Things in Venezuela are not as they seem.
The first problem, of course, is with the country’s oil reserves…
It’s still being reported almost daily that Venezuela is home to some 300 billion barrels of oil reserves – the largest of any country in the world.
But anybody who knows the situation can tell you that, though that number might be geologically accurate… it does not tell the whole story.
The whole story is one of highly suspicious additions to oil reserves, a complex industry in shambles… and a highly unstable political environment that has burned oil companies twice in the past 50 years.
The first problem with Venezuela’s oil is that we don’t really know how much it has…
Why Venezuela’s Oil Reserves May Be Overstated
As recently as 2007, Venezuela had roughly 100 billion barrels of proven oil reserves. From 2007 through 2010, under former president Hugo Chávez’s leadership, the country reclassified an additional roughly 200 billion barrels of oil as proven reserves.
The additions to its reserves wouldn’t be suspicious if the country’s national oil company, PDVSA, had made a big new discovery or if production were increasing over time. But it reclassified these reserves without either of those things happening. In other words, the only way to “prove” oil reserves is by drilling.
Oil industry veterans refer to the drill bit as a “truth machine,” but the truth is we have zero evidence that Venezuela has done the necessary drilling to verify its alleged increase in reserves. The news is even worse, because Venezuela’s national oil production is less than a third of its peak level of nearly 3.5 million barrels per day in the late 1990s (just before Chávez came to power in 1999).
Oil experts at Wood Mackenzie estimate current Venezuelan production is roughly 900,000 barrels per day – an approximate 70% decline. The country’s peak oil production is often quoted in the press at three million barrels per day in the early 2000s. Whatever the correct numbers are, they all tell the same sad story of a huge decline.
Speaking of production, more than half of Venezuela’s current oil production is located in the Lake Maracaibo Basin in the northwestern part of the country. But the newer reserves lie in the Orinoco Belt in eastern Venezuela, where development has been more limited. Maracaibo has been under development for more than a century, while Orinoco development started in the 1990s.
So it would take a substantial new investment to ramp up production in that region. But it’s highly unlikely any major oil company will make that investment any time soon, for more than one reason…
The Many Challenges of Extracting Venezuelan Oil
First of all, Orinoco oil is heavy, sour crude, meaning that it has a high sulfur content. It’s more expensive to produce that kind of oil because it’s the consistency of cold peanut butter. That makes it harder to extract, and then it has to be diluted before it can be transported anywhere.
Second, even if a large foreign oil company decided that producing heavy, sour crude from the Orinoco Belt was a reasonable economic proposition, the political risk is still too high…
On January 9, President Donald Trump hosted a meeting at the White House, inviting leaders of major oil companies to weigh in on Venezuela. He’s looking for the industry to commit to investing $100 billion to produce oil in Venezuela.
I doubt that commitment is forthcoming. ExxonMobil (XOM) CEO Darren Woods told Trump:
We have a very long history in Venezuela. In fact, we first got into Venezuela back in the 1940s. We’ve had our assets seized there twice. And so you can imagine to re-enter a third time would require some pretty significant changes from what we’ve historically seen here and what is currently the state.
If we look at the legal and commercial constructs and frameworks in place today in Venezuela, today it’s uninvestable. And so significant changes have to be made to those commercial frameworks [and] the legal system.
There has to be durable investment protections, and there has to be change to the hydrocarbon laws in the country.
Ask anybody who knows the oil industry, and they’ll tell you that ExxonMobil is possibly the single greatest capital allocator in its history. If they say Venezuela is uninvestable, you should take them at their word.
You better believe other major oil companies heard Woods loud and clear and aren’t eager to have their investments nationalized. It’s not at all crazy to conclude that companies with enough money to move the needle on Venezuela’s national oil production aren’t interested without massive changes to its oil policy.
And let me ask you this: Do you think those “legal and commercial constructs and frameworks” Woods mentioned will change quickly? And even if they changed, what guarantee would major oil producers have that their investment would be safe for a decade or more? Oil production is not a short-term undertaking. It involves a large capital investment that must produce a return over a period of more than a decade.
Imagine being in charge of allocating billions of dollars for 15 to 20 years in a country where the political environment has been hostile to oil companies for the past half a century. Good luck getting anybody to write a big check for oil development in Venezuela.
The political situation is unlikely to change in the oil companies’ favor any time soon, especially considering that, as of this moment, despite Trump’s public statements and his administration’s plans, the U.S. does not control the Venezuelan government.
Maduro’s vice president, Delcy Rodríguez, was sworn in as Venezuela’s interim president after Maduro was captured and taken to the U.S. It’s well known that she’s fiercely loyal to Maduro and has appointed loyalists to key government posts.
Nor does the government seem to want things to change much. Trump has said publicly that Venezuela’s current government is giving the U.S. “everything we feel is necessary.” He has also said publicly that he doesn’t believe opposition leader María Machado has the support of the Venezuelan people.
But let’s be really optimistic and pretend for a moment that politics weren’t the huge issue they are.
Even if politics weren’t an issue, the Venezuelan oil infrastructure is in shambles. The Venezuelan government nationalized the industry in 1976 and executed another wave of asset seizures in 2007 (the two seizures Woods referred to when speaking at the White House).
Long story short, the Chávez and Maduro regimes ran Velezuela’s oil industry into the ground. Producing heavy, sour crude is a complicated job and politicians have zero expertise at leading an effort to do it. As Shale Magazine reports:
Maintaining production of heavy oil requires constant reinvestment, reliable power, and uninterrupted access to diluents – many of which historically came from the U.S. Gulf Coast. Without these inputs, and high enough oil prices to support them, production systems fail quickly.
When foreign partners exited Venezuela, PDVSA lost the ability to sustain that complex ecosystem. Steam-assisted extraction stalled. Upgrading capacity deteriorated. Fields that required continuous maintenance were left idle. Even when oil prices recovered globally, Venezuela was unable to capitalize.
This is the paradox at the heart of Venezuela’s energy crisis: the country with the world’s largest oil reserves lacks the operational capacity to turn those reserves into stable production without outside help.
So you see…
It’s a huge mess. Anybody expecting a massive, new $100 billion-plus investment in Venezuela’s oil any time soon is dreaming.
The Cure for Low Prices Is Low Prices
To understand how all this spells opportunity for investors, it’s important to note what Shale Magazine said about oil prices: that Venezuelan crude requires a high enough oil price to support its complex heavy, sour crude ecosystem.
But President Trump says he wants to lower oil prices. He doesn’t seem to understand that lowering oil prices is more likely to slow the development of Venezuelan heavy, sour crude than speed it up.
And it’s likely true that lots of new Venezuelan oil supply reaching the Gulf Coast or other refineries that can handle heavy, sour crude would help push oil prices down. Since we highly doubt there’ll be any sizeable increase in Venezuelan production any time soon, that’s unlikely to happen.
At $59 a barrel recently, oil is already trading roughly 26% off its January 2025 highs. The overall U.S. oil industry is said to require $60 to $65 per barrel to make enough money to keep up production. So $59 or low $60s doesn’t seem like a big issue.
But that price doesn’t necessarily incentivize new oil production capacity. Significant new drilling isn’t incentivized until we get closer to $70, and in many cases even $80, per barrel.
It boils down to a core truth of commodity-sector investing: The cure for low prices is low prices. If the Trump administration does somehow succeed in lowering oil prices, it’ll create a powerful disincentive to invest in new oil production. That’ll lead to a lower supply and soon after, higher oil prices.
You can’t make serious money in commodities without being a good contrarian, and energy is a contrarian play in the U.S. stock market right now. The State Street Energy Select Sector SPDR Fund (XLE) was the third-worst performer among the 11 S&P 500 sectors last year. It rose just 4.4%, with only real estate (-0.8%) and consumer staples (-1.2%) performing worse.
My latest two recommendations for The Ferris Report readers were in the energy sector, and I’ll make at least one more new energy pick either this month or next.
Pulp fiction novelist Jim Thompson once said, “There is only one plot: things are not as they seem.”
Things aren’t as they seem in the Trump administration’s plans for the Venezuelan oil industry.
And investors will likely reap market-beating returns as a result.
Good Investing,
Dan Ferris
Editor, The Ferris Report
Editor, Extreme Value
Co-host, Stansberry Investor Hour
Editor’s Note: This year, one of the world’s biggest oil producers poured $1 billion into a startup that could KILL the oil industry.
This obscure startup is the front-runner in a technology that could generate virtually limitless energy.
Bill Gates says that it “could be as transformative as the invention of the steam engine before the Industrial Revolution.” (Details here.)
No wonder Microsoft recently inked a massive deal to generate electricity from this breakthrough power source.
Even the firms that are most vulnerable to its disruptive potential are piling into it… Oil supermajors ExxonMobil, Chevron, Eni, and Shell are staking billions of dollars in a technology that – according to Live Science – could “make oil obsolete.”
And now – thanks to a little-known “backdoor” into this technology – it’s your turn.
