Archive for December 9th, 2008

Venezuela and Oil 101

December 9, 2008

The last post I made on oil, has generated lots of questions in large
part because of a link by Instapundit, there were many comments and
questions in private emails by people that do not necessarily follwo Venezuela closely, which leads me to believe some basic facts
about Venezuela and its oil production and consumption capabilities
and how they relate to my calculation should be clarified:

—What is Venezuela’s oil production?

This is a key part of the analysis in the previous article in this blog. Venezuela
claims to be producing 3.2 million barrels of oil before the recent
production cut of 173,000 barrels. However, no reputable source
believes this number including the IEA (reports here)and OPEC, of which Venezuela is
actually a member. Venezuela has lobbied OPEC to accept the official
Government’s number but OPEC went the other way and actually reduced the country’s quota to a
number near the production level it had been  reporting for the country. Every year
the Venezuelan Government presents a budget assuming a huge number for
oil production, but with a ridiculously low price. Only the cheerleaders of
the revolution believe these numbers.

In my calculation I used a range of oil production numbers which go
on the low side from the OPEC and IEA number (2.37 mbpd) and on the
high side the number used by an independent analyst who is the highest
number I know (2.6mbpd), but still well below what PDVSA and the Venezuelan
Government say (3.2 mbpd). It should be noted that OPEC and IEA mostly
agree and move in tandem in that they have lowered their numbers on
the country’s oil production, since 2003.

—What are Venezuela’s oil exports?

For the calculation below, the total exports are basically
irrelevant, because I only estimated the net foreign currency revenues
of the country. Venezuela has become a net importer of gasoline, thus
on the one hand Venezuela could be exporting 2 million barrels of oil
per day (mbpd), but it has to import an unknown amount of gasoline, which needs to
be paid for and thus represents foreign currency outflows for the
country. Thus, my calculation does not take exports into account, but
is simply:

Total Dollar Revenues for Venezuela= Dollars as if we exported all
production-dollars to pay for gasoline imports-Dollars for oil sold on
credit or not paid under agreements

I have NOT taken into account the fact that the imports are at a
higher prices than the average exports since they are higher quality

—What is the country’s gasoline consumption?

PDVSA claims today’s internal consumption is 520,000 barrels of oil
a day, below the 560,000 barrels of oil PDVSA reported in 2002. This
number has no credibility, given the 57% increase in the number of
vehicles in the road since 2004 as well as the 44% growth in the
economy since 2002.

Our number for internal gasoline consumption only uses the increase in
the number of vehicle, but does not take into accounts other factors
such as smuggling to Colombia, which has to have increased as the
arbitrage difference between the price of gasoline between the two
countries has soared in the last four years and the fact that there
has been a drop in natural gas production in Western Venezuela
(acknowledged by PDVSA) which has led to the use of fuel oil instead
of natural gas in that part of the country. Reliable estimates range
from 680,000 to 820,000 barrels a day. I used 795,000 barrels of oil a
day, but believe it is actually higher.

—But if it costs so much to produce a barrel of oil what happens
to the country as the price of oil goes below PDVSA’s costs and there
are no earnings from selling the oil?

One has to separate the question into three parts:

1) PDVSA as a company making money

2)The dollar needs of the country

3)The fiscal picture of the country

1) PDVSA as a company would lose money if oil got below its production
costs. Because on top of that it still has to pay taxes and royalties
to the Government whether or not it makes money. And in the past,
PDVSA has paid dividends beyond its earnings. Thus “losing” money is
PDVSA’s problem as a “private” company if even Government owned. PDVSA
will have less capacity to explore and start new projects if this
happens and it has yet to pay for the nationalizations of heavy crude
producers Petrozuata and Cerro Negro. At the same time, PDVSA will
lose less on the gasoline subsidy, as the price at which gasoline is
sold in Venezuela (8 cents per gallon at the parallel swap exchange
rate or 18 cents at the official rate of exchange) is closer to the
production price

2) Venezuela needs dollars because, like most countries, it is not
self-sufficient on all products and the high levels of inflation have
hurt local production of goods and competition from cheap imports as
the currency has been held artificially constant for 4 years.

Venezuela imported US$ 50 billion in 2007 and will match that figure
this year. Clearly, if the country does not have the US$ 50 billion it
has to draw down international reserves and use money in the
development funds. But of course, the first solution will be fewer
imports. This implies lower economic growth, unemployment and even
shortages (Most people don’t realize that last year’s shortages had to
do with the Government not having the cash flow to import everything
needed). Look to the automotive sector, one of the ones that generate
more jobs to be the most affected by this.

3)The fiscal picture. The country has essentially two sources of
revenues for its budget: From oil and from taxes. If oil revenues go down, it may
raise taxes up to a point, but the fiscal balance looks awful.
Normally, the country can borrow internally and externally. Externally
is basically impossible in the short term because of the international
credit crisis. Internally will be an option but it is limited in size
and if there is a devaluation will become very expensive (A
devaluation will drive interest rates at least temporarily as
inflation expectations will go up and investors will ask to be paid
accordingly). Devaluation is the simplest solution, but it generates

My post deals only with the second question, as the third is very
complicated and can be attacked in many different ways and the first
would take time to analyze in detail. (Which I don’t have). My guess is that foreign currency needs will generate a crisis first as has been the case in the past/

Finally, I would like to note that I don’t feel oil price are going
to weaken much more than they have, it seems as counter intuitive for
them to continue to go down as for them reaching $140. However, when
trends like this get so speculative in nature you overshoot to the
downside as well as the upside. But if I had to bet, I would bet that
the average price of the Venezuelan oil basket next year will be
around US$ 60 and I believe that still means trouble unless a serious
adjustment is made.=