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According to various press reports, Venezuela president Hugo Chavez’s exit is approaching and he has just merged into the right lane. Chavez is on life support following complications from his latest cancer surgery.
Thus, as an end to an error… era nears, it is apt to reflect on how Chavez’s march down the road to serfdom squandered the greatest oil rally in history.
Since Chavez came to power (in February 1999) he has nationalized major industries, intimidated his neighbors, antagonized his largest trading partner, the U.S., has used the state-owned oil company (PdVSA) as his own personal piggy bank to fund his political ideology and has scared away foreign investment, with little to show in return.
According to estimates from Bloomberg, Venezuelan crude oil production continues to lag. In February 1999 estimated crude oil production was 2.9 MMb/d… and the OPEC basket was $10/b!
From that point, until the 2008 commodity bubble, crude oil prices climbed 1,210% ($131/b), yet, monthly Venezuelan crude oil production declined on average by 0.19% per month. Production hovered just above 2.0 MMb/d by the time the commodity bubble imploded in the first quarter 2009.
The primary driver behind the long run decline in output stemmed from a national strike (led by the then anti- Chavez PdVSA). In late 2002 crude oil production plunged from just below 3.0 MMb/d to just above 0.6 MMb/d.
In response to the strike Chavez purged PdVSA of talent and replaced it with political allies.
As such, Venezuelan oil production has yet to recover. In fact, production has averaged right around 2.5 MMb/d or 0.4 MM/d below pre-strike levels. Thus, given that PdVSA’s oil has averaged around $66/b since then, then that means the company has left about $100 billion on the table (gross).
The situation with Venezuelan oil production has now deteriorated to the point where PdVSA stopped publishing official output statistics two years ago.
The Venezuelan government has spent the last thirteen years butchering its oil cow. In the process, the ideologues in Caracas have ceded an even more valuable commodity, intellectual capital, in return… a commodity that will continue to pay dividends long after Venezuela’s oil has run dry.
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The Schork Report is a specialized research note providing technical and fundamental views of the energy markets. The daily report details specific trading strategies based on proprietary research and analysis. Our global client base represents all aspects of the energy trading market, including financial institutions, hedge funds, producers, marketers and end-users.
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