The Devil's Excrement

Actually, today the Chinese launched a satellite called
Simon Bolivar for which the Venezuelan Government paid US$400 million to have
the Chinese build it.

Good deal for the Chinese, I Haven’t bought a
communications satellite lately, but I am sure the Chinese made a bundle
selling it and selling consulting and training going forward.

Supposedly, this satellite makes
us more independent. Sure, we have an independent communications satellite,
but it gives us little independence as if we don’t pay the Chinese I am sure
they will turn everything off.

To make the scene even more bizarre, we were told by the
autocrat himself that our scientists (which ones?) will use this satellite
somehow. I guess they will make phone calls or connect to the Internet or
something like that. This contrasts with the statements by Evo Morales, who was
invited to the launch, that he hopes the satellite favors the indigenous people
of Latin America.

Jeez, this satellite is certainly quite versatile if it
will satisfy both needs. It certainly has no remote sensing capabilities.

To complete the tour of ignorance and misleading statements,
we were told that it is the Ministry of Science and Technology that runs the
project.

Another giant step for ignorance and false advertising in
Venezuela.

What’s next? Self sufficiency in food by buying
Argentinean farms and importing their production?

I guess all of the accusations against prominent
Government figures are irrelevant to this bastion of Venezuelan Justice. And
given the fact that the suitcase full of cash was taken to Argentina about 15
months ago, it may be good to remind her of the trial of the cops accused with
deaths on April 11^th. 2002, who have been detained for four years
and have yet to be brought to trial.

—And then, just like that, this
same lady turns around and says the accusations against opposition leader
Manuel Rosales brought up by President Chavez and Maracaibo’s Mayor Di Martino,
will be investigated “in quick and expedite fashion”. This despite the fact
that she has no clue what the accusation of corruption is about and no formal
case has been presented yet.

What a difference between the two cases, no?

—And in the same case, the Venezuelan National Assembly discussed today
opening an investigation against Manuel Rosales. Since they are there the
Assembly will also
investigate him for trying to kill Chavez. Faster than a speeding bullet in
the middle of an electoral campaign. Such nice people!

—And then as a Director of the Electoral Board says that the Board
should investigate Chavez taking advantage of his position, the
head of the Board says that the institution she presides has no accusations
that the President is taking any advantage of his position. Funny, I guess that
Director must be irrelevant or does not exist, no?

It is not easy to know how much is
out there, by moving funds out of the Central Bank and into the development
funds one does not have regular information as to the assets available. Thus,
we can only look back at most numbers as of June 1^st.

Venezuela currently has US$ 39
billion in reserves, which corresponds to roughly 9 months of imports. I have
never liked to use this number, because panic begins way before the money looks like
it is dwindling down.

I prefer to leave international
Reserves outside the calculation, so that I can look at how much money the
Government has in Bolivars as well, otherwise I would be double counting because those
Bolivars came from the backing of those same reserves.

Thus, we look at the dollars and Bolivars held by various institutions and later we add them up

Fonden: As of
June 30^th. Fonden had US$
14.7 billion between cash and investments. However US$ 7.7 of that has been committed
to projects that are being executed and US$ 2.51 billion have been spent or are
due, leaving US$ 4.41 billion. We know Fonden has left about US$ 1.4-1.5
billion in Argentinean Boden 15’s purchase at 65%, but which currently trade
around 25%, representing a loss of US$ 560 million. Additionally, Fonden had
US$ 525 million in Lehman Brothers instruments, which are simply unavailable
for use. Thus, Fonden has no more than US$ 3.3 billion available, some of which
may be invested in Sovereign debt, which is at lower prices.

Total Fonden: US$ 3.3 billion (Not all of it may be in US$ but given the law
regulating Fonden I would assume it all is)

Bandes: According to its financial
statement Bandes
has more or less US$ 2.7 billion a number that has changed little in the
last six months. However, other Government funds different than Fonden, keep
their foreign assets in US$ at Bandes, in June this amounted to US$ 7.9
billion

PDVSA:
Reportedly PDVSA has US$ 3 billion
in cash and Bs. 3 billion in
cash.  

FIEM: FIEM
has US$ 0.8 billion

Banco del Tesoro: US$ 0.3 billion

Bs. The Government has in the
banking system Bs. 18 billion

Bs. The Government has at the
Central Bank Bs. 4.6 billion

Various Bs., Bs 3 billion

—Total Assets in US$

            Fonden                   US$ 3.3
bil.

            Bandes                   US$
10.6.

            PDVSA                     US$
3.0 bil.

            FIEM                       US$
0.8 bil.

            Tesoro                    US$
0.3 billion

Total dollars                     
US$ 18.0 bil.

—-Total Assets in Bs.

            PDVSA
                     Bs.    3.0 bil

            Banks                        Bs.
18.0 bil

            Central
Bank             Bs.
4.6  bil.

          
Various                      
Bs. 3.0 bil

            Total                          Bs.
28.6 bil.

Let’s look first at the budget,
which is US$ 89 billion, with no salary increases, additional expenditures and
the like:

Local Revenues                US$
38 billion

Oil Revenues                    US$
38 billion (Assuming
average US$ 80 per barrel)

Local Debt Issues            US$   5 billion

Deficit                            
US$ 8 billion

This can be compensated with
Bandes and Fonden funds. Alternatively, a 30% devaluation would yield US$ 10
billion. Thus, the numbers don’t look terrible at US$ 80 per barrel. At US$ 60
there are problems because you need and extra US$ 10 billion, thus you would
deplete Fonden and Bandes and have to devalue.

It thus looks like we will see a
devaluation, use part of the Bandes and Fonden funds and I suspect there will
be an increase in both the value added tax as well as the implementation of a
debit tax.

Before you think I am too
optimistic for 2009, I really don’t think the average price in 2009 will be
below US$ 60 per barrel even if it looks that way right now. Oil prices are
likely to overcompensate on the down side as much as they did on the upside,
given the uncertainty in the future of the world economy. Prices are acting
right now like the worst case scenario is likely. I am not sure that is going
to be the case.

More worrisome is the balance of
payments issue.

Revenues from oil exports (US$80
per barrel)                US$ 38 billion

Other Exports                                                                 US$   6 billion

                                                          Total                    
US$ 44 billion

Imports this year                                                            US$ 54 billion

Deficit                                                                              US$ 10 billion

Thus, this is really a problem, because you would have to use all of
Fonden and Bandes US$ in order to satisfy dollar needs or draw down
international reserves. The problem is that M2 is getting to be US$ 80 billion,
so if reserves drop, people are going to get quite nervous.

Note that this is the optimistic
scenario of US$ 80 per barrel. Things would get really critical at US$ 60 per
barrel.

Even more worrisome, note that the
Government would have no money to intervene the parallel swap market which
could go to stratospheric levels and thus a devaluation looks inevitable.

Finally, I have not included in
any of this Chavez’ folly of nationalizating Cemex, Petrozuata, Cerro Negro,
Sidor and Banco de Venezuela. All of those add up to US$ 14 billion. By late
2009 one may expect one of the two heavy oil arbitrations to come to a close
and Chavez is likely to pay Banco de Venezuela US$ 1.2 billion before the end
of the year.

It certainly looks like things
will get very complicated at these levels of oil prices for the Venezuelan oil
basket. In both the ficsal and balance of payment scenarios a devaluation certainly looks like a sure thing in the first half
of 2009.

In what follows I will try to follow largely the second
approach, that is relate what the official version of the numbers is and then
try to point out where the discrepancies and problems are, while trying to keep
it simple. I am actually repeating things I have said before on oil, but the
recent drop in prices suggests it is important to review it. To keep the
subjects separately I will cover only oil in this first part.

We were told yesterday that the 2009 budget set the price
of a barrel for the Venezuelan oil basket at US$ 60 per barrel. This number on
its own is meaningless, because you only get dollars for your exports.  That is the relevant number at the end
of the day.

Thus, you need to know:

Total Production

Subtract Internal Consumption

Subtract oil sold as part of intra Government treaties, or
at least figure out what fraction of that you get paid  for.

—Production

Here is problem number one:

PDVSA says production is around 3.15 million barrels per
day

The International Energy Agency and OPEC says productions
is around 2.45 million barrels of oil a day

No matter how you turn this one around, it is hard to
believe that OPEC is wrong, after all Venezuela is a member and has argued and
tried to change the number. Sadly, the 2.45 million number takes the country
back to 1997 in oil production.

—Internal
Consumption

This is the key:

Official number: 530,000 barrels of oil a day

My Estimate: 800,000 barrels a day

Ramon Espinasa’s estimate 750,000-800,000

Who is right?

Well, let’s look at the evidence: In 2001 PDVSA stated
that internal consumption was 510,000 barrels of oil a day.  Thus, PDVSA claims internal consumption
has gone up 20,000 barrels a day since 2001. But, between 2002 and 2007 the
Venezuelan economy supposedly grew by 44% and the number of vehicles increased
by 50%, the price of gasoline has drooped by more than 50% in real terms and the
price difference between Venezuela and Colombia is a factor of 30 (I take these
numbers from Espinasa).

Thus, it seems unbelievable that production has increased
by barely 20,000. My number comes from the increase in vehicles alone using
numbers from the car salesmen association.  

Clearly, the PDVSA number makes no sense.

—Exports
under Treaties

These are all official numbers for 2007 except China which
is official 2008:

Petrocaribe 138,000 barrels a day

Caracas Cooperation Agreement: 70,000 barrels a day

Argentina: 34,000 barrels a day

Cuba: 92,000 barrels a day

San Jose Pact: 80,000 barrels a day

China: 80,000 barrels a day

The problem here is that conditions vary. Cuba has two
years grace period plus long term cheap financing. Petrocaribe has 50% plus
long term cheap financing, as well as the San Jose Pact. China never pays, the
oil pays for projects, so that there is no cash flow for PDVSA. The total is
486,000 barrels of which 170,000 does not get paid, leaving 316,000 barrels,
only about half or 158,000 barrels of which gets paid and generates dollars for
the country and cash flow for PDVSA.

Thus, of the total left after local consumption, you
subtract 486,000 and then add 158,000

—Summary

With all of the above, the believable numbers are:

Production 2.45 million a day

Consumption-800,000 million barrels a day

This gives 1,650,000 barrels a day.

But you have to subtract 486,000 and then add 158,000.

Thus, the most likely number for Venezuela’s exports of
oil is:

1,322,000
barrels of oil a day

This would provide foreign currency revenues for the
country at the following levels:

I will use these numbers in the latter parts, but you see
the picture: Venezuela will import over US$ 50 billion this year. Of curse, the
country has other sources of foreign currencies, but the picture is not pretty
if the country can’t borrow abroad.