Donald Trump’s Venezuela Oil Deal and Concerns About Bonds

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0:31From the opinion pages of the Wall Street Journal, this is Potomac Watch. Donald Trump's Venezuela oil deal comes into clearer focus as Energy Secretary Chris Wright defends it in Caracas. What are we learning about the deal and what does it mean for American policy in Latin America? I'm Paul Gigo, and I'm here with Marianna Stasia O 'Grady and Joe Sternberg. Let's start with the Venezuela oil deal that Donald Trump announced last weekend. And let's listen to Chris Wright, the Trump administration energy secretary, on a visit to Venezuela this week. What this deal is to partner the United States with the development of oil and gas resources in Venezuela.

1:17It's not a displacement or a replacement of private companies. Business drives progress. Business will drive the growth of oil and gas production in Venezuela. But the United States involvement both benefits the taxpayers of the United States with discounted oil and enormous reserves. But the United States government will not be the operator or producer of those reserves. So it's actually not even a deal between the U.S. government, the Venezuelan government. It's a deal between the United States government and a Venezuelan company to help develop the resources. All right, Mary, let's break that down a bit.

1:49But this isn't a deal, Wright says, between the U.S. government and the Venezuelan government. It's a deal with a private businessman in Venezuela, Alejandro Betancourt. Tell us kind of what the terms are as we know them with Betancourt. I want to elaborate a little bit more on this role of the Venezuelan government here. One thing to focus on, Paul, is what you said, as we know them, because there's a lot we don't know. There's been a lot of hype, but there hasn't been a lot of detail. But it's important to divide these business deals and separate them. So one, you have international oil companies like Chevron going to Venezuela and upping the amount of investment they say they're going to put in the country.

2:38Chevron says it's going to put in$7 billion over five years. But I would stress that what it got out of this latest arrangement that the White House helped it get is no bid contracts, which the terms of the deal are completely secret. So we've had seven months of Venezuelan government saying, come on down, invest in Venezuela. And nobody's basically, Chevron's done a little bit, but nothing's really happened. Now, all of a sudden, Chevron says, yes, we're going to dump all this money in there. But it's a no bid contract. We're getting some oil fields. And the terms are a secret. Apart from that is the U.S.

3:21relationship with Alejandro Betancourt. And he has a company called Blue Energy. North American Blue Energy Partners. Right. And in this particular deal, the U.S. is going to get 20 percent of the oil that NAVEP brings up at cost. And it's going to have a 35 percent equity stake in NAVEP. But what we don't know is who is going to finance this. The speculation is that the U.S. is going to give loan guarantees to NAVEP. So when Nevek goes to the bank to borrow, it's going to be able to say the Pentagon is guaranteeing this loan. So that's the other leg of this investment in oil in Venezuela. Yeah, the Betancourt ties, Mary, to the regime in Venezuela of Delce Rodriguez are very crucial here.

4:17The reason the government, and this is where the government-U.S. relationship comes in, it's not a direct relationship between the Trump administration and Delce Rodriguez and the government in Caracas. But it is nonetheless a crucial relationship because the regime grants the rights to drill in areas with 65 barrels of oil and estimated reserves. So he gets preferential treatment and then we in the U.S. government gets 20 percent preference for 20 percent of whatever production that is. That's in essence a three way business partnership, is it not? It is. And I think this is the reason why so many people are upset about what Trump is doing in Venezuela, because the Delci Rodriguez government, which is a dictatorship, has a long history of corruption.

5:13I mean, really gross, rampant corruption. I mean, they basically pillaged the whole country. And now through Alejandro Bencourt, we're going into business with Delce Rodriguez. And this was, you know, there's a funny sign being posted in Spanish going around the web that says it was to take away the Chavistas and leave the oil. But you're taking away the oil and leaving the Chavistas. Yeah, but the Chivistas, just for people who don't follow this closely, being the term for the ruling party going back to the Chavez revolution. And Delcio Rodriguez was the underling of Nicolas Maduro, who the U.S.

5:59military captured in January. And now the president of the United States says, well, Delce Rodriguez is fine. She's great. We can deal with her. But below Maduro and Rodriguez, it's still the same people in charge, right? It's the same people in charge. And Trump was saying the other day, oh, look at all the political prisoners they've let go. But there's still more than 300 political prisoners. And one of the key elements to the intervention that occurred in January, where Nicolas Maduro was removed, was to hold elections in the country. And elections are not just for the sake of choosing a different leader, but the most popular leader whose party won in 2024, that's Maria Corina Machado, also wants to create a rule of law in Venezuela, institutional frameworks, transparency, all the things that this deal is not.

6:56That's what Maria Corina Machado would do if she was able to go back and stand for an election. So far, there's been no progress made towards actually having an election. And I think from the point of view of the opposition in Venezuela, the suspicion is that this will make that even longer, make it harder to do that because now the U.S. administration wants to keep on the good side of Delce Rodriguez. Is that a reasonable fear? For sure. I mean, I think what Chris Wright was just saying was, oh, this is a very pro-business arrangement. Well, this is a very pro-dictatorship arrangement. And of course, Delce Rodriguez is interested in this.

7:41She wants the money that's flowing from the oil exports. Let's remember that the reason why Maduro was in trouble right before we took him out was that the U.S. had sanctioned all the oil shipments, so they weren't able to export oil. Now she's able to export oil. She's getting dollars. What's not to like? She gets, you know, all of the upside and she doesn't have to do anything else, take them toward a democracy. When they say that they're making progress because they have the head of the National Assembly, who is the brother of Delce Rodriguez, talking in dialogue with the former head of the National Assembly from 2015, which was the last legitimate election, he's talking to them.

8:25He's been dialoguing with people for 15 to 20 years. So that's no progress. That's status quo with the dictatorship. All right, we're going to take a break. And when we come back, we'll have more on the American oil deal with Venezuela when we come back. If you're an RIA, Schwab Advisor Services is the Watson to your homes. Smart, dependable, always has your back. With all the wealth services, technology and support your firm needs, the difference is so obvious. It's Schwabius. Follow the clues at Schwabius.com. This is Matthew Hennessy, the editor of Free Expression. I want to personally invite you to come check out what we're doing.

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9:40Sign up for free expression today. We'll see you in your inbox. Welcome back. I'm Paul Gigo here on Potomac Watch with Mary Anastasia O 'Grady. Venezuelan oil production has been way down. It's only 1.1 million barrels a day, far below what they had been doing years ago and far below what we think the potential is. So the question becomes, let's say this deal goes forward. Where is the private investment going to come from to exploit these oil fields if, in fact, there's doubt about the rule of law? There's doubt about the proper institutions in place. I just saw that Chevron this week, which is a longtime oil developer in Venezuela, is going to say it's going to put in$7 billion more.

10:32But I think that's going to be in their fields, not as part of this deal, is my understanding right there. First of all, they're saying over five years, they're going to put in$7 billion. They're not in business with Betancourt right now. No, no, no, no. That's my question. That's my question. And the other thing to keep in mind is that Lake Maracaibo, which used to be a huge area for oil development, is completely ruined. It's destroyed. It's polluted. It's completely broken down because they expropriated those wells and then they didn't maintain them and so forth. So, yes, Chevron is going to apparently drill some new wells over the next five years.

11:13But what other companies are going to hear as long as there's no rule of law and there's a dictatorship? I think that's a reasonable question to ask. Personally, I don't think that NABEP, the North American Blue Energy Company, is reliable. I mean, this Alejandro Betancourt has never been convicted of a crime, but he certainly has a reputation for being less than a reliable investor. It makes you wonder why the U.S. chose him. I mean, there are lots of people, lots of Venezuelans who know about the oil business in Venezuela. I mean, many of them fled to Colombia. There are a lot of them in Edmonton, Alberta.

11:56You know, they had to leave because the Chavez government had politicized the industry so much. Lots of people they could have turned to. And instead, they turned to this guy with a really shady reputation. Isn't it because he's pals with Delce Rodriguez? I mean, so there's this political connection. He's got the ties. And so, okay, well, we'll do business with this fellow who is close to Rodriguez. I mean, the question I have about the President of the United States has always talked for decades about, well, we're going to take the oil. You know, when we go intervene globally somewhere, you know, we never take the oil.

12:35We just do it for altruistic reasons or obscure national interest reasons, as he might put it, when we should have, we should grab the oil in Iraq or Iran or wherever it might be. So I'm not surprised at his mode of preoccupation with the oil here on those grounds. But if you think about the global marketplace for oil and you think about the Venezuelan development for oil resources, it's really coming into its own in a couple of places that you have written about. One is Guyana, nearby Venezuela. They have very rich fields that global oil companies are developing. And then you have the shale resources in Argentina, which are rich.

13:23And some people think they're as rich as the shale resources in the American Southwest. And Harold Hamm, one of the leading entrepreneurs of the shale revolution in the U.S., is putting in billions of dollars as those other resources come on screen. The way I look at it is Venezuela claims, we don't know, but they claim to have the largest proven reserves underground, right? And Donald Trump has a problem in Iran with this stalemate. And he's looking for a quick, high profile response to the fact that, you know, we're not getting as much oil out of the Middle East as we used to. And I think he saw in this thing he cooked up, you know, Chevron has wanted to go in there in a bigger way, non-transparent contracts, secret, no big contracts.

14:16But they get to go in there and they've been very active lobbyists in Washington. He gets to do this deal with the Rodriguez government through Alejandro Betancourt and brag about how he's going to get 20 percent of the output at cost. So it's a nice narrative at a time where he really needs a win on the energy front. And actual impact in the near term on oil prices, it's nonexistent, correct? Yeah. Yeah. This is a long term project. By long term, we mean past the Trump presidency. I think so. Because investment takes a long time. Yeah, I think so. I think we're talking at least, you know, two, three years at a minimum.

15:01Can he refill the Strategic Petroleum Oil Reserve, as he has said he wants to refill in the near term? Not with Venezuelan oil. And, you know, I think that there's one other point that we should touch on, which is that politically, this is really, really bad for him. I mean, the Venezuelan, the Latin American vote, particularly in South Florida, is furious about this. And even Republicans who don't like to say anything against Trump are saying, well, we like the idea of exploring for oil, but we don't like the idea of leaving Delce Rodriguez there and not having elections. That's just what they're saying publicly.

15:35But privately, people are furious about the fact that they feel like they've been betrayed. They feel like, you know, he's going into business with with the dictatorship. Your suggestion is that that could hurt him and the Republicans in Florida? Is that what you're saying? I think it could hurt him with Republicans who are from the region, wherever they live, because one of the reasons why they really liked Donald Trump was he was going to stand up to these guys. And now, like I said, it seems like he's going into business with them. Well, all right. I think this is going to get a lot of scrutiny on Capitol Hill, particularly if Democrats take the House or Senate in November.

16:19So we're going to probably learn a lot more about this as it goes on. And we'll learn a lot more about Alejandro Betancourt before this is also over. We're going to take another break here on Potomac Watch. And when we come back, we're going to talk about the various eruptions in the bond market with Joe Sternberg when we come back. This episode is brought to you by Charles Schwab. Decisions made in Washington can affect your portfolio every day. But what policy changes should investors be watching? Washington Wise is an original podcast from Charles Schwab that unpacks the stories making news in Washington right now and how they may affect your finances and portfolio.

16:58Listen at schwab.com slash Washington Wise.

17:07From the opinion pages of The Wall Street Journal, this is Potomac Watch. All right, let's turn to another business and political topic. The bond market's been getting a lot of attention, political criticism of the Trump administration. Let's welcome in Joe Sternberg, one of my colleagues in Washington. Joe, today, if we tape this Thursday, bond yields, that's the interest rate, has actually, they've been falling somewhat today. 10-year and 30-year have been falling. Maybe the Iran conflict is not going to erupt further because bond prices have been moving somewhat with the Iran conflict. But they're still higher than they've been, in some ways, have returned to their pre-pandemic rates.

18:01The 10-year bond between, you know, kind of 4.7, 4.8 percent, 30-year, which is important because it influences mortgage rates, 5.2, 5.3 percent. I guess my question first, Joe, is are these rates something we should worry about, really? Or are these, is this a return to normalcy, normalcy being defined as pre-crisis rates, pre-pandemic rates. Well, I mean, purely as an economic matter, Paul, I don't think that it is anything to worry about because we have ample economic history that shows us that the U.S. economy can prosper at interest rates of about this level because that's what the U.S. economy was doing all through the 1990s.

18:47It's a telling analogy because what we discovered during the dot-com boom of the 90s and the investment in the previous generation of tech and productivity enhancements in the economy is that actually interest rates at about this level were entirely consistent with that kind of investment boom. And so that should be encouraging for anyone who is now thinking about artificial intelligence and the new wave of investment in that. Interest rates at the level where they are currently sitting are very unlikely to suffocate that. And in fact, the promise of that technology might be one of the things that is causing those corporate borrowers to bid up interest rates in the marketplace precisely because they believe that there is going to be a return that will justify it.

19:40The thing that has changed since 2007, the last time rates were about this level before the financial crisis, is the government finances. So I think that from this perspective, I'm not so worried about a medium or long term economic crisis from interest rates at this level. you always have to be cautious about whether things might break in certain corners of the financial system as rates continue rising after a prolonged period where they were very low. But it is going to create fiscal challenges that I think that investors are thinking about right now because governments are so much more indebted than they were the last time interest rates were that level.

20:23And so this rise in government bond rates has pretty significant implications for the federal budget and how Congress is going to have to make spending decisions. The rates are not economically troubling, but they're something of a warning sign that maybe investors are starting to demand a higher price for buying treasuries for further investment in America? I mean, is that where you're coming out here? There does seem to be reason to think that an element of that is going on. I mean, look, the bond markets are enormous and very complex. And what we're really talking about is millions upon millions of individual investors' decisions about how they want to price risk.

21:12So it can always be dangerous to try to draw a single conclusion about what they are saying. And I think that part of this run-up in interest rates might have to do with expectations of inflation in the future. Part of it might be related to economic growth. But there does seem to be a concern about fiscal stability in the US, where the debt is now at about$40 trillion, and Congress shows no signs of trying to substantively close the deficit. but also across other developed economies. And so I think that you can end up in a situation where the specific mechanism is the governments find themselves having to borrow much more than historically they have had to do during peacetime to finance those deficits.

22:01And so the government is coming to market at the same time that you have all of these private investors that also are looking to tap capital. And I would much rather put my money in artificial intelligence and data centers than the treasury if I'm looking for a return. So you can see why rates on government debt also end up having to go up as a result of this. We underestimate the degree to which the borrowing for artificial intelligence is influencing these rates. There's huge, huge financing requirements for the AI hyperscalers that are a big factor here. That's one point. The other point is the Federal Reserve under Kevin Warsh, the new Fed chairman, has signaled that he wants the bond market to find its actual price.

22:55He wants the bond market. He doesn't want the government and the Fed to sit on bond prices and therefore not send accurate signals. What's happened since the crisis in the financial panic of 2008-2009 is through forward guidance and quantitative easing, that is buying bonds, the Fed buying bonds, and mortgage-backed securities. What happened is one of the goals was to keep long-term bond rates down. And that created the environment near zero interest rates, low long-term rates. You created an incentive for a lot more borrowing and maybe, and you were pricing risk in a way that wasn't always accurate.

23:43There have been some of these explosions in bad products and in investments. I'm thinking of the way that Silicon Valley Bank mispriced risk and ended up going belly up. You had investments in crypto and other things that haven't always worked out because there was a lot of money around and at very low rates. So in that sense, I like the fact that the bond market is now sending more accurate signals about the actual credit risk. Yeah, you know, I think that the Fed angle is particularly interesting here because remember, Paul, as you pointed out when we started our conversation, as we are recording this on Thursday, rates seem to be pulling back a little from their highs.

24:33One of the reasons for that is that Christopher Waller, who's also a member of the Fed board, sits on the rate setting committee, the Federal Open Market Committee, alongside Kevin Warsh and plenty of others, gave a speech today where he suggested maybe he personally wouldn't support raising interest rates at their coming meetings this fall if he sees some evidence in the tea leaves that inflation is still under control. And I think that investors seem to be interpreting that as a sign that maybe there's hope that the pain will abate and that Warsh will face a bit more resistance within the Fed on pushing forward with his determination to take more of a hands-off approach and allow rates to find their market level.

25:21But I think that, you know, for all of the reasons that you pointed out and so many more, we should not be afraid of bond markets and every other financial market doing their job of allocating capital. I mean, I think that one of the big problems that the economy has had since 2007 and 2008 was policymakers' resistance to allowing that to happen, in part because they were so convinced that more government spending would be the way to lift the economy out of the Great Recession and the slow growth period that came after that, and then out of the pandemic. And so all of these policies were oriented toward making it cheaper for the government to borrow and never mind the consequences for the rest of the economy.

26:09And I think that it's wonderful if we are finally reaching a point where we're going to make it possible for the markets to correctly price and allocate capital to the productive private parts of the economy and end this default assumption that we should be focused on facilitating government borrowing at the exclusion of everything else. I should stress here that I'm not saying, and I don't think you are either, that government debt at 100 % of gross domestic product is not a problem. That's where we are now. And to find that comparable figure, you have to go back to the immediate aftermath of, wait for it, World War II after years of being at war.

26:57Another figure that people may find startling is that the annual deficit as a share of the economy is likely to be something like 6.6 % this year. Now, that's in a growing economy in a non-crisis environment. environment. Granted, there's conflict in Iran, but it's not a major war in terms of requirements for government spending, at least not now. But that's an unheard of figure given the economic circumstances we have now, and that has to be financed. When you add those two together with higher interest rates, what you have is increasing costs to the treasury each year to the federal budget in financing.

27:44So now to pay the interest on all of the debt we've accumulated, it's about a trillion dollars a year, about a trillion dollars a year. That's more than we now pay for defense. Put that in perspective. So the largest line item in federal expenditure is Social Security right now. By the end of the fiscal year that we are currently in, interest expense, that trillion dollars might be the second. It might be on the cusp of edging out Medicare, which for ages has been the second largest expenditure item. So you're absolutely right, Paul. I mean, no one should be sanguine about the consequences of this kind of debt load on the government.

28:25And I think the U.S. economy is fortunate that we retain our position as the global reserve currency and the world's largest economy and arguably its most dynamic economy. So foreigners will be happy to send money onto our shores, not least to help finance all of the private sector investment that we are doing right now. But that is not an excuse for Congress to fail in its responsibility to get the government budget under control. Because if we can't do it, when we have the tailwind of this enormous technological boom that is starting to unfold, we're not going to be able to, and we have a very narrow window before Social Security in particular starts placing new strains on the federal budget within six years.

29:19So I think that, you know, this is the time that Congress has to pull itself together. And hopefully, And, yeah, this is a hope and it never pays to be too optimistic when we're talking about Congress. You know, the discipline that the bond markets are trying to impose through that higher interest expense and the rising costs of financing the government debt. You know, Lord knows we need the discipline because what we were doing before with the ultra low rates has not encouraged them to fall into line. Well, Joe, in the annals of understatement, your line that it never pays to be too optimistic about Congress, that could be top 10 in the Jugo rankings anyway.

30:02But it is interesting politically that the interest on the debt does and the bond market yields does seem finally to be getting the attention of political actors. And I say this because if you look at the Trump administration's actions, Scott Besant was spent on a recent controversy over his assertion that he could buy back long term debt with the Treasury General Fund. And that created a controversy when his former colleague in business, Stan Druckenmiller, the investor, criticized that. But also, Besant is now talking about, quote, a fiscal consolidation package that he is working on with the Office of Management and Budget, White House Budget Director Russ Vogt.

30:54And they say they're going to come out with it here shortly in September. Now, what that involves, I don't know. I don't see them taking on Medicare. I don't see them taking on Social Security, certainly. Maybe they'll do more on fraud and welfare programs and try to close offer a package that would close some of the egregious policies that allow states to gain entitlement spending. And we've written about those in our pages. But it looks like they're doing this not because they expect it to pass, but because they want to show, OK, we're proposing something. We're taking this seriously. Yeah. Look, if any of this were going to be easy or painless, Congress would have done it already because they love easy and painless.

31:50So, I mean, the key point about any fiscal consolidation, and this is true across the vast stretches of economic history, it is always painful because people have been benefiting from the spending behavior that got you into the pickle that you're in now. And so kind of my interpretation of what is happening right now, I don't know if you would agree with this, Paul, is that we are just at the very beginning of the beginning of grappling with the problem. So gimmicks like Besson's bond buyback program, which was too small to have any material difference and was never going to fundamentally change the fiscal picture anyway.

32:28It feels like the kind of thing that you do if you have just had this moment of panic where you've realized that the Fed is no longer reliably going to bail you out of your financing problems. Yields are going up and you want to make the pain stop. And so you start doing anything that you can think of to throw stuff at this problem in the hope that something will work. And you start small with the painless stuff. And it will probably be a ratcheting political process over time where they will realize that the simple low-hanging fruit like the Treasury buyback program, that will end up not working.

33:08And then they'll do the waste, fraud and abuse thing, and they'll get some mileage out of that. And then they'll discover that there isn't actually enough money there to do it. And it will probably be a few years before you get any substantive progress on any of the entitlements or other things that are actually driving these problems. And when it happens, it's going to be a really bloody political process. Because, again, if it were easy, they would have done it already. But, you know, you can see signs that this process is starting to play out in its earliest stages. Well, as Scott Besant, the Treasury Secretary, has also said recently that the way to solve the debt problem is to grow and to grow faster.

33:48Economic growth has got to be a big part of this. Has to be. Faster economic growth. The problem is, given the debt hole we have dug for ourselves, and because of the forecast with the baby boomers retiring and Social Security and Medicare expenses rising, and we'll have some more defense needs too, for sure, particularly given the dangerous world we're in. You're going to have to grow at over 3 % a year for an extended period of time to be able to make a significant dent in that. and have debt actually falling as a share of the economy. So I think that's probably unrealistic, given where we are here.

34:35And we haven't grown at 3 % a year for a long time and any lengthy basis. We're going to also have to reform these programs. And that's where the difficulty that you described will come in. So I think a measure of hopefulness. We will leave it at that. And thanks to Joe Sternberg. Thanks to Mary O 'Grady. And thanks to you all for listening. We are here every day on Potomac Watch. If you're an RIA, Schwab Advisor Services is the Watson to your homes. Smart, dependable, always has your back. With all the wealth services, technology, and support your firm needs, the difference is so obvious, it's Schwabius.

35:19Follow the clues at schwabius.com.