Venezuela's Oil Tale
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The uncertainties surrounding Venezuela and President Hugo Chávez make it very difficult to discern the truth about what is going on in the country. For example, how does one explain the underperformance of Venezuela’s bonds in the past four years, in the middle of an unprecedented increase in oil prices? Or the market’s deteriorating confidence in Venezuela despite the fact that is has improved its liquidity and capacity to pay?
Venezuela’s oil and energy policies, which are at the heart of national politics as well as the national economy, are often misinterpreted. But it is important for analysts to focus on several key aspects of the country’s economic policymaking, including the current and projected levels of oil production, the cost of Venezuelan petro-diplomacy in Central America and the Caribbean, and the opportunity cost of the domestic gasoline price. An analysis of Venezuela’s energy and economic policies reveals some surprising conclusions, but one thing is certain: do not expect any changes before the presidential election in December 2012.
How Much Does PDVSA Export?
A variety of methods can be used to calculate Venezuela’s oil exports. Oil export figures reported by the Central Bank of Venezuela (BCV) and the state-owned petroleum company, Petróleos de Venezuela, S.A. (PDVSA) claim total oil production of 3.1 million barrels per day (mbd) in the first half of 2010, with exports of 2.4 mbd—down from 2.8 mbd in exports from the same period in 2009. At this level, oil exports generated approximately $61 billion last year.
But figures from the Organization of the Petroleum Exporting Countries (OPEC) contradict Venezuela’s. OPEC calculations claim an average oil production of only 2.3 mbd for 2010, which implies gross exports of 1.6 mbd. PDVSA has constantly said that the source of this difference is that the OPEC figures do not fully account for production in the Orinoco Belt—a territory with large deposits of extra heavy crude oil—along with condensates and other products.
Given the nearly 1 mbd difference in the Venezuelan versus OPEC figures, PDVSA hired British firm Inspectorate to verify its level of oil exports. Since 2009, Inspectorate has certified net oil exports, defining them at 2.3 mbd on average during 2010—a number close to the official figures.
Another method for determining true oil exports is to compare Venezuela’s export numbers with Venezuelan oil import data reported from other countries. In carrying out this analysis with data for 43 countries from the United Nations commodity trade statistics database, no major deviation from the official gross export data published by PDVSA could be found for the 2005–2009 period.
But the same could not be said for net exports. The difference among net and gross exports could be important, since PDVSA said that it bought $24.3 billion in oil and derived products (around 1.2 mbd) in the first nine months of 2010. Basically, some of the oil processed in the refineries owned or partially owned by PDVSA could have been bought from other producers. The problem is that no other oil-producing country claims to be selling oil to Venezuela. This likely means that most of these transactions are among different refineries that PDVSA owns, or in which it has a form of participation.
From these figures, it is not possible to make a final conclusion on net oil exports. The sample does not include all countries, and PDVSA could still have some margin to distort the figures by buying oil in international markets. But these calculations indicate that actual oil exports will be closer to the official figures than those published by OPEC and other independent analysts. This implies that Venezuela does not have a problem of cash constraints. But it is suffering from the idiosyncrasies of its policies: a capital control regime that results in an overvalued and subsidized exchange rate, which contributes to deindustrialization, or rather, the Dutch Disease phenomenon.
A declining trend in oil exports since 1998 is the main concern about Venezuelan oil policy. According to PDVSA figures, oil exports have fallen nearly 700,000 barrels per day (bpd)—from 3.1 mbd in 1998—despite the incorporation of approximately 600,000 bpd of new oil generated from the Orinoco Belt projects. This erosion in oil production is due to a lack of investment, which has kept Venezuela far from the target of 5.0 mbd in annual production by 2015. Oil exports are also affected by a significant increase in domestic consumption fueled by last year’s electrical crisis and the unrealistically low price of gasoline.
It is important to highlight that since 2009, PDVSA has been trying to focus more on its core business of oil production instead of government-led responsibilities in areas such as electricity and food distribution. Additionally, increased pressure is being placed on its partners to accelerate investment and raise production in the new Orinoco Belt projects. The likely result is stabilization in oil exports in 2011, with a medium-term increase as Orinoco Belt projects get underway. But if the trend in declining oil exports persists, Venezuela will become increasingly dependent on higher oil prices and/or periodic adjustments to sustain its accounts.
Venezuela's Petro GiveAway
The increase in oil prices gives Venezuela more financial resources as well as the ability to share oil with
allies in Central America and the Caribbean. Assuming that oil production remains at 2.4 mbd, Venezuela’s gross oil exports could reach $71.4 billion in 2011 and $81.4 billion in 2012, estimating an average Brent benchmark price of $91 per barrel in 2011 and $105 per barrel in 2012. But the oil that PDVSA sells under preferred conditions must be discounted to determine its true oil export income.
The first of the beneficiaries is Cuba. Under bilateral mutual cooperation agreements, PDVSA, as a partner of the Cuban company Cupet, can operate and process Venezuelan crude oil in Cuba’s Cienfuegos refinery. As a result, PDVSA sends to Cuba 120,000 bpd for an estimated value of $3.2 billion in 2011 and $3.6 billion in 2012. In return, Cuba compensates Venezuela with medical services, sports training, intelligence services, and technical support.
Another set of beneficiaries comprises select countries in Central America and the Caribbean, where PDVSA is financing 50 percent of the value of the exports under preferential conditions. These favorable loans are for 17 to 25 years at a 1 percent interest rate with a one- to two-year grace period. For Venezuela, this will amount to cash losses of $6.2 billion in 2011 and $6.6 billion in 2012, but it also means that the Chávez government is the principal donor and/or financier of the region. The Dominican Republic and Nicaragua, the principal beneficiaries of this pact, each receive 30,000 bpd. In the case of the Dominican Republic, the government receives and refines the oil and then resells its derivatives at market prices. In this operation, the Dominican government will obtain $450 million in 2011 and $500 million in 2012 as favorable loans. The subsidy to Nicaragua is for a similar amount.
The third special case is China, which has disbursed almost $32 billion in loans to Venezuela under preferential terms (the average interest rate is Libor plus 338 basis points) and to which Venezuela has committed 300,000 barrels in oil exports per day for the next ten years. The agreement was at market prices at the moment of delivery, and PDVSA is dedicating about $100,000 to pay the loan. The rest is basically sold at market prices. Under these conditions, Venezuela will pay China $3.2 billion in 2011 and $4.1 billion in 2012.
Taking into account all these factors, plus the expected increase in oil prices, Venezuela’s net oil income is likely to increase to $62 billion in 2011 and $70.7 billion in 2012. Despite this projected windfall, many still believe the country has a cash constraint in hard currency. This perception of scarcity may come from the overvaluation of the exchange rate and the fact that Venezuelans cannot buy all the dollars they want at the official rate of 4.3 Venezuelan Bolívares to $1. However, Venezuela should have enough resources to fulfill its commitments at least until 2012, even though the expected increase in public spending ahead of the 2012 presidential election would leave the country in a weaker position for 2013 and beyond.
Cheapest Gasoline in the World
Venezuela has the world’s cheapest gasoline. But what does this subsidy mean for Venezuelan society? And who is the principal beneficiary? For 2011, the domestic gasoline price is 2.1 cents per liter, or 8 cents per gallon at the official exchange rate (half that if using the nonofficial exchange rate). The international market price is 63.6 cents per liter. Filling a tank in Venezuela is cheaper than buying a can of soda, and the tip for the gas station attendant is often equal to or higher than the cost of the gasoline.
Recently, Chávez declared that PDVSA has more than 90 percent of its refining cost subsidized, estimating the subsidy at $1.5 billion a year. This calculation is incorrect. Instead, it is necessary to compare the domestic price of gasoline with its opportunity cost (that is, its export price). Basically, every liter of gasoline Venezuelans sell domestically is one liter not sold on the international market. And since the domestic price of gasoline has remained practically constant in nominal terms, the total subsidy has been increasing with the devaluation of the currency, the increase in the price of oil and the ever-increasing rate of consumption. Assuming 17.6 billion liters of annual domestic consumption, the total gasoline subsidy amounted to $9.4 billion, or 4.6 percent of GDP, in 2010.
Though it is true that Venezuela is one of the world’s leading oil producers, and therefore many Venezuelans believe that they are entitled to cheaper gasoline, it is also true that subsidies should not go beyond the limits of what is rational. The implicit gasoline subsidy in 2010, compared with what is established in the 2011 National Budget Law, represents 2.9 times what the national budget has earmarked for health care, 70 percent more than allocated for education, and almost four times more than proposed spending on universities.
A gasoline consumption pattern for each income level included in the BCV survey taken on family budgets in the Caracas Metropolitan Area is used to analyze who benefits from this subsidy. As expected, gasoline consumption increases disproportionately the higher one climbs the social strata; in other words, the gasoline subsidy is regressive. The 25 percent of the population that is in the highest income bracket consumes almost nine times more gasoline than the 25 percent in the poorest bracket. Dividing the subsidy among the populations of each of the strata and multiplying by the average family size shows that Venezuela gave to the richest families $3,318 in gasoline subsidies in 2010, while the 25 percent in the poorest bracket received only $479.
The Resource Curse—in the Extreme
President Chávez’ economic policies over the past 12 years have amplified the natural resource curse: low growth, high volatility, Dutch Disease, accusations of fiscal greed and corruption, inequality and poverty, and weak institutions. Since 1998, and despite the oil windfall, Venezuela has grown on average 2.3 percent per year. In contrast, the seven largest Latin American countries grew on average by 3.2 percent. Within this period, Venezuela experienced five years of negative growth with an average contraction of 5.6 percent and seven years of positive growth with an average expansion of 8.4 percent. Venezuela is an extreme example of Dutch Disease: in nominal terms, oil exports have grown 410 percent since 1998, while imports have grown 130 percent. But in real terms, exports have fallen 40 percent, with imports more than doubling.
At the same time, Venezuela’s institutional development lags behind its Latin American peers. Using the World Bank Governance Indicators for 2009, Venezuela’s percentile rank for control of corruption is 8 percent; the regional average is 47 percent. Similar selective comparisons are as follows: rule of law (3 percent Venezuela, vs. 43 percent regional); quality of regulation (4 percent vs. 45 percent); government effectiveness (19 percent vs. 50 percent); political stability (11 percent vs. 38 percent); and accountability (26 percent vs. 49 percent).
A country like Venezuela, with abundant natural resources, should be seen as having high potential investment in various projects and abundant access to foreign exchange to purchase capital goods and raw material. But unfortunately, after 12 years of unproductive economic policy, Venezuela has spent more than $517 billion in oil income and increased its total debt from $31.3 billion in 1998 to an estimated $96 billion at the end of 2010. Although current distortions cannot be maintained indefinitely, no changes should be expected before the presidential election. The increase in indebtedness that the government has registered in recent years has moved it from a position of net creditor to that of net debtor.
Moreover, these distortions are expected to deteriorate even further leading up to the 2012 election. Given that the principal goal of Chávez appears to be to remain in office—and to use all the power of the state to do so—changes should not be expected in terms of any adjustment of the official exchange rate, the domestic price of gasoline and/or a halt in expropriations. From the cash flow figures, the country has the capacity to pay its external obligations, with debt service representing just 12 percent of gross oil exports in the next two years.
But after the expected deterioration of the net external position over the next two years, Venezuela will likely remain in a more vulnerable position that will require adjustments for whoever is in office in 2013. At the moment, the oil market outlook is helping to postpone any adjustments.
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