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The nation with the most oil is falling apart

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Venezuela

The South American country, which relies on its oil and gas industry for revenue, has seen its economy falter and may default on its debt.

The largest pool of underground oil in the world is just 1,400 miles south of the U.S. border, and the nation sitting on it is devolving into chaos.

Venezuela was always the most vulnerable country to a collapse in oil prices, and two years after prices started dropping, the country is in political and economic crisis.

The latest indicator is the decision by two major airlines to stop flying to the country. The largest airline in South America, LatAm, and Germany’s Lufthansa said the government is refusing to release ticket revenues as part of a larger plan to keep foreign currency in the country.

For decades, Venezuela’s economy relied on foreign currency flowing into the country in return for oil. The socialist government’s budget relied on oil averaging $110 a barrel, but the price dropped below $30 earlier this year.

Inflation is so high that the government cannot afford to print more currency. Schools only operate four days a week, store shelves are barren and food riots are growing. Hospital patients are dying from simple illnesses because there are not enough medical supplies.

When people go hungry, they get angry. The socialist government can no longer deliver on its promises, and voters have elected a right-wing parliament. The two sides are increasingly relying on violent protests to further their causes.

What happens next in Venezuela is important to Houstonians on many levels. First, 30 million people without enough food and medical care is perhaps the worst humanitarian crisis in the Western Hemisphere in a generation. The Caribbean country is also strategically important with a lengthy border with Colombia.

The nation’s impact on the oil business could be profound. The state-run oil company is not paying Houston-based companies for their services, and many of them are scaling back operations. The government is about to issue $2.5 billion in promissory notes to cover the oil company’s bills, but these companies don’t want them.

Venezuela supplies the world with 2.2 million barrels of oil per day, which is about 3 percent of global demand. That number is shrinking because the government can no longer afford to maintain the equipment needed to keep the oil flowing.

Add a full-blown collapse in Venezuela to the violence around the oil fields in Nigeria, and the world no longer has a daily 1.5 million barrel surplus of oil. Instead of oil prices slowing rising as they are now, speculation could drive them up dramatically.

So far, Venezuela has not exploded, though, and we’ve seen more of a slow-burning crisis. But tempers are running short, and the chaos is growing. We may find ourselves paying a lot more attention to Venezuela as the summer progresses.


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