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.
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.
From left to right:
Venezuela’s President Nicolas Maduro Moros, former and deceased President of Venezuela, Hugo Chavez and former President of Cuba, Fidel Castro.
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.
Viva la revolution, Viva a free Venezuela.
Always Watching Your Chickens,