Venezuelan President Nicolás Maduro just told the world that the bogeyman known as OPEC is as dead as black and white television. Maduro verified OPEC’s death by announcing plans for a Venezuelan cryptocurrency called the Petro.
This is a fascinating development because Venezuela was one of the founding members of the Organization of Petroleum Exporting Countries (OPEC) back in 1960. Yet Maduro is now promoting an alternative oil-marketing mechanism that threatens to undermine the entire OPEC structure.
OPEC is designed as a cartel that is intended to dominate the market by controlling the price of oil. Maduro is promoting a technology; cryptocurrency, that would enable anybody including Venezuela’s government to circumvent that cartel’s market domination.
Proof that OPEC is Irrelevant
To succeed a cartel needs to contain the biggest players in the market. The available data indicates that several of the biggest oil producers are absent from OPEC’s membership.
The best way to understand OPEC’s futility is to examine these two lists.
Active OPEC members 2018
- Equatorial Guinea
- Saudi Arabia
- United Arab Emirates
Top Ten Oil Producers 2017 according to The Daily Record
- Saudi Arabia
- United States
- People’s Republic of China
- United Arab Emirates
Seven of the world’s top ten oil producers are not members of OPEC. The second, third and fourth largest oil producers (the USA, China, and the Russian Federation) are not OPEC members. To make matters worse for OPEC, the International Energy Agency (IEA) thinks the United States is poised to overtake Saudi Arabia as the world’s top oil producer in 2018, CNBC reported.
If this data is correct, most of the world’s oil is outside of OPEC’s control; which makes the organization completely irrelevant. The days when OPEC had the power to raise oil prices and create gas lines in the United States are history. All the USA or Russia would have to do to counter any OPEC price increase is to start dumping oil on the market.
Can the Petro Save Venezuela from Maduro?
It is obvious that Maduro and his advisors understand that OPEC can no longer help them. That is why they are trying to create another marketing channel for their oil in the form of the Petro.
The Petro is described as a “cryptocurrency backed by reserves of Venezuelan wealth – of gold, oil, gas and diamonds.” The hope is to offer an alternative to Venezuela’s worthless currency the Bolivar and provide means of selling oil and borrowing money.
Each Petro is supposed to be backed by one barrel of oil so it would theoretically have been worth around $67.20 (0.06473958 Ethereum (ETH)) on 19 January 2018. The Oil Price gave OPEC crude a $67.20 barrel price on 19 January 2018. Note: some people disagree with this claim Investopedia staff writer David Floyd thinks the Petro is really backed by nothing. See his 16 January article for a good overview of the Petro.
Venezuela needs every cent it can get, economists predict that the rate of hyperinflation in the nation will reach 30,000% in 2018, The Miami Herald reported. The average income in the country was down to $2.46 (0.00233332 ETH) in early January and Venezuelans’ buying power might drop by 75% in just two months.
“The Venezuelan economy is locked in a death spiral,” Steve Hanke; a professor of applied economics at Johns Hopkins University, told The Herald. “Adopting the U.S. dollar is the only guaranteed way to stop this.”
Since an egomaniacal Marxist despot and anti-American bigot like Maduro would never adopt the US dollar cryptocurrency is a good alternative. It is already working in Venezuela where many families are eating because they can make $500 (0.4745281 ETH or 0.4283022 BTC) a month by mining Bitcoin (BTC).
Maduro’s Bad Economics will doom the Petro
The Petro is probably doomed to failure by Maduro’s very questionable economics. The whole project seems to be based on a false and dangerous notion.
The Petro “won’t be defined by market speculation, which often provokes large up-and-down fluctuations,” Maduro propagandist David Jaramillo said. “The Petro’s price will be related to the international price of gold, gas, oil, and diamonds. This is what the digital currency investment community has been craving for a long time.”
This is nonsense because the prices of commodities like gold, oil, and diamonds are only based on market speculation. The Petro’s value will be based on commodity prices, so it will be far more vulnerable to market speculation than a traditional fiat currency like the Bolivar.
Cynics would note that controlling Petro mining would enable Maduro and his cronies to make large amounts of money by speculating in the cryptocurrency. So the Petro might be good for Maduro’s bank account but it will be bad for Venezuela.
Marxist Maduro is trying to create a New Speculative Market in Oil
Maduro is trying to create a new speculative market in oil and other natural resources. The self-proclaimed Marxist is proving that he is a very good capitalist.
It is also clear that Maduro and his advisors understand how the market works; because they are planning to sell the Petro at a deep discount, Al Jazeera reported. Unverified documents “leaked” to Reuters indicate that the Petro will be sold to investors at a 60% discount in a private offering.
The Petro offering is supposed to be worth $2.3 billion (218.156 million ETH) according to Reuters. It sounds as if Maduro trying to create a means of selling oil at a discount and an oil futures market through cryptocurrency.
How Maduro Plans to use the Petro to rip off Investors and the Venezuelan people
The whole market sounds purely speculative and designed to generate profits for insiders like Maduro and his advisors. They will laugh all the way to the bank while investors and the Venezuelan people get ripped off.
If Maduro and company can sell $2.3 billion worth of Petros at a 60% discount they would rake in $1.38 billion (130.894 million ETH) in pure profit. The Petro sounds like a classic pump and dump scam.
What’s worse is that most of that money might be in widely-accepted cryptocurrency like Bitcoin or Ethereum. That means Maduro and his friends will be able to walk away with large amounts of untraceable and easy to hide altcoins. It sounds like a great deal for a tyrant who understands that he will soon be driven out of the country.
US Treasury Admits that Petro is a Pump and Dump Scam
A better deal for Venezuelans would be to adopt Ethereum (ETH) or Bitcoin BTC) as the national currency and the US Dollar or the Euro as the official paper currency. That, of course, would be tough because Maduro would need real money to buy those currencies.
One organization that is not amused by Maduro’s plans is the United States Treasury Department. To its credit the Treasury is warning investors to stay far away from Maduro’s pump and dump scheme, The Bitcoinist reported.
“The Petro digital currency would appear to be an extension of credit to the Venezuelan government (and) could, therefore, expose US persons to legal risk,” a U.S. Treasury press release stated. “(It) is another attempt to prop up the Maduro regime, while further looting the resources of the Venezuelan people.”
OPEC is Dead Get Used to It
So yes, OPEC really is dead, if it was not Maduro would not be organizing a pump and dump scam to raise cash. Nor would Saudi Arabia be considering an IPO of its national oil company Aramco if it OPEC was working.
The Kingdom of Saudi Arabia is considering an IPO in order to raise cash and create an alternative to OPEC. Reuters reported that the Aramco IPO might occur in the second half of 2018.
Investors need to stop paying attention to OPEC because it is dead. Instead they need to start watching the moves of governments, like those in Saudi Arabia and Venezuela. It is factors like the Petro and Aramco IPO that will help set the price of oil in the future.
Disclaimer: This commentary is intended as food for thought, not as financial or investment advice!! Please, folks, do your own research and thinking and make up your minds.