Photo: Alberto Cárdenas Almeida

Say you run a small corner store, an abasto. You have about $100 in sales a month, your costs are about $80, but you also have some debts. Your monthly payment on the debt is $30. You’re going hungry to somehow make those payments each month. The bank is making threatening noises about foreclosure. Is your abasto solvent?


On some fundamental level, it sounds insane. How can the country that controls access to the world’s largest oil reserves imaginably be unable to pay its creditors?

Oh, except we forgot one detail: there’s a small patio behind your abasto, and there’s an immense hoard of old Spanish morocotas buried there. Maybe $12 trillion worth of gold coins. Is your abasto solvent now?

This, basically, is the common sense response to the notion that Venezuela is bankrupt. On some fundamental level, it sounds insane. However bad things may look in the short-term, however screwed up the cash-flow situation may be, the country that controls the world’s largest oil reserve can’t imaginably be insolvent, can it?

Well, let’s take the thought experiment in a different direction. Say instead of morocotas in the patio, your abasto is the legal owner of Asteroid 433 Eros. (It’s a thought experiment, it’s allowed to be far-fetched.) 433 Eros happens to be shot through with enormous gold deposits, estimated to be worth $12 trillion.

Is your abasto solvent now?

The real question concerning Venezuela’s solvency is whether it’s closer to the morocota-rich abasto or closer to the 433 Eros-rich abasto. In the first case, turning the theoretical wealth it owns into financial flows is dead simple: all it takes is a shovel. In the second case, the existence of gold on a far-off asteroid doesn’t really have much bearing on the abasto’s creditworthiness: there’s just no feasible way of turning that gold into the revenue stream you need to pay your creditors.

Morocotas or Asteroid?

We know our oil reserves are vast: so vast, chances are the vast bulk will never come out of the ground. At today’s prices, they’re theoretically $12 trillion. Yes, the oil market is volatile — tomorrow it could be $24 trillion, or $6 — but either way, it’s an unimaginably vast number.

But how feasible is it to turn that wealth into income streams that can be used to pay our debts? Are we an abasto over a huge hoard of morocotas? Or an abasto that owns a golden asteroid?


Turning that theoretical wealth into actual revenue flows is tricky.

Clearly we’re somewhere in the middle.

Turning oil reserves into actual revenue flows is tricky. It’s slow. It’s risky. And it can’t be done without resources: not just financial but managerial, institutional and technological resources as well. All of those resources are in short supply in Venezuela today. And none of it can be improvised.

The current government has demonstrated again and again that it’s just plain not able to manage the transition to higher production levels. For a decade, oil production target after oil production target has been missed. With chavismo in power, our huge oil reserves might as well be on some distant asteroid. We can’t even stem the decline in production, let alone mobilize the resources to boost it.

How much would that change with a less crazy group of people in power? That’s a harder question. And it’s at the heart of the long-running argument between the FRodista and the Hausmannista camps. It may be that, in a day-after scenario, it’s possible to find private lenders willing to advance the capital to develop Venezuela’s vast reserves. But on what conditions? At what interest rates? And would the new, enlarged stock of debt be sustainable?

Things get murky real fast, because the galloping opacity of official sources leaves us without the basic information we’d need to answer the key questions. Questions like exactly how big Venezuela’s GDP is in dollar terms — an unanswerable conundrum in a country with multiple exchange rates orders of magnitude apart. Questions like “what are Venezuela’s real import needs?” And, “how large are the direct subsidy programs we will need to be to soften the blow of price and FX adjustments?” And “what kinds of deficits will we need to run during transition and how we are going to finance them?”


As long as the answers to basic questions in public finance remain as unanswerable as a Zen kōan, we can only speculate about where we lie on the Morocotas/433 Eros spectrum.

Take just one of these unknowns — in some ways, the most basic: the dollar value of our GDP. If you think once it’s all said and done, Venezuelan GDP will settle in the $300-$400 billion range, then yes, we’re much closer to the abasto-over-the-morocotas side of the spectrum. A $400 billion economy can probably shoulder the debt it will take to turn the theoretical wealth under the ground into the revenues used to pay the old debts…and the new ones.

If you think Venezuelan GDP is going to settle in the $100-$150 billion range, then that’s clearly a fantasy: in that scenario, Venezuela’s carrying over 100% of GDP in public debt and paying credit card-level interest rates for the privilege. That puts us more in 433 Eros territory: the costs of financing the capital you need to turn that wealth into a stream of government revenues are as foreboding as the cost of financing a spaceship to go mine an asteroid.

As long as the answers to basic questions in public finance remain as unanswerable as a Zen kōan, we can only speculate about where we lie on the Morocotas/433 Eros spectrum. How can you plan public finances in a country where you know neither the numerator nor the denominator in the the Debt/GDP ratio?

But are there answers to these questions that lead you to think the unimaginable is true? That a country sitting atop a virtual ocean of oil can nonetheless be insolvent?

There sure are.

22 COMMENTS

  1. From 2003 to 2011 Hugo Chavez “bet the house” on attaining value for Venezuelan oil assets. Like Mussolini raising his chin on the podium in Rome and swearing his undying allegiance to the man with the funny mustache in Berlin, so too did Hugo Chavez. He expelled ExxonMobil, Conoco Philipps and many other experienced oil firms, then raised his chin, waived his arms and put all of his oil chips on Beijing. China is now one of the very few countries that can monetize Venezuelan oil assets. If they now refuse to “invest” in these huge assets, no one will. That’s the real underlying problem here, China says no.

  2. The future price of oil is dicey, the cost of Venezuelan heavy oil extraction is high, and Venezuela’s real GDP isn’t probably very high, especially, vs. its real indebtedness, and the additional indebtedness necessary to develop large amounts of increased oil production. This, and the increasing need to wean the world away from hydrocarbon use due to increasing global warming, plus the continued development of technologies to extract oil from abundant shale/similar deposits at economical cost (the Green River area, in the U. S., for example, contains an estimated amount of oil equivalent to all of the world’s currently estimated reserves combined, but the the technology isn’t currently available to develop it economically).

  3. China is faced with losing a huge sum of money that it has invested in a failed state run by communist idiots. It has the capability to force a regime change by financial manipulation and threats but will it chose to do so? It is more likely to demand big increases in Chinese immigration, direct control of venezuelan oil fields (like in Ecuador), and possibly a port or military base-the obvious imperialist colonization that is so condemned in SA. China is claiming and seizing territory in its own backyard and is unfazed by the disputes it has aroused with its much weaker neighbors, so why hesitate to try to muscle in elsewhere in the world if there is something to gain?

  4. That’s why people has to be taught to discard that blatant populist lie that Venezuela’s inherently a “rich country without need of hard work”

  5. “The current government has demonstrated again and again that it’s just plain not able to manage the transition to higher production levels. For a decade, oil production target after oil production target has been missed.”

    This suggests “incompetence” or “ineptitude”. Of course PDVSA could produce much more. Of course there are still lots of engineers and technical people who know how to pump the heavy black stuff out. Not to mention the hundreds of oil professionals that were kicked out, or a few cheap Gringo expatriate technicians to get their shyt straight in Maracaibo or elsewhere.

    But WHY don’t they do it? Why did they fire the best personnel, the most “competent” ones? Why don’t they hire foreign ‘savoir faire’?

    Because there’s no MONEY in it. Nothing to steal. I’m really tired of hearing about “incompetence”. Venezuela proved it can extract a lot more oil than they do today. They have the know-how. What they don’t have under the criminal Chavista regime is the incentive to do it.

    Maintenance? Investments in oil infrastructure or honest personnel with competitive international salaries?

    ESO NO PAGA.

    What pays is do shady deals with China or Russia, or Cuba and others, give the oil away, and get filthy rich with under-the-table deals in the interim.

    ESO SI PAGA.

    “Incompetence”? Technical “Ineptitude”, yeah, right. CORRUPTION is the real reason, as always in Vzla.

    • Toro disagrees with the results in Vz, but not the public policies that produced them. The enablers construct all kinds of twisted narratives to avoid discussing the actual causes.

      Remember that in every version of leftism, theft is political and must be used to further the “revolution.” [So are your hunger pains.]

  6. First of all, let us posit that there is an inherent cap on oil prices in the range of about $60/barrel. That is the price shale oil extraction. As soon as oil were to get to that price, existing operations in the U.S. and elsewhere can come back on line quickly and make up any deficit in the supply. So, we should disabuse ourselves of the notion that oil will ever go above that cap. Furthermore, there is every reason to believe that oil will continue fluctuate in the $40-45 range for the foreseeable future, and could even go much lower as new energy technologies come on-line.

    Even assuming political and economic stability in Venezuela, a huge investment (tens of billions of dollars) would be required to maintain existing production and to bring new production on line. Will the existing price of oil justify that investment? Probably, yes. But, it will not produce the sort of high-octane profits that gave Venezuela its previous reputation as a “rich country”.

    So long as Venezuela continues with the existing instability and uncertainty, it will not justify the investment and it will continue its economic death spiral. But, even once stability is reestablished, it cannot count on ever being solely dependent on oil, ever again. There just isn’t enough profit in it. Venezuela MUST diversify its economy, if it is to ever become prosperous again. Even Saudi Arabia figured that out decades ago, and took steps to protect themselves.

    Right now, I would say Venezuela IS insolvent, so long as the political conditions prevent substantial foreign capital from entering. That asteroid might be located, but they have not even begun to nudge it into a new orbit.

  7. If during the American Civil War you gave an army of 10.000 men to a general with the talents of a Robert E Lee and another of 20.000 men to a general with the talents of a Nathaniel Banks ( a dunce if there ever was one) which army would you consider militarily more valuable , few would doubt that the former , because what matters in measuring the value of anything is not the brute capacity of its resources but the capacity of those that exploit those resources to maximize their potential worth thru the use of their special expertise ,talent and ability …….same thing with crude reserves , its not just their size that counts but the collective expertize talent and ability of the organization that is entrusted with the exploitation of those oil reserves ……..that’s why Chavez destruction of Pdvsa ( the real one not HIS fake Pdvsa) was so tragic because the kind of organization that was destroyed was pretty nearly irreplaceable ……….!!

    In a way that’s one of the key concepts of professors Haussmans many articles and works, what matters is not just education or lofty principles but the integrated cummulative how-to expertise of organizations , not just the individuals but the organizations because its the organizations which accumulate and integrate the many expertises that are required to do a good credible job in any field ……, moreover where organizations form a mutually supporting web of linked businesses within a territory that really maximizes their productive potential !!

    Now it is inevitable to create conditions for international organizations to do the job of restoring Venezuelas economy in ways that don’t just serve their corporate interests but ALSO the interest of the country and its people , its not as automatic as people assume …..!!

    You cant do it at one go , you have to break down the task into manageable pieces , prioritize what comes first and then second and so on , find or if possible create organizations to do the job and gradually and methodically build from there …….!!

    • Your civil war analogy is spot on except for one important issue. There were no cannon factories in the South and the North has near limitless food and manufacturing capacities. Those 20k men led by an idiot has resources that were unimaginable in the South.

      The oil fields in the Bakkan are difficult as VZ to pull oil from but the gringos have near unlimited technology to find ways to extract it. 60B barrels with current technology.

      The problem is going to be finding a way for VZ to manage their balance sheets and get people to invest their tooling to help them realize their wealth when the socialists simply “acquire” those investments from them at the point of a gun barrel.

      • Sure you need the resources to make things work for you ( the cannon foundries of the north, the large army ) , but if you dont have people who know how to make good use of those resources , and instead have incompetent people handling them there is a good chance that you are going to know failure either indefinitely or for a very long time.

        Alway like making the analogy of a skilled card player being given not so great cards to play with a less skilled opponent who is given very good cards , there is a good chance that the skilled player will beat his opponent even if he doesnt have the best cards….!!

        My dad used to say , ‘las cosas valen segun quien las tiene’ , which stands for the same thing…..!!

    • While Nathaniel Banks was an incompetent general, an example of why political generals are usually not a good idea, he was a self-made man who rose from working as a bobbin boy in a textile mill to Governor of Massachusetts. From an example of the 19th century self-improvement genre: The Bobbin Boy; Or, How Nat Got His Learning. An Example for Youth. By William M. Thayer.

      I suspect that 5,000 or less of Lee’s troops could have beaten 20,000 troops led by Nathaniel Banks. Banks was an utter disaster as a general, from what I recall.

      Improving PDVSA is impossible as long as it is under Chavista control.

      • I never thought to see a discussion of the merits of Nathaniel Banks here, but since it’s come up…

        Banks was not a professional soldier, but neither were many of the other top generals in the war. Both sides brought in many civilians with leadership potential to flesh out the enormous expansion of the armies, and some of them did very well (Nathan Bedford Forrest, for instance, or John Logan). Some were useless or worse (Ben Butler, John Floyd). But many were reasonably useful. Banks falls into the latter class. He was competent military administrator (an often-underestimated virtue), and his record as a field commander was about 50/50.

        He besieged Port Hudson successfully in 1863, lost one battle and won another on the Red River in 1864. He was defeated twice in Virginia in 1862, but in both cases his force was outnumbered two-to-one and fighting Stonewall Jackson.

        That’s a long way from “utter disaster”. Just to be fair.

    • Those 300,878 billion barrels Quico made reference are “proved” reserves using a recovery factor of 20% . One parenthesis here: the 20% recovery rate is nothing crazy taking into account how fast technology is being developed and the fact that these are 35yrs+15yrs+10yrs contracts.The Original Oil in Place (OOP) total is even more vast.
      More importantly, less than 0.4% of those reserves are “developed” reserves (an official PDVSA figure by the way – go to the 2015 PDVSA Annual Report – Page 38 – and you’ll find that only 12,931 billion are “developed reserves” (SPE reserves definition: http://www.spe.org/industry/petroleum-reserves-definitions.php) . This means, basically, that in order to monetise these undeveloped reserves you have to spend and lot of money (…you don’t have) and time (…you lack). The real question here is IF these reserves are going to be developed – not because they aren’t economically-technologically feasible – but because of the impact of burning them will have to the environment and the CO2 emission targets. Oil companies are growing more a more conscious about this and are now self-imposing CO2 cuts/targets. The SEC is also demanding them to make a revision on their financial reports “assuming” the costs of producing CO2 above targets. Do I need to say that Orinoco’s Oil Belt oil (where 95% of those 300 billion barrels are) are extra-heavy and sour (= high CO2 content)? …as the saying goes: “…esto esta mas enredado que pelo en pata e’pollito”.

      • If the crude is sour and heavy (and thus potentially more contaminating) you have to spend money on taking out the metals and sulphur and heavy carbon components be it on an Upgrader right after extraction or as part of the refining process , the cost of investing on such processes are built into the price of those types of crudes so when they come out to market they carry a lower price than that of conventional crudes , thats why the average price of Venezuelan crudes is some 6 to 8 USD below the Opec average…!! this was a standard practice of the Venezuelan oil industry for a great many years …..!!Dont know about now!!

  8. The issue is not the implied value of the oil reserves but the ability of the debtor to manage the risk.

    A hobo with a pair of ratty shirts and a shovel is not a billionaire if they camp out in front of fort Knox.

    Conversely, the oil fields require a special set of skills and technology to be productive. The less productive the PDVSA is with their unrealized assets, the more risk they have.

    Venezuela is a sovereign country and the oil reserves are exkusively theirs to drill as they see fit. The problem is the contracts that were written or bonds issued against the perceived value.

    Again, there is a hobo who owns the door knocked to fort Knox but the gold is now mixed with other material that has zero value. Is the hobo now a billionaire in waiting? Well, not really as the hobo has no way to extract the gold in sufficient manner as to make it to market.

    Commdity futures/trading is a bitch.

  9. The issue posed goes beyond tecnical competence and corruption. Whether Venezuela can sustain an economy based in large part on oil production ultimately depends on the patience of the Venezuelan people. Even if the competency and corruption issues are resolved such that production rises, will the Venezuelan public be willing to defer generous public benefits to allow a sufficient domestic capial base to accumulate. This is particularly difficult in a democracy where competing political parties compete in auctions to attract votes. Do the people of Venezuela have the patience, that is a huge issue.

  10. The recovery in Venezuela depends on the patience and persistence of Venezuelans all over the world. They have demonstrated a larger degree of patience than I would expect from the people of any other country on the planet. Unfortunately this patience has been bestowed upon a government that doesn’t deserve it, and has dug the economic hole in which Venezuela now finds itself.

    I was fortunate enough to live and go to school there. I got to know the people, the culture, and the beauty of the country, and I managed to marry a future Miss Universe before the pageant system could get its claws in her. I have former classmates who are petroleum engineers, surgeons, and highly qualified professionals living abroad, and almost to a woman (and man) they can’t wait to return and be involved with the rebuilding of their beloved Venezuela.

    It’s no coincidence that the petroleum industry in Columbia, and several other countries, has taken off as PDVSA sank. The number of petroleum professionals fired by Chavez after the strike numbered not in the hundreds, but in the thousands! Those experts will return. They can’t wait to return. Some still make frequent trips to Venezuela to volunteer their help because they can’t stand to see what is happening to the country.

    There will be generations of young Chavistas effectively lost to the economy. Parents and grandparents are weighed by the knowledge that some of their younger generation won’t survive the upcoming change. They grew up listening to Hugo tell them that they have every right to the same shoes, the same cars, and the same life as those who studied and worked for years to achieve success. Even with all of the Venezuelan oil, it turns out he lied.

    There will be a purge. The question is one of timing. How long will it be before all of the expat, or exiled, Venezuelans can feel safe returning to rebuild? How quickly will the financial institutions return the billions of dollars that the Chavistas, (Maria Chavez is worth an estimated $4,000,000,000) stole? That’s a hell of a start on rebuilding.

    Can the MUD hold it together, or will it disintegrate due to political ambition?
    Only time will tell.

    I lived there for a few years a few decades ago. But if I got a call saying I needed to go back and help rebuild, I’d be hard pressed to refuse. I miss Venezuela to this day.

  11. […] Last time, I explained it like this: it’s as if you had a small abasto that spent more money than it takes in in sales each month. The abasto can hardly come up with its monthly loan payments, and so it sure feels like it’s broke. But there happens to be an unfeasibly huge amount of wealth in the form of morocotas — old Colonial gold coins — buried in its backyard. […]

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