Following the death of Venezuelan President Hugo Chavez, many analysts are now looking at oil and oil companies to see how their prices will react. Venezuela is home to the world’s second-largest oil reserves; however, most of that oil has been under wraps, protected by the nationalized oil industry that Chavez set up. Now that Chavez is gone, the landscape of the oil industry is in flux; Venezuela’s future oil production will probably affect prices, and thus investors with positions in a variety of oil and commodity based assets.
Throughout Hugo Chavez’s 14 year reign as President of Venezuela, he was committed to nationalizing oil production in order to aid in funding a variety of social programs aimed at helping the poor. In doing so, he eventually limited the amount of oil supplied to the rest of the world (and left a substantial amount of money on the table for Venezuelan coffers). Conversely, the amount of oil expertise flowing in his own country was limited due to his protectionist policies. Supermajor oil companies like ExxonMobil (XOM) exited the country, furthering reducing the country’s exposure to oil and gas technology.
Venezuela’s current oil production infrastructure is pretty dilapidated due to Chavez’s inability (or indifference) to reinvest in the nationalized oil industry, especially with limited technological innovations and expertise. Even if future leaders in the Latin American country were to open up their borders to a variety of multinational oil corporations, it may take awhile for the foreign direct investment to lead to a substantial oil production.
In the short term, analysts project very little fluctuation in oil prices or the stock prices of oil companies. Though the price of oil was down 79 cents, or -0.89%, on Wednesday, it was largely unattributed to Chavez’s passing. Chevron (CVX), Total S.A. (TOT) and BP (BP) shares were up a fraction during Wednesday trading, with other supermajor oil companies like ExxonMobil (XOM), ConocoPhillips (COP), and Royal Dutch Shell (RDS-A) only down a fraction. Chavez’s death has yet to show any big impact on these stocks.
Venezuela’s Political Future
The reason for this short term market apathy is partially due to the political instability left in Venezuela in the wake of Chavez’s passing. Without Chavez’s leadership and personality, there is no clear direction for interim-President Nicolas Maduro to take oil production; most likely the past production methods will continue. The forthcoming elections to pick a new President will be the real driver of future oil production.
As the political situation in the country works itself out, not much is expected to change regarding oil production, oil prices, and oil stocks. Potential investors like Russia, China, and India are staying on the sidelines until the political situation unfolds. However, once some political certainty takes place, the markets may finally react.
If the people of Venezuela elect a leader that finally opens the country up to new investment, allows an increase in oil production, and limits taxation, the markets will react favorably. Moreover, it could be a boon to the Venezuelan people and economy.
The Bottom Line
All eyes will be on Venezuela in a post-Chavez world. Because it has the second largest oil reserves in the world, many are anticipating the chance to finally get their hands on the resources. This could result in lower gas prices for consumers and higher stock prices for investors. A lot is riding on Venezuela’s future elections; once the political situation unfolds, investors will get a improved outlook on the future of investments.
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