Venezuela and the US Economy
On January 3rd, US government operatives and military took Venezuelan president Nicolas Maduro into custody from his residence in Caracas in relation to narco-terrism and other criminal charges. Venezuela is a natural resource super power that, under new leadership, could significantly impact markets worldwide. They have the largest proven oil reserves in the world and significant caches of rare earth metals. Despite these resources, Venezuela has not efficiently capitalized on its economic potential. This is due to the recent political instability, corruption, and decrepit infrastructure. Following Maduro’s capture, the US could guide the government of the country and its leadership in order to restore order and rebuild the economy. An economically stable and resource efficient Venezuela could directly affect the American economy in a positive way.
Oil in Venezuela was discovered by Royal Dutch Shell geologists in 1922. By the 1930s, 3 international oil companies (Gulf, Royal Dutch Shell and Standard Oil) controlled 98% of Venezuelan oil. The oil industry in Venezuela steadily grew and in 1976 it was nationalized by president Carlos Andres Perez. In the 1980s oil prices plummeted and Venezuela's economy took a hit and at the same time Venezuela took on massive debts by purchasing foreign refineries. In 1998 Hugo Chavez was elected president of Venezuela. Chavez took the stance of using the country's vast oil wealth to provide services for the people and help the poor. At the time, oil prices soared so the Venezuelan economy did well, however Chavez fired mass amounts of oil experts for striking against the national company and this triggered the downfall of the country. Chavez abolished term limits and increased his power. He eventually became a dictator, later passing the rule down to Maduro. Maduro continued to allow the economy to fall. Since he assumed power the Venezuela economy has shrunk by over 75%.
In the 90s Venezuela was producing over 3 million barrels of oil per day but now they fail to even produce 1 million per day, catastrophic hyperinflation has caused middle and lower class families' life savings to become obsolete and US sanctions, imposed to combat corrupt elections and human rights infringements, have further slowed the economic growth. Now that Maduro has been removed from the country, they now have an opportunity to build themselves back up to their former glory.
President Trump has said that he would like to move large, American oil companies back into Venezuela. If oil companies are willing to make the extensive investment into the oil reserves of Venezuela, we could see a large-scale rebuild of the country’s infrastructure and sharp economic growth much like we saw in the early and mid 20th century. The financial recovery of Venezuela unfortunately will be made more difficult due to the billions of dollars in debt that they have taken on because of years of bad governance.
The US would also presumably reduce sanctions on Venezuelan oil if conflicts with the current government and glaring issues with the oppression of citizens were addressed. Right now the US mainly imports oil from Canada, Mexico and the middle east but with the addition of the large oil reserves of Venezuela, oil prices for consumers could see a decline. Additionally, US Gulf Coast oil refineries are equipped to refine heavy crude oil, which is the type of oil that is harvested from Venezuela. This would bring increased income and jobs to the southeastern United States.
More globally, Venezuela only contributes to less than 1% of world oil supply but as mentioned previously the raw oil potential is enormous. The introduction of Venezuelan oil to allies of the United States would increase oil supply worldwide, reduce prices and allow the US and their allies to reduce their dependency on potentially hostile countries, such as Russia, for oil.
Be on the lookout for oil and mining companies who are willing to tap into a politically stable and fertile Venezuela. Investors may benefit if Venezuela achieves political stability and economic reform. There is potential for large scale economic growth similar to what we saw from the region in the mid 90s.