Wednesday, October 15, 2008
The economic crisis, oil prices and Venezuela
The economic/financial crisis shaking the U.S. and Europe and the partially related decline in oil prices have provoked much discussion regarding how these events will effect the Chavez government. Chavez heralds the crisis as proof of capitalism's imminent downfall while his opponents predict declining oil prices are about to provoke his downfall. All this is definitely worthy of analysis and comment.
This post will attempt to give my views on those subjects. Part of the reason for wanting to give my own views as I have seen both pro and anti Chavez blogs make some basic mistakes that I would like to correct.
Apologies in advance for the long, rambling and not well written nature - it is all time permits. Hopefully the key concepts and points I am trying to make will still be clear.
Given the length of the post and realizing not everyone will read all of it I am reproducing here the final summary:
To summarize: OPEC stopped following the wise policies that allowed it to be successful earlier in this decades. As a result of abandoning the highly successful "price band" policy OPEC has now lost control of prices and it will be difficult (but not impossible) to regain that control). The current price declines result mainly from this error by OPEC, not from the impending recession. Venezuela is NOT facing an immediate economic calamity or precipitous decline in its economy as a result of the price decline as some assert. However neither is it following policies that will assure continued economic growth. Rather, Venezuela faces economic stagnation in the coming years (no growth or very slow growth) which will leave most of its population with an unacceptably low standard of living. That would be true EVEN IF prices hadn't declined. The decline in prices only accelerates the arrival of that stagnation. Only by putting the brakes on its out of control consumption binge and increasing investment rates can this stagnation be avoided.
I will start briefly with the economic crisis, then discuss oil prices, and then give my thoughts on how this impacts Venezuela:
The Economic Crisis
The economic problems currently facing the world are severe and likely to manifest themselves in a deep and long recession in not just the U.S. but other countries as well. There are several reasons for this.
First, despite all the money being given away to banks and financial firms next to no money is being spent to actually get the economy out of the recession it is in. The $750 billion give away to lower Manhattan will not help the economy. The reason is that the primary problem is not a lack of credit. The economy is already in a recession with consumption dropping and sales dropping so who wants credit anyways?? Does GM want credit to build new factories? Of course not. Do consumers want credit to buy new houses? Of course not. Do people want credit to start up or expand new businesses right now? Of course not.
The economy is in a downward cycle because people are losing their jobs or afraid of losing their jobs on top of having lost assets through real estate or stock losses. They are therefore spending less, which reduces demands for goods, which forces employers to lay off people in response to declining sales, which in turn provokes more unemployment and less spending. This is the typical downward spiral of a recession or depression in a capitalist economy.
You don't turn this around by giving money to banks or even by cutting interest rates (which is derided as "pushing on a string" in this situation). The only way out is the good old Keynesian way of deficit spending that puts money in the hands of people that will spend it and having the government itself spend lots of money via things like public works. That increases spending by creating jobs and creating more overall demand in the economy thus creating an upward spiral in place of the downward spiral. YET THE U.S. GOVERNMENT HASN'T EVEN BEGUN DOING THAT AND DOESN'T LOOK LIKE IT WILL START ANYTIME SOON.
Possibly after the election the lame duck congress and Bush could try to push through a big stimulus plan. But I don't think that is likely meaning that it will probably wait for the new congress and president in January. By then the damage will be done and there will be no avoiding this being a sharp recession.
It is likely to also be a long recession. The reason I say that is threefold: First the world has relied on a borrowing driven U.S. economy to be its prime mover. Second the U.S. has relied on debt and asset bubbles to be its prime movers and this is coming to an end. When stocks tanked in 2000 real estate quickly took their place as the new asset bubble that could drive the economy. Now that real estate has tanked what will take its place to quickly get the economy moving... nothing that I can think of unless maybe some big tulip bubble develops. Third Europe and possibly Asia are also heading into recessions and therefore will not save the world from this economic decline.
Given all of the above economic activity world wide will be declining for some time and even when it resumes will likely be quite sluggish with no obvious prime movers to move it forward.
The implications of this for all commodities and especially oil prices are obvious - they will be declining in price, possibly quite sharply, and not rebounding for several years in all likely hood.
Oil Prices and OPEC
Not we need to look at oil prices which have not only the world economic crisis effecting them but several other factors as well.
Venezuelan oil (the oil I care about for purposes of this post) peaked over the summer at about $120 per barrel and this week fell to $68 per barrel.
Why are oil prices dropping? Believe it or not it isn't even mainly due (yet) to the financial crisis as oil prices were dropping prior to that.
The precipitating factor in oil price declines can be seen in this picture:
As oil prices rose over the past 5 or so years those increases were easily tolerated because oil, and the things it becomes like gasoline, were still perceived by consumers to be cheap and so it didn't change their habits.
However, somewhere north of $80 per barrel for oil or $3 per gallon of gasoline (in the U.S.) peoples perceptions changed. In the U.S. this was very easy to spot starting this past spring. Cars like the one pictured above were something no red blooded American would ever have been caught dead in. Now I see several of these cars each day. The formerly ubiquitous Hummers have all but disappeared. Virtually every car advertisement in the U.S. now starts off with how many miles to the gallon it gets. People are driving less and when they drive they are driving much more slowly. People are flying less. People who own power boats are leaving them in dock. The net result is that oil consumption in the U.S., which consumes 25% of the worlds oil, is dropping. For the same reason oil consumption in other countries is also declining or at least leveling off.
This change in peoples mentality and habits is even worse, from an oil producers point of view, than it might at first appear. Once people view oil as expensive they make changes that are for the long term and not easily reversed. For example, they buy smaller cars and even when the price of gas drops they won't immediately change back to bigger cars.
Oil prices are inelastic and can easily spike with small increases in demand or small decreases in supply precisely because oil consumers are so reluctant to change their habits in the short term. It is that price inelasticity that allows a cartel like OPEC to be so successful.
However, the flip side of that is that when people do change their oil consumption habits they don't easily revert back and even a small drop in consumption can cause prices to drop dramatically. That makes it imperative for oil producers to try to avoid having oil prices get so high that they induce people to start changing their consumption habits. Once they start cutting back it is next to impossible to get them to change back over the short term and that makes it very difficult for OPEC to defend prices and keep them high even with production cutbacks.
That you don't want oil prices to get too high was a fact well known to OPEC (they learned it the hard way in both the 70s and 80s). That is precisely why in 1999 when OPEC, with a lot of help from the new Chavez government, started to try to get back on its feet it implemented a price band. The idea of a price band was that there was a price that OPEC didn't want oil to go below and which would provoke to cut production to defend it BUT ALSO THERE WAS A PRICE THEY DIDN'T WANT OIL TO GO ABOVE AND IF IT DID GO ABOVE THAT PRICE THEY WOULD INCREASE PRODUCTION TO TRY TO BRING IT DOWN. The whole idea of that was precisely to avoid what happened in the 1970s, 1980s and what is happening again right now where people are fundamentally altering their habits in ways that will lead to long term drops in oil consumption and will cause prices to crash.
So back in 1999/2000 OPEC, with Venezuela and Ali Rodriguez leading the way, established a price band of $22 to $28. They didn't want the price of oil to go below $22 per barrel but they also didn't want it going above $28 per barrel (hah, seems quaint now doesn't it!!). They were smart - having been burned before with price spikes leading to demand destruction leading in turn to price crashes they wanted to be very cautious and not allow an unsustainable price increase. They wanted moderately high oil prices that were sustainable over the long term.
That was a very smart and well thought out policy.
Over time of course prices went over the upper limit of the band, demand didn't seem to be adversely effected (because it was still really cheap by historical standards) and so OPEC kept upping the price band.
More time went by, prices went up, the price band went up, consumption didn't seem to be effected and then, human nature being what it is, someone came up with the brilliant (actually assinine) observation "hey, we don't need a price band any more - the sky is the limit" and OPEC formerly abolished the price band in 2005.
The result? Prices could keep going up and up and OPEC no longer felt compelled to do anything about it when it crossed the upper limit of the price band because now there was no price band and no upper limit. Hubris and arrogance had taken over in OPEC and caused them to forget those hard learned lessons from the 70s and 80s. In fact, when this past summer when asked if they would consider reinstating the band to reign in skyrocketing prices the president of OPEC dismissed it as an out of date notion effectively saying prices will go where they will go and we won't stop them (at least on the way up!). [By the way OPEC should replace this worthless idiot. He, the head of a cartel, actually said "let the market set the price". Apparently he doesn't realize that if the price were left to the market it would be less than $10 per barrel and that the only reason it sells for more is because of the existence of the very cartel he leads!!!]
So oil prices punched through the invisible, but very real, barrier of what consumers are willing to pay, consumers slowly but surely started to change their habits and... guess what? Oil prices started to decline - well before this recent financial scare in fact.
Once again the old saying is being proven right: "There is no cure for high oil prices like high oil prices".
Oh, and guess what happened just a couple of weeks ago in the midst of the slide in oil prices??
Bernardo Alvarez, the former Venezuelan ambassador to the U.S. who has now has lots of free time on his hands because Venezuela doesn't have an ambassador in the U.S. anymore, said in public statements that OPEC should bring back the price bands.
Sorry Bernardo but the horses are out of the barn now and getting them back in isn't going to be easy. If Mr. Alvarez had prevailed upon his boss (no not Maduro, I mean Chavez) to act on this a year ago maybe something could have been done. But now they have provoked a crisis in oil prices which they are well behind the curve on and which as hard as they might try OPEC will be unlikely to be able to reverse, possibly for years.
[As an aside this points up a problem which is evident across virtually the actions of the Chavez government at least going back to Chavez's 2006 re-election when their arrogance and hubris kicked into high gear - instead of being pro-active and implementing good policies to maximize opportunities they are in constant crisis management mode by virtue of letting problems fester until they blow up in their face. This is now happening with oil prices and it is only a matter of time until other festering problems like crime and a out of whack currency blow up. For all their apparent differences obviously Bush and Chavez have a very similar management style.]
The end result is that this demand destruction brought about by oil prices that were too high now has a destructive momentum of its own and will be asserting downward pressure on oil prices for years.
Additionally a worldwide recession looks like to further exert downward pressure on prices.
Last but but not least, even though I don't have time to say much about it, the United States military is now the proud owner of 85 billion barrels of formerly Iraqi oil. If the U.S. winds up winning that war, as certainly looks possible, no one should doubt they are going to make sure production there is ramped up as a way of keeping prices low and cutting a number of their not so favorite people (Chavez included) down to size.
Taking all that together there is a lot more reason to think that oil prices, over at least the medium term, are going to go down than up. They certainly look like they are heading down to $50 per barrel and possibly even lower unless OPEC acts very quickly and very decisively (if behind the scenes and unannounced) to cut production dramatically and get back ahead of the curve.
Before going further I want to address at least one myth that a number of people seem to be counting on to save their oil dependent bacon – Peak Oil. A large number of people seem to think it doesn't matter what OPEC does or what ever else happens in the world, because Peak Oil will come to the rescue of countries like Venezuela and keep prices high.
Peak Oil is the notion that at some point oil starts running out and even before it completely runs out it will be in such short supply that it will dramatically increase prices.
Over time it is actually true. At SOME point and time in the future oil will have to run out - obviously. The question is are we anywheres near that point right now and is that what is driving current prices.
The answer is no.
First off the world currently consumes approximately 85 million barrels of oil per day.
According to current estimates there are about 1.2 to 1.3 trillion barrels of proven oil reserves in the world. Do the math and you have about four decades of oil left.
Now maybe four decades does sound a little dire to you but hold on for two more facts:
1) if you follow that proven reserves number over time you'll notice something funny. It doesn't change much. Sometimes it even goes up. The reason is that is that while the currently proven reserves are used up a little bit each year new reserves are found in bits and pieces all over the world year in and year out so that the total reserves doesn't fall at all or much slower than looking at consumption patterns alone would suggest.
2) if you look at the table that I linked to you we'll notice something curious - HUGE and I mean HUGE quantities of oil that we all know about are left out. Taking a country near and dear to our heart we notice that Venezuela is listed as having only 87 or even 52 billion barrels of oil. Ah, hello, have the people who put this together ever heard of the Orinoco Belt???? Count that and Venezuela has around 250 billion barrels of oil, not 87 billion. Quite a difference, no?
The reality is in that 1.2 trillion barrels number they didn't include Venezuela's gigantic reserves of heavy oil, two surveys didn't include Canada's oil sands, and none of them counted the U.S. oil shales. God only knows what else they are leaving out.
The point is Peak Oil, as true as it clearly is at some point in the future, is likely 5, 6 or even 7 decades off. It is NOT the determinate factor of oil prices now nor is it likely to be so for several decades.
Peak Oil is not what boosted oil prices in 1999 - it was OPEC being rejuvenated (with a lot of help from Chavez) that did. When oil prices were dipping in early 2007 it wasn't Peak Oil that brought them back up, it was OPEC staying ahead of the curve and cutting production in a timely fashion that did.
Similarly the only thing that is going to prevent oil prices from tanking now and staying on the floor for a long time is immediate and dramatic action by OPEC. They are well behind the curve so there is no guarantee they can do anything but at the very least they have to try. Peak Oil is not going to boost prices back up over the next few years. Only fools would sit back and wait for that to happen. Its OPEC or nothing.
[sorry for the long windedness but I want to make another important point here. I have seen it asserted that some oil like Venezuela's Orinoco oil is extremely expensive to produce, can only be produced profitably if prices are above $50 per barrel. This is then used to assert that an oil price of $50 per barrel so much production will become uneconomical and drop out of the market that it will put a floor beneath oil prices preventing them from falling further.
Nice theory, but don't count on it. Orinoco heavy oil doesn't cost anywheres near $50 a barrel to produce. In fact, it costs well under $10 per barrel and as techniques improve that number is dropping. Proof of this is not only PDVSAs financial statements but also the fact that once oil got above $30 per barrel the Venezuela government started to see how much the foreign oil companies were making from the Orinoco oil and started changing laws to increase the governments take. Again, incorrect and false notions about the oil industry aren't going to stop the price slide, only OPEC can do that -maybe.]
So far I've made two guesses about the future:
1) that the world is going into a prolonged period of recession/slow growth.
and
2) that oil prices are going to fall further and stay down for years unless OPEC pulls off a near miracle.
So if those guesses on my part turn out to be right what are the implications for Venezuela's economy?
The impact on the Venezuelan economy:
Looking at this the impact on Venezuela there is a near term versus the intermediate/long term.
In the immediate future there are two forces arrayed against each other here and it is the interplay of those two forces along with whatever adjustments the Venezuelan government makes that will determine what happens.
The two forces are:
1) Venezuela's huge kitty of money that it has squirreled away during the past 5 years
versus
2) the fact that Venezuela is almost entirely dependent on oil for its economic well being.
Using these facts lets make some quick and important observations.
Most importantly the Venezuelan economy isn't under any immediate threat at all from declining oil prices. It is very important to note that the at current levels oil prices are still well above what Venezuela's average oil price was for all of 2007. That is while the average price in 2007 was $65 per barrel the current price is $68 per barrel as of last week and the year to date average for 2008 is still around $100 per barrel.
So right now, as we speak, Venezuela is awash in a lot more petro dollars than it ever has been before and much more than it was last year which was itself a boom year by any measure. That means Venezuela's oil economy is gong to have done very well in 2008 no matter how much the price drops in the remainder of the year.
But what happens in 2009? The answer to that is not much of anything if the Venezuelan government doesn't want it to.
Here I think some of the pro-Chavez blogs have been really underestimating how much money the Venezuelan government has saved up. In its year end report for 2007 the Venezuelan Central Bank (BCV) gave the value of assets held by the Venezuelan government abroad. I can't find the link at the moment and have to go from memory but I'm pretty sure it was well over $80 billion dollars. Clearly that is a lot of money. Keep in mind that was as of 12/31/2007, before oil prices skyrocketed this year. Given how the foriegn reserves alone have gone up by about $8 billion I think we can safely say the Venezuelan government has at its disposal somewhere between $90 and $100 billion dollars.
I am not going to go through all the different possible permutations of what the break even point is for Venezuela's trade balance and how much it might have to dip into its savings. The Inka Kola blog has done a pretty good job of that and people can look at his table.
[another aside to correct errors. Inka Kola makes two mistakes but lucky for him they sort of offset so his chart is fairly accurate. First he asserts that Venezuela is exporting 2.2 MBPD when a quick check of their audited financial statements shows they are exporting a lot more than that. So in that sense he underestimates their oil revenue. But then he amazingly asserts that they are going to INCREASE oil production this year or next. Earth to Inka Kola, when prices start falling OPEC CUTS production, not increases it. So unless Hugo Chavez, Rafael Ramirez, Ali Rodriguez, Bernard Mommer, etc have all collectively lost their minds Venezuela is soon going to be cutting its production, not increasing it. But hey, the silliness of thinking they would increase production in the face of a price collapse helps offset the sillinnes of not looking at their financial statements to see how much oil they actually produce and export so in the end everything turns out ok. The moral of the story: always try to make mistakes in pairs and always try to get them to offset each other :) )
The net result is that Venezuela can hang on for quite some time, possibly years, with oil back below $50 per barrel if they want to. So that takes care of the near term.
Does this mean that I think things are ok and Venezuela is going to weather this storm?
No, not at all. In the intermediate to long term Venezuela faces the exact same problems now that it faced when the price of oil was going up.
With its current policies Venezuela was going to find itself in a lot of trouble even if oil stayed at $120 per barrel. The only thing that the change in oil prices does is change the DATE when Venezuela's unhealthy and unsustainable reliance on oil exports catch up with it.
Let me explain why.
For the past god knows how many decades the only prime mover in the Venezuelan economy has been oil. Just as deficit spending and asset bubbles have been the prime mover that pulled the U.S. economy along in recent years INCREASED oil revenues have been the force that have pulled the Venezuelan economy along.
And note something very important in what I just said - it isn't just high oil revenues that provided for Venezuela's growth - it is the fact that they were constantly increasing that allowed for growth. Ever increasing oil revenues, led to increasing spending which in turn led to economic growth. There really isn't any evidence that anything else played a role in Venezuela's recent growth.
That key fact has a couple of implications for Venezuela's future.
First, it looks like Venezuela has just lost the prime mover of its economy just like the U.S. did when housing prices went down. Even if OPEC is successful at stabilizing prices will they be able to make them increase year after year again as they have over the past four years? That is highly doubtful. The average price of Venezuelan oil this year will likely wind up being somewhere between $80 and $90 per barrel. Can anyone imagine that it will be HIGHER than that in 2009? And even if by some miracle it is, can you count on it being higher still in 2010? And then in 2011? Clearly the Venezuelan economy is fighting very long odds here.
Second, Venezuela, in spite all of the money it has saved up almost certainly can't compensate for oil prices no longer going up. It looks like they will have to spend many billions out of their savings just to MAINTAIN their current level of government spending and current level of imports. Sure that can prevent them from going into a recession in the near term. But it also means they will grow very little or not at all.
Can they draw on their reserves enough that they can actually INCREASE spending and imports even with oil revenue declining? I suppose, for a year or so. But they will burn through their money so fast the day their economy the day the economy runs up against a wall will arrive even sooner.
So once again I beleive that both pro and anti Chavez analysts are mistaken; the opposition commentators in asserting that an abrupt economic decline is likely and the pro-government commentators in asserting that Venezuela should come through fine. Rather than economic decline or continued growth what Venezuela is likely to face within the next couple of years is economic stagnation - that is no or minimal growth. While having the same level of oil income will allow their economy to not decline, as will drawing on savings even if current oil revenues decline somewhat, there is no indication that any other sector of the Venezuelan economy can take the place of oil fueled government spending and grow the economy - not industry, not agriculture, not anything. Given this its looks almost certain that growth will drop to near zero once oil revenues level off (much less decline)
Here I think it important to make a point about why stagnation or slow growth would be so much worse for a country like Venezuela than it is for a developed country like the U.S. or Japan. Given the current financial crisis there have been many articles in the pro-Chavez media implying that the U.S. is undergoing some sort of human calamity. Further, one of my favorite blogs, BoRev, led a post with: "Hey look who's going to ride out the whole global money thingy better than you" to imply Venezuelans would likely be better off that north Americans. Sadly, they won't.
The reason is quite simple and obvious: Venezuela is a poor country where most people have a very low standard of living. Countries like Japan, the U.S. and most of Europe have a high standard of living and while some, particularly the U.S., are highly unequal and have virtually no social welfare programs average people there are much better off than most people in underdeveloped countries like Venezuela.
Of course, the U.S. wasn't always so well off and during at least one previous depressions the situation of much of its citizenry was quite dire provoking the president of the time to say:
This certainly no longer applies to the U.S. to anywheres near the extent it did when the speech was given. But it sure has present day Venezuela (and many, many other countries) pegged. The standard of living of Venezuelans today, even in what are boom times for them, are easily comparable to the U.S. during the Great Depression. The main difference is that in the U.S. those conditions where temporary, in Venezuela they are a permanent condition.
Hence, the best way to describe the condition of Venezuela and other under developed countries is that they are in a "Permanent Depression". That is, their conditions are permanently as bad (or worse) than they are in advanced countries even when those countries are in a severe economic depression.
That is why comparisons between economic conditions between advanced countries and underdeveloped countries need to be made very carefully. If the U.S. economy doesn't grow most Americans still enjoy a very high standard of living. If the Venezuelan economy doesn't grow most Venezuelans remain stuck in a very bad position as they are, by virtue of their under development, stuck in a permanent depression. It is for that reason that BoRev's cute headline is so inaccurate: the average north American or European will still live much better than your average Venezuelan no matter if their economy goes into a recession and Venezuela's doesn't.
This also explains why having high growth rates is so critical for a country like Venezuela. Only decades of high growth can get them out of this "permanent depression" that they have been in practically forever. And this also explains why even though Venezuela has grown rapidly in recent years and the standard of living there has gone up it cannot afford to stagnate - stagnation for Venezuela means accepting as permanent a state of affairs far worse than anything the U.S. or Europe is going through right now.
Now that we have seen why stagnation is so unacceptable we can return to Venezuela's current situation. And there the fact is that while the Venezuelan government has very responsibly saved huge sums of money there is no amount of savings that can help them avoid stagnation. Even if they had saved $200 billion they would face the exact same problems, only the time frames for the problems to manifest themselves would change.
There is only ONE way out of this problem - they have to develop other prime movers to their economy. That is they have to build up other wealth generating (as opposed to wealth consuming) sectors to their economy, namely industry and even agriculture. Once they had those other wealth generating sectors up and running and creating wealth then they would no longer be dependent on increased oil revenues to spur their growth.
Unfortunately, as this blog has spent the better part of a year documenting, it seems certain they aren't doing that. Sadly when you look at what they are using their oil wealth to subsidize, a middle class consumption binge, it becomes clear that they aren't even moving in the right direction.
Here we can see what all too many of their precious petro dollars are going towards.
Heaven forbid khaki pants for wealthy Venezuelans get imported with anything but heavily subsidized petro dollars!! For the Venezuelan government making sure rich Venezuelans don't get jipped by having to buy their imports with devalued black market dollars is apparently more important than building industry. Anyone who follows Venezuelan economic statistic or even spends significant amounts of time in Venezuela can't avoid seeing that this is what the Venezuelan government spends much, or even most, of its oil revenue on.
Given what thus appears to be a rather dire situation what can the Venezuelan government do, at least in this lowly bloggers opinion? Pretty much what I have been arguing that they should do for years now:
1) Maximize the funds available for investment by cutting back on all unnecessary consumption - particularly of expensive consumer goods consumed by the upper classes. This can be accomplished both through devaluing their currency (which they also need to do for other reasons) and by increasing tarrifs and/or simply prohibiting the importation of those items.
2) Having clear plans and goals for developing key sectors of the economy such as manufacturing and agriculture. Then constantly monitoring actual outcomes against the plan and making adjustments as necessary.
3) Having a very high level of investment, 35% of GDP at a minimum. It is impossible to have high growth rates without high investment unless you have some ever growing external source of income such as oil money. As Venezuela cannot count on ever increasing oil revenues it MUST have high levels of investment in order to keep growing and avoid stagnating in the next few years.
4) From the proceeding it is clear what they must NOT do as a result of declining oil revenues - they must NOT reduce investment. So for example they should definitely NOT use FONDEN monies (FONDEN is the national development fund whose purpose is to fund major investments) to support general imports including those of consumer goods. If they do that they are literally slitting their own wrists just to have a very short term gain. If anything, consumption should be cut back everywhere it can (ie, not for the poor but for the middle and upper classes) to fund INCREASED investment.
5) Venezuela needs to see that the sensible policy of price bands, which they originated back in 1999, again become official policy within OPEC. They are presently seeing how the arrogance of thinking there is no price too high for oil can cost them dearly. Now they can only hope that demand doesn't drop so much that even OPEC cuts are powerless to halt the decline in prices.
My best estimation of what a reasonable price band would be is between $55 and $75. If OPEC acts quickly and decisively hopefully it can stop prices from going below $55 or at least prevent them from staying below that price for long. But it also needs to act to moderate them if they go above $75.
In my opinion the implemantation of those five points would give Venezuela its best chance of avoiding economic stagnation and getting out of its "permenent depression" in the years to come.
To summarize: OPEC stopped following the wise policies that allowed it to be successful earlier in this decades. As a result of abandoning the highly successful "price band" policy OPEC has now lost control of prices and it will be difficult (but not impossible) to regain that control). The current price declines result mainly from this error, not from the impending recession. Venezuela is NOT facing an immediate economic calamity or precipitous decline in its economy as a result of the price decline as some assert. However neither is it following policies that will assure continued economic growth. Rather, Venezuela faces economic stagnation in the coming years (no growth or very slow growth) which will leave most of its population with an unacceptably low standard of living. That would be true EVEN IF prices hadn't declined. The decline in prices only accelerates the arrival of that stagnation. Only by putting the brakes on its out of control consumption binge and increasing investment rates can this stagnation be avoided.
|
This post will attempt to give my views on those subjects. Part of the reason for wanting to give my own views as I have seen both pro and anti Chavez blogs make some basic mistakes that I would like to correct.
Apologies in advance for the long, rambling and not well written nature - it is all time permits. Hopefully the key concepts and points I am trying to make will still be clear.
Given the length of the post and realizing not everyone will read all of it I am reproducing here the final summary:
To summarize: OPEC stopped following the wise policies that allowed it to be successful earlier in this decades. As a result of abandoning the highly successful "price band" policy OPEC has now lost control of prices and it will be difficult (but not impossible) to regain that control). The current price declines result mainly from this error by OPEC, not from the impending recession. Venezuela is NOT facing an immediate economic calamity or precipitous decline in its economy as a result of the price decline as some assert. However neither is it following policies that will assure continued economic growth. Rather, Venezuela faces economic stagnation in the coming years (no growth or very slow growth) which will leave most of its population with an unacceptably low standard of living. That would be true EVEN IF prices hadn't declined. The decline in prices only accelerates the arrival of that stagnation. Only by putting the brakes on its out of control consumption binge and increasing investment rates can this stagnation be avoided.
I will start briefly with the economic crisis, then discuss oil prices, and then give my thoughts on how this impacts Venezuela:
The Economic Crisis
The economic problems currently facing the world are severe and likely to manifest themselves in a deep and long recession in not just the U.S. but other countries as well. There are several reasons for this.
First, despite all the money being given away to banks and financial firms next to no money is being spent to actually get the economy out of the recession it is in. The $750 billion give away to lower Manhattan will not help the economy. The reason is that the primary problem is not a lack of credit. The economy is already in a recession with consumption dropping and sales dropping so who wants credit anyways?? Does GM want credit to build new factories? Of course not. Do consumers want credit to buy new houses? Of course not. Do people want credit to start up or expand new businesses right now? Of course not.
The economy is in a downward cycle because people are losing their jobs or afraid of losing their jobs on top of having lost assets through real estate or stock losses. They are therefore spending less, which reduces demands for goods, which forces employers to lay off people in response to declining sales, which in turn provokes more unemployment and less spending. This is the typical downward spiral of a recession or depression in a capitalist economy.
You don't turn this around by giving money to banks or even by cutting interest rates (which is derided as "pushing on a string" in this situation). The only way out is the good old Keynesian way of deficit spending that puts money in the hands of people that will spend it and having the government itself spend lots of money via things like public works. That increases spending by creating jobs and creating more overall demand in the economy thus creating an upward spiral in place of the downward spiral. YET THE U.S. GOVERNMENT HASN'T EVEN BEGUN DOING THAT AND DOESN'T LOOK LIKE IT WILL START ANYTIME SOON.
Possibly after the election the lame duck congress and Bush could try to push through a big stimulus plan. But I don't think that is likely meaning that it will probably wait for the new congress and president in January. By then the damage will be done and there will be no avoiding this being a sharp recession.
It is likely to also be a long recession. The reason I say that is threefold: First the world has relied on a borrowing driven U.S. economy to be its prime mover. Second the U.S. has relied on debt and asset bubbles to be its prime movers and this is coming to an end. When stocks tanked in 2000 real estate quickly took their place as the new asset bubble that could drive the economy. Now that real estate has tanked what will take its place to quickly get the economy moving... nothing that I can think of unless maybe some big tulip bubble develops. Third Europe and possibly Asia are also heading into recessions and therefore will not save the world from this economic decline.
Given all of the above economic activity world wide will be declining for some time and even when it resumes will likely be quite sluggish with no obvious prime movers to move it forward.
The implications of this for all commodities and especially oil prices are obvious - they will be declining in price, possibly quite sharply, and not rebounding for several years in all likely hood.
Oil Prices and OPEC
Not we need to look at oil prices which have not only the world economic crisis effecting them but several other factors as well.
Venezuelan oil (the oil I care about for purposes of this post) peaked over the summer at about $120 per barrel and this week fell to $68 per barrel.
Why are oil prices dropping? Believe it or not it isn't even mainly due (yet) to the financial crisis as oil prices were dropping prior to that.
The precipitating factor in oil price declines can be seen in this picture:
As oil prices rose over the past 5 or so years those increases were easily tolerated because oil, and the things it becomes like gasoline, were still perceived by consumers to be cheap and so it didn't change their habits.
However, somewhere north of $80 per barrel for oil or $3 per gallon of gasoline (in the U.S.) peoples perceptions changed. In the U.S. this was very easy to spot starting this past spring. Cars like the one pictured above were something no red blooded American would ever have been caught dead in. Now I see several of these cars each day. The formerly ubiquitous Hummers have all but disappeared. Virtually every car advertisement in the U.S. now starts off with how many miles to the gallon it gets. People are driving less and when they drive they are driving much more slowly. People are flying less. People who own power boats are leaving them in dock. The net result is that oil consumption in the U.S., which consumes 25% of the worlds oil, is dropping. For the same reason oil consumption in other countries is also declining or at least leveling off.
This change in peoples mentality and habits is even worse, from an oil producers point of view, than it might at first appear. Once people view oil as expensive they make changes that are for the long term and not easily reversed. For example, they buy smaller cars and even when the price of gas drops they won't immediately change back to bigger cars.
Oil prices are inelastic and can easily spike with small increases in demand or small decreases in supply precisely because oil consumers are so reluctant to change their habits in the short term. It is that price inelasticity that allows a cartel like OPEC to be so successful.
However, the flip side of that is that when people do change their oil consumption habits they don't easily revert back and even a small drop in consumption can cause prices to drop dramatically. That makes it imperative for oil producers to try to avoid having oil prices get so high that they induce people to start changing their consumption habits. Once they start cutting back it is next to impossible to get them to change back over the short term and that makes it very difficult for OPEC to defend prices and keep them high even with production cutbacks.
That you don't want oil prices to get too high was a fact well known to OPEC (they learned it the hard way in both the 70s and 80s). That is precisely why in 1999 when OPEC, with a lot of help from the new Chavez government, started to try to get back on its feet it implemented a price band. The idea of a price band was that there was a price that OPEC didn't want oil to go below and which would provoke to cut production to defend it BUT ALSO THERE WAS A PRICE THEY DIDN'T WANT OIL TO GO ABOVE AND IF IT DID GO ABOVE THAT PRICE THEY WOULD INCREASE PRODUCTION TO TRY TO BRING IT DOWN. The whole idea of that was precisely to avoid what happened in the 1970s, 1980s and what is happening again right now where people are fundamentally altering their habits in ways that will lead to long term drops in oil consumption and will cause prices to crash.
So back in 1999/2000 OPEC, with Venezuela and Ali Rodriguez leading the way, established a price band of $22 to $28. They didn't want the price of oil to go below $22 per barrel but they also didn't want it going above $28 per barrel (hah, seems quaint now doesn't it!!). They were smart - having been burned before with price spikes leading to demand destruction leading in turn to price crashes they wanted to be very cautious and not allow an unsustainable price increase. They wanted moderately high oil prices that were sustainable over the long term.
That was a very smart and well thought out policy.
Over time of course prices went over the upper limit of the band, demand didn't seem to be adversely effected (because it was still really cheap by historical standards) and so OPEC kept upping the price band.
More time went by, prices went up, the price band went up, consumption didn't seem to be effected and then, human nature being what it is, someone came up with the brilliant (actually assinine) observation "hey, we don't need a price band any more - the sky is the limit" and OPEC formerly abolished the price band in 2005.
The result? Prices could keep going up and up and OPEC no longer felt compelled to do anything about it when it crossed the upper limit of the price band because now there was no price band and no upper limit. Hubris and arrogance had taken over in OPEC and caused them to forget those hard learned lessons from the 70s and 80s. In fact, when this past summer when asked if they would consider reinstating the band to reign in skyrocketing prices the president of OPEC dismissed it as an out of date notion effectively saying prices will go where they will go and we won't stop them (at least on the way up!). [By the way OPEC should replace this worthless idiot. He, the head of a cartel, actually said "let the market set the price". Apparently he doesn't realize that if the price were left to the market it would be less than $10 per barrel and that the only reason it sells for more is because of the existence of the very cartel he leads!!!]
So oil prices punched through the invisible, but very real, barrier of what consumers are willing to pay, consumers slowly but surely started to change their habits and... guess what? Oil prices started to decline - well before this recent financial scare in fact.
Once again the old saying is being proven right: "There is no cure for high oil prices like high oil prices".
Oh, and guess what happened just a couple of weeks ago in the midst of the slide in oil prices??
Bernardo Alvarez, the former Venezuelan ambassador to the U.S. who has now has lots of free time on his hands because Venezuela doesn't have an ambassador in the U.S. anymore, said in public statements that OPEC should bring back the price bands.
Sorry Bernardo but the horses are out of the barn now and getting them back in isn't going to be easy. If Mr. Alvarez had prevailed upon his boss (no not Maduro, I mean Chavez) to act on this a year ago maybe something could have been done. But now they have provoked a crisis in oil prices which they are well behind the curve on and which as hard as they might try OPEC will be unlikely to be able to reverse, possibly for years.
[As an aside this points up a problem which is evident across virtually the actions of the Chavez government at least going back to Chavez's 2006 re-election when their arrogance and hubris kicked into high gear - instead of being pro-active and implementing good policies to maximize opportunities they are in constant crisis management mode by virtue of letting problems fester until they blow up in their face. This is now happening with oil prices and it is only a matter of time until other festering problems like crime and a out of whack currency blow up. For all their apparent differences obviously Bush and Chavez have a very similar management style.]
The end result is that this demand destruction brought about by oil prices that were too high now has a destructive momentum of its own and will be asserting downward pressure on oil prices for years.
Additionally a worldwide recession looks like to further exert downward pressure on prices.
Last but but not least, even though I don't have time to say much about it, the United States military is now the proud owner of 85 billion barrels of formerly Iraqi oil. If the U.S. winds up winning that war, as certainly looks possible, no one should doubt they are going to make sure production there is ramped up as a way of keeping prices low and cutting a number of their not so favorite people (Chavez included) down to size.
Taking all that together there is a lot more reason to think that oil prices, over at least the medium term, are going to go down than up. They certainly look like they are heading down to $50 per barrel and possibly even lower unless OPEC acts very quickly and very decisively (if behind the scenes and unannounced) to cut production dramatically and get back ahead of the curve.
Before going further I want to address at least one myth that a number of people seem to be counting on to save their oil dependent bacon – Peak Oil. A large number of people seem to think it doesn't matter what OPEC does or what ever else happens in the world, because Peak Oil will come to the rescue of countries like Venezuela and keep prices high.
Peak Oil is the notion that at some point oil starts running out and even before it completely runs out it will be in such short supply that it will dramatically increase prices.
Over time it is actually true. At SOME point and time in the future oil will have to run out - obviously. The question is are we anywheres near that point right now and is that what is driving current prices.
The answer is no.
First off the world currently consumes approximately 85 million barrels of oil per day.
According to current estimates there are about 1.2 to 1.3 trillion barrels of proven oil reserves in the world. Do the math and you have about four decades of oil left.
Now maybe four decades does sound a little dire to you but hold on for two more facts:
1) if you follow that proven reserves number over time you'll notice something funny. It doesn't change much. Sometimes it even goes up. The reason is that is that while the currently proven reserves are used up a little bit each year new reserves are found in bits and pieces all over the world year in and year out so that the total reserves doesn't fall at all or much slower than looking at consumption patterns alone would suggest.
2) if you look at the table that I linked to you we'll notice something curious - HUGE and I mean HUGE quantities of oil that we all know about are left out. Taking a country near and dear to our heart we notice that Venezuela is listed as having only 87 or even 52 billion barrels of oil. Ah, hello, have the people who put this together ever heard of the Orinoco Belt???? Count that and Venezuela has around 250 billion barrels of oil, not 87 billion. Quite a difference, no?
The reality is in that 1.2 trillion barrels number they didn't include Venezuela's gigantic reserves of heavy oil, two surveys didn't include Canada's oil sands, and none of them counted the U.S. oil shales. God only knows what else they are leaving out.
The point is Peak Oil, as true as it clearly is at some point in the future, is likely 5, 6 or even 7 decades off. It is NOT the determinate factor of oil prices now nor is it likely to be so for several decades.
Peak Oil is not what boosted oil prices in 1999 - it was OPEC being rejuvenated (with a lot of help from Chavez) that did. When oil prices were dipping in early 2007 it wasn't Peak Oil that brought them back up, it was OPEC staying ahead of the curve and cutting production in a timely fashion that did.
Similarly the only thing that is going to prevent oil prices from tanking now and staying on the floor for a long time is immediate and dramatic action by OPEC. They are well behind the curve so there is no guarantee they can do anything but at the very least they have to try. Peak Oil is not going to boost prices back up over the next few years. Only fools would sit back and wait for that to happen. Its OPEC or nothing.
[sorry for the long windedness but I want to make another important point here. I have seen it asserted that some oil like Venezuela's Orinoco oil is extremely expensive to produce, can only be produced profitably if prices are above $50 per barrel. This is then used to assert that an oil price of $50 per barrel so much production will become uneconomical and drop out of the market that it will put a floor beneath oil prices preventing them from falling further.
Nice theory, but don't count on it. Orinoco heavy oil doesn't cost anywheres near $50 a barrel to produce. In fact, it costs well under $10 per barrel and as techniques improve that number is dropping. Proof of this is not only PDVSAs financial statements but also the fact that once oil got above $30 per barrel the Venezuela government started to see how much the foreign oil companies were making from the Orinoco oil and started changing laws to increase the governments take. Again, incorrect and false notions about the oil industry aren't going to stop the price slide, only OPEC can do that -maybe.]
So far I've made two guesses about the future:
1) that the world is going into a prolonged period of recession/slow growth.
and
2) that oil prices are going to fall further and stay down for years unless OPEC pulls off a near miracle.
So if those guesses on my part turn out to be right what are the implications for Venezuela's economy?
The impact on the Venezuelan economy:
Looking at this the impact on Venezuela there is a near term versus the intermediate/long term.
In the immediate future there are two forces arrayed against each other here and it is the interplay of those two forces along with whatever adjustments the Venezuelan government makes that will determine what happens.
The two forces are:
1) Venezuela's huge kitty of money that it has squirreled away during the past 5 years
versus
2) the fact that Venezuela is almost entirely dependent on oil for its economic well being.
Using these facts lets make some quick and important observations.
Most importantly the Venezuelan economy isn't under any immediate threat at all from declining oil prices. It is very important to note that the at current levels oil prices are still well above what Venezuela's average oil price was for all of 2007. That is while the average price in 2007 was $65 per barrel the current price is $68 per barrel as of last week and the year to date average for 2008 is still around $100 per barrel.
So right now, as we speak, Venezuela is awash in a lot more petro dollars than it ever has been before and much more than it was last year which was itself a boom year by any measure. That means Venezuela's oil economy is gong to have done very well in 2008 no matter how much the price drops in the remainder of the year.
But what happens in 2009? The answer to that is not much of anything if the Venezuelan government doesn't want it to.
Here I think some of the pro-Chavez blogs have been really underestimating how much money the Venezuelan government has saved up. In its year end report for 2007 the Venezuelan Central Bank (BCV) gave the value of assets held by the Venezuelan government abroad. I can't find the link at the moment and have to go from memory but I'm pretty sure it was well over $80 billion dollars. Clearly that is a lot of money. Keep in mind that was as of 12/31/2007, before oil prices skyrocketed this year. Given how the foriegn reserves alone have gone up by about $8 billion I think we can safely say the Venezuelan government has at its disposal somewhere between $90 and $100 billion dollars.
I am not going to go through all the different possible permutations of what the break even point is for Venezuela's trade balance and how much it might have to dip into its savings. The Inka Kola blog has done a pretty good job of that and people can look at his table.
[another aside to correct errors. Inka Kola makes two mistakes but lucky for him they sort of offset so his chart is fairly accurate. First he asserts that Venezuela is exporting 2.2 MBPD when a quick check of their audited financial statements shows they are exporting a lot more than that. So in that sense he underestimates their oil revenue. But then he amazingly asserts that they are going to INCREASE oil production this year or next. Earth to Inka Kola, when prices start falling OPEC CUTS production, not increases it. So unless Hugo Chavez, Rafael Ramirez, Ali Rodriguez, Bernard Mommer, etc have all collectively lost their minds Venezuela is soon going to be cutting its production, not increasing it. But hey, the silliness of thinking they would increase production in the face of a price collapse helps offset the sillinnes of not looking at their financial statements to see how much oil they actually produce and export so in the end everything turns out ok. The moral of the story: always try to make mistakes in pairs and always try to get them to offset each other :) )
The net result is that Venezuela can hang on for quite some time, possibly years, with oil back below $50 per barrel if they want to. So that takes care of the near term.
Does this mean that I think things are ok and Venezuela is going to weather this storm?
No, not at all. In the intermediate to long term Venezuela faces the exact same problems now that it faced when the price of oil was going up.
With its current policies Venezuela was going to find itself in a lot of trouble even if oil stayed at $120 per barrel. The only thing that the change in oil prices does is change the DATE when Venezuela's unhealthy and unsustainable reliance on oil exports catch up with it.
Let me explain why.
For the past god knows how many decades the only prime mover in the Venezuelan economy has been oil. Just as deficit spending and asset bubbles have been the prime mover that pulled the U.S. economy along in recent years INCREASED oil revenues have been the force that have pulled the Venezuelan economy along.
And note something very important in what I just said - it isn't just high oil revenues that provided for Venezuela's growth - it is the fact that they were constantly increasing that allowed for growth. Ever increasing oil revenues, led to increasing spending which in turn led to economic growth. There really isn't any evidence that anything else played a role in Venezuela's recent growth.
That key fact has a couple of implications for Venezuela's future.
First, it looks like Venezuela has just lost the prime mover of its economy just like the U.S. did when housing prices went down. Even if OPEC is successful at stabilizing prices will they be able to make them increase year after year again as they have over the past four years? That is highly doubtful. The average price of Venezuelan oil this year will likely wind up being somewhere between $80 and $90 per barrel. Can anyone imagine that it will be HIGHER than that in 2009? And even if by some miracle it is, can you count on it being higher still in 2010? And then in 2011? Clearly the Venezuelan economy is fighting very long odds here.
Second, Venezuela, in spite all of the money it has saved up almost certainly can't compensate for oil prices no longer going up. It looks like they will have to spend many billions out of their savings just to MAINTAIN their current level of government spending and current level of imports. Sure that can prevent them from going into a recession in the near term. But it also means they will grow very little or not at all.
Can they draw on their reserves enough that they can actually INCREASE spending and imports even with oil revenue declining? I suppose, for a year or so. But they will burn through their money so fast the day their economy the day the economy runs up against a wall will arrive even sooner.
So once again I beleive that both pro and anti Chavez analysts are mistaken; the opposition commentators in asserting that an abrupt economic decline is likely and the pro-government commentators in asserting that Venezuela should come through fine. Rather than economic decline or continued growth what Venezuela is likely to face within the next couple of years is economic stagnation - that is no or minimal growth. While having the same level of oil income will allow their economy to not decline, as will drawing on savings even if current oil revenues decline somewhat, there is no indication that any other sector of the Venezuelan economy can take the place of oil fueled government spending and grow the economy - not industry, not agriculture, not anything. Given this its looks almost certain that growth will drop to near zero once oil revenues level off (much less decline)
Here I think it important to make a point about why stagnation or slow growth would be so much worse for a country like Venezuela than it is for a developed country like the U.S. or Japan. Given the current financial crisis there have been many articles in the pro-Chavez media implying that the U.S. is undergoing some sort of human calamity. Further, one of my favorite blogs, BoRev, led a post with: "Hey look who's going to ride out the whole global money thingy better than you" to imply Venezuelans would likely be better off that north Americans. Sadly, they won't.
The reason is quite simple and obvious: Venezuela is a poor country where most people have a very low standard of living. Countries like Japan, the U.S. and most of Europe have a high standard of living and while some, particularly the U.S., are highly unequal and have virtually no social welfare programs average people there are much better off than most people in underdeveloped countries like Venezuela.
Of course, the U.S. wasn't always so well off and during at least one previous depressions the situation of much of its citizenry was quite dire provoking the president of the time to say:
In this nation I see tens of millions of its citizens—a substantial part of its whole population—who at this very moment are denied the greater part of what the very lowest standards of today call the necessities of life.
I see millions of families trying to live on incomes so meager that the pall of family disaster hangs over them day by day.
I see millions lacking the means to buy the products of farm and factory and by their poverty denying work and productiveness to many other millions.
I see one-third of a nation ill-housed, ill-clad, ill-nourished.
This certainly no longer applies to the U.S. to anywheres near the extent it did when the speech was given. But it sure has present day Venezuela (and many, many other countries) pegged. The standard of living of Venezuelans today, even in what are boom times for them, are easily comparable to the U.S. during the Great Depression. The main difference is that in the U.S. those conditions where temporary, in Venezuela they are a permanent condition.
Hence, the best way to describe the condition of Venezuela and other under developed countries is that they are in a "Permanent Depression". That is, their conditions are permanently as bad (or worse) than they are in advanced countries even when those countries are in a severe economic depression.
That is why comparisons between economic conditions between advanced countries and underdeveloped countries need to be made very carefully. If the U.S. economy doesn't grow most Americans still enjoy a very high standard of living. If the Venezuelan economy doesn't grow most Venezuelans remain stuck in a very bad position as they are, by virtue of their under development, stuck in a permanent depression. It is for that reason that BoRev's cute headline is so inaccurate: the average north American or European will still live much better than your average Venezuelan no matter if their economy goes into a recession and Venezuela's doesn't.
This also explains why having high growth rates is so critical for a country like Venezuela. Only decades of high growth can get them out of this "permanent depression" that they have been in practically forever. And this also explains why even though Venezuela has grown rapidly in recent years and the standard of living there has gone up it cannot afford to stagnate - stagnation for Venezuela means accepting as permanent a state of affairs far worse than anything the U.S. or Europe is going through right now.
Now that we have seen why stagnation is so unacceptable we can return to Venezuela's current situation. And there the fact is that while the Venezuelan government has very responsibly saved huge sums of money there is no amount of savings that can help them avoid stagnation. Even if they had saved $200 billion they would face the exact same problems, only the time frames for the problems to manifest themselves would change.
There is only ONE way out of this problem - they have to develop other prime movers to their economy. That is they have to build up other wealth generating (as opposed to wealth consuming) sectors to their economy, namely industry and even agriculture. Once they had those other wealth generating sectors up and running and creating wealth then they would no longer be dependent on increased oil revenues to spur their growth.
Unfortunately, as this blog has spent the better part of a year documenting, it seems certain they aren't doing that. Sadly when you look at what they are using their oil wealth to subsidize, a middle class consumption binge, it becomes clear that they aren't even moving in the right direction.
Here we can see what all too many of their precious petro dollars are going towards.
Heaven forbid khaki pants for wealthy Venezuelans get imported with anything but heavily subsidized petro dollars!! For the Venezuelan government making sure rich Venezuelans don't get jipped by having to buy their imports with devalued black market dollars is apparently more important than building industry. Anyone who follows Venezuelan economic statistic or even spends significant amounts of time in Venezuela can't avoid seeing that this is what the Venezuelan government spends much, or even most, of its oil revenue on.
Given what thus appears to be a rather dire situation what can the Venezuelan government do, at least in this lowly bloggers opinion? Pretty much what I have been arguing that they should do for years now:
1) Maximize the funds available for investment by cutting back on all unnecessary consumption - particularly of expensive consumer goods consumed by the upper classes. This can be accomplished both through devaluing their currency (which they also need to do for other reasons) and by increasing tarrifs and/or simply prohibiting the importation of those items.
2) Having clear plans and goals for developing key sectors of the economy such as manufacturing and agriculture. Then constantly monitoring actual outcomes against the plan and making adjustments as necessary.
3) Having a very high level of investment, 35% of GDP at a minimum. It is impossible to have high growth rates without high investment unless you have some ever growing external source of income such as oil money. As Venezuela cannot count on ever increasing oil revenues it MUST have high levels of investment in order to keep growing and avoid stagnating in the next few years.
4) From the proceeding it is clear what they must NOT do as a result of declining oil revenues - they must NOT reduce investment. So for example they should definitely NOT use FONDEN monies (FONDEN is the national development fund whose purpose is to fund major investments) to support general imports including those of consumer goods. If they do that they are literally slitting their own wrists just to have a very short term gain. If anything, consumption should be cut back everywhere it can (ie, not for the poor but for the middle and upper classes) to fund INCREASED investment.
5) Venezuela needs to see that the sensible policy of price bands, which they originated back in 1999, again become official policy within OPEC. They are presently seeing how the arrogance of thinking there is no price too high for oil can cost them dearly. Now they can only hope that demand doesn't drop so much that even OPEC cuts are powerless to halt the decline in prices.
My best estimation of what a reasonable price band would be is between $55 and $75. If OPEC acts quickly and decisively hopefully it can stop prices from going below $55 or at least prevent them from staying below that price for long. But it also needs to act to moderate them if they go above $75.
In my opinion the implemantation of those five points would give Venezuela its best chance of avoiding economic stagnation and getting out of its "permenent depression" in the years to come.
To summarize: OPEC stopped following the wise policies that allowed it to be successful earlier in this decades. As a result of abandoning the highly successful "price band" policy OPEC has now lost control of prices and it will be difficult (but not impossible) to regain that control). The current price declines result mainly from this error, not from the impending recession. Venezuela is NOT facing an immediate economic calamity or precipitous decline in its economy as a result of the price decline as some assert. However neither is it following policies that will assure continued economic growth. Rather, Venezuela faces economic stagnation in the coming years (no growth or very slow growth) which will leave most of its population with an unacceptably low standard of living. That would be true EVEN IF prices hadn't declined. The decline in prices only accelerates the arrival of that stagnation. Only by putting the brakes on its out of control consumption binge and increasing investment rates can this stagnation be avoided.
|
