Can Venezuela Tap World’s Largest Oil Reserves?

The Organization of Petroleum Exporting Countries (OPEC) recently announced that Venezuela may have more oil than any country in the world.  Good news for Venezuela, you would think, but necessarily so. That’s because the oil is located beneath quite inhospitable jungles.  It’s difficult and expensive bringing it to the surface.  Moreover, the crude is heavy and tar- like and thus very expensive to handle, transport, and refine.  All these confounders call for a whole lot more ability than the incompetent government of Hugo Chavez can muster. 

Chavez may know how to run a Bolivarian Revolution, but he is terrible at running an economy. As a result, Venezuela’s economy suffers from very high inflation and low growth. 

Venezuela’s significant other problems include the following:

• a surplus of domestic currency that people believe will soon be devalued,
• a shortage of available U.S. dollar currency that can be used to buy assets,
• massive corruption, including the loss of 20 percent of the state oil company (PDVSA) pension fund to a Ponzi scheme fraudster connected to senior Venezuelan officials; $500 million was stolen,
• overstated government economic production statistics. 

While Venezuela has huge oil reserves, the country’s production performance is anything but great. Chavez has taken over many companies and installed his loyalists to run them just like he did years ago to the state-owned oil company. His pattern is to fire those who protest and replace them with people long on ideology and short on competence and willingness to work. Thus, Venezuela has lost much of its capable technical oil industry people and suffers from less-than- competent management at almost all of the state-owned companies.

Recently, Venezuela recalled most of its gold reserves stored in unfriendly countries. One possible rationale for repatriation of the gold is a desire to clandestinely sell some of it to finance Chavez’s give-away programs, including building 2 million houses for the poor.  He previously asked the PDVSA to fund the housing project from profits, but because of mismanagement the oil company doesn’t have the profits to do so. Could Chavez secretly sell some gold to finance his give-aways without telling the people of Venezuela?  It wouldn’t surprise us.  He’ll do whatever to create support among the impoverished class and help himself stay in power.  We are not concerned that his potential sales depressing gold prices. You can be that many countries would scramble to buy the gold if it reached the market.

The bottom line is this: despite its huge natural resources, Venezuela falls far short of making it to our buy list.