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Will Venezuela Be the End of OPEC?

Written by Keith Kohl
Posted May 12, 2017

How much worse can things really get for OPEC?

Given the news recently, it seems like we’re just going around in circles.

It’s not just the production deal, either, though I’m sure we’ll all be glad to finally see a decision made on that front within the next few weeks.

That being said, there is one point that I feel I really must keep reiterating: OPEC cannot afford to let oil’s price plummet the way it did a few years ago.

Recent developments have made that fact strikingly clear...

Insult to Injury

You may have heard, while reading through the latest political hoo-ha, that Venezuela is facing a new round of U.S. oil sanctions.

Threats of such sanctions were heightened recently by President Maduro’s controversial plan to rewrite the country’s constitution, but the country was in turmoil long before we got to this point.

Venezuela is in dire straights, both politically and economically. Much of the latter issues have stemmed from — you guessed it! — the oil rout we’re still slowly digging ourselves out of.

See, Venezuela has been one of OPEC’s largest producers for decades. Even today, in its diminished state, the country still accounts for around 2% of the world’s total crude oil output, which amounts to millions of barrels per day.

At the height of the oil industry, Venezuela’s political woes could be forgotten for the sake of profits.

Today, that’s no longer the case.

More than half of Venezuela’s GDP and government budget comes from oil export revenues. And even with oil leveling out around $50, it’s no longer enough to keep the drama at bay.

Results have escalated from laughably long lines at grocery stores...

lines in Venezuela

To riots in the streets, with many demanding the removal of President Maduro.

The country’s oil situation got so bad last year that Venezuela, a top OPEC producer, actually started importing shale oil right from the U.S. as a necessary resource to get its own heavy crude out to market.

Now, with the threat of sanctions taking even this boon away, it’s only a matter of time before this regime falls, and the country’s oil industry with it.

Broadening Perspectives

This isn’t the first time the U.S. has used oil sanctions to reign in another country’s actions.

Iran spent nearly 40 years under U.S. sanctions and has, since their removal at the beginning of 2016, been struggling to regain the millions of barrels in production capacity and annual sales it lost during that time.

If such sanctions reach Venezuela, the consequences will be much more dramatic, and without a doubt will be felt across the whole of OPEC...

The cartel as a whole has been in a tight spot the last few years. It’s not just Venezuela that relied on oil exports for spending money; unofficial leader Saudi Arabia is losing out, too.

It’s the only reason the world’s biggest oil producers both inside and outside OPEC agreed to cut production: they’re all running short of cash.

And the U.S. has the power to put them in an even worse state.

Now, let’s be fair: If Venezuela’s business is off the market, that’s nearly 2 million barrels a day and just short of 300 billion barrels in proven reserves stuck in the ground, untouchable.

The price of oil would go up for everyone, the U.S. included.

But the U.S. has one more ace up its sleeve: refineries.

Even Saudi Arabia has been grabbing up all the U.S. refinery capacity it can, since it’s got little of its own and can’t sell its low-grade heavy crude without a little cleaning.

It’s far from the only country that has to do this.

The U.S. can afford to import more expensive crude... because it will just end up selling that oil back at equally inflated prices as refined petroleum products and charging more for the use of its refineries at the same time.

Taking the Swing

Most of the power the U.S. holds can be traced to one state: Texas.

It’s home to the prolific Permian Basin, where rising rig counts and soaring production continue to this day.

It's also within close proximity to the Gulf of Mexico, where many of those coveted heavy crude refineries are located.

No doubt it’s the place every major oil producer wants to be.

The oil industry’s power shift of the last few years has been amazing to watch. But if you’re just watching and not taking part in the profits, you’re already missing out big time.

Until next time,

Keith Kohl Signature

Keith Kohl

follow basic@KeithKohl1 on Twitter

A true insider in the energy markets, Keith is one of few financial reporters to have visited the Alberta oil sands. His research has helped thousands of investors capitalize from the rapidly changing face of energy. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital as well as Investment Director of Angel Publishing's Energy Investor. For years, Keith has been providing in-depth coverage of the Bakken, the Haynesville Shale, and the Marcellus natural gas formations — all ahead of the mainstream media. For more on Keith, go to his editor's page.

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