One of my least favorite traits in a person is an unwillingness to budge in an argument — even when they are repeatedly proven wrong with facts, science, or whatever it may be. I’m talking about the kind of individual who would cut off their nose to spite their face.
I’m also talking about Saudi Arabia.
Saudi oil ministers met with their counterparts from Venezuela on Sunday, with the intention of “discussing” the global supply glut.
To be honest, I’m shocked the meeting even took place, considering that the Saudis have repeatedly prevented such meetings in the past — in spite of desperation among other oil producers and utterly catastrophic conditions in the oil market right now.
Don’t get your hopes up too high, though, because the Saudi ministers ended up ditching the meeting before anything substantial was achieved.
The final comment regarding this meeting?
“Nothing really happened.”
The result of this inaction?
“Venezuela is in a death spiral.”
(Honestly, I wish I had been the one to say this first. Instead, it was Steve Hanke, a professor of applied economics at Johns Hopkins University and director of the Troubled Currencies project.)
Venezuela’s economy has suffered immensely alongside oil prices, and combined with dissention among the political ranks, the country and its currency are in real trouble.
Let’s not beat around the bush here. Venezuela is on the verge of economic and societal collapse.
Personally, I’m more inclined to side with this Forbes writer, who says, “Venezuela’s economic catastrophe isn’t about to happen, it has happened.”
The country’s revenues have fallen by 70%, and the overall economy contracted by 5% last year alone.
The informal black market economy, however, seems to be flourishing very nicely.
Inflation is hovering at more than 800%. The country is reporting shortages of basically every product, except murder (they have the second highest rate in the world).
Venezuelans clearly have bigger problems on their hands than Saudi lack of cooperation.
In fact, some might say that the biggest problem is their own government, which many believe is violating basic principles of economics.
Harvard Economist Ricardo Hausmann said that Venezuela’s political instability, a fact of life since the death of former president Hugo Chavez, could make its potential default eclipse Argentina’s 2001 debacle.
Maduro’s administration, instead of seeking out essentials like food and medicine for his people, has chosen to print more worthless money.
Maduro himself called this “re-engineering.”
Anyone with the most basic understanding of economic monetary policy knows that this is the exact opposite course of action one should take to combat inflation.
There are three basic ways to do it, and they all involve the goal of reducing the money supply.
I’m not kidding when I say that the Maduro administration actually ordered more currency (the bolívar) by the planeload.
The currency has lost 81% of its value over the last year, crashing past 1,000 per U.S. dollar.
To be honest, all I can do is sit here and shake my head.
Is it Saudi Arabia’s responsibility to float other oil producing nations? Absolutely not, and Venezuela’s problems (clearly) extend far beyond oil.
However, the Saudi regime is being a real sh*thead by holding production levels as leverage against political rivals in order to punish them.
And you know what they say:
What goes around comes around.
Despite the fact that the Saudis broadcast their own “resilience” in the face of plummeting oil prices, I would beg to differ. The nation’s budget has transitioned from a $48 billion surplus in 2013 to a $140 billion deficit this year.
I wouldn’t exactly call that a “resilient” fiscal outlook.
According to one energy reporter, “the fiscal outlook for the Kingdom looks so dire, the International Monetary Fund warned it could go through its fiscal reserves within five years.”
The nation’s export revenues dropped by almost 50% in just the last year, and it just started selling bonds for the first time since 2007. Economic diversification is essential for the Saudis to weather this storm.
Unfortunately, oil accounts for 90% of the government’s revenue. This isn’t far off from Venezuela, which relied on oil exports for 96% of its hard currency and 45% of the federal budget.
Conditions aren’t looking good for any of the oil producers. Morgan Stanley warned yesterday “that a global supply overhang was unlikely to start clearing before 2017.”
So the only question now is: Which nation will be the first domino to fall?
(Unless you believe it has already fallen.)
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