Sunday, December 07, 2008

Projecting the impact of oil price declines on Venezuela's trade balance 

Over the past several months the price of oil has fallen precipitously. This has prompted a lot of speculation as to what the impact will be on Venezuela's export revenues and its economy.

Unfortunately, most of it has been the typical uninformed non-sense that surrounds Venezuela and as usual most of it emanates from from Chavez's opponents both in Venezuela and in the international media. With silly made up numbers they come to absurd conclusions - such as Venezuela supposedly exporting about 1.3 million barrels of oil per day for revenue - which can easily be debunked just by looking at numbers put out by decidedly non-Chavista organizations such as the U.S. Energy Information Agency.

Fortunately, Mark Weisbrot has tossed his had into the ring and done the best and most serious analysis to date of what the likely impact on declining revenues will be. The end result is that even with prices of down to $50 per barrel (which was a price not yet reached when he wrote his analysis) Venezuela would still likely run a trade surplus. That, along with the huge savings Venezuela has, would mean that Venezuela should be able to whether the current oil price decline without too much difficulty.

While I agree with the overall conclusion of his report I noted he did make some mistakes in his analysis which when corrected make the prognosis for the Venezuelan economy somewhat less optimistic. I'll therefore go over those mistakes, fix them, and present my own analysis of what oil price Venezuela needs to keep its "head above water".

First, Weisbrot wisely uses PDVSA's audited financial statements as his source for information. This is the correct thing to do given that these numbers are audited by the U.S. auditing firm KPMG and have been corroborated by other sources such as those given by the U.S. Energy Information Agency. In fact, while I pointed out some months ago that PDVSA's export numbers, which are broken down by country, matched exactly what the U.S. government says its imports are from Venezuela Weisbrot took it a couple steps further and matched PDVSA's numbers to the import numbers for all the OECD countries (all developed countries) as well as China's. If that doesn't put to rest the fact that PDVSA's numbers are accurate (and knowing all the moonbats out there it probably won't) I don't know what will !!

From the now confirmed PDVSA financial statements Weisbrot gets an export number of 2.89 million barrels per day which he then uses for his calculations. Unfortunately, in using that number he makes two mistakes.

The first is that he apparently doesn't realize that that export number is a gross number. That is while Venezuela does export that amount of oil and refined products it also imports oil and refined products (what it really mainly does is export some oil to be refined and then import the refined products). Given this, the 2.89 million barrels number is a gross number and shouldn't be used to try calculate net export earnings.

The correct way to do it is to take total Venezuelan oil production and then subtract out internal consumption. Looking at PDVSA's financial statement from June 2008 we see their total production of oil was 3.244 per day (page 6) and their domestic consumption was 490,000 barrels per day (page 11). This gives net exports of 2.75 MBPD which is 140,000 barrels per day less than Weisbrot's number.

He then commits an even more bizarre error. He doesn't make any attempt to account for production cuts that Venezuela will be making along with the rest of OPEC in an attempt to stabilize prices. Last month Venezuela was to have cuts 129,000 barrels per day of output. On December 17th OPEC is scheduled to meet again and it is all but certain that they will cut production - probably between 1 and 2 million barrels which would likely mean that Venezuela would have to cut another 129,000 barrels. As an approximation we can assume that total OPEC related cuts for Venezuela will be 260,000 barrels per day.

Subtracting the OPEC cuts from 2.75 million barrels per day brings Venezuelan exports down to 2.49 million barrels per day - a full 400,000 less than Weisbrot's number.

Weisbrot then notes that of the 540,000 barrels that Venezuela exports to the Caribbean countries doesn't get paid immediately for at least half of it. So that is then another 270,000 barrels that should be subtracted from the 2.49 million and gives a final export for revenue number of 2.22 million barrels per day.

It is this 2.22 MBPD number that we will use to calculate revenues.

For example if Venezuelan oil were to average $50 per barrel (which Weisbrot took as a worst case scenario but now looks more like a "best case" scenario) would bring in $40.5 billion in oil revenues. Add in $6.5 billion for non-oil exports and total export earnings would be $47 billion if oil averages $50.

Take oil down to the current Venezuelan price of $34 per barrel and we get $27.5 billion in oil exports which when added to the $6.5 billion in non-oil exports gives $34 billion in revenue.

Next we turn to what Venezuela has to spend in dollars to pay for imports and other dollar denominated expenses such as travel by Venezuelans and debt service. From CADIVI, which is responsible for handing out all dollars in Venezuela, we see that dollars handed out through November of this year total $42.3 billion. Pro-rating for 12 months we get $46 billion. To this we should try to account for imports that PDVSA does for their own needs directly without going through CADIVI and debt service. Venezuelan debt service for the next two years is supposed to be minimal but PDVSA does import a lot of equipment for its own investments and may be importing food for its own food distribution network without going through CADIVI.

Therefore barring more exact numbers the best estimate that can be made is that they will probably need $50 billion in dollars to meet their ongoing expenses.

Referring back to our previously calculated numbers this means they would have a $3 billion deficit with Venezuelan oil at $50 per barrel while they would have a $16 billion deficit with Venezuelan oil at its current price of $34 per barrel.

The latter is a significant deficit but as we shall see shortly it is not unmanageable for Venezuela.

It is also interesting and easy to calculate what the "break even" price is for Venezuela. Knowing that Venezuela needs $43.5 billion from oil exports ($50 billion in expenses minus $6.5 billion in non-oil exports) and dividing that by 2.22 MBPD and 365 days we get $54 per barrel. Oil prices quoted in the news are generally $10 above what Venezuelan oil fetches so if you see oil prices at $64 per barrel Venezuela is breaking even and anything less it is losing money.

Now that we have quantified the situation the question is how much of a bind does a $3 billion or $16 billion deficit put Venezuela in. To answer that we need to have some idea of how much Venezuela has saved in up in dollars. According to the Venezuelan Central Bank Venezuela has about $118 billion in assets abroad.

Of that $120 billion about $23 billion are receivables for the oil they've given to other countries in return for future payment. Obviously that is not money they can get right now. Another $20 billion are fixed assets held abroad such as Citgo and other refineries that PDVSA owns. That is also not easily accessible. Another $39 billion is held in the Central Banks reserves which could be spent in a pinch but really shouldn't be. Subtracting all of the above from $120 billion leaves about $36 billion in money that they can spend to support imports or any other dollar denominated expenses they may have.

With just that $36 billion they could theoretically remain solvent at $50 oil for a decade while even with $34 oil they could hold out for two years.

Clearly Weisbrot's overall conclusion that Venezuela isn't going bust anytime soon is accurate even if the situation isn't quite as rosy as he paints it.

Finally there are some other points that should be noted but because they are hard or impossible to quantify have not been included in this analysis:

1) These numbers do not include any money given to other nations such as Bolivia, Ecuador or Nicaragua. If Chavez wants to give those countries monetary assistance with current oil prices he is going to have to dip into his savings.

2) The discounts given out to the Petro Caribe members will be reduced as prices drop. Because I don't know the exact discount scale for various prices I didn't include it here. But assuming that Venezuela is giving out 270k barrels of oil per day and not getting paid for it is probably no longer true. If Venezuela cancelled the program altogether and got full payment it would bring in another $3.3 billion in revenue at $34 per barrel and $5 billion at $50 per barrel.

3) The same economic crisis which is helping drive down oil prices will also help reduce the cost of Venezuela's imports. For example, food prices have been dropping dramatically as have other "commodity" items such as steel. This could easily shave a few billion dollars off of Venezuela's import bill. Further, the dollar has been appreciating during the current crisis (amazing but true) meaning that even though Venezuela's oil brings in fewer dollars those dollars are actually worth more.

In any event Venezuela does not face an immediate crisis. As I have posted before though it does face stagnation and difficulties in promoting long term development. Those facts will be the subject of the next post.


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