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The White House recently slapped new sanctions on Venezuelan officials, banning them from entering the United States.
That follows past, more general sanctions…
As well as rumors that, if true, could end up completely collapsing the South American country – sanctions on Venezuela's national oil company, PDVSA.
See, Venezuela is now on the brink of total collapse, and PDVSA looms large in this unfolding crisis.
The focus is the company's ability to pay its bond interest. Doing so is crucial, but prospects are grim.
Along with that goes the ability of the central government to administer an entire population and avoid the country descending into outright civil war.
And that's pushing the Venezuelan government right into Russian and Chinese hands.
This Is Venezuela's Oil Supermarket
PDVSA is the vehicle for about 90% of Venezuela's trade revenue and has served as a primary outside purchaser of all manner of staple commodities essential for the literal survival of a domestic economy rapidly sliding into oblivion.
While charismatic Hugo Chávez was in power, PDVSA was required to spend foreign hard currency export proceeds held outside the country to acquire food for import into Venezuela.
It prompted a colleague of mine at PDVSA to lament: "I thought we were an oil company, not a supermarket."
Paying for the purchases abroad was supposed to minimize the adverse impact of exchanging currency under oppressive domestic inflationary pressures and a fractured infrastructure.
What it actually did was undermine any ability to use PDVSA's revenue to buttress an increasingly insolvent central budget.
It also wasted money, as food was purchased and then transported through intermediaries at exorbitant prices. PDVSA, after all, operates oil tankers, not cargo vessels.
Nicolás Maduro, Chávez's successor, complicated the matter even further by regularly raiding PDVSA coffers to pay for a wider range of imports, tied fundamentally unstable sovereign debt issuances to PDVSA bond futures, and relied on accelerating heavy-handed responses to local unrest.
As the crisis worsened, life in the streets became unbearable.
Contacts tell me that the few retail establishments in Caracas that managed to remain open often wouldn't decide on the actual price of goods and services until you reached the counter.
Inflation was just that high, and the effective market value of the bolivar, the local currency, moved that quickly.
It reminded me of when I was living through Russia's currency devaluations. A dollar went a long way in Moscow then, and in Caracas now.
As Maduro's repression increased, America launched some initial sanctions. Another, more concerted round came in response to Maduro replacing the National Assembly (controlled by the opposition) with a new legislature more bound to his will.
As I've sketched in some detail in Oil & Energy Investor, Washington is now eyeing PDVSA specifically for sanctions, threatening, among others, to restrict or eliminate U.S. exports of lighter oil to PDVSA.
These exports are required to allow the processing of the much heavier oil from Venezuela's Orinoco oil basin.
This area on either side of the Orinoco River may hold the largest oil reserves in the world.
But this is very heavy oil. I can personally attest to this. Years ago, I put some of this in the palm of my hand, turned the hand over, and it just sat there.
This oil makes molasses set speed records. It's much more expensive to extract and process, requiring expertise and technology generally available only in the West.
If Venezuela were to lose the ability to process its oil products, the country's domestic markets for gasoline, diesel, and other distillates would collapse. The resulting knock-on effect is certain to escalate inflation and make basic life intolerable.
And that's not the only way in which PDVSA is under increasing pressure…
About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.