The tale of Venezuela’s free gasoline and PDVSA’s free (fake) profits

August 8, 2010

One way to start a conversation about the bizarre Venezuelan economic system under XXIst. Century Pseudo socialism is to talk about gasoline prices. The conversation may go something like this:

Foreign Friend who does not follow Venezuela closely (call him F): How expensive is gas in Venezuela?

Devil: Gasoline is essentially free in Venezuela.

F: Free? Are you nuts? How can they give it away?

Devil: Ok, I lied, it’s not free, it’s 50 cents…

F: Woa! 50 cents a gallon that is truly cheap, almost free.

Devil: no, no, not for a gallon, it takes about 50 dollar cents to fill the full gas tank of a medium to large size car. It’s easier to calculate it that way than to figure out per liter or per gallon cost, but basically it is 1.1 cent per liter or 4.2 cents per gallon.

F: (puzzled look, glassy eyes): but this makes no sense, the poor have no cars, it is the rich that benefit from this. You can’t produce gasoline at that price.

Devil: You are absolutely right. Chavez says that profit is a capitalistic concept and the “people” own the oil anyway, so he has kept the price fixed for 11 years as inflation has hit 1,000% in the same period.

F: But still, it’s not a matter of profit, but cost. You are selling the gas way below cost and someone is paying for it. And on top of that such cheap gas promotes wasteful use of the oil, if it does not cost anything, then why drive less? In any case, how much does it cost to produce the gas in Venezuela?

Devil: You are right on all counts, gas consumption has doubled in six years and the estimate is that the subisidy is about $35 per barrel or about 10 billion a year, but it is hard to know the cost of producing oil in Venezuela, the company’s financials are hard to undestand. For example, the company makes free or fake profits when it buys and sell its own bonds.

F: Wait, wait! What do you mean free profits? That makes no sense.

Devil: Well, few economic things make much sense in Venezuela. But let me try to explain the free profits at Pdvsa:

You see, last year in Venezuela we had two exchange rates (This year we have more, but that is a different story) In November PDVSA sold about US$ 3 billion in bonds to local investors in exchange for Bolivars. The bonds were sold at about 140% of their face value, so PDVSA got 3 billion x 1.4 x 2.15 Bs. in the sale or Bs. 9.03 billion. People essentialy bought dollars at Bs. 5.3.

A few days later, PDVSA bought something like 300 million dollars cash value of its own bonds in the international markets and used it to pay debts it had with contractors for Bs. 1.6 billion and in that way it made $445 million dollars.

F: This makes no sense, how did it make so much money? Buying 300 million, they made 445 million?

Devil: it’s the magic of exchange rates. See, Pdvsa had debt in the amount of Bs. 1.6 billion with contractors. The cost of a dollar for PDVSA is Bs. 2.15 each (official rate) it “bought” 300 million dollars of bonds at Bs. 2.15 or Bs. 645 million, but it paid the contractors with the bonds at a different rate of Bs. 5.3 per dollar. So, it “made” a profit of the difference between the two or 1.6 billion minus 645 million or about 955 million Bolivars, which through the magic of PDVSA’s accounting in US$ is 955/2.15= 445 million dollars. Voila, free profits!

F: Wow! But doesn’t this mean they could do this as many times as they wanted?

Devil: Yes, but if there is a devaluation, those Bolivars are worth much less. With January’s devaluation, half the profit simply evaporared for example. In fact, all of PDVSA’s Bolivars were worth half after the devaluation. It’s all smoke and mirrors, doing this is in fact a devaluation, Pdvsa sold dollars at Bs. 5.3, repurchased them at Bs. 2.15 and then sold them again at Bs. 5.3, that is the key, It’s all fake profits in the end. It could do it again and again.

F: Well Devil, this is too bizarre for me to understand, let’s go back to looking at those beautiful mountains.

(Note, the numbers are all approximate, I invented them to fit the profits claimed by PDVSA as closely as possible)

19 Responses to “The tale of Venezuela’s free gasoline and PDVSA’s free (fake) profits”

  1. JJ Says:

    First thing you need to understand – economics is no science, never was – it’s the way for the few rich to control the rest. Just check out Us bank system – how it’s going into the debt beyond understanding and then go back and look at Venezueala. your problem is that you can’t look beyond your very short sighted, pseudo scientific eco-fascist point of view, the one that brought US to $10 trillion in debt! I don’t wish capitalism to my worst enemy and I hope this disaster will never happen to Venezuela. They’re not perfect but the direction they’re going is much better than US debt generation, creating money out of thin air utopia.

  2. LA Says:

    watch the documentary Inside Job – now THERE’S some fake profits for you! the Venezuelans are pikers in comparison…

  3. LA Says:

    How is this much different than what Wall St does in the US? In housing or agriculture since 90s for example

    (see Frederick Kaufman’s The Food Bubble published in Harpers 6/10 re Goldman Sachs and others gambling with food production-same strategy that led to housing market crash

    Re free gas, US gas might not be free but we subsidize it through wars and blood.

    The only equitable/fair way to reduce energy consumption is rationing-ALL market mechanisms or taxes favor rich who are not going to reduce their consumption (as does “flat” tax).

    Heard at lecture yesterday that the US could have supplied ALL its energy needs through solar arrays that would have cost half the $ we have spent on Gulf wars and no blood. (Based on Scientific American Jan 08 estimate of needing 30,000 sq. miles at $420 billion to power US)

  4. Mathieu: The absolute amount of subsidy per person is much higher for the rich or for the middle class than it is for the poor person, there is almost a factor of three difference between the top and the bottom. Moreover cars are also subsidized and since gas is cheap, it makes the proposition of buying a car more attractive (Cars are subisidized because car parts for manufacturing are brought in at Bs. 4.3 per $, Bs. 2.15 up to last year).

    It would be much more of a direct subsidy to use natural gas in all public transportation or give public transportation a direct subsidy. The gasoline susbisdy is paud by PDVSA and this year it will be US$ 10 billion. That is almost $400 per person and is paid by PDVSA which is cash strapped. It is a very perverse subsidy.

  5. Correction.
    United Nations Development Program
    Under poverty line 52%*

    *The problem of saying poor people is: what is the standard to classified poor people. I am sure the poverty rates in Venezuela are much much higher, so, is better to use Under the poverty line.

  6. I like the story of PDVSA.
    But, just one thing, is not because the poor people don’t have cars that this cheap gas, only benefit the rich… I agree crazy cheap gas need to stop in Venezuela and it needs to be a transaction to higher the prices. But cheap gasoline benefit mostly poor people, venezuela have a 80% more or less of poverty, and this prices lower the cost of public transportation, food distribution, energy cost, etc.
    So to say that cheap ga benefit only rich people is an absurdity.

  7. Roberto N Says:

    Yeah, that was one hell of a reception, no?

  8. GWEH Says:

    Gordo, that’s why he recently cancelled travel. Memories of CAP returning from Davos in ’92 linger strongly. Adult diapers in short supply!

  9. Gordo Says:

    I heard that when gasoline prices were raised once, it almost caused a bloody revolution!

    Koyla, the Indian Paintbrush Trail in the Grand Tetons, is one of my favorite trails in the whole world.

  10. loroferoz Says:

    You have characterized it correctly.

    It is tautology in economics. PDVSA has become too big and whatever it does now with the help of the Central Bank is circular.

    I am in doubt about the manner in which VENEZUELA WILL BE SHOCKED OUT OF TAUTOLOGY. We will be shocked, like catatonics. Or rather, we will be popped like a bubble.

    What scale and depth of suffering and violence will ensue?

    I cannot very well blame Chavez for all of it. Certainly he accelerated it beyond any expectation and certainly he has made sure that there will be angry and armed people to make it worse. But my wager is that the opposition will be just as surprised by the events.

  11. Kolya Says:

    OT: poor Miguel is heading back to the daily chaos of Caracas–he may already be back… but I hope you had a great break in Montana, on the Snake River (where at, by the Tetons in Wyoming?) and in ruggedly beautiful Utah.

    OW is right, Dead Horse Point is a great place.

    I actually lived in Utah for a few years (primarily around Logan), and did my share of back country travel in the Wasacht, the Uintas, and the spectacular red slickrock desert country of southern Utah. Interestingly, most Utahns are Mormons, but some of the wildest people I’ve met were non-Mormon Utahns.

  12. captainccs Says:

    Gasoline might be free but food inflation is galloping. Soon they will have to remove another tree zeros from the bolivar flacuchento and call it the BSeXtraFuerte (BSXF). That’s all what we get from the Chavez gang, BS extra fuerte. Tons of BS on alo presidente. Tons of BS in rotten food.

  13. Daniel Says:

    wow.. this post explains a whole hell of a lot… so in other words, PDVSA can send out a bond.. and sell it at local currency.. but its denominated in USD… so once its sold to local currency at 5.3Bs/USD.. then the company that bought PDVSA bonds goes to US market and sells it at the value of the bond.. since its denominated in USD.. then PDVSA goes back out in the foreign market buys it back.. at 2.15 Bs/USD… therefore essentially making 5.3-2.15=3.15/USD right away. and then uses that money to pay off all the contractors that are locals.. (on top of that PDVSA has their own bonds back and can reissue it back to the market place at 5.3Bs/USD (technically speaking)

    soo… the part that doesnt make sense to me is this….

    are most contractors local? or foreign? and if they are foreign, Im assuming they want foreign currency… so is that where the bleeding is coming from?

  14. The bond was just announced, 2022, Coupon 12.75%, higher than I expected:

    Click to access Convocatoria-Bono2022-09-08-2010.pdf

  15. Miguel Octavio Says:

    It’s easy to blog when you just narrate what happened in real life, vacation ending

  16. Gringo Says:

    Why do I keep thinking of Alice in Wonderland and Through the Looking Glass when I read about Thugoslavia?

  17. Roger Says:

    And they don’t have any road taxes either! But, there are potholes that you can loose a Russian Tank in!

  18. OW Says:

    You know you have issues when you blog on your vacation.

    Make sure you go to Dead Horse Point State Park. The most scenic spot in Utah, which is really saying something (though I hope you hiked up the Virgen River in Zion – that is a close second).

  19. HalfEmpty Says:

    Heh, for some reason dialogue from Joey Heller came to mind:

    1st Lt. Milo Minderbinder: I want to serve this to the men. Taste it and let me know what you think.
    [Yossarian takes a bite]
    Yossarian: What is it?
    1st Lt. Milo Minderbinder: Chocolate covered cotton.
    Yossarian: What are you, crazy?
    1st Lt. Milo Minderbinder: No good, huh?
    Yossarian: For Christ’s sake, you didn’t even take the seeds out.
    1st Lt. Milo Minderbinder: Is it really that bad?
    Yossarian: It’s cotton!

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