Archive for August 17th, 2008

When is the price of oil a problem for Venezuela?

August 17, 2008

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. Venezuelaís
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
countryís 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 countryís 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 letís 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 isnít much leeway in the numbers. Venezuela
canít 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 countryís numbers simply donít make it, forcing him to take
some truly unpopular measures.

Three species as flowring is apparently picking up

August 17, 2008

Top left: This Cattleya Mossiae does not appear to know that it should have flowered three months ago. Not bad for its firest time, note the solid lip and the flaring. On the right a Cattleya Percivaliana named Gabriela.

On the left a Phalenopsis species, Phal. Cornu Cervi, anyone in Caracas that wanst one I have a few to trade. On the left a hybrid of Cattleya Broughtonia with Cattleya Bicolor.

August 17, 2008

In a country where the rule of law gets trampled more and more, Hugo Chavez announced today that tomorrow he will find a new way to do it when he plans to nationalize the cement companies in the country. There are three companies that will be nationalized, which are majority owned by Cemex, Lafarge and Holderbank. However, the ones under the control of Cemex and Lafarge trade in the Caracas Stock market and thus are subject to the Capital Markets Law, which Chavez plans to step over.

Under the Capital Markets Law, anyone that wants to take over a company, including the Government has to first tender at a specified price for all of the shares. This applied to and was use din the case of Electricidad de Caracas and CANTV, but Chavez is gettingt more autocratic by the day and has decided to skip this bothersome legislation even if it happens to be the law of the land. By the way, the same law applies to Banco de Venezuela, which is also publicly traded.

The nationalization of the cement industry is oriented exclusively to nationalize Cemex Venezuela. In fact, it is my understanding that there have been negotiations to reach an agreement only with Cemex and not with the other two. In the end Chavez will pay whatever he wants and the people in charge of the Comision Nacional de Valores will say nothing about the Law which they are supposed to defend.

Chavez is nationalizing the cement industry because he believes he will be able to build more housing as if that was ever a limitation. Once again the ignorant Chief Economist of Venezuela ignores the laws and destroys the value he has shown for ten years he is incapable of creating.

I own a few shares of Cemex Venezuela, so indirectly my assets are being nationalized and my rights are being ignored.