The Devil's Excrement

If anyone wanted proof of the absolute idiocy of the Venezuelan Government, today’s press conference by once-considered-serious Ali Rodriguez Araque, showed why the country is falling apart under the mismanagement of the Chavez administration.

As the country’s electrical infrastructure falls apart and Chavez bars the national electric company Corpoelec from raising electric rates, after seven years of a tariff freeze, Rodriguez Araque proudly announced that any Government institution that does not pay its electric service will have its electricity shut off. You see, Government entities, from Ministries to institutes owe Corpolec some four billion Bolivars, roughly US$ 930 million at the “new” and “unified” official rate, who knows what at the unspeakable green lettuce rate.

And therein lies the tragedy of this non-Government: Nobody is in charge, despite Chavez controlling all powers, each Minister, Head of Institute, Director or whatever, is his all-powerful Dictator of his own fiefdom, accountable to nobody. So, why pay electric bills? A penny saved is a penny earned…and to hell with the future of the country or it proper functioning.

Rodriguez himself notes than when he sends his employees to cut off power, his own people are jailed by the mini-Chavez’ in charge of the various institutions that fail to pay their electric bills month after month!

He is nobody in a Government of lots of little somebodies…

The mess is so huge that Rodriguez said that the revenues of Corpoelec, the revenues, from all the electricity that it sold in 2010, was only sufficient to cover half of the payroll of Corpoelec. Everything else, like so many other subsidies and distortions, has to be supplied by the central Government.

No wonder the electric network is such a mess, we should blame El Niño, but El Niño Hugo Chavez, the same one that unilaterally overrides studies that electric rates need to be increased or sends the victims of the floods to tents that can barely hold their own in a gust of wind.

But the bigger fool is Rodriguez, considered the most capable Minister in the first few years of the Chavez administration. He began the destruction of PDVSA under Chavez’ orders firing 20,000 workers in 2003, including all of the key technical personnel, allowed himself to be displaced from Finance by the incompetent Giordani and now attempts to do the impossible in trying to prop up the electrical power network, with no money.

Thus, the one time guerrilla fighter has now become a sorry pawn of Chavez’ delirium, quietly following orders and barking his own that nobody will follow.

He will not even have to turn off the lights, they will go off on their own.

(I am going to unify them)

Economic theory always talks about the efficient allocation of scarce resources, the acceptance that Governments have to optimize wealth, distribute it as uniformly as possible in order to maximize the well being and happiness of citizens. Clearly, none of Chavez’ “economic” advisers either understands this, nor has explained it to Hugo. The revolution continues to run on a path of destruction, where the State believes that it can do it all, in the process, it is destroying value, reducing those same resources that are scarce and simply trying to redistribute them around. In the end, if your could distribute it all evenly, Venezuela would turn out to be a Nation of poor people. Yes, the extremes have to be eliminated, but the way about doing it have all been wrong in the last twelve years.The subsidies and distortions in the end turn out to be more costly than actually reaches the poor. In fact, the money that it costs to sustain the gasoline subsidy alone could be used to give half the Venezuelan population over the “average” of the GDP/Capita of the country. Not that I am arguing that should be done.

But Chavez’ Government could care less about optimizing or improving resources. When a cement plant is nationalized just to be able to say that the Government owns it, the price of the plant, say US$ 1 billion is spent on buying an existing plant with x jobs, rather than creating a new plant that generates jobs. Even worse, the plant is run more inefficiently, there is less economic value and we are all poorer.

But there are worse subsidies and distortions than the dumb nationalizations. Minister of Planning and Finance Giordani has actually been arguing in the last few days that people were taking advantage of the dual exchange rate of Bs. 2.6 and Bs. 4.3 to the dollar offered by the Givernment.

Duhh!

It took him seven years to learn that?

I could have told him that would happen on day one. It is the story of dual exchange rates in the world and Venezuela.

But what really gets to me is that Giordani  has suggested that even Government imports were being sold as if they were purchased at the higher rate of Bs. 4.3 per US$. So, someone within the Government was making a lot of money out of that arbitrage, because someone had to pocket that difference. The worst part is, nobody is being accused, charged or being fingered. But n the end the truly, really worst part is that those that implemented these idiotic, corrupt, distorted and dumb system, are still running the show.

There is simply no accountability.

And there were many other arbitrages that were absurd and they still exist. It had become fashionable for middle and upper middle class people to send their kids to study abroad. They were given a basic stipend and tuition at Bs. 2.6 per US$ to go study abroad. Hey, with the parallel rate at three times that, how could you go wrong? I am not against education, but I would prefer a program to give scholarships to the best and the brightest at Bs. 0 to go abroad that to fund the well to do at Bs. 2.6.Because most of them could afford it anyway.

And why should I be able to buy US$ 400 of Internet goods at Bs. 4.3 per US$? I was planning to forego the pain of submitting the forms this year to get that amount, but the Government changed policy and I got an email two days ago telling me I had to do nothing, that my card was renewed automatically and I could go ahead and spent my money. This makes no sense at Bs. 4.3, its absurd, its unfair to the poor.

It is the furthest thing from optimizing the allocation of scarce resources. It is the opposite, it is giving money to the rich to buy widgets and gadgets from Amazon, even if they don’t accept my Venezuelan credit card for kindle books.

And I don’t even ask for the travel money, or my US$ 5,000 a year from SITME at US$ 5.3, something some people spend all the time planning and preparing for.

But these things are likely to be tiny in the scale of food imports from the Government and the private sector. Who knows what is authorized at Bs. 2.6, now Bs. 4.3. For that matter who knows what is being imported at Bs. 4.3 and sold at an equivalent exchange rate of Bs. 10 per US$.

But Giordani hails his own decisions, refuses to recognize he imposed this crazy and goofy system and in fact, he is continuing it. At Bs. 4.3 per US$ you still get a subsidy for your kid to study abroad, for your Internet dollars, for food purchased at Bs. 4.3 and sold as if it was purchased at Bs. x higher and likely for breast prosthesis used to enhance the attractiveness of Venezuelan upper and middle class women.

Giordani must be proud of that.

After a few discussions with readers, I decided to do another reality check on the price of gasoline in Venezuela. For all intents and purposes, it is free, no cost, zippo, as the picture above demonstrates.

I filled my tank yesterday. I used 93 octane, unleaded, which in Venezuela costs Bs. 0.097 per liter as you can see above in the green square.

Now, let me explain that Bs. 0.097. With the latest devaluation, the lowest exchange rate available is Bs. 4.3 per US$, which menas that a liter of gasoline in Venezuela is:

(Bs. 0.097/Bs. 4.3)= 0.0225 US$ cents

A number so small, that it is hard to relate to. Try 8.5 cents a gallon, yes US$ 0.085 per gallon or 35 times cheaper than the $3 gallon which prevails today in the US. Think about it, 35 times cheaper!

That is why I prefer for you to look at the other number: I got 43.27 liters for Bs. 4.2, or I filled my tank for less than a US dollar, exactly 97.6 cents.

Of course, there are exchange rates which are worse than Bs. 4.3 per dollar, like the Central Bank’s SITME system, which is Bs. 5.3 or the “forbidden rate”, which are even higher. If you use those, it is even cheaper.

Let’s put it in perspective: A bottle of water of 300 ml. or so, costs Bs. 7, more that my tank of gasoline. A can of Coca Cola about Bs. 6 or 7, also more than my tank of gas. I had a salad today, Bs. 50, ten times a tank of gas, well actually 11.9 times if you want to be precise.

I have a brother who fills his motorcycle with Bs. 0.45, gives the attendant Bs. 1 and tells him to keep the rest. The other day, my bother only had a Bs. 10 bill, gave it to the attendant and he said, no, it’s ok. The gas is indeed free!

So, if you double it, it is still free. Zero impact.

Think about it a different way: A barrel of gasoline is about 203 liters. It sells in Venezuela for US$ 4. It costs to produce at least US$ 20 at the new “low” exchange rate. Venezuelans use about 800,000 barrels of gasoline a day, times 365 times $16 of production subsidy is about US$ 4.6 billion. And I am probably low in the estimate. Of course, we could export it too and even make money. What a capitalist concept!

But think. Who owns cars? Rich people. Poor people go in buses. The impact of a one dollar tank of gas on the ticket price is zilch, zero, ok, it’s 1x 10-3, basically irrelevant. For the rich, it is a nice subsidy. Traffic is hell, so in the end we pay for it anyway.

Get the picture?

Evo Morales increased the price of gas from about 50 cents a gallon to 90 cents a gallon. He had to back track. But he went back to prices which are six times higher than in Venezuela, he wanted to make it almost twelve times more expensive.

This goes back to my old question: Can we insert a little rationality into our system, please!!!

Note added: Reader Lazarus, who knows the stuff, does the calculation in the comments for the size of the subsidy, here is his conclusion:

The loss opportunity cost to the country? Estimating, conservatively, 500,000 bbl per day internal consumption, if sold at the international market price of ~$120 per barrel of refined product, less the $3.50 actual sales prices, is about $58 million per day (BsF 267 million). Annually comes to $21 BILLION.

As he says, you could build a lot of stuff with that amount.

(By a remarkable coincidence, both Caracas Chronicles and Setty discuss the same topic today from different angles, maybe we should send all three posts to Ramirez and someone in the Government who speaks English)