Oil prices have been dropping quite rapidly recently . This
is not too surprising, what was surprising was that they kept rising in the
face of a slowing economy in the US and Europe. Clearly, oil is on the rise
secularly, but it cannot be immune to the economies of those countries that
consume the most of this comodity. That there are problems ahead for oil prices is clear as
the Iranian Governor of OPEC said yesterday that OPEC should cut its output
at the meeting next month, because there was excess demand of about one million
barrels a day at this time. Quite a change from the tight supplies supposedly
in place at the beginning of the year. Expect the correction on the downside to be overdone.
The question is what this means for Venezuela. Venezuela’s
oil basket closed this week at an average of 107.95 per barrel, a sharp drop
from the 126.46 registered barely a month ago. The question is at what level of
prices does the country start having problems? This is not an easy question to
answer because prices can go down significantly before effects are truly felt.
Moreover, a lot of the spending that Chavez is incurring in can be cut without
it having an immediate impact on our daily lives.
But one can do a very simple calculation of at what price
does the country start losing foreign currency, which is a good benchmark for
country’s to start having problems. This is what is called the current account,
which grossly is the sum of the balance of trades plus (or minus) whatever
income goes in and out of the country in foreign currency.
Let us first look at the country’s needs in the next twelve
Imports: US$ 50 billion (They are on a US$ 48 billion pace
in 2008, but Xmas will round it off to the 50 billion dollar level)
Help to Argentina (non-oil) US$ 2.4 billion
Other help abroad US$ 1.6 billion
Thus, Venezuela has needs of US$ 54 billions in the next
twelve months, ignoring the need to pay for nationalizations and Chavez’ pocket money whims.
Let us look now at the possible sources of income. Now, if
you truly believe that Venezuela is producing more oil than what OPEC or the
IEA say, then stop here, you will never agree with my calculations. I will use
2.4 million barrels a day as my benchmark for production. Then, there is the fact that non-oil
exports are expected to be US$ 1.6 billion in the next twelve months, that debt
service will be about US$ 1.5 billion and the country will issue debt for US$ 4
billion in foreign currency. This adds up to US$ 7.1 billion.
Now let’s look at oil exports that generate money.
Production 2.4 million barrels
But, for exports you have to subtract:
Internal consumption of 800,000 barrels a day
Petrocaribe subsidy of 130,000 barrels of oil a day
Chinese development fund of 80,000 barrels of oil a day
Thus, the true amount available for exports that generate
cash flows is 1.38 millions of barrels of oil a day or 507.35 millions of
barrels of oil a year.
Using the numbers above the equilibrium number for the
Venezuelan oil basket is US$ 92.63 per barrel, not terribly distant from where
we are today.
Problems will only start somewhere below and of course,
Venezuela may stop helping Argentina or try to issue more debt, which looks
difficult, but in the end there isn’t much leeway in the numbers. Venezuela
can’t increase oil production or non-traditional imports. Doubling debt to US$
8 billion (very difficult!) and ignoring Argentina, lowers the magic number to US$ 79 per barrel.
But can Chavez do the first and does he dare do the second?
The biggest measure Chavez could take to improve the
Increase gas prices and/or reduce imports. But given his
threats to the private sector, this would latter would lead to shortages and
the former to a sharp drop in popularity.
In some sense, Chavez has been taking the worst possible
measures in terms of a scenario in which oil drops to say US$ 85 per barrel. At
that level, the country’s numbers simply don’t make it, forcing him to take
some truly unpopular measures.