespread shortages on the very people the socialist revolution is supposed to be helping.

Maduro has vowed to continue his mentor's revolution. Chavez came to power in 1999 with a promise to spread the nation's vast oil wealth to its poorest citizens, eventually nationalizing the assets of foreign firms.

(Read more: World Bank panel rejects Venezuela's appeal over Conoco)

For a time, the promise was partially fulfilled. Thanks to heavily subsidized food and energy, poverty rates fell and household consumption rose. But the heavy reliance on oil revenues, much of it ill-spent, has left the country mired in economic stagnation.

Now, a younger generation with little memory of pre-Chavez Venezuelan life is demanding that the government change course.

"They're realizing that it's not enough having the subsidies if you cannot find essential supplies in the supermarket," said IHS Global Insight economist Paula Diosquez-Rice. "They have stopped producing anything—from food to cars. It was cheaper to just import them."

As the private economy has withered, Venezuela now imports two-thirds of its food. Gross domestic product fell from 5.5 percent in 2012 to just 0.7 percent last year and is expected to grow by just 0.5 percent this year, according to the World Bank. That compares with 2.9 percent growth for Latin America this year. Venezuelan inflation is running over 50 percent a year and the local currency, the bolivar, is trading on the black market at more than 10 times the official rate.

(Read more: Venezuela details new Sicad 2 currency platform)

That leaves the country heavily reliant on oil exports of about 2.2 million barrels a day, much of it sold to the U.S. The state oil company, PDVSA, also makes and distributes about 750,000 barrels a day through its Citgo subsidiary.

For now, there is little immediate threat to the country's oil production, the golden goose that continues to churn out hard petrodollars. Unlike the 2002 political upheaval that prompted a crippling strike, the current protests haven't targeted oil facilities, which are located in the eastern part of the country, far from the urban street protests. The oil minister has said PDVSA has a "contingency plan" to beef up security at all its facilities; past plans have included a military presence at refineries and production plants.

And Venezuela badly needs every petrodollar it can produce. Years of borrowing to fund budget deficits—estimated at 16 percent of GDP last year—have saddled Venezuela with interest payments of some $13 billion this year. Foreign reserves have dwindled to just $20 billion.

(Read more: Venezuela's Maduro not in danger yet: Pro)

Bond investors—understandably concerned about getting their money back—have bid up the yield on existing debt to 18 percent, making further borrowing expensive—and problematic.

That makes Venezuela's $90 billion a day in oil revenues a critical financial lifeline, one both the government and opposition will go to great lengths to protect.

Even if output is affected, global oil markets are fairly well positioned to sustain a supply hit, thanks to rising U.S. production from the boom in fracking.

This year, global supplies are expected to rise by 1.8 million barrels a day—all of it from non-OPEC sources, according to the latest Energy Department estimates. Meanwhile, with global economic growth still relatively sluggish, demand is expected to grow by 1.2 million barrels a day—to 91.6 million.

Maintaining oil output is one thing. But restoring political, social and economic stability will be much harder.

Food shortages have widened as protests have created transportation bottlenecks. The government's recent plan to ease currency restrictions may help bring more hard cash into the country, but it will only fan the flames of inflation.

"Even if the government changed to a more pro-business economy, it would be very hard to for the government move away from years of these subsidies and all of the things the public is expecting," said IHS Global's Diosquez-Rice. "You can start opening up the economy, but it's not going to be an easy road. It's going to be years of struggle."

By CNBC's John Schoen. Follow him on Twitter @johnwschoen or email him.