By pumping more oil, can Venezuela hope for a better future?
...and whether revived trade with Caracas will save the West from itself. With valuable insights from oil man Luis Pacheco, and more
Join us at SCALED today, as we again cast an eye across the Atlantic and over the last century, this time to watch the epic rise and spectacular fall of one of Latin-America’s biggest industries: Venezuelan oil.
And a rip-roaring tale it is: A Caribbean setting, empires at war, would-be pirates on makeshift skiffs raiding oil platforms… It’s that old Latino chestnut: localised corruption, gangsterism and misgovernment. But, wait, who’s that swaggering into view? Hey, if it isn’t Western hegemony.
The West likes to think of itself as a bright beacon of hope in a dark world of tyranny. Sure. Now imagine a lofty old lighthouse perched on a receding cliff, nearing the brink of collapse. That is the once-unchallenged petrodollar. It underpins Western dominance and, arguably, is on the wane.
For some, it’s a long time coming. For most, it’s out of the blue. An Ernest Hemingway quip comes to mind. “How did you go bankrupt?” the great man was asked. “Two ways,” he replied. “Gradually, then suddenly.”
At the heart of the tragedy is oil. Yes, oil: the cause of, and solution to, all geopolitical problems. When the West can’t get its hit of petrochemicals, that’s a problem. As for a solution, there’s Venezuela, a lapsed ally, with petroleum to burn.
So can’t we be friends… again?
It’s a helluva lot to cover in a short piece. Assumptions will be made. Call it fuel for thought.
Venezuela, land of dashed hopes and broken dreams
Not so long ago, Venezuela, roughly triangular and bigger than France and Germany combined, was a massive oil exporter. From the late 1950s to 1970 it was the biggest in the world and as late as 1999 the biggest to the US. The sticky black stuff held us together.
The OPEC-founder probably retains the largest oil reserves in the world and, if its government is believed, the second largest gas reserves in the Western hemisphere. Yet the fuel-hungry Free World hasn’t tapped them for some time, per White House decree.
It began 20-odd years ago. An ex-army officer, Hugo Chavez, after leading a failed coup d'état, got voted into power. Under the self-declared “21st century socialist”, the government in Caracas refused to play ball by the liberal democracy rulebook (editor’s note: funny how other oil nations are allowed to cheat—cough, UAE, cough). Since then Venezuela has been economically sanctioned time and (vicariously) time again.
“Caracas was forced to go rogue in oil market terms,” explains Luis Pacheco, a congenial oil consultant based between the US and Colombia. He’s also the former CEO of a subsidiary of Venezuela’s national oil and gas company, PDVSA, and a Monty Python fan. “Chavez and his successor, Nicolás Maduro, have ruled like autocrats. They put themselves and their entourages above the Constitution.”
Caracas had to find another channel for what was the basis of its economy. “Rogue oil” is what Pacheco calls the resulting product. “Rogue oil can be sold in certain markets, but at something like a 30-40% discount. On top of that, there are a host of oil nations under American sanction. Naturally, this put Venezuela into tight competition with other sanctioned producers. In that respect, the sanctions regime was a double whammy for our industry: reduced profits and increased desperation.”
With oil output falling from a black cascade of 3.5 million oil barrels a day, to a sticky trickle of 700,000, the Venezuelan currency, the bolívar, has been left weaker than twice-boiled tea.
Here’s a question: why in 20 long years didn’t Russia or China replace the US as patron of the Venezuelan oil industry? SCALED reckons that American military prowess and proximity to the Caribbean may have something to do with it. Anyway, Russia profited from Venezuela’s misfortune. As for the Chinese, perhaps they didn’t see a safe invesment.
For, truly, in Venezuela chaos has reigned. To take just one example, some oil platforms are isolated, floating in the middle of huge bays. Slum-dwelling scrap dealers regularly drift in under cover of night and hold oil-workers at gun-point. The raiders strip decaying rigs of equipment and the miserable workers of whatever few valuables they may have held on to.
After 20 years of these raids, corruption and military administration, PDVSA is a near-wreck; a business in dire need of investor love. “Everything from electricity generators and power-lines to whole refinery inventories require replacement and repair,” says Pacheco somewhat solemnly. “We have an expression: hanging from the brush. The image is of a painter dangling from the side of a tall building, with only the paint on the bristle-tips sticking to prevent his fall. That’s the Venezuelan economy. So investment will have to come from outside.”
The West goes short
This winter, European powerhouses such as Germany face the once unimaginable prospect of factory closures. Even if Europe can afford to pay record prices, there may simply not be enough fuel.
The Germans placed their faith in the Energiewende: a quick switch to renewables. While the effort has been impressive, there are plenty to tell you it’s either far from complete or a foregone failure. Kemi Badenoch, a straight-talker who tried for Tory leadership, dubbed it: ‘unilateral economic disarmament’.
Recently, sanctions were slapped on Russia. As predicted in the second-ever SCALED post, Western society couldn’t afford them but Putin could (or wears an impressive poker face).
Perhaps in the face of climbing petroleum revenues, Moscow went ahead and turned off the gas. To add insult to injury, the Russians did it under force majeure, i.e. ‘it ain’t our damn fault so just try and sue’.
On top of that, the West is staring down the barrel of shortages of and price increases in everything from grain to the phosphate used in fertilizers. The dollar growing fat on speculation further hurts worldwide production, something one economist casually dubbed the Doom Loop.
The media seem loath to mention it, but lunatic public health policies disrupting or out-right disabling supply chains have a big role to play here. Stressed suppliers are keeping throttled resources to themselves. The war in Ukraine and the not-so-distant prospect of the West losing Taiwanese assets does not help.
In response to inflation, central banks are hiking rates but analysts at Blackrock point out that it won’t make staple goods magically appear. Or, as one Goldman Sachs maverick puts it, ‘you can print money, but you can’t print commodities’.
Let’s return to the dollar. Its strength comes from worldwide use, particularly for trading commodities. If the dollar can’t buy fuel, you’ll have to swap your greenbacks for another currency before you can heat your home and/or (as now seems to be the choice) power your factories and food processors. Trading commodities in rouble, renminbi or anything without the noble head of an American president printed on it is not good for the dollar, which means it’s not good for the West.
It boils down to this, folks: the West better find some fuel and buy it in dollar, fast.
Shale oil to the rescue?
Shale oil and Russian exports filled the vacuum left by Venezuela’s departure from the market. Can shale oil now make up for the purging of Russian commodities? “Sanctions on Russia create a shortfall of perhaps 800,000 barrels a day for the US,” says Pacheco. “It sounds like a lot but has to be seen in the context of the 22 million b/d US market.”
Perhaps not so bad then. On other hand, this is only to speak of American demand. The US will find it “almost impossible” to expand fracking and cover the needs of allies, according to Haliburton Co., one of the world’s largest oil field service companies. But, more importantly, Washington buying its own shale oil a global petrodollar does not make.
So, where does the Free World go? Iran? Pffff! As if Israel would allow it.
Well, where then?
You guessed it
In March this year, US emissaries visited Caracas for the first time in what must seem like an age to the trade-starved nation. SCALED understands that top US officials with Lat-Am ties took part in the mission, including Deputy Assistant Secretary of State, Juan Sebastian Gonzales, and former White House senior advisor, Bill Valdez.
These talks are bearing juicy, exotic fruit. The US has already allowed Venezuelan oil shipments to Spain and Italy, in return for debt relief. Iran is giving PDVSA more crude, freeing up exportable lighter grades. The resulting export-surge has helped make Venezuelan credit somewhat good again.
And then, well, whaddya know! Two US funds suddenly partner up with a Venezuelan firm to ‘explore’ for oil in an area which already has confirmed reserves. In short, the US has begun bypassing its own sanctions. To call this a turn-around would be an understatement. A mere three years ago, President Trump was threatening to invade the Caribbean nation.
Further talks may now take place in Mexico. Caracas has already freed some US prisoners. Next, Washington expects some friendly overtures from Maduro towards the opposition.
One well-informed Venezuelan who spoke to SCALED is sceptical of further change. “Maduro has been negotiating with the opposition for decades and will drag the negotiations on forever. He has been trained to do this by the Cubans. He agrees to something, and doesn’t do it. So far that’s worked. He’s not negotiating in good faith. We may have the largest oil reserves known to humanity, but under the present leadership production will continue to decline.”
One experienced and well-informed Venezuelan analyst who spoke to SCALED is skeptical of further change. “Maduro has been negotiating with the opposition for decades and will drag the negotiations on forever. He has been trained to do this by the Cubans. He agrees to something and doesn’t do it. So far that’s worked. He’s not negotiating in good faith. We may have the largest oil reserves known to humanity, but under the present leadership production will continue to decline.”
Others are perhaps more sanguine. “In the event of a breakthrough it’s a complicated business, legally speaking,” Pacheco explains patiently to the oil novices at SCALED. “New licences will have to be issued for any and all operations involving Western companies beyond maintenance .” Politically, a success in negotiation would be a hot-potato too. The Maduro status quo would claim this sea change as a victory for the regime.
All going well, production is quickly restored (as Chevron, which retains extensive equity-holdings in Venezuelan oil fields, is betting). An emerald stream of dollar washes in, making the greenback great again, and the bolivar gets a boost.
Are we talking about a boom? Maybe, although not likely for the majority of Venezuelans. One thing’s certain: Europe, as e.g. France expects, will be buying badly needed extra fuel. At the least, some geo-political balance could be restored.
If there is a boom, what happens if a commie-hatin’ Republican is back chewing Cuban cigars in the Oval Office? Time will tell. By then there may be so much money flowing, tongues will have to be bitten.
After all, even if Russia loosens the spigot, Venezuela’s oil and possibly its gas may be the sputtering great ship Western Liberalism’s last hope. Otherwise there is a distinct risk of the West coming adrift, experiencing mutiny and being stricken, perhaps then stripped clean by pirates drifting in from all directions on makeshift skiffs.