Pirates of the Caribbean: Venezuelan Oil Under Attack

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Pirates haven't occupied our headlines in quite some time now that major shipping routes go well past Somalia, even as minor attacks on shipping in dangerous parts of the world like Indonesia and Iran make for difficult transfers of cargo.  While the Caribbean hasn't been afflicted by piracy since Thomas Jefferson launched naval patrols to secure US interests in the region back in 1803, a new team of corsairs and thieves have descended upon the tropical region in Venezuela seeking to steal supplies of the nation's oil.  The oil industry accounts for the majority of the Venezuelan economy, while also affecting the broader western hemisphere that relies on Venezuelan crude directly or indirectly.  What do new attacks on Venezuelan oil mean for investors who hold crude in their portfolio?

A Long Troubled Past

For as long as ships have traveled through the Caribbean, pirates have preyed on slow or unguarded vessels.  The first pirates came not as a collection of free-wheeling anarchists but as orderly privateers who had commissions from England or Holland to seize Spanish ships laden with gold and silver.  The huge treasure galleons soon became too irresistible for thieves to wait on letters of mark, however, leading to pirates of all nations and interests to attack shipping lanes and come away with whatever their guns could manage.  Indeed, not all pirates went for gold: mercury shipments destined to arrive in the silver mines of Peru had great re-sale value as medicine in colonial America, as mercury cured symptoms of pox, although not the disease itself.  Historians remember the 1700s as the golden age of piracy, when famous freebooters like Edward Teach (better known as Blackbeard) blockaded entire ports to seize cargo.  Privateering re-emerged in the Caribbean during the Civil War, when the Union offered prize money to any ship of any nationality who captured a Confederate blockade running smuggler ship seeking to sell valuable cotton in overseas markets.  With the end of the Civil War and the enforcement of the Monroe Doctrine through much of Central and South America, however, piracy died out on the large-scale.  On the small scale, however, it continues to this day, as Venezuela has learned.

Venezuelan Lifeblood

Few nations on Earth rely on one product for their economy quite like Venezuela.  Even Saudi Arabia or Qatar have diversified their economies further than Venezuela, which relies on petroleum of one form or another for 95% of their exports.  Venezuela's obligations to OPEC and famously socialist invective have earned them the status of rivals to the United States -- president Hugo Chavez famously offered Edward Snowden amnesty in Venezuela -- despite the fact that America purchases two out of every five barrels of oil pulled from beneath Venezuelan soil.  The fall in oil prices hit Venezuela particularly hard, especially since key OPEC "allies" refused to curtail production in order to inflate prices for crude.  The economic slowdown resulted in a wave of crime as the unemployed poor sought any available option for money: Venezuela's murder rate now stands second only to Honduras for worst in the entire world.  Such crime has hit the biggest employer in town, the oil industry, particularly hard.

To Steal From Thieves

Much of Venezuela's petroleum exports need to flow through Lake Maracaibo, an inlet that connects the major population centers of Ciudad Ojeda and Santa Rita to the Caribbean Sea and Atlantic Ocean, about the size of the Great Salt Lake in Utah.  This lake connects the Venezuelan pipelines with the exporters, making it a pivotal center for the state-owned PDVSA.  PDVSA sits on the largest reserves in the entire world at nearly 300 billion barrels, representing more value than the United States' GDP and enough oil to power the entire world for ten years.  This source of fantastic wealth in a nation struggling to reach prosperity means that PDVSA has been hit hard at Lake Maracaibo, where pirates in speed boats travel to the rigs or to the refineries in order to steal crude and materials.  The most high-profile attack took place in March, when pirates stole the copper cables and tapped into about twenty-six thousand barrels of oil (well over a million dollars' worth) for re-sale on the black market.  There's ample suspicion that many of these pirates work for PDVSA itself, members of the 150,000-strong workforce, since they possess the knowledge of unguarded areas and know how to transport and fence the crude.  Police report that dozens of thieves can get in and out of the poorly-monitored facilities each day, stealing everything from metal scrap to entire barrels of petroleum.  Due to state secrecy, there's little way to know the extent of the thefts, with the Venezuelan Oil Ministry categorizing the piracy trend as "high frequency."  Given that the excessively-paranoid state (who famously accused George W. Bush of poisoning president Chavez) issued reports that these pirates committed political sabotage in order to undermine the national government, it's clear that the Venezuelan authorities have yet to take the necessary precautions to truly ensure the security of their 3-million-barrel-per-day economy.

Takeaways: Supply Up In Smoke

Oil piracy and theft represents a very real problem not only to Venezuela but also to OPEC nations like Mexico and Nigeria that struggle with crime and corruption.  Even a large pirate attack, such as the one that claimed 26,000 barrels from the Maracaibo refinery, will do little to dint the global supply of crude.  However, fears over supply shortages do just as much to ratchet up the price of crude as supply shortages themselves.  As oil turns the corner from a dreadful 2014 into a recovering 2015, a portfolio with a good quantity of petroleum can capitalize on piracy fears in the short term.  Selling high after such reports of oil piracy usually allows you to buy low within a few days or weeks, furthermore, as concerns about security become old news.

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