Wednesday, November 12, 2008

Florida real estate isn't the only thing under water. 

The new year is only a month and a half away and unless something changes really soon Venezuela's budget for next year is already in big trouble.

The main reason being tanking oil prices and OPEC production cuts.

Venezuela's budget for next year assumed Venezuelan oil production would be 3.7 million barrels per day and the price would be $60 per barrel. As of today, neither one of those assumptions is holding up.

First off, while the budget called for 3.7 MBPD of production Venezuela currently only produces about 3.1 MBPD which is in line with OPEC quotas. Why they made a budget that assumes MORE oil production than OPEC quotas even come close to allowing them to produce is completely beyond me. It has to make you wonder if the whole government isn't starting to lose their collective marbles.

Anyways, they are at least 600k short on daily production of what the budget calls for AND OPEC is already talking about another round of cuts. So I think it is a safe assumption that they will be underproducing relative to the budget by 600,000 barrels per day.

Doing the math (600,000 barrels x $60 per barrel x 365 days) gives a shorfall of over $13.1 billion dollars! No small change there.

That however is only one piece of the puzzle. The next part is that Venezuelan oil is now selling for $50 per barrel while the bdugeted price is $60 - or in other words if we assume the price neither goes up or down next year (probably the fairest assumption we can make though I think it is more likely to continue going down than to go back up) they are losing $10 on every barrel.

Given that they have net exports of about 2.4 million barrels per day when we do the math (2.4 million x $10 x 365)we get another $8.7 billion dollar shortfall.

Add them together and we can say that using the most realistic assumptions the Venezuelan budget for next year already has an almost $22 BILLION dollar whole in it. That is, if nothing else changes, they will have a $22 billion deficit next year.

Of course, they are probably good for the money, given what they have saved up. Still, covering this out of savings means that things that were originally meant for investments in infrastructure or industry would now be used just to support ongoing government expenditures. There is no way that is good.

Further, this is just one years deficit. What will 2010 be like? Maybe, assuming the worlds economy recovers, prices may go up a bit. But it is very doubtfull given what OPEC quotas are likely to be that Venezuela will be able to produce anywheres near the 3.7 MBPD the budget calls for, even in 2010. So their budget for that year will likely have a big hole in it too.

Any prudent government would already be starting to toss a lot of unnecessary expenditures overboard and take other steps such as instituting a dual exchange rate for items deamed non essential. But so far this government isn't. And unless they do it soon after the elections (say by January at the latest) it can be assumed they are sticking with the policy of letting the imbalances grow until everything blows up. Given that I spent all of 2007 waiting for them to take sensible pro-active measure which they never did I am not going to be holding my breath this time.

On a final note, just to rub salt into a wound, another oil exporting country was clever enough to hedge all their oil prices for next year. That is, Mexico spent $1.5 billion dollars on hedges guarenteeing them the price of $70 per barrel no matter what the actual price is. And they did this for ALL their oil!!

If prices stay as low as they are now some poor sucker is going to wind up losing a lot of money paying Mexico for the price difference while Mexico won't have a gaping hole in its budget like Venezuela does.

Obviously Chavez isn't nearly as clever as he likes to think he is. If he was, he could have hedged Venezuela's oil exports, his budget would be just fine (well, except for the absurd production number) and he would actually be kicking the capitalists in New York while they were down by making them lose tonns of money subsidizing Venezuela's oil.


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