Venezuela's Socialist Experiment Has Failed
Which country has the largest proven oil reserves in the world?
Most folks would probably guess Saudi Arabia or some other Middle Eastern nation.
Some might guess Canada or Russia, or maybe even the United States.
But few would guess that Venezuela boasts the largest oil resources in the world.
Saudi Arabia held the top position among nations with the largest oil resources. But those resources only accounted for oil from conventional sources. When the extraction of crude from unconventional sources (like oil sands) became technologically and economically feasible, Venezuela became the top holder of oil reserves.
Venezuela boasts plenty of conventional oil resources. But the country is also home to a massive oil sands district similar to the resources found in Alberta, Canada. Venezuela's Orinoco tar sands, however, require less capital for production, and extraction costs are much lower. And there's a lot more of it.
This puts Venezuela at the top of the list of nations with oil resources. Including both conventional and unconventional sources, Venezuela actually has almost double the proven oil reserves of Canada.
Countries With Highest Proven Oil Reserves
- Venezuela — 297.6 billion barrels
- Saudi Arabia — 267.9 billion barrels
- Canada — 173.1 billion barrels
- Iran — 154.4 billion barrels
- Iraq — 141.4 billion barrels
With such a treasure trove of perhaps the most important commodity on the planet, the nation should be doing well.
Heck, with such a resource, Venezuela should be doing fantastic.
But the socialist administrations of Hugo Chavez and Nicolas Maduro have steered the country into chaos, with misguided government and central bank actions during the rise and fall of oil prices in the past two decades.
More than 95% of Venezuela's export earnings are from oil revenue. The country basically exports nothing else.
That means when oil prices are high, the money rolls in, and everyone's happy because the economy is great. And the answer to a windfall in profit in the socialist regime was to redistribute the resources via government spending on things ranging from job-producing infrastructure projects to social welfare.
That was from 2011 to mid-2014 for Venezuela, with oil prices near $100 per barrel.
But when oil prices crash, as they did later in 2014, the money begins to dry up. The economy comes to a grinding slowdown. People get laid off. And then everyone becomes unhappy.
The socialist government's answer to spurring the economy is essentially the same as the answer to dealing with windfall: redistribute the resources via government spending on things ranging from job-producing infrastructure projects to social welfare.
But the experiment has failed. And as a result, Venezuela has racked up a massive debt, devalued its currency into oblivion causing hyperinflation, and left the country in economic and social ruin with shortages of necessities like food, medicine, and water.
In an effort to curb inflation, the central bank recently cut five zeros from the bolivar. What was 100,000 bolivar became 1 bolivar. Before that, a pound of tomatoes cost more than 2 million bolivar (about US$0.76).
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In what seemed like a desperate move, Maduro recently introduced a new cryptocurrency to help support the failing economic system. The cryptocurrency, called Petro, is backed by the nation's oil reserves.
At first the crypto crowd praised the Venezuelan government for taking steps to normalize cryptocurrency as a legitimate asset.
But now Maduro's administration has ordered that banks must adopt the Petro as a unit of account. And the Petro is looking more like government-mandated extortion than a cryptocurrency.
In what seems like another desperate move, the Venezuelan government now hopes to shield the country's economy from continued inflation with a plan of selling mini gold ingots.
The 1.5 g. and 2.5 g. small ingots are to be made from locally mined metal. However, purchasers will not actually receive any physical gold bullion. Instead, they will be issued certificates that represent ownership.
It's unlikely that many people will be clamoring to buy Maduro's gold paper. His administration is highly distrusted and disliked among the Venezuelan people. Heck, Maduro just survived an assassination attempt a few weeks ago.
On top of that, people are eating their pets to stay alive. If they had a bunch of cash, they'd leave the country.
Despite having the world's largest and most valuable oil resource, Venezuela is sinking into utter chaos. Misguided government and central bank actions of the socialist administrations since 1999 set Venezuela up for economic failure. And now the chicken has home to roost.
What we're seeing is one of the biggest national busts in history. We'll be on a sharp lookout for rising opportunities.
Until next time,
As an editor at Energy and Capital, Luke’s analysis and market research reach hundreds of thousands of investors every day. Luke is also a contributing editor of Angel Publishing’s Bull and Bust Report newsletter. There, he helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets. For more on Luke, go to his editor’s page.
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