Archive for December 6th, 2008

As oil cycle overshoots on the downside the worst effects of The Devil’s Excrement will be in play

December 6, 2008

If oil prices stay where they are now, things are not going to get bad
for Venezuelans, unfortunately, they are going to get extremely ugly.
Basically, we are going into the worst possible scenario for
the country, where things will get very complicated and there will be
very little that can be done . All of the distortions in the economy,
all of the mismanagement and waste will now come to the surface in
more violent fashion that anyone could have ever imagined. And while
Chavez looks for his indefinite reelection, little is being done to
contain the effects of the collapse of oil prices. As seen below, the
price of the countrys oil basket is now at 34.40, something we had
not seen since 2004. Except that a lot has changed since 2004.

To begin with, there have been five years of inflation, while the
exchange rate has been maintained constant. This implies that PDVSAs
local costs have increased at a rate of 119% (The rate of inflation
since January 2004), while the price of oil has now gone back to the same
levels. While I dont know the details on what percentage of the costs
of PDVSA are in Bs. and what percentage in US$, an economist who used
to work at PDVSA tells me that this means in the same period the cost
of producing a barrel of oil has gone from US$ 15 to somewhere north
of 28 dollars per barrel. Thus, what was a $19.40 profit per barrel
five years ago, will now be only a profit of under $6 per barrel.

I have refined the calculation I did previously on the real foreign
currency cash flow of the Government, where I have now used a range of
independent production estimates for the countrys production of
between 2.37 mbpd to 2.6 mbpd (million barrels per day). I then redid
my calculation on the number of new vehicles on the road since PDVSAs
last reliable number for local consumption which was in 2002. This
calculation yielded that there has been a 57% increase in gasoline
consumption which extrapolates to 795,000 barrels of local consumption
per day.

This gives a range for exports of oil between 1.575 and 1.805 mbpd for
current exports.

However, as I had noted before, Venezuela does not actually get paid
for all of these exports even if PDVSA registers it all as exports.
Essentially, of the 424,000 barrels per day sent to Cuba, Petrocaribe,
China fund, Argentina and San Jose Pact, Venezuela only gets paid for
172,000 barrels per day. This means that the real and true foreign
currency cash flow that the country and PDVSA actually see is between
1.32 and 1.55 mbpd. This leads to the following real foreign currency
revenues depending on the price of the Venezuelan oil basket in the
first column, where I have extended it now to low levels unforeseen a
few months ago.

US$ per b.

1.3 mbpd bil.  US$

1.5 mbpd bil. US$

10

4.83

5.67

15

7.24

8.50

20

9.66

11.34

25

12.07

14.17

30

14.49

17.01

35

16.90

19.84

40

19.32

22.67

50

24.14

28.34

60

28.97

34.01

70

33.80

39.68

80

38.63

45.35

90

43.46

51.02

100

48.29

56.68

Table I Calculation of real foreign currency cash flow based on  range of oil productions from 2.37 million to 2.6 millions of barrels of oil per day, where we have subtracted local consumption and all oil exports which generate no revenues. The firts column shows the price of the Venezuelan oil basket, the second the lower range of estimates of 2.37 mbpd and the second 2.6 mbpd, which correspond to 1.3 to 1,5 mpbd in real foreign currency cash flow for the country.

Thus, at current price levels, Venezuela will have foreign currency
revenues of slightly above US$ 17 billion in 2009. Given that imports
alone will top US$ 50 billion in 2009, you can see how problematic
things may get.

Of course, if things get critical, the Government could and is likely to
ask the countries that receive those 424,000 barrels per day to pay up
or else. This can be done with about 344,000 barrels as the money for
the China fund is already committed. This will improve the picture
somewhat, but it is a decision likely to be made only when things get
creally bad.

To the numbers above, you have to add about US$ 6 billion in non-
traditional exports, which still leaves a shortfall of abut US$ 25
billion at current prices in foreign currency needs.

From the point of view of the budget, which was estimate at US$ 79
billion, US$ 35.9 billion were assumed to come from PDVSA in the form
of dividends, taxes and royalties, which assumed US$ 86 billion in
revenues from exports. My calculation above has to be redone for this,
because oil sold to friendly countries under agreements, pays all of
the above, even if the countries are given credit. This is only a 17%
difference which brings foreign currency revenues to US$ 20 billion.

Thus, think about it, at current levels, PDVSA exports are HALF of
what the budget estimates will be paid to the Government in taxes,
dividends and royalties, which gives you an idea about the magnitude
of the problem.

Separately, the budget assumes tax collection of US$ 36 .23 billion up
from US$ 30 billion last year. If this scenario continues, the economy
will contract, consumption will go down and tax collection will drop.

The country has US$ 38 billion in foreign reserves, which implies they
would be around US$ 20 billion in a year.

But the only way to compensate the shortfall in Bolivars is to devalue
and increase taxes. This will put the burden of the problem on the
poor, who will have to buy more expensive food, now imported at the new
rate of exchange. Devaluing will also increase local production of
goods as producers getting killed by the fixed inflation rate and
cheap imports will have more incentives. Devaluing will increase
exports, which will protect some reserves and improve PDVSAs profit/
loss picture, but it is going to be rough, very rough. Moreover the
longer Chavez postpones an adjustment, the worst it may become and
right now it does not look like anything may be done until the
reelection referendum is past.

It is now that all of the money given away and spent on purchasing
existing and well run companies (many not yet paid for BTW) for ideological reasons
will be needed for the basic needs of Venezuelans. The madness of
economic policies under Hugo Chavez will turn into a nightmare for his
Government and for all Venezuelans. It is the same oil cycle we have
seen over and over. It is the effect of The Devils Excrement at its
worst.

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