Veneconomy on the electric crisis and GDP growth in Venezuela

February 12, 2010

Veneconomy in its weekly publication attempts to estimate the effects of the electricity crisis on the economy. His conclusion is that the economy will shrink by at least 8% in 2010, ignoring the effects of the banking crisis which has destroyed almost 10% of the money in circulation. I have shortened the article to eliminate hings that have been said in the blog already

The real costs of the electricity crisis by Veneconomia

This presidential decree – like everything else the Chávez regime has said or done in relation to the national electric­ity crisis – is no more than noise, smoke and mirrors. Moreover, the “investments” the regime pledges to make, including $4 billion in 2010 to add 4,000 MW of genera­tion capacity, are an illusion at best, and outright lies at worst. Nothing the Chávez regime attempts will reduce the electricity supply deficit in less than three to five years, and the rationing the country will suffer until at least 2012, if not longer, will have an immense cost in terms of lost eco­nomic growth. Meanwhile, the question that most economists and analysts are only just starting to seek answers to is this: How much could the electricity crisis re­ally cost Venezuela?

VenEconomy has attempted to calculate an approximate answer to this critically important question. It’s not simply a case of how much the regime can or should spend, but rather how great might the over­all economy’s losses be while the electric­ity crisis lasts. The baseline employed for the following estimates is a proposal made by a group of analysts including experts from Simon Bolivar University, who pro­posed “reprogramming” all of the country’s “commercial and industrial ac­tivities to four days a week,” and reduc­ing all activities on Sundays to the maximum possible extent. Moreover, these experts suggest that a four-day work week and three-day weekend should be contin­ued until Guri Dam’s reservoir refills and the government restores the thermal power generation park to full operational capacity including the completion of all planned new generation projects. This would achieve the desired electricity con­sumption savings of 20% which the gov­ernment has set as its official short-term conservation target.

However, there’s an important glitch in this proposal’s basic assumptions, which is that this plan only would have to be maintained until the rains return to Ven­ezuela, presumably in May or June.

VenEconomy believes this core assump­tion is mistaken. The electricity deficit will persist for two-three years, or more. Even President Chávez acknowledged just two Sundays ago that Venezuela’s electricity crisis would be worse in 2011 than in 2010. This indeed is a very ominous admission,considering Edelca’s warning that it could be forced to shut down 5,000 MW of Guri’s hydropower generation capacity before end-May 2010, triggering what Edelca calls a “national collapse” due, in part, to the fact that Guri water is what powers the downstream hydroelectric plants.

VenEconomy thinks that the country faces at least three years of permanent electricity rationing.

VenEconomy’s initial crude calculation was that a four-day work week would cost Venezuela the equivalent of 20% of GDP over the course of 12 months. Obviously, most of that loss would be compensated for via increased output of goods and ser­vices over the four working days. Thus, VenEconomy thinks a decline of 5% of GDP is almost certain, to which another 3% of GDP contraction would accrue from the near-total shutdown of the basic indus­tries in Guayana.

As a result, VenEconomy’s preliminary estimate is that the crisis will cost the na­tion the equivalent of 8% of GDP in 2010, plus another 6% in 2011 (assuming that Chávez is mistaken in saying that 2011 will be a worse year for the electricity sector than 2010), and a further 4% in 2012, for a total cumulative three-year contraction equivalent to 18% of GDP, for a total of some Bs.F.5,000 (in today’s bolívars) for every man, woman and child in Venezuela.

11 Responses to “Veneconomy on the electric crisis and GDP growth in Venezuela”

  1. mediocriollo Says:

    Miguel

    are they talking total GDP, including Oil?

  2. HalfEmpty Says:

    I’m trying to figure if this is a drop from Real GDP or a drop from Potential.

    Reads like Read…, and that’s scary.

  3. HalfEmpty Says:

    mEH, reads like REAL.

    /keyybords they’re gettin smiler

  4. loroferoz Says:

    Well, you would think that eliminating The Friday would not have as great an impact as eliminating, say, Wednesday.

    But maybe Venezuelan workers will move the get-out-early, bug-off-leave-it-for-Monday day to Thursday and act just as if it were Friday.

    Just joking. It’s scary if the Universidad Simon Bolivar guys cannot come with anything better than a four day work week. Of course they cannot, generating power, doing maintenance to the national grid, etc. etc. would not be a challenge, even for the best-run utility company in the world. Which Edelca and Corpoelec are far from being, given the present situation.

  5. marc in calgary Says:

    In the second last paragraph you state that Veneconomy calculates that a move to a 4 day week will cost the country about 20% of GDP, my question is why would anyone assume that on the remaining 4 work days, goods and services would increase so as to keep the GDP decline to about 5%. It is just another day off work… sure everyone still needs to eat on that day, but without those willing to extend their hours or productivity in the other 4 work days, the loss to production is still there.
    Does Hugo really think that millions of people will be content to simply sit in the shade without air conditioning and hope for better times to come?

    I can’t wait to see how he spins this for the coming legislative elections…

  6. island canuck Says:

    I think a 4 day work week would be great for the tourism industry here in Margarita Island.

    Go for it :-)

  7. StJacques Says:

    Nice summary Miguel, I think Veneconomy’s analysis will hold up.

    What is so shocking to me, and probably anyone else who has had any kind of training in Economics, is that in the midst of such dire news Chavez not only does nothing to reassure economic actors both at home and abroad, he continues to take steps (esp. devaluation of Bolivar at two rates) which only increase uncertainty.

    Does anyone really know what the value of anything is in Venezuela?


  8. […] calculate that Venezuela’s electricity crisis will cost the country 8% of its GDP in […]

  9. Bill Simpson of Slidell USA Says:

    Ten years ago, I would have bet anyone that there would never be an electricity shortage in Venezuela for as long as I was alive. Anyone who has studied the resource base of Venezuela, finds it hard to believe that such a thing is actually happening. It should teach the entire world the importance of good government, and the rule of law. It is sad that the people of Venezuela had to be the victims of the lesson.

  10. Marcos Urbina Says:

    Short circuit inside the revolution

    Venezuela is going through a grievous power –electrical energy- emergency but the so called revolution is also having difficulties to conceal it, while the motto “To stick to one’s hands” pretending not to understand, ignoring this problem isn’t paying any results.

    Frequent black outs would reach even to the farthest country geography, consequently affecting its inhabitants. There’s no getting around it: government officials are definitely not ruling this South American country efficiently and again, back to the old tricks, they don’t attend their office duties, as clerks fail to come to work either for the well being and people’s welfare or to bring this country on the road to a fair progress and steady growth.

    But wages these bureaucrats earn are justified provided they support and secure Chavez president at office and of course at power. This explains vacant minister offices as public administration clerks abandon their jobs just to attend to campaign parades.

    We would expect an outcome: the basic, elementary maintenance overhaul given to dams is neglected, overlooked and careless by negligent office clerks, who obligated to wear red clothes -men in red- are forced to attend to these parades -assistance is checked- even humiliated if refused, so Venezuela won’t get out of control.

    The country’s infrastructure, communication, transportation, and roads, has become impaired, wearing out, causing damage to citizens. This is what has happened to electric power plants, despite huge budgets approved by president Chávez to deal with these problems.

    In only just a decade, over 950.000 million dollar bugged of calculated proceeds without control authority or instrument have been handed out to energy board, without authority control, except for the ostentatious, showy governmental expense squandering. This has been augmented by the new attention, courtesy contributions and donations given for the sake of the Bolivarian Revolution to allied countries, plus purchases of obsolete weaponry for non existing wars.

    The biggest and only dam in Venezuela is “Guri” or “Raúl Leony,” once a major outstanding engineering masterpiece, and still is today, standing as one of the best in the world, lacks appropriate maintenance and safeguarding creating some problems along the years. So it shows the fact only half of total turbines working presently is responsible for 70% of power going to Venezuela’s energy necessities.

    Nevertheless, 11 years since Chávez got power and enough resources were not sufficient to build more dams -or alternate power plants. At the same time other ways for generating energy have been abandoned -like thermoelectric plants powered by orimulsion fuel. These latter depend greatly on oil -Venezuela has plenty of this- and would be much more manageable than depending on rain hazard.

    The country is now under the worst leadership crisis, blaming others for the power shortage, ranging from “El Niño,” to blame the IV Republic, ruined by almighty chavismo, it has been the government way out of it.

    Energy supply has been a hard trial for Chavez and his admirers, yet they have mismanaged this damned catastrophe. The only way out of this in resolving the current power crisis would be a proposal bound to execute and carry out new alternate ways to get Venezuelans out of the existing electric shortage.

  11. StJacques Says:

    That was an important comment Marcos. It is nice to hear a local perspective.

    On the subject of “sufficient resources,” I just posted on the electricity issue last night and I made an attempt to show that Venezuelan demand for electricity grew at its fastest pace from 2004 to 2007, driven by its growth in GDP, which was the time when Chavez could have acted–and should have acted–to fix the power crisis.

    http://stjacquesonline.blogspot.com/2010/02/coming-electrical-power-disaster-in.html

    And the apologists for Chavez cannot say that no one knew about the coming shortfall in the power supply or that El Niño could lower the water flows in the Caroni basin either. EDELCA warned Chavez in 2002, others warned him over the next two years, and Venezuela’s National Institute of Meteorology and Hydrology had the information about El Niño’s impact on water levels at Guri after the 1997-98 El Niño event.


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