Moneybeat: The Venezuela question

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MARY REICHARD, HOST: Coming up next on The World and Everything in It: The Monday Moneybeat.

NICK EICHER, HOST: It’s time now to talk business, markets and the economy with financial analyst and advisor David Bahnsen. David heads up the wealth management firm the Bahnsen Group, and although in an airport, he is here now. Good morning to you.

DAVID BAHNSEN: Well, good morning, Nick, good to be with you.

EICHER: Well, David, obviously major news over the weekend with the capture of Venezuelan President Nicolas Maduro and his wife now facing charges in the United States. You heard what we said earlier. On the legal side when Maduro faces justice, but from an economic standpoint, David, talk a bit about how you see the future.

I mean, Venezuela is an OPEC plus country. It’s an energy producer. How do you see things?

BAHNSEN: Well, from an economic standpoint, the big issue is going to be oil obviously, and you highlight the fact that they’re a member of OPEC, plus the president stated on Saturday that he felt that they had been non productive in terms of global oil output.

U.S. has interest there. On the ground, there are several major integrated oil companies that have a large drilling presence, and the President referenced them, coming in and building out the infrastructure to bring more global supply to the market.

Geopolitically, the major issue here is that Venezuela is a provider of both oil and gas to China, and I believe that that has a lot to do with this behind the scenes, in terms of further strengthening us Western hemispheric presence, and isolating China from other allies in the Western Hemisphere when it comes to global energy markets.

So there’s a lot that will play out in the days ahead. Obviously, there’s a legal, geopolitical, you know, military story here, but my probably most important insight would be on the economic side, and that’s going to be what it does to commodity prices and overall oil supply.

EICHER: Right, well David, we played audio earlier in the program. You heard all of that over the weekend, the President and his national security team explaining what happened the Secretary of State, who now has an even bigger portfolio for himself, the Secretary of War, the Chairman of the Joint Chiefs.

How did all the messaging strike you? I mean, I do wonder about the effect on markets in the long term, and I wonder whether the entire message was communicated clearly and in a restrained way, or whether it might have raised some new questions that might unnerve the markets.

BAHNSEN: I think that Secretary Rubio was most comforting in reinforcing this as a law enforcement action. Everything he said was factually correct. Maduro is a criminal. He has been under US indictment through several administrations.

I think that the concern to the markets would be if we were getting ready to go on a kind of wild west binge of interventions, even if in all contained in the Western Hemisphere, and they did a good job at portraying this for a very specific and strategic purpose.

Look, Venezuela’s relevance to U.S. economic interest is pretty much limited to oil supply. That’s different than what the geopolitical interests are and their role as a narco terrorist and some of these other issues, they get a little bit outside of my lane. But I thought that the administration did a good job messaging what their intent was here.

Obviously, the mission itself was executed very well, and now we wait and see what the aftermath is.

That’s the point I’d bring up, that I am a lot more forgiving and supportive of certain American foreign adventurism than some of my friends are. But that is largely dependent. The US response to these things is largely dependent on the aftermath, how we do, and so you could cherry pick some of the language, like we’re going to go run Venezuela. Now you mentioned Secretary Rubio having a larger portfolio in addition to running the State Department, National Security Advisor, the president of United States more or less implied that he’s now going to run Venezuela for a little bit.

So yeah, I think markets are going to want to see if we handle the exit as efficiently as we handle this operation, then that will be good for markets.

EICHER: David: One long-running issue here, of course is the legacy of assets nationalized under regime of Hugo Chávez—oil infrastructure now decades old, originally built with capital from American companies.

Could you talk about the economic challenge of restoring productivity to 20-year-old assets that companies haven’t fully controlled and haven’t been able to invest in?

BAHNSEN: Yeah, well, in some cases, it’s older than 20 year old assets.

And so, you know, look, I have full disclosure. We’re a significant shareholder in Chevron, and Chevron is the largest player in this as far as US based companies, partially because of their acquisition of the heck. Corporation, which also had significant contracts there.

And so when you’re dealing with these public private partnerships, which I am very opposed to, when it’s the US government with private companies, but it gets even crazier when it’s U.S. private companies with other public partnership.

And in this case, you have a nationalized oil industry in Venezuela that had various joint ventures with companies like Exxon and Chevron and Hess and so it’s very difficult to get the right capital expenditures when you don’t own the asset and you don’t have control over the productivity out of the asset.

So what the President of the United States very firmly implied in his press conference on Saturday is that the U.S. companies were now going to go in and they were going to spend the money for infrastructure improvement, and then they were going to get paid back from the productivity.

So the U.S. sort of putting its military protection around a private company doing a private activity, versus before the dysfunction, and in a lot of cases, the corruption of the Venezuelan government was distorting that you could argue, why would U.S. companies want to get in bed with such a situation to begin with?

I think that’s a very legitimate issue, and in many countries around the world, they haven’t.

But South America is a little different than some of the Middle Eastern autocracies, because some of the South American countries have had good leadership for a period of time, and then there’s a takeover or revolution, and then you end up with a bad country, but the assets still sit there.

So Venezuela has been very temperamental, very unpredictable for a long time, and unfortunately, this is the legacy of Chavez.

And I’d like to point this out by the way, to American faculty-lounge professors, and I’d like to point this out to the new mayor of New York City, those “collectivist” presences in South America have not done well for their people.

EICHER: Looking ahead, and acknowledging how many unknowns remain, I wonder about a best-case scenario: if everything goes right, could Venezuela re-emerge as a meaningful player in global oil markets—and would that materially change the broader energy picture?

BAHNSEN: Well, when you say if it all goes as well as it possibly could, then yes, there’s a great impact, but nothing goes as well as it possibly could, so there probably will be hiccups and so forth.

But I think at this point, Nick, I’m a little afraid to answer prematurely, because of what we don’t know about succession, about potential uprisings, what kind of you know, push back to U.S. presence there will be.

And let’s not forget that if we just had a magic wand and could take over oil production in foreign countries tomorrow, it doesn’t change the fact that there’s questions about the demand side of the oil equilibrium, right? We’re dealing with a supply and demand equation.

So you did see oil prices come down last year. The President would like to keep them down, and this is one way that US producers can maintain profits at the same level of production, even with low oil prices, is expand places they’re able to produce.

And so there was all this conversation when the US went to Iraq over 20 years ago about where there was and wasn’t an oil motive. And a lot of that proved to be a lot more bark than bite.

President Trump on Saturday, flat out said it that we intend to go in, and we would tend to make money on the oil down there.

So I think that’s a factor. And then, as I mentioned before, deterrent to China. You basically trying to keep oil and gas out from the Western Hemisphere being sold to China. There’s that leverage factor as well.

Those are the economic angles I’m focused on now.

EICHER: All right—David Bahnsen, founder, managing partner, and chief investment officer of The Bahnsen Group. Be sure and visit DividendCafe.com to read David’s big annual white paper on the economy. A look back and a look forward. It’s coming Friday, and we’ll talk more about it next week. David, safe travels!

BAHNSEN: Thanks so much Nick.

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