Weekly Geopolitical Report – The Tragedy of Venezuela (June 6, 2016)
by Bill O’Grady
The decline in oil prices has been a major problem for oil-exporting nations. In general, the degree of disruption is mostly based on how well the country was run before oil prices plunged.
Venezuela has arguably been the worst run of the major oil producers. The late President Hugo Chavez built an economy that was distorted by subsidies, price freezes and an arcane tiered exchange rate system. His economic program only worked because of revenue generated by high oil prices. Once oil prices declined, the Chavez economic system began to unravel.
Conditions have deteriorated to a critical point where it seems unlikely that the country can continue on its current path. Barring an unexpected rally in oil prices, the economy appears to be on the brink of collapse.
In this report, we will explain how the distortions in the economy have led to the current crisis, discuss the future of President Madero and explore the possibility that Venezuela will become the first major oil producer to collapse and lead to an unexpected supply shock. As always, we will conclude with market ramifications.