Of late, Venezuela has had a wretched time of things.

As a rule I attempt to be judgement-free when it comes to evaluating governing systems. For the most part, governments—like economies and cultures—are products of geography. Germany’s proximity to so many competitors makes it focus on organization and quality. America’s territorial insulation and richness enables it to get by with a much smaller, more laissez faire system. China’s regional splits force it to gyrate between central clampdowns and peripheral spin-outs. I try not to criticize or play favorites, and keep my personal preferences to myself.

But then there’s Venezuela.

Venezuela is a country of geopolitical advantages in a region where those are hard to come by. It has oil and agricultural wealth, an educated populace, a commanding position on world trade routes, and easy access to the world’s largest consumer market. It is far from the most advantaged country, but Venezuela had what it needed to thrive…until a reckless, selfish cult took that wealth for itself.

The Venezuelan system isn’t socialist at all. It hasn’t been for a long time. When a socialist government takes over a productive asset, it runs that asset with an eye towards furthering some government goal. Perhaps not competently, but keeping seized assets operational so they can provide this or that input is sort of the point. For at least the past decade when the Venezuelan government has taken over something—say a farm—they instead loot it like a flock of locusts and simply leave it to lie fallow.

This isn’t socialism, or even mismanagement—this is kleptocracy. (Yes yes yes there’s an argument to be made that most socialism-flavored governments concentrate so much decision-making into government hands that such cronyism is a constant danger, but that’s a debate for another time.) Suffice to say, since roughly the middle of the Chavez era in the late 2000s, the only thing socialist about the Venezuelan system has been the propaganda.

Under the misgovernment of President Nicolas Maduro, Venezuela has suffered one of the worst economic depressions in human history—so far we’re at an estimated 50% contraction in GDP and seven-digit annualized inflation growth.

The crisis can be seen, and felt, most acutely in terms of food prices. A Venezuelan earning the official minimum wage would need five months of savings to purchase a single can of olive oil. Private grocery stores struggle with supply issues thanks in large part to corruption in government-controlled supply chains. “Non-essential” items like condoms, diapers, and medicines are all but inaccessible. Venezuelan fuel is now sold just across the border in Colombia to Venezuelans by corrupt government officials who keep the cash.

Venezuela used to have a modern healthcare system, but now basic supplies are so scarce that intensive care units have shut down. Doctors have emigrated. Over 70% of the hospitals that are still open don’t have running water and frequently lose power. An estimated 3.4 million, or 10% of the population, have fled the country, mostly to Colombia and Peru.

Those who stay have begun the process of dying from malnutrition and preventable diseases. The average Venezuelan lost 24 pounds in calendar year 2017. The pace of decline is accelerating. At the time of this writing, the bulk of the capital of Caracas has not had power for a week. No power means no running water means no refineries means no gasoline means no food distribution.

Summed up, Venezuela in 2019 is teetering on the edge of a complete decivilizational event.

Decivilizational. It’s a big word with bigger implications. But first we need to unpack what we’re going to unpack: civilization itself.

Everything we know about human civilization is based on the simple idea of organization. Once a government lays down some basic ground rules like “don’t kill your neighbor” people start doing what people do: raising families, growing food, hammering out widgets. People start trading, so that the farmer doesn’t also have to make flour. This specialization makes us more productive in our chosen fields—be it farming or milling or blacksmithing. This society gets richer and expands. More land, more people, more specialization, more interaction, more internal trade, greater economies of scale.

Eventually we become so specialized and our technology has advanced so much that we become totally incompetent at tasks which used to be essential. Try producing your own electricity or enough food to live on while keeping up your full-time job. What makes it all possible is the idea of continuity: the idea that the safety and security we enjoy today will still be here tomorrow and we can put our lives in the hands of these systems. After all, if you were pretty sure the government was going to collapse tomorrow, you’d probably worry less about whatever work-related minutiae your manager insists is so important and instead focus your time on learning how to grow and can vegetables.

What the Americans have done in the post-World War II era is to vastly expand continuity via the global Order. Instead of specialization and interaction being limited to the internal affairs of individual nations, the Americans imposed security on the global system. Think of Europe, a place where dozens of ethnicities have fought wars with one another for millennia. Yet with the exception of some hiccups in the Western Balkans there hasn’t been a shot fired in anger between armies since May 1945. That’s flat-out unprecedented. Labor hyper-specialization is now the norm, and trade has become so complex entire economic sub-sectors (independent logistics providers, trade negotiators, contract mediation, and warehouse planning consultancies), now exist to facilite it. The civilizational process is reaching for its ultimate, optimal peak.

But “optimal” is not the same thing as “natural.” The Americans deliberately forced the Order into existence to fight the Cold War. The Americans have a deep continuity and large economies of scale without the Order, but the global system is wholly artificial. Making matters worse, the Order does not and cannot maintain itself. Someone must pay the bill to keep it going, and the American right, the American left, and the American center have lost interest and are all arguing for a more constrained American role in the wider world. No one else has the spare economic heft or the large market or the globe-spanning naval capacity to force an Order. Break the global continuity and everything that makes our world work quickly cracks apart.

There are a number of ways down, but they all share something in common: reduced interaction means reduced access means reduced income means fewer economies of scale means less labor specialization means reduced interaction. Shortages force people to look after their own needs directly. The value-added advantages of continuity and labor specialization whither. Everyone becomes less efficient. Less productive. And that means less of everything: not just electronics but electricity, not just automobiles but gasoline, not just fertilizer but food. And it compounds. Electricity shortages gut manufacturing. Food shortages gut the population. Fewer people means less chance of keeping anything that requires specialized labor working. Say, things like the electrical grid or food production.

Whether the country in question is high-tech export-led manufacturer (Germany, South Korea, China), a mid-tech supply chain link (Thailand, Poland, Turkey), a resource exporter (Kuwait, Russia, Morocco), or a major agricultural supplier (Brazil, South Africa, Kazakhstan) the differences are one of scale rather than kind. Lack of continuity means disruption of what we think of as civilization to exist.

Just how vulnerable is everyone? Think of it this way:

While “only” about one-fifth of global foodstuffs are traded internationally, the vast majority of global foodstuffs are produced with industrialized inputs like fertilizers and pesticides. Those inputs on average more than triple yields. Those inputs are largely petroleum-derived and four-fifths of the world’s oil is traded internationally. Unless you live in a country lucky enough to produce enough oil for its own needs and have the ability to process it into agricultural inputs and have the climate and land necessary to grow your own food, all it takes is one small tweak to the physical security of trade routes in the general vicinity of places like the Former Soviet Union or the Persian Gulf to shift you from living in a world of plenty to a world of want.

What would you do—what wouldn’t you do—to get a full belly? To feed your children?

That is what decivilizational means: a cascade of reinforcing breakdowns that do not simply damage, but destroy, the bedrock of what makes the modern world work. And that’s just one example in one sector.

What is going on in Venezuela is horrible by any measure, and in a world of Order Venezuela is the very definition of outlier. But a world of Order is not the natural state of things. Pay attention: Some shade of what the Venezuelans are going through is what many of us will need to deal with. Soon, the only thing that will truly make Venezuela stand apart is that its pain is self-inflicted.

Read Part I and Part II

Geopolitics has two speeds.

The first is glacial. The sort of huge, multi-generational trends that I spend most of my time studying and charting don’t shift easily or quickly. Whether the issue is pushing an army over a mountain range, or attempting to encourage a country full of people to have more children, or finding a substitute for gasoline, change – or at least change that is big – comes slow.

This is part of the power of geopolitics: if the rules change only rarely, it is fairly straightforward to draw trends deep into the future.

Of course, there is that other speed. The forces of geography may be unstoppable and inevitable, but that does not necessarily make their destined results imminent. Political forces don’t simply resist them doggedly, but often pathologically. For a solid example, consider the Cold War: the Soviet economy was never much more than an organized mess, yet from the time Soviet leadership realized it was all hopeless in the early 1970s, it still took another two decades for it all to go to pot. Only a fool would assert the Soviets did nothing of relevance during that time.

Yet leaders resist forces geopolitical at their risk. Pressure builds until the inevitable release. The greater the delay, the greater the pressure, the greater the subsequent explosion. In such moments truly epic forces are unleashed all at once: the Berlin Wall’s fall, the Asian Financial Crisis, the September 11 attacks, the release of Avengers: Endgame.

At such moments, the speed accelerates to lightning and people in my line of work have a heyday. It’s professional vindication, personal validation, and a helluva lot of excitement all at once. We all look for these moments.

Last week I saw something in Venezuela that I knew had to happen eventually. After two decades of mismanagement well past the merely criminal, it appeared the socialist government of Venezuela had finally collapsed under its own incompetence. Forces geopolitical, I thought, had finally gotten their revenge.

Part I and Part II of this series were, to be blunt, my wallowing in the moment.

Aaaaand I jumped the gun.

Please take this newsletter for what it is: part mea culpa, part explanation, and part a look forward at what it means that Venezuelan strongman-president Nicholas Maduro is not quite done making history.

First and most obviously, Maduro is still large and in charge. Initial reports that he had fled the country or slipped in the shower and fell on some bullets were wildly untrue. The Venezuelan military – the only faction in Venezuela that really matters as concerns Maduro’s survivability – remains more-or-less unified and in support of their boss.

Nor has the Venezuelan opposition made meaningful progress. Consolidation around self-declared interim president Juan Guaido appears no more coherent than any of the other failed opposition efforts to close ranks. The only item of substance that has changed from the past 20 years of Chavez-Maduro rule is that nearly every country in the Western Hemisphere has now called for Maduro to step down. There is zero indication that any of these countries, however, is willing to do much more than mouth the words. A military invasion is firmly off the table (and with the Venezuelan capital of Caracas not being a coastal city, any such effort would be, in a word, complicated).

Second, there is one power that is doing a bit more than voice its concerns. Since that power is the United States, best to pay attention. On Jan 28 the Americans levied blanket sanctions on the Venezuelan state oil firm, PDVSA. While the United States will still allow Venezuela to sell crude to American entities, Washington will not allow any cash from the sales to flow back to Caracas. In addition, the Americans froze the assets of Citgo – a PDVSA subsidiary in the United States that’s primarily a refiner.

Formally, about 32% of Venezuela’s crude oil exports end up in the United States, but this vastly understates how dependent Venezuela is upon the American market for a pair of reasons that can only be the normal state of operation in a country as broken as Venezuela has become.

Of the seven-tenths of Venezuela’s oil exports that do not flow to the United States, the majority – technically –goes to China and Russia. However, Venezuela gets no cash from these “sales.” Instead, the oil is accepted as payment-in-kind to whittle down the billions of dollars of loans those two countries have extended to Venezuela over the years. Nearly all this crude oil is then sold on to the American market where the Chinese and Russian intermediaries are paid in cash.

Bottom line 1: the direct sales to the United States are Venezuela’s primary source of income. Without them, Venezuela’s humanitarian/economic/political catastrophe – a mess that has already resulted in widespread famine – will become truly apocalyptic.

Bottom line 2: It is unclear if the new U.S. sanctions will touch these flows as well. If they do, the Chinese and Russians will be left holding gobs of crude they – and nearly anyone else on the planet – lack the capacity to refine. With no one able to take Venezuelan crude in appreciable volumes, PDVSA will have no choice but to shut down nearly all operations and experience a massive skilled labor bleed. That would add – at minimum – two years to any theoretical future recovery.

Third, this now has reverberations throughout North America.

Most American oil production is now shale crude, a specific sort of crude oil that has extraordinarily low concentrations of contaminants such as sulfur or mercury and has the consistency of nail polish remover. That makes it almost hilariously easy to refine into finished products.

Or that’s how it should work anyway.

Starting in the late 1970s the American oil industry believed that the global stream of crude oil was becoming heavier and more sour, so they invested bajillions of dollars in upgrading the entire network so the Americans could import crap crude no one else wanted (big discount!) and refine it into top-of-the-line products for sale at home and abroad (big margins on the upgrade and arbitrage).

One of those crappy crude grades U.S. refiners sought out was Venezuelan crude which is as heavy and sour as U.S. shale crude is light and sweet. Buy low, sell high. Life was good.

Recent events have made life less good.

American shale crude is now being produced so cheaply – on average full-cycle costs are now below $40 a barrel – it is crowding out America’s domestic low-quality crude production. The American crude stream is becoming increasingly light and sweet to the point American refineries cannot easily process it. New refineries are being built and older ones expanded and/or dumbed down, but that’s an expensive and time-consuming process and refiners needed to be sure this whole shale thing would last before really buying in. Despite being on the very cusp of technical oil independence, of late the United States energy complex has become more dependent upon imported crude in order to gain access the specific heavy/light/sour/sweet mix that works best for the refining complex while the excess shale crude is exported.

The three imported grades that figure most prominently are collapsing.

The first is Mexican. While the mainstay of U.S. refiners for decades, the general collapse of oil production in Mexico has all but eliminated Mexican crude oil from the American diet. There was hope with the energy reforms of the outgoing administration that this would be reversed, but freshman Mexican President Andrés Manuel López Obrador has made it clear those reforms will at best be slow walked. Don’t expect any fresh flows of Mexican crude in the U.S. market until at least 2030.

The second crude grade U.S. refineries like comes from the Canadian province of Alberta. Dealing with Albertan tar sands is sloppy, expensive work – requiring a cost point in excess of $70 to break even. Today U.S. crude is selling for $55.

It gets worse for the Albertans. Alberta is landlocked and has wildly insufficient transport options to get its crude into the U.S. market. Between that and a general political paralysis in Ottawa on energy issues that (almost) makes Washington look functional, Albertan crudes are now regularly selling at a $30 or higher discount to American crudes. The Albertan provincial government recently ordered reduced output in an attempt to level out price problems. (The political reverberations of this in Canada will be extreme, but that’s a newsletter for another day.)

The final crude grade U.S. refineries prefer is, of course, Venezuelan crude. Based on how the Trump administration handles the new sanctions regime, Venezuelan crude may vanish from the American market completely.

In the short term this is not looking very good as it will force U.S. refiners far abroad to search for crap crude. The Middle East is probably the only region that can provide the volumes the U.S. needs. Ironically, on specs alone, Iranian and Russian crude might actually look pretty good.

In the longer term this is not looking very good for everyone outside of the United States. Events in Venezuela (and Canada and Mexico) are forcing U.S. refineries to change their slow-walk shifts from preferring crap crude to preferring shale crude into more of a panicked sprint. Once completed – give it two to four years – the United States, beyond simply having no interest in protecting oil flows out of the Persian Gulf, will have no interest in protecting oil flows from anywhere.

The United States maintains the only global navy and it has been the American commitment of that navy to global commerce and security that enables a global oil market to exist at all. No one with possible exceptions of France and Japan will have the military capability to reach the Persian Gulf in force at all. The ultimate result will be oil shocks of the sort the world hasn’t experienced since World War II… except in the United States which will be a sequestered market.

It is always dangerous writing about unfolding events. With that in mind, Part I is just about where we are now. Part II is about the future.

Assuming for the moment that Nicholas Maduro has indeed fallen from power and his regime is crumbling, everything that happens in the next few weeks are details. Venezuela’s constitutional system of government has been suspended to shattered since at least the mid-2000s, and any new government will literally be making things up as it goes along. Even if the new government is truly representative of the popular will and makes no mistakes whatsoever, Venezuela’s mid-term future is for chaos and degradation. The damage of the Chavez/Maduro years has simply been too deep-rooted and catastrophic for this story to unfold any other way.

Four main problems:

First, food. Venezuela used to be a significant food exporter, but a combination of outright theft, corruption, supply chain breakdown and state expropriation of private assets that resulted in those assets lying fallow, has reduced the country to importing roughly three-quarters of its foodstuffs. As other economic sectors decayed the ability of anyone to afford what food is available has shriveled and starvation set in.

In the best-case scenario with perfect management, political unity and deep international assistance, bringing Venezuela back to food-neutral will take three years. Venezuela is in the tropics, and when tropical lands lie follow they tend to go riotous pretty quickly. Add in the infamous low fertility of tropical soils and the Venezuelans will need to reform all the supply chains for fertilizers and pesticides and such just to get things started. That all takes time. And money.

In the meantime, the 30-million(ish) people who remain in Venezuela will either continue to starve or live on handouts. Either way, the political system will remain fragile and so very, very desperate for years to come.

Second is oil – both a problem in its own right and perhaps a partial solution to the money issue. The money part is obvious – oil brings in income that could be used to regenerate Venezuela’s agricultural sector. But neither is this quick or easy.

Venezuelan crude is some of the most expensive to produce in the world, and fetches some of the lowest prices. It is high in sulfur and thicker than toothpaste. Only highly-specialized technicians can coax it out of the ground, and many Venezuelan crudes require specialized equipment just to get it to port. There are also very few countries that can process it. Add in economic chaos and a whiff of political desperation and there will not be a long line of companies wanting to pour large volumes of cash into the country in the near-term. Adding as little as a million barrels per day of new output is likely at least a five-year project. Venezuela currently produces only about 1.6 million bpd, down from 3.4 million bpd when Chavez took power.

(Side topic: When the Saudi government saw Chavez angling for power, they did everything they could to encourage him, hoping his economic populism would wreck the country’s oil output. They picked the right horse.)

Making matters worse, technically – legally – Venezuela owes any new production to Chinese and Russian entities who have provided the Chavez and Maduro governments with billions of dollars of loans. Loans that were to be repaid with crude oil.

Third, Venezuela in the best of times is a very shooty place. The political culture of the country has always been shaped by extreme economic inequality, which has generated crime and violence rates as bad as Colombia’s while Colombia was in a cocaine-fueled civil war. The oil largess succeeded in pacifying large parts of the population, in essence buying off the poor with absolutely massive subsidies on energy products and food.

It isn’t so much that any economic rectification effort must abandon those subsidies, but instead that the country cannot afford them now. Expect broadscale unrest to be the norm for years.

And that’s hardly the worst of it. Chavez’s first attempted rise to power took the form of a coup. After becoming president more conventionally, he later survived a coup. It all made him a bit nervous. In order to establish a force that would be loyal to him personally, he flat out bribed a few tens of thousands of neighborhood thugs to be his unofficial militia and equipped them with Russian-provided AK47s. They are now unmoored and unpaid – but not unarmed. Expect them to take whatever they damn well please.

Finally, Venezuela had no real release valves. If Maduro is truly gone, there is no one left to blame except whatever poor bastard tries to pick up the pieces and lead the country to a better future. There is no food-exporting country next-door that Venezuelans could theoretically migrate to. (Brazil produces food, but the trackless Amazon is between Venezuela and Brazil’s agricultural lands). The only country Venezuela shares a land border with that folks can walk to is Colombia, and the Colombians have already taken in over two million Venezuelan refugees.

(Another side topic: Most Latin American countries have enacted restrictions on Venezuela migration to prevent swarms from coming. Colombia has not. During the Colombian Civil War the Venezuelans accepted droves of Colombian refugees. The Colombians feel it is their duty to return the favor. Despite all the bad blood between recent governments on both sides, along with the general descent into nationalistic-populism around the world, it is nice to see the two powers not being complete jerks to one another.)

Whether Venezuelan refugees being largely stuck in-country is good or horrid of course depends upon what you think of people who are refugees due to internal political mismanagement, but the bottom line is that there is nowhere for Venezuelans to go.

And there won’t be for years.

To read Part II, click here

So…there might have just been a military coup in Venezuela.

Not hard to see the justification. The economic policies of the now-deceased Hugo Chavez largely destroyed what used to be the breadbasket of the northern half of South America as one as the most sophisticated energy firms of the developing world: PDVSA. Under Chavez’s successor, current(?) President Nicholas Maduro, the degradation has accelerated. Foreign airlines no longer serve the market and most foreign contractors across all sectors have left due to non-payment, and the destruction of the country’s economic cores combined with a level of graft that would even make Russian oligarchs blush (briefly) has become so entrenched the country is in the early stages of a civilizationally-crushing famine. Something like one-sixth of the population has already fled and at least two-thirds of those who remain are malnourished. The Maduro government has largely abrogated the country’s constitution, run sham elections and largely kept the country’s opposition parties out of the halls of power.

Put simply, the place is ready to blow. And it just might be blowing.

Last week a shadow assembly of opposition groups labelled Maduro a usurper. U.S. Vice President Mike Pence on Feb 22 formally recognized that assertion.

On Jan 21* there was a definite coup attempt by the National Guard. It was stopped and the government arrested the leadership.

On Jan 23 opposition leader – Juan Guiado – unilaterally declared himself the interim Venezuelan president. Shortly thereafter, U.S. President Donald Trump formally recognized Guiado’s claim to power.

Perhaps most importantly, while the military isn’t saying anything, riot police are guarding – not dispersing – anti-government protestors. Where the military comes down on this will ultimately prove whether this is a true change, or just the start of another massacre.

I cannot overstate how something like this has been a long time coming. Between Chavez and Maduro the Venezuelan system – politically, economically, and culturally – has degraded from being one of Latin America’s most successful and vibrant to among its most dysfunctional. But a coup today hardly means the country is through the worst.

Far from it, this is where things get very, very bad.

*I wrote this in three minutes flat, so I got the date wrong and listed as Feb 21 originally.