I have previously warned that the price collapse might not
be over and that it’s entirely possible that oil will spike even lower, perhaps
hitting $40. Barron’s last issue pondered a low of $35 a barrel.
What’s more, I’ve been telling my readers that despite the
spin that U.S. and Canadian fracking and oil sands caused oil’s collapse, this
decline was actually triggered by Saudi Arabia and the other Sunni Muslim oil
kingdoms of OPEC.
Why? It was their way of undermining Putin’s Russian
government and Iran’s theocracy that require $105 and $140 oil to meet the cash
needs of their governments. By lowering oil, the Sunni oil kingdoms might be
forced to withdraw support from Syria’s Assad government and undermine Iran’s
nuclear weapons and long range missile programs.
Now, I want to alert you to the first victim; the first
government that WILL fall as a result of these low oil prices — and it could
happen any day …
Venezuela has the largest proved reserves of oil in the
world; a whopping 297.57 billion barrels of oil. Venezuela’s President Nicolas
Maduro Moros, a former bus driver, was the man who inherited the Venezuelan Presidency
after the death of former President Hugo Chavez, and was handpicked as his
successor. (Source: Wikipedia)
However, thanks to the socialist policies of Hugo Chavez,
and the nationalization of the country’s oil industry years ago, Venezuela’s
energy infrastructure is actually in a state of collapse. The country’s oil
production keeps falling roughly a million barrels a day.
Oil is literally Venezuela’s lifeblood. An incredible 97% of
Venezuela’s foreign earnings come from oil and the government needs $120 oil
per barrel to balance its incredibly bloated budget.
Having nationalized the assets of major oil companies, there
is no outside investment capital willing to risk investing money in Venezuela’s
oil industry.
The decline in the price of oil came to little more than
half of what the country needs to operate. The reality that Chavez and Maduro’s
socialist revolution is completely unfriendly to capitalism has plunged the
country into a financial and social crisis.
Maduro’s initial response last year was to punish business
owners and blame them for the plummet in the country’s currency, forcing them
to sell their inventories of goods for much less than they cost to replace.
The country’s black market is a result of the war on
business, capitalism and free enterprise. Now, with oil at $65 a barrel, even
the black market is falling apart because the country is sinking into a deep
economic depression.
Inflation is at 60% and the Venezuelan economy has shrunk 5%
in the first six months in 2014 …
Extreme shortages of food, medicine, toilet paper, shampoo,
soap, milk, eggs and all the consumer basics are so bad that Maduro actually
had the audacity to implement fingerprint scanning this past summer at grocery
stores in order to limit people in how much they buy...
Professionals like doctors, lawyers, teachers, engineers,
programmers, etc … are fleeing the country as fast as they can.
This past weekend, I threw a small party at my home with
several current and former Venezuelan nationals who STILL own homes in the
country. During our time together, I asked them to give me a non-emotional
assessment of Venezuela. They were unanimous in their belief that President
Maduro is on borrowed time.
Here’s some of what they had to say …"James, the Army
generals that have survived off the black market, going back years under
Chavez, can’t make enough under the table to pay their colonels, majors and
captains. No one has enough money to pay $25 U.S. for a gallon of milk or $15
for a pound of rice. So even the black market is collapsing.
"Americans and Europeans aren’t coming because they
know the military is increasingly out of control. Rumors have been swirling for
a couple of months; Maduro was on the verge of not being able to pay soldiers’
wages.
"The 60% inflation number is a huge lie. If you can
find what you want to buy, maybe its 60% up, but the reality is that the
store-shelves are empty. If you’re a soldier and you get paid paper currency
that can’t buy anything, why bother to complain about 60%, 100%, even 500%
inflation? Venezuelan currency is toilet paper.
"Maduro, Fidel Castro and Chavez murdered my country.
Sooner or later, the poor will turn on Maduro completely and he'll be hung from
the Presidential palace gate."
When I pointed out that oil had fallen from $75 to $65 and
could fall to $40, the Venezuelans at my gathering literally cheered. When I
asked how many people think Maduro can manage to stay in power till the end of
2015, one of my guests spoke for the others and said:
"Maduro and his cronies should be living their lives as
if each day is their last. The army will put an end to him any day. They’ll
come into power with the promise to return the country’s democracy in 18 to 24
months. They will also be 100% pro-American.
"If everything goes right, it will take Venezuela 10
years to recover from the ravages of Maduro, Fidel Castro and Chavez’s crony
communism. But, it’s something that could begin any day."
As I listened to my guests, I came to the stark realization
that the sharp fall in oil, as directed by the Saudis and oil kingdoms of OPEC,
may be showing Vladimir Putin and Iran’s theocracy what lies ahead for them
unless they untangle western sanctions (western investment and banking access)
and get the oil price back up to about $90 a barrel.
So, the obvious question for oil investors becomes: Would a
revolution and pro-western government in Venezuela mean that the world oil
market would be flooded with supply?
No, the reality is that it would take at least three years
to repair and upgrade Venezuela’s oil infrastructure and as long as six years
before new offshore drilling could get the country’s oil production over the
3.5 million barrels a day target set for last year.
Still, if Venezuela’s Maduro is removed from office tonight,
most uneducated and poorly informed investors will hear the announcement of a
military overthrow and sell the oil patch. I can only hope that it coincides
with an exhaustive selloff that marks the bottom of the current correction in
the oil market.
James DiGeorgia
James DiGeorgia is the editor of Global Resource Hunter, a
monthly newsletter designed to help you ride the commodity supercycle — an
ongoing surge in price of food, energy, metals and more.
James is also the editor of Junior Resource Millionaire, a
weekly newsletter that aims to help you rack up profits on trades with
explosive potential in the precious metals, base metals, agriculture and energy
industries.
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