In recent months, media outlets have portrayed a bleak picture of Venezuela: citizens waiting in line for basic items such as toilet paper and flour, babies being delivered in cardboard boxes and the national currency, the bolivar, being used as napkins. Unfortunately, these conditions are not an exaggeration.

Venezuela currently teeters on the brink of economic and social collapse. The country has the distinction of being the world’s worst performing economy. According to the IMF, its economy contracted by 6 percent last year and is forecasted to contract a further 10 percent this year. Inflation, the IMF predicts, is expected to reach 1,640 percent in 2017. Alejandro Arreaza, an economist at Barclays, estimates that the government has an 85 percent chance of defaulting on its debt over the next twelve months. The country’s murder rate has been steadily rising and is now the second highest in the world. Meanwhile, 10 percent of the population has already left for other countries.

Many economists predict that the nation may be stuck in its current economic rut for over a decade.

To understand how the crisis could have escalated to this extent, a brief background on the country’s economic and political environment is necessary. The current situation’s root causes can be traced to Hugo Chavez’s ascendance to power at the end of the 20th century. A controversial figure, Chavez built his campaign and his presidency on the creation of a Marxist social welfare state. In the first decade of his presidency, from 1998 to 2008, he nationalized many of Venezuela’s vital industries, such as oil, mining and transportation. He imposed price ceilings on a variety of basic goods, such as corn and flour, and simultaneously revamped the country’s healthcare system.

While his critics decried his government’s harsh response towards protestors and his use of socialist propaganda, they could not deny his results. According to World Bank statistics, Venezuela’s literacy rate, life expectancy and GDP per capita all increased during Chavez’s first 10 years. As record high oil profits filled the government’s coffers, Chavez expanded his use of social benefit programs and gave poorer Venezuelans access to healthcare and education. The country was not an economic powerhouse, but it was nonetheless beginning to develop and modernize.

Chavez’s success, however, depended on revenue derived from oil, and high oil prices masked many of the country’s underlying structural economic problems. For example, according to BBC reports, Chavez’s price ceilings on food items, though beneficial for the poor, incentivized producers to leave the country or stop producing altogether. Consequently, Venezuela began to import most of its food.

However, since the bolivar continued to appreciate due to high oil prices, this did not become an immediate issue. In fact, World Bank statistics indicate that, with oil constituting 97 percent of Venezuela’s exports, the country simply imported everything else, while still managing to run a current account surplus for 15 years due to its immense oil exports.

The nation failed to realize that if oil prices were to substantially decrease, severe economic hardship would ensue. Indeed, this is exactly what has been happening. The global oil glut, coupled with weak demand from China, has negatively impacted oil-producing countries around the world, and Venezuela is no exception. To add to its woes, Chavez’s death in 2013 has led to the rise of his party’s successor, Nicolás Maduro. In particular, Maduro retained some of Chavez’s outdated policies, such as turning away international humanitarian aid and refusing to devalue the official exchange rate in an effort to project the appearance of Venezuela’s strength and resilience.

Maduro’s political gaffes offer a clue as to why Venezuela has recently suffered so much: a lack of effective political leadership. The Wall Street Journal reports that while other oil-producing countries such as Brazil and Saudi Arabia have also had economic downturns, they have managed to diversify their economy or use financial savings to fund the economy while oil prices are low. Venezuela has done neither.

Mismanagement, rampant government overspending and possible theft has left the government with a nest egg of $3 million, according to the Washington Post, while other oil-producing countries have reserves in the hundreds of billions. As the government’s foreign currency reserves dwindle, it has turned to printing more money to repay its debts and has reduced its imports. Consequently, the Guardian reports that a sizable black market for everything from U.S. dollars to bacon has sprung up around the country, as consumer goods become increasingly scarce and runaway inflation makes the bolivar worthless.

As Venezuela descends even deeper, one must ask: what can be done?

One short term solution would be to allow humanitarian aid into the country, regardless of its impact on the government’s public perception. Professor Willian Burke-White, director of the Perry World House at the University of Pennsylvania, notes that Chavez was notorious for his anti-U.S. stance and built acrimonious relations with many countries in Latin America as well. Maduro has continued this policy, and as a result, Venezuela is short on allies who are eager to help in its time of need. Maduro would need to change or even reverse his diplomatic stances to gain favor and vital aid to help his people.

Another necessary measure is to allow market forces to determine Venezuela’s exchange rate, regardless of the inevitable depreciation that occurs. Bloomberg reports that the current official exchange rate ranges from 6 to 200 bolivars per dollar, while the black market rate is over 1000 bolivars per dollar. Although the official rate is cheaper, actually receiving this rate involves a complex application process, and only high-ranking government officials have consistent access. Unfortunately, corruption ensues, as officials obtain foreign currency legally and sell it at a higher price. This causes further friction between the public and the government.

A longer-term solution would be to reduce the economy’s dependence on oil. Tourism used to be a substantial driver of the economy, but safety issues and a restriction on Americans entering the country have marginalized its impact. Other industries, such as fishing and manufacturing, have also lost ground as the government has continued to pour any available investment into the oil industry. Professor Alejandro Velasco, who focuses on Latin American issues at New York University, notes that such a dynamic shift in the economy’s structure could only be accomplished by a complete change in the country’s leadership.

There is a chance, albeit a slim one, that this could occur as soon as December 2016. If the current opposition party gains enough political clout to push for a recall referendum this year, then they are favored to win. If the referendum is held after 2016, then the new president would be the current vice-president from Maduro’s incumbent party, since the Venezuelan constitution prohibits a new party’s leadership two years before the end of the current party’s term, which ends in 2019.

Venezuela thus faces a very steep mountain to climb over the next few years. Ultimately, pressure for change may come from the public itself. Although Maduro has thus far remained insistent on not accepting foreign aid, he may not have much of a choice as the country continues to deteriorate.

The scale of Venezuela’s economic and political collapse should serve as a warning to other nations that depend on volatile commodity prices. Political strife, economic deterioration and social conflicts are just a few of the symptoms Venezuela currently faces and will face for years, perhaps decades, to come. Similar countries must diversify their economies immediately or risk causing larger-scale global conflicts when the next commodity crash occurs.

Since late 2014, the United States domestic energy market has been in the midst of the worst industry downturn in nearly half a century. But investors are lying in wait, looking for the opportunity to jump back in. Optimal timing remains the only factor holding back reinvestment.

With crude oil’s recent price hovering around $50 per barrel, the probability of reaching sustained equilibrium at these prices is low, and the probability of continued decline is even lower. While overall energy market fundamentals continue to raise eyebrows, an investigation of the likelihood of improvement is increasingly necessary. Recent market flux and mergers and acquisitions activity signal a possible revitalization of the stagnant domestic oil and gas industry. Upstream companies, those that search for and extract oil and gas products, are currently attempting to both trim fat to improve their balance sheets and acquire new holdings to position themselves for rapid growth upon further price recovery.

These deals offer insight into possible positive attitude clues from the executive teams behind them. With companies willing to take on extra debt or raise funding through secondary equity offerings, mergers and acquisitions in this area should be taken as a strong bullish sign for investors. In particular, mergers and buyout attempts among smaller midstream companies increased precipitously over the last several months, which hints at the concerted industry effort to consolidate and improve operations efficiency.

However, the largest deals brokered over the summer season are perhaps the most indicative of positive industry sentiment. Recent deal activity by the larger upstream firms has focused on attempts to acquire new oil and gas plays ripe to be highly profitable when the supply glut ends.

Range Resources’ $4.4 billion acquisition of Memorial Resource Development exemplifies just this style of thinking. Memorial Resource Development held promising natural gas reserves in Northern Louisiana, making the company’s buyout essentially an investment in future production for Range Resources.

“The merger [would provide] core acreage positions in the two highest return, lowest cost natural gas plays … [and] complementary assets positioned near expanding natural gas and NGL demand centers.” Drew Cozby, former CFO of Memorial Resource Development explained the rationale behind the buyout given current market conditions to the Dartmouth Business Journal.

EOG Resources’ $2.5 billion merger with Yates Petroleum Company falls along the same lines. EOG Chief Executive Bill Thomas described the addition of Yates’ proven crude positions in Texas’ Delaware Basin and the Powder River Basin of Wyoming and Montana as “paving the way for years of high-return drilling and production growth.” With crude prices still below the breakeven $61 for the Permian Basin estimated by Labyrinth Consulting Services Inc., the deal’s creation of a 574,000-acre position in the heart of the region appears to be either a questionable gamble for the foreseeable future or a bold positioning strategy at the heart of Texas’s most profitable drilling region.

Expected to close by the end of 2016, Anadarko Petroleum’s $2 billion purchase of deep-water drilling access via Freeport McMoRan is also worth noting. Larger energy and exploration companies, such as Anadarko, continue to feel the weight of high proportional debt (38 percent Debt-over-Enterprise Value ratio relative to industry comparable numbers that hover around 28 percent, according to Yahoo! Finance) from low oil prices and are focused on generating the cash flow they need to fund deals that provide access to yet more profitable plays. The Oil and Gas Financial Journal estimates that $3 billion in free cash flow coming over the next 5 years from additional Gulf of Mexico reserves will allow them to do just this, with greater targeted investment onshore in the promising Delaware and Denver Basins.

What is the net result of the previous three deals? According to PLS Inc., merger activity within the industry was the highest in July 2016 at $8.4 billion since the pre-price-crash era, when the highest tally was $12.9 billion in July 2014. Aside from being seismic boosts in production deal flows that the industry has lacked for the last two years, these deals combined are the largest upticks in activity, as big upstream companies vie for exposure to the most profitable onshore regions of US natural gas and crude.

The frenzy among the nation’s largest public energy companies to complete deals in the Texas Permian Basin region has left private equity investment in their wake, according to Mergermarket. The competition for exposure has led to multibillion-dollar entry fees to the region — yet the failure of private equity firms to win deals thus far means that an excess of funds remains for investment around the Permian Basin and elsewhere domestically. Thus, while investments in choice reserves have already raised prices beyond suitable levels for all but the largest buyers, a strong bullish sign for the market remains in the large amount of capital pending deployment.

In terms of market momentum, the laymen investor looking to ride on the coattails of those first to act can only hope the deal frenzy delivers tangibly better equity valuations or higher crude prices. The willingness to spend billions on buying out firms certainly exudes confidence, but this is a market driven overwhelmingly by supply and not demand. With the energy industry’s ability to continually dodge the bullet of demand destruction from the time-consuming and costly nature of finding suitable alternatives, consumers will not need less oil any time soon. Thus, oversupply will continue to be the dominant variable in oil price fluctuations for the near future.

In this vein, broader geopolitics continues to signal that the opportunity for investment is still on the horizon. While positive signals came from the Organization of Petroleum Exporting Countries (OPEC) talks at Algiers, prices may witness the same malaise well into 2017 despite the initial optimism surrounding the output freeze agreement. As per OPEC, its tentative output cap for 2017 will set production levels lower by only 750,000 barrels per day from a previous 32.5 million barrels per day. Considering this number in the context of Russia’s 400,000 barrel per day increase in production for the month of September and the historic tendency for OPEC members to ignore individual quotas, the cutback will probably have relatively minor significance.

Yet, the OPEC decision to decrease output without accord from Russia is confusing. Based on each nation’s disagreements at the last OPEC meeting in April, Saudi Arabia and Iran should be the two states continuing to overproduce as each tries to win market share. In the same competition is Russia, who is now left to fill the void created by OPEC’s decreased production. Moreover, pressure from officials in Moscow will reinforce the predisposition of the country’s oil majors to pump more in order to spur economic growth after the freefall of the Russian GDP and the Ruble over the last two years.

While OPEC’s decision also eliminates geopolitical uncertainty from both Saudi Arabia and Iran through the next year, it preserves the United States’ role as the swing producer nation. Any increase in production by Russia will have to be met by decreased production from the United States, hence its role as the swing state. More specifically, Russia will use increased output as a weapon to force the United States to concede market share, which the domestic producers in the United States will do to protect prices.

From the OPEC arena, the increase in Russian production would have been anticipated, especially given Russia’s attendance at the OPEC talks in Algiers. Thus, much like the Saudi decision to flood the market with excess supply in 2014, Russian overproduction will keep American output subdued despite the promising developments in merger activity from domestic companies.

Should Russia continue to flood the market, as data from its third largest producer Rosneft OAO suggests it will, any gains created by OPEC cuts will be reversed. Worse yet, should Rosneft production levels reach a forecasted 20 percent increase for 2017, the market could be left with an even worse supply glut. As much as US producers would benefit from a return to normalized supply levels, many companies have short positions already prepared for its continuation.

When asked about the geopolitical climate’s effect on the balance sheets of US producers, Drew Cozby, former CFO of Memorial Resource Development, stated his company confronts these challenges by “actively hedging commodity exposure and attempting to lock in well economics … [to minimize] downside exposure.” Yet, confronting a market oversupplied by several millions barrels of excess production each day is nearly impossible.

Potential investors should also understand that these positions will, at best, only partially limit the full downside to Russia’s destructive overproduction, and that the market will probably remain oversupplied. Russia will hold the key to a price recovery in 2017 based on these terms, but the role is one they will not accept. Thus, the tide of domestic optimism and increased mergers and acquisition activity may remain overshadowed for the foreseeable future by these factors as they combine to stagnate the industry’s rebound.

The last few months have not been easy on the price of crude oil. Since May 2015, Brent Crude, the global benchmark for crude oil value, has fallen over 60 percent, reaching a decade low of $28.55 a barrel on Jan. 18, 2016. The price of crude oil continues to break record lows, with the global oil market losing a fifth of its value since the start of the new year. Oil’s precipitous drop is attributable to a massive supply glut that results from a variety of factors, ranging from innovative drilling techniques to geopolitical conflicts.

The shale oil revolution

U.S. oil production has steadily expanded in the past five years, with average daily crude oil production rising from 5.5 million barrels a day in 2010 to 12.7 million daily barrels in October 2015 according to the Energy Information Administration (EIA):

The increase in U.S. oil production is fueled by the rapidly growing shale oil industry. Shale oil extraction targets light crude oil stored in petroleum-bearing rock formations of shale or sandstone. Production of oil from the rock formations requires hydraulic fracturing, a technique in which rocks are subjected to highly pressurized liquids that break the formation and expose petroleum reserves within. The U.S. possesses multiple shale assets that contain valuable petroleum-bearing rock formations, such as the Eagle Ford Group in Texas and the Bakken Formation spread between Montana and North Dakota.

As a result, crude oil production in the U.S has become both cheaper and more prolific in the past decade, becoming a major contributor to the steady increase in global daily crude oil supply from 88 million barrels in 2010 to 93 million in 2014 as reported by the EIA.

Market war between OPEC and US shale suppliers

The Organization of Petroleum Exporting Countries (OPEC) is an intergovernmental organization that controls over 80 percent of the world’s oil reserves, a position that gives the cartel an immense amount of control over the global supply of oil. In 1973, Arab OPEC member states declared an oil embargo against the United States and other nations that supported Israel during the Yom Kippur War. The embargo, lasting from October 1973 to March 1974, caused a jump in the per barrel price of $9, from $3 per barrel to $12. It also sparked a global recession, signaling the end of the post-World War II period of economic prosperity.

In the past decade, however, the growth of the shale oil industry in the United States has presented a significant threat to OPEC’s oil dominance. At OPEC’s semi-annual meeting in December 2015, the organization decided to raise its daily production quota from 30 million barrels to 31.5 million barrels, a sign that the oil-exporting countries are unwilling to give up market share to U.S. shale producers so easily. OPEC intends on squeezing non-OPEC supply out of the global oil market by dropping the price of oil to unsustainable levels for non-OPEC suppliers.

The effects of OPEC’s bid for dominance are still being felt in the United States. Take for example Conoco Phillips, the world’s largest pure energy exploration and production company and operator of multiple drilling assets in Eagle Ford and Bakken Shale. The company’s equity lost over 35 percent of its value since June 2015 according to Yahoo Finance, with further losses expected on the horizon. Chesapeake Energy, the second largest oil and gas producer in the United States, faced similar losses, with its share price falling 70 percent since June 2015 as reported by Yahoo Finance. Multiple smaller shale oil companies have already gone bankrupt, with Samson Resources Corporation filing for Chapter 11 bankruptcy in September 2015 and Escalera Resources more recently following suit in November 2015.

What does the future hold for crude oil?

On Jan. 8, 2016, the EIA declared that the amount of crude oil commercially stored had reached 482.6 million barrels, a number just under the 80-year high in terms of crude oil storage. Furthermore, global oil storage is projected to increase throughout 2016. The International Energy Agency announced in its Oil Market Report for December 2015 that it expects a steady increase in production and inventory storage throughout 2016:

“Global inventories are set to keep building at least until late 2016…[OPEC]the exporter group has effectively been exporting at will since Saudi Arabia convinced fellow members a year ago to refrain from supply cuts and defend market share against a relentless rise in non-OPEC supply.”

With storage of oil reaching near record levels, a sharp increase in oil demand will likely have a delayed impact on the price of oil as supply is slowly drained from global inventory.

The lifting of Iranian sanctions in January 2016 presents another troubling prospect for the future of crude oil. Iran is a major exporter of crude oil that experienced a fall in production of more than one million barrels daily after international sanctions were enacted in 2012. With the world’s fourth largest oil reserves, Iran’s re-entry into the global market will further increase an already bloated glut of supply. Iranian officials stated that the country was in the process of increasing production by 500,000 barrels a day, with the ambition of expanding Iranian production capacity to six million barrels daily.

On the demand side, things look more hopeful. World oil demand is projected by the International Energy Agency to increase steadily through the end of 2016, with daily demand increasing from 94.69 million barrels in Q1 2016 to 96.49 million barrels in Q4 2016.

We must wonder, however, if demand will be able to outpace consistently increasing supply throughout 2016. Even if the global oil market experiences a supply shock on the magnitude of Saudi Arabia ceasing to produce oil, the impact of the shock will arrive late into 2016 as stockpiles of crude slowly recede from current record levels. As a commodity, crude oil is naturally subject to the market forces of supply and demand, and those market forces see crude oil losing value through the end of the new year.

The oil industry is in one of its deepest downturns since the 1990s. On January 15, oil prices crashed six percent, with the Brent and WTI Index both closing at below $30 a barrel for the first time in 12 years. To put that in perspective, that is lower than it was in the midst of the 2008 financial crisis, the worst global economic downturn since the Great Depression, according to analysis by the Financial Times. It is clear that what initially began as a small price drop has ultimately resulted in an 18-month long plunge. Even worse, there seems to be little possibility for a recovery in the immediate future.

To understand the bleak state of the oil market, one must first understand the mechanics that are behind its trajectory. In 2014, crude oil prices peaked at $115 a barrel, almost four times what they are now. At first, many economists predicted that oil would continue its upward trend and fully rebound to pre-recession prices. However, a number of factors contributed to its slow, but continuous, downward slide. To begin, China, one of the biggest importers of crude oil, saw annual economic growth of only 7.4 percent in 2014, its lowest rate in 24 years. For the first time since its rocket-like expansion, it had missed its growth rate target.

Since then, the Chinese market has undergone a roller coaster-like trajectory, galvanizing government intervention and economic stimulus. While the stock market has no direct effect on oil prices itself, its fall has reinforced global concerns that the Chinese economy is heading for an abrupt slowdown, thus undermining future expectations for the sales of oil. Therefore, it comes as no surprise that the Shanghai Composite Index and the Brent Crude Index have closely mirrored each other.

The second and largest contributing factor to the decline has been the recent international glut of crude oil. Hyper-competition between oil producers desperate to cling on to their market share has lead oil production to surge over 95 million barrels of oil a day, despite declining prices, according to reporting by the New York Times. Crude oil inventories have swelled to the highest level on record. This rise in oil supply, unmatched by an equivalent rise in demand, has therefore put downward pressure on prices. Analyst Kevin Book of ClearView Energy Partners predicts that that this oversupply will continue at least until the last quarter of 2016. To make matters even worse, many of the world’s largest economies, the United States as a prime example, has moved to increase domestic production, diminishing the demand for foreign oil.

Lastly, the rallying U.S. dollar has made crude less attractive to overseas buyers. As is with any other commodity, Oil is always and only bought in U.S. dollars. Over the past year, the dollar has become stronger against most currencies. As a result, foreign importers are finding themselves spending more to buy crude oil, as they must exchange more of their local currency for each dollar.

With oil prices this low, many investors have argued that there is only room for rebound. This is undoubtedly false, as most of the factors contributing to the slide in oil prices, including China’s slowdown, supply-demand imbalance, and a the strong dollar, are likely to continue. Despite heavy economic stimulus, China will be unable to stimulate growth as it has once before, with this year’s growth projected to be only around 6 percent, according to the Straits Times.  Similarly, many emerging markets particularly in Latin America, the Caribbean, and parts of Asia and Europe are also facing economic contraction. As a result, these countries will weigh heavily on the global economy. In January, the International Monetary Fund revised their global economic outlook, lowering their growth expectations for the world economy down to 3.4% for 2016.

Lastly, the glut of oil is likely to see little to no resolution in the immediate future. With major exporters refusing to slow down production and Iran expected to become a major exporter of oil again under the nuclear deal, there is a serious possibility of the oil market not rebalancing until the last quarter of 2016. Iran’s oil minister Bijan Zanganeh believes that Iran will export 500,000 barrels of crude a day in the immediate post-sanctions period. In the six months after, this amount is set to double, with Iran exporting up to 1,000,000 barrels a day.

Thus, with oil supplies ready to rise, China’s wide-impacting economic slowdown, and rather mild predictions for the global economy in 2016, it is clear that the price of oil has nowhere to go but down.