Desperate Venezuela (1): The Crash In Revenues

viernes 19 de junio de 2015

Reports are that Venezuela is negotiating another loan from China, which is apparently almost as disturbing to Venezuelans as some Chinese. Loaning ever-increasing amounts to a government that looks to be setting a new definition for unstable strikes many as less than wise, shall we say.

“Low” oil prices are definitely affecting the country, but more important has been the mismanagement of the economy by the United Socialist Party, formerly led by Hugo Chavez. His belief that socialism would produce economic progress and that he could order consumer prices to stabilize as if they were unruly recruits meant that even in 2012, when oil prices were at historic highs, the country was facing shortages of commodities from chicken to toilet paper.

It didn’t help that he spent money like a drunken sailor, some of it on laudable social programs, some in aid to poor countries (especially Cuba, another victim of socialism), but also much on vanity projects. Corruption has apparently worsened under Chavez and Maduro, and probably helps explain the Florida real estate boom of the past decade. Currency controls and the use of three different official exchange rates are heaven-sent for the venal, and have created huge economic difficulties as usual. Reliance on the loyal rather than the competent has produced exactly the kind of results you would expect, with nearly every part of the socio-economic structure either struggling or collapsing.

But let’s talk money. At present, Venezuela produces 2.4 mb/d of oil, of which 0.3 mb/d goes to repay China and 0.2 mb/d in aid to the Petrocaribe program. The latter is essentially sold at a 50% discount, meaning the government has 0.4 mb/d of non-cash oil exports. Additionally, the nation consumes 750 tb/d (which includes smuggling), meaning that cash sales are on other order of only 1.35 mb/d. When the oil price was $100 a barrel, Venezuela was receiving about $45 billion a year, but at current prices, the amount is closer to $20 billion.

No wonder Venezuela is not only courting Chinese and Russian money, but holding out the olive branch to the US, which is supposedly attempting either a coup, the assassination of President Maduro, or both. As Herbert Stein once said, “If something can’t go on, it won’t.” The Venezuelans recognize that they can’t wish the price of oil higher and they can’t wait for the predicted (by some) increase to “normal” levels of $80 or more. Desperate is as desperate does.

For now, Venezuela is in need of cash to buy the goods it can no longer produce, and mortgaging its giant oil reserves are the only way to obtain that. But selling one’s seed corn usually bodes ill for the medium term future, which should explain why the government is trying to find investors in its oil fields. More rational and less xenophobic behavior will help in the long run, but in the short run, those who can’t provide people with toilet paper are all dead.

My next post will deal with possible paths to a transition.

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