Venezuela And Colombia: A Joint Future

August 17, 2015

9NsEQ

I was in Colombia last week. As the price of oil hit its lower level in five years, the Colombian peso was reaching a five year bottom, Bogota’s real state prices were dropping, the economy was slowing, but most people in Bogota seemed to be thinking, real state can not get lower than this and the price for the US$ is simply speculation, so why should I pay more for it?

Few seemed to see what I saw, that the peso will keep devaluing as oil drops and that the twenty year boom in real state prices is over. But sometimes changes are hard to see if you are a local.

Which made me think about the impact of what is going on in both Venezuela and Colombia in the future. And it is simply very bleak…

Think about it, at a time that Colombia is having a hard time with its finances and the peso devaluing, more than one million Colombian/Venezuelans or Venezuelan/Colombians are thinking of going back to Colombia, as jobs are ever more scarce in that country. And the Santos administration  is not even looking at the problem: What are these people going to do? Where will they work? Who will employ them?

Because Colombians are more concerned with other problems, like increasing taxes to cover the deficit, or the FARC negotiations. Meanwhile, the economy seems to be running away from them.

But, without being a doomsday predictor, imagine some likely scenarios: Oil keeps dropping, the deficit keeps widening in Colombia, which only exacerbates the problem. What happens at $ 30 per barrel, how about $20, and don’t even think about $10.

But that is precisely the scenario we should be thinking about. At US$ 30 per barrel, which technically seems to be quite feasible, things would get so bad in Venezuela, which not only it would drive many Colombians out of Venezuela, but may force the Government of Venezuela, current or future, to equilibrate prices. And in such an equilibrium, not only will there be another million of Colombians be driven out of Venezuela, but there will be the destruction of thousands of jobs for Colombians, currently involved in the arbitrage of prices between the two countries.

To begin, he elimination or reduction of the arbitrage will be a severe blow to the Colombian economy. Not only will 25% of the oil sold in Colombia (local estimates of what is extracted from Venezuela) go back up to international prices, but thousands of items from food, to medicines, to every day items will no longer be available at much lower prices. And even worse, those currently employed in Colombia in the bachaquero/arbitrage industries, will lose their jobs. Just like that…

And we are talking of thousands of jobs, as evidenced by a friend of mine who went to the Guajira region and found that after a certain point, “formal” gas stations disappear, as “bachaqueros” take over from them, selling gasoline in containers and sophisticated pumping systems at a 30%-40% discount to Colombian prices.

Which implies that the humanitarian crisis will not be exclusive to Venezuela, but a joint problem. A problem that makes Venezuela’s future closely linked to Colombia’s. We face a joint future, which politician’s seem to be ignoring. But if oil truly goes down to the low 30’s as many expect it, it is a joint future for the two countries.

And is not a pretty one.

 

 

 

 

 

 

 

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50 Responses to “Venezuela And Colombia: A Joint Future”

  1. Juan Largo Says:

    It’s worth repeating – not only are oil prices tanking, but many state-run refineries are in dire condition. I quote:

    “Recently, Pdvsa reported to the OPEC (Organization of Petroleum Exporting Countries) that we were producing 2.6 million barrels per day; almost 400,000 less than the output in 2008,” economist Francisco Monaldi remarked.

    One of the biggest problems faced by the oil company is that “since 2012 our most productive deposits which are located to the north of Monagas are falling down.”

    Falling down in the literal sense. As in falling over for the total lack of standard servicing. All hopes for quick bounce back are negated by the lack of cash flow and wholesale defection of petroengineers to everywhere from Baton Rouge to the North Sea.

    The Venezuela oil industry is basically fucked, and is being nursed along by foreign firms managing a decreasing amount of functional rigs.

    JL

  2. Paul Esqueda Says:

    Very good scenario analysis Miguelito, things can really get worse as the price drops. I think we need to be reminded that Chavez emerged as a strong political option to many people when the price of oil dropped to about $8/barrel in 1998.The political establishment collapsed with AD and COPEI gasping for money mainly because of the horrible state of Venezuelan public finances at the time. So I would agree with Miguel that 18 months is a long time and that desperate solution s can lead to long term crisis like the one we are living now in Venezuela. It is also important to look at the long term cycles of the price of commodities in general that has plunged the Latin American economies at least three times in the last 30 years. So keep an open mind when people with good knowledge of the situation prognosticate disaster.

  3. Ira Says:

    According to Chavista statistics, which are of course dependably unreliable (hey, I like that expression!), VZ saw an immigration figure from Colombia of 120,000:

    https://www.yahoo.com/news/venezuelan-leader-closes-colombia-border-crossing-3-days-044604427.html

    Now, I don’t know how stupid these Colombians have to be to actually think the grass is greener in VZ, but it doesn’t jive with predictions of a million Colombians returning to Colombia.

    And look at the prostitution industry, which is something I like to look at every chance I get:

    From almost the Chavista beginning, it was Venezuelan whores making the money in Colombia–not the other way around.

    But wait…

    I think I just confused myself, and this observation is meaningless.

  4. Roger Says:

    Probably just as much food and such enters Venezuela from Colombia. Also, Colombians are the only folks I know of who will accept Bolivars in payment! Besides gas, I suppose the Bs. go to FARC de Venezuela SA?


  5. […] If you’re wondering why the internacionalistas don’t want to stay in Colombia, read Miguel Octavio’s post on Venezuela And Colombia: A Joint Future. […]

  6. Boludo Tejano Says:

    While lowered oil prices will pose a problem for Colombia, Colombia’s economy is rationally structured, unlike the economy of Venezuela, so Colombia will be better able to respond to lower oil prices. Granted, that observation isn’t exactly rocket science.

    This article points out an irony about the cheaper than water gasoline prices in Venezuela: a lot of gasoline is smuggled to Colombia, where the gasoline then benefits both the bachaqueros and the Colombian economy. So at least one part of that Chavista devil, the dreaded “Madrid-Bogota-Miami axis,” benefits from Chavista gasoline prices. Perhaps someone should point out to Maduro and friends that one way to screw the Colombian economy would be to raise gasoline prices in Venezuela.


    • Colombia doesn’t get that much smuggled fuel. If Venezuela increases gasoline prices it will help the Venezuelan economy, which will allow it to buy more food, possibly from Colombia.

      Maduro doesn’t have anything left to do to hurt other countries. He can’t deal with Guayana. The only thing he can do is continue to wreck Venezuela.

      • moctavio Says:

        According to PDVSA they get between 80,000 and 100,000 barrels a day

        • Ira Says:

          Now, you know better than to place any credibility on PDVSA figures. Which also makes Colombian estimates dubious.

          And since when is gasoline, not crude oil, measured by barrels?

        • Boludo Tejano Says:

          Ira
          And since when is gasoline, not crude oil, measured by barrels?

          Since the oil industry has used the barrel to measure liquid petroleum products, both finished and crude products. Consider this graph from the Energy Information Administration:
          http://www.eia.gov/TODAYINENERGY/detail.cfm?id=7510


        • MO, PDVSA doesn’t have a handle on internal flows. Even Pedro Leon isn’t sure how much oil they get in the Faja, and nobody knows how much gasoline they make. But let’s assume it’s true: the Venezuelan side doesn’t sell it into Colombia for free. My guess is Colombia benefits from say 20 % to 30 % discount on the international price for a product of uncontrolled quality. Colombia makes 1 million BOPD, which is bound to decline due to low prices. But in the great scheme of things that 1 mmbopd isn’t a huge proportion of Colombia’s GDP. Nor is it all going to disappear. As I wrote the best move is for the government to offer to buy oil at a higher price and let the end buyer pay up. This keeps activity at a higher level. But the ANH does need to work out what to do about marginal fields with a lot of production (like Rubiales). Those need some sort of flexible PSA instead of a tax and royalty regime.

          • moctavio Says:

            Whether the estimate is 80,000 barrels or 100,000 barrels is irrelevant, but I have not heard of a number that is not in that ball park. The Venezuelan side may not sell it for free, but it charges less than that 30% discount if my friend could buy gas at 40% to 50% on the highway. So, it is a big subsidy. And in terms of much needed foreign currency it is a nice piece of change. And you may dismiss it as small part of GDP, but add the food that is also smuggled, the medicines, the lack of remesas, however many people will go back to Colombia and you have a big problem. A big problem, because all I heard last week (I am no expert on Colombia) is how everything has slowed down, how real state is dropping (which will stop construction, when Colombians realize the real state gold mine no longer works) and how the devaluation is hurting business. Add to that the fiscal deficit and higher taxes and I think there is a huge problem facing Colombia and the Government is not thinking about many of them. I really hope oil bounces back within that 18 month time frame, but I am afraid the damage done in those 18 months will be severe. You dont need huge proportions of drop in GDP to make people feel terrible, when you are not growing by much, small percentages are huge for poverty and people. Add political campaigns and jeez, I dont know, but I found little to get positive about. The dollar is at 3,000 pesos, but Colombia has yet to feel the effect of 40 dolar oil, let alone the complications I am adding.

      • Boludo Tejano Says:

        80-100,000 BBL a day turns into 1.2-1.5 billion gallons of gasoline a year. Not chicken feed. From this graph of Colombian oil production and exports, it appears that in 2010 Colombia consumed ~ 300,000 BBL of oil a day. Which makes the gasoline smuggling a not insubstantial part of Colombian oil consumption.

        • moctavio Says:

          Colombians told me 25% of their consumption so it jives with PDVSA’s numbers

        • Ira Says:

          It’s simply impossible that 1/3 of Colombian gasoline needs are met by smuggling. Logistically, how the hell can that happen?

        • Boludo Tejano Says:

          Ira, what is implausible is not necessarily impossible. A picture being worth a thousand words, consider the following from Google Images: bachaquero de gasolina. That will give us an idea of the logistics involved.

          I find it interesting that PDVSA and Colombian estimates for gasoline smuggling roughly coincide.

  7. Observer Says:

    If you think the oil price is down, just wait until the US Senate approves the Iran Nuclear deal. The sanctions will be lifted against Iran and all that Iran will do to recover its economy is flood the oil market!


    • That doesn’t make sense. Iran would watch out for its interests, which require it maximize cash flow. Flooding the market would lead to a short lived crash, and they will get less overall cash flow.

      I’ve been in this business for 40 years, and I’ve seen plenty of stupid behavior, but it doesn’t pay to assume competitors are incredibly stupid.

  8. Tony Tan Keng Yam Says:

    Nice tricolor picture of the idyllic Gran Colombia!

    La “Ultra-Derecha” (Uribe/El Imperio/Leopoldo) should force e a pact with la Rebolusion (Chavismo/Farcs/Santos) to give them a small piece of jungle where they could freely conduct all drug trade, embezzlement, murders, with perfect Castrista impunity. (Then Drone-Bomb the hell out of it one night) Hey, dreams are free..


  9. M.O.: I’ve been looking very closely at the industry oil production and financial performance over the last 12 months, and I’m convinced the current low oil price environment is unlikely to last longer than 18 months.

    I want to link you to the EIA drilling productivity report: http://www.eia.gov/petroleum/drilling/pdf/dpr-full.pdf

    The EIA is a little amateurish but I think you and your readers may trust it more than other sources. If you look at the production performance for the Bakken and the Eagle Ford in North Dakota you will see they have peaked. These two, and the Permian, are the main “shale” producers in the USA. And the data shows a significant cut back in well permits, as well as companies delaying fracturing and completion because oil prices are too low.

    I could go on and review what’s going on country by country, or basin by basin, but it takes too much space. But the gist of it is that most producers can’t stand the low price environment for several years. And this includes ALL OPEC nations. Even Saudi Arabia is having to pull money from savings, and the pace is unsustainable.

    We also read a lot about companies bragging they have better technology and have dropped costs. The lower costs are real, caused by service companies taking really hard hits, which they can’t sustain for a long time. But even with the lower prices most producers seem to need something around $80 per barrel WTI to stay alive. This means we are seeing a Darwinian struggle which kills off most participants at $40, gives them a bare breathing margin at $60, allows them to get by limping at $80, and encourages them to increase production once oil price approaches $100.

    I’m rounding off and generalizing, but the gist of it is simply that, unless the world economy craters and demands drops, most oil industry participants can’t stand going below $40 WTI. At that price level the U.S. shale frackers stop completing wells and put their better wells on choke, and in other countries they simply cut back repair activity and shut in wells.

    • moctavio Says:

      Fine, but 18 months is a long time when you have a humanitarian crisis in your hands. Markets over correct and right now we are close to $40 and if it simply stays down here, Venezuela will get much worse and Colombia will follow. I am not predicting long time oil prices, what I am saying is that current prices are already creating a situation that may become untenable in the next six months.

      • Tom ODonnell Says:

        Moctavio – In my view, you have raised some really important considerations here It is a respectable, possible scenario from my perspective. Sure there are other scenarios where economies start to turn around (like China, etc. with knock on boosts to LatAm and oil, …), and perhaps things would not play out as you suggest with a million Colombians returning, etc.; but, well, I think oil prices will likely go much lower, at least for the near-to-medium term.

        I’d add to what you have raised about instability in Colombia that, in such a scenario, there are social and political explosions possible.


      • 18 months is an eternity for Maduro. Santos can get around the problem by having a law to allow refineries to pay up to $72 per barrel WTI equivalent for oil produced in Colombia. This amounts to a subsidy carried by oil product consumers, and shuts off exports (which are inconsequential). Companies accepting the deal would have to accept the imposition of a super tax = to 30 % of revenue for oil sold above $72 per barrel until they have repaid the subsidy.

        Such a subsidy scheme helps maintain the economy functioning, people will be employed, and they won’t get used to short term transportation and cooking fuel costs. I wouldn’t propose it if I didn’t think the oil slump would be short lived.

        Longer term Colombia does need to be reducing national oil production in a managed faction. I would also sign a deal with a foreign investor to build a coal to liquids plant with CO2 capture they can use for enhanced oil recovery.


        • Here’s an example of what’s going on in the USA.

          http://www.highyieldbond.com/bankruptcy-samson-resources-revamp-sees-chapter-11-filing-by-sept-16/

          We are seeing a lot of refinancing and new equity injections to avoid outright bankruptcies. Schlumberger is financing operators to keep their crews working, and there’s no real evidence that USA producers can survive at prices as low as they are now.

          In other words, the only way prices will drop lower would be if the Chinese economy locks down. As I mentioned, this isn’t going to do much for Maduro because a price recovery will take some time. I do sense there’s a lot of political wind pushing to drop prices, it’s clear to see the Saudis want to kill off competitors, and the USA government seems to be quite happy for now. But be careful playing in this market, it’s super volatile.

    • Ira Says:

      And you’ve never heard of the Tesla battery, which is going to make combustion engines obsolete within a few years?

      It is OVER for oil as far as cars are concerned, and THAT is the death knell of the oil industry.

      Yes, this would be considered a ridiculous prediction 20 years ago, but today and now…no.

      Look at the numbers of electric cars/hybrids now being sold. Add to that the increased battery performance and lower costs of these vehicles based on increased production/economies of scale….

      And your gasoline car is going the way of the home rotary telephone.

      • moctavio Says:

        Then Colombia is in REAl trouble

        • Ira Says:

          Many countries might be, but others have the lithium deposits to profit from it.

          Hell, for all we know, they might find lithium in Colombia and VZ as well.

          • nacazo Says:

            I don’t think oil is such a large percentage of the Colombian economy as in Venezuela. So lower oil prices may not affect Colombia as much as it IS affecting Venezuela.

            • moctavio Says:

              Of course not, but the devalaution can mostly be blamed on dropping oil prices, whoch means that 90 days from now, the peso will be lower yet.


      • Ira, the Tesla battery is an energy storage device which uses generic technology. It doesn’t deliver a viable economic return as a peak shaver device. Tesla is a bit like the McLaren, a fancy device which requires enormous subsidies to survive.

    • Ira Says:

      As long as we (meaning Americans) can get the oil via fracking, not to mention getting it from Canada, that changes the whole dynamic!

      We don’t “need” it from foreign sources (excluding Canada) any longer. And all we need are oil tarif policies to bury OPEC, even if that means $60 a barrel for a few years to come.

      Which, as you know, is much higher than today’s prices. But still radically less than the $100 these scumbag exploiters have come to depend on.

      Oil prices are OVER as we’ve come to expect them.


      • Long term, oil production from low permeability resource plays, deep water, and Canadian heavy oil, all require prices above $100 per barrel, rising gradually to $150 per barrel by 2035-40. This isn’t a big mystery in the oil industry, and explains why Shell just got a permit to drill the first exploration well in their Chukchi Sea campaign. That oil prospect could be the largest discovery since the Brazilian presalt. It may produce as much as 500,000 BOPD in 12 years.

  10. Ira Says:

    Bachaqueros don’t pay taxes. “Formal” gas stations do.

    I don’t see any doomsday scenario for Colombia at all, especially since its a credit-worthy nation, and the U.S. certainly has its back.

    Colombia’s fantastic comeback story began and continued prior to any arbitrage/smuggling advantages vis-a-vis Venezuela. (And to me, Uribe is a god, who should be worshipped at every church, synagogue and mosque.)

    Of course, declining oil prices will hurt Colombia, like many other places, but I don’t really see how the elimination of certain black market activities will account for a significant % of the country’s overall economic activity.

    • Dr. Faustus Says:

      I’m with you on this one. Uribe worked miracles in Colombia.

    • moctavio Says:

      The peso started the year at 2376, it is at 3,000 today and if oil does not bounce it will keep on trucking like the Grateful Dead. The country has a huge fiscal deficit and the Government’s solution is to increase taxes, such that some people will have to pay between 60-70%. Meanwhile the estimate is that between half a million and a million will leave for Colombia in the next 12 months, assuming Venezuela remains stable.

      So, imagine a scenario in which 100,000 barrels a day of oil have to be bought at international prices and the 30-40% of foodstuffs that flows into Colombia at Bs. 6.3 goes to market prices. This would add another million of Colombians that would leave and the economy is likely to be in a recession. Uribe is not the President, it is Santos. I think a recession is on the way now, imagine another push…

      • Ira Says:

        In a nutshell, here is…and always has been…my “take” on “people”:

        I believe that people are an asset for economic growth, not a deficit/negative. A million people returning to Colombia are a million more people entering the marketplace, making purchases and such, which GROWS an economy, and creates jobs.

        Countries with declining populations always do worse, never better.

        I also believe that immigration to the U.S. is vital for our economic future. We need workers to do certain jobs, and increasing numbers of them to pay into SS. The problem we have HERE in the states is the untold numbers of illegals not paying any taxes at all, and the benefits and health costs they incur on the country.

        Legal Colombians returning to Colombia certainly don’t pose the same economic dangers. Especially since these were pretty entrepreneurial Colombians (legal or illegal activities) who saw where the money was and moved to VZ in the first place:

        These are not people who will wind up on social assistance.

        • moctavio Says:

          When you have high unemployment and you are entering a recession, one million people can create a big problem, particularly when those in charge are worried more about the peace process than the economy.

          • Ira Says:

            Santos’ peace process options are zero at this point. You’re talking about FARC, I assume.

            Most Colombians pretty much know that in dealing with FARC, he has been a fucking disaster. Uribe was a year or two away from eliminating FARC once and for all, but because of term limits, he didn’t have that extra year or two he needed.

            Sure–he’ll have to “worry” about the “peace process” if he continues his ridiculous policies, but if he had followed Uribe’s, FARC would be history two years ago.

  11. Tony Tan Keng Yam Says:

    Good analysis..

    “oiga, vea-usted, hermano, en que trabaja?”

    “pues fijese, ahoritica mismo vea, en la Industria del Bachaqueo”

  12. spanows Says:

    your arepa index was in the WSJ yesterday, well done!

  13. M Rubio Says:

    I’ve said it before and I’ll say it again. The economy here is now so contorted that I can’t see how it can ever be normalized without dumping the existing currency and starting over with a new one.


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