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Cheap Gasoline: Why Venezuela Is Doomed To Collapse

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Riots in the streets. Killings of protesters. Shortages of consumer staples like toilet paper and flour. Power outages. Confiscations of private property. Capital flight. Inflation running at more than 50%. The highest murder rate in the world.

The situation in Venezuela has grown so terrible that we could very well be witnessing the waning days of the Chavez-Maduro regime.

But don’t hold your breath. Despots propped up by revenues from natural resources have had a surprisingly robust track record over the past 100 years. Saddam Hussein survived through ruthlessness and handouts to Baath party loyalists. Khadafi perfected the same model in Libya. The Saudis and other Gulf sultanates and emirates have survived by paying off tribe members. Zimbabwe’s Robert Mugabe is still around thanks to his trade in blood diamonds.

In each case, the big boss keeps his head by paying off everyone who matters.

Hugo Chavez appeared to have the same kind of staying power. But with a difference. Rather than just focusing on lining the nests his generals and ministers and doers, Chavez, and Nicolas Maduro after him, found a different way to squander Venezuela’s great oil wealth. They could have created a mechanism by which the people of Venezuela could leverage oil wealth to finance investment and capital formation (like, say, Norway). Instead they’ve simply given it all away.

Indeed, it might not happen this month or this year, but Venezuela is ultimately doomed to collapse because of cheap gasoline.

Befitting Venezuela’s position as holder of the world’s biggest oil reserves, Chavez set the price of gasoline at the official equivalent of 5 U.S. cents per gallon. Using the more realistic black market exchange rate, a gallon of gas in Venezuela costs less than one penny. You can fill up an SUV for less than the price of a candy bar.

It’s one thing for a dictator to curry favor among his subjects by handing out cash. You can trade cash for goods today. You can save it up and buy something bigger tomorrow. And vitally, you can invest cash and create capital. Cash has unsurpassed option value.

But in Venezuela, cheap gasoline doesn’t. Sure, some enterprising Venezuelans would fill up their tanks, drive to Colombia, siphon it out and sell it for a profit. But most just take it for granted, like breathable air. You can’t trade it, can’t sell it, can’t store it up.

Over time, when a government continually gives its people a non-tradable subsidy, they will come to consider it a right, not a privilege. When that happens it will no longer occur to them to be thankful toward their generous president for the handout. When that take-it-for-granted moment occurs, the handout no longer retains any political capital for the ruler who presides over it. On the contrary, once the populous sees the subsidy as a right, it necessarily become a political liability for the leader — tying his hands and preventing the implementation of a more reasonable policy.

Grant people a right and they will thank you, for a little while. Try to take away that right and they will revolt. The last time Venezuela tried to hike gas prices, in 1989, there were riots in the streets.

Cheap gasoline is why the government of President Nicolas Maduro is doomed to collapse. He can’t raise gas prices meaningfully without setting off an even greater populist uprising than the one already wracking the capital. But without change, the Venezuelan economy and its state-run oil company Petroleos Venezuela (PDVSA) cannot last long.

Let’s work through the numbers to see how bad it is:

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Pres. Maduro with PDVSA workers. (Credit: AP)

Venezuela produces about 2.5 million barrels of oil per day, about the same as Iraq.

About 800,000 barrels per day of gasoline and diesel is consumed domestically for which PDVSA doesn’t make a dime. That’s about 290 million barrels per year in subsidy oil.

What’s that cost PDVSA? Oil minister Rafael Ramirez has said that the breakeven cost to supply refined gasoline to the masses is $1.62 per gallon, or about $70 per barrel. But because Venezuela’s refineries can’t even make enough fuel to meet demand, PDVSA also has to import about 80,000 bpd of refined products (for which they must pay the far higher market price in excess of $2.50 per gallon). All told, the subsidized fuel costs PDVSA about $50 billion a year — that’s at least $25 billion a year in fuel subsidies plus another $20 billion or so in foregone revenue that PDVSA desperately needs to reinvest into its oil fields. Even a well managed company would have trouble climbing out of such a big hole.

Deducting that 800,000 bpd of domestic consumption from the 2.5 million bpd total leaves a subtotal of 1.7 million bpd that Venezuela can sell into the world market.

But we have more deductions. In order to finance fuel subsidies and other social spending, PDVSA has borrowed massively. According to PDVSA’s statements, its debt has increased from $15.5 billion in 2008 to $43 billion now. Venezuela’s biggest creditor is China, which has reportedly loaned the country $50 billion since 2007. China is not interested in getting Venezuelan bolivars; it insists on being paid back in oil — about 300,000 bpd worth of oil.

Paying China its oil knocks PDVSA’s saleable supply down to 1.4 million bpd.

We’re not done yet. Chavez was not just generous to his own people. In an effort to make friends with his neighbors, he forged a pact called Petrocaribe, through which PDVSA delivers deeply subsidized oil to the likes of Cuba, Jamaica, Haiti and Nicaragua. Though shipments at peak were more than 200,000 bpd, including 100,000 bpd to Cuba, there’s evidence that PDVSA has cut the volumes. No wonder, when the Dominican Republic has reportedly been paying back PDVSA in black beans. Cuba sends doctors and athletic trainers. (Jamaica puts its PetroCaribe debt to Venezuela at $2.5 billion.)

As if that weren’t enough, PDVSA, through its U.S. refining arm Citgo has even donated more than $400 million worth of heating oil to poor people in the United States. That’s about 4 million barrels over nine years.

So all that largesse knocks off another 200,000 bpd or so, bringing PDVSA’s marketable supply down to 1.3 million bpd.

Over the course of a year, selling that 1.3 million bpd of oil brings in about $50 billion in hard currency (assuming about $100 per barrel). This contrasts with PDVSA’s reported revenues of $125 billion, most of which is not in dollars, but bolivars, of uncertain worth.

That $50 billion might seem like a tidy sum, but keep in mind that this represents more than 95% of Venezuela’s foreign earnings. And that’s not enough for a country of 40 million to live on.

Because no one in their right mind would want to exchange goods for bolivars, it’s out of this pile of greenbacks that Venezuela has to pay for all its imports as well as about $5 billion a year in dollar-denominated interest payments. Venezuela’s foreign currency reserves have plunged from $30 billion at the end of 2012 to about $20 billion today.

Newspapers have closed because they can’t import paper. Toyota has stopped making cars because it can’t get dollars to import parts. Shortages of sugar, milk and butter are common. The CEO of Empresas Polar, a big food manufacturer, has rejected Maduro’s criticisms that his company is to blame for shortages, insisting that because the government holds all the country’s dollars he can’t get the hard currency he needs to import raw materials.

Venezuela’s official exchange rate stands at about 6 bolivar to the dollar. But on the black market one greenback will fetch 87 bolivars or more.

If you’re an entrepreneur or a business owner in Venezuela, you’re not likely to keep throwing good money after bad there, especially if you’re a retailer like Daka. Last November Maduro ordered soldiers to occupy Daka’s five stores and forced managers to sell electronics at lower prices. In some cases looters just helped themselves.

Reuters reported that Maduro was outraged at a store selling a washing machine for 54,000 bolivars — $8,600 at the official rate. That might seem high until you hear from a business owner: “Because they don’t allow me to buy dollars at the official rate of 6.3, I have to buy goods with black market dollars at about 60 bolivars, so how can I be expected to sell things at a loss? Can my children eat with that?” said the businessman, who asked Reuters not to identify him.

When the president of the country speaks to the merchant class saying, “The ones who have looted Venezuela are you, bourgeois parasites,” that’s a sign to any entrepreneur that it’s time to round up whatever dollars you can and get out.

Venezuela is more likely past the point where it can grow out of its problems. Oil production is believed to have fallen as much as 400,000 bpd in the past year due to natural decline rates from mature fields. PDVSA says it is on track to invest more than $20 billion in its operations this year — but are those official dollars or black market dollars? Western oil companies are wary about putting their capital into the fields, considering that Chavez has famously nationalized assets of ExxonMobil, ConocoPhillips , Harvest National Resources, Exterran and others. PDVSA says it owes oil company partners and contractors $15 billion.

Some partners, like Chevron CVX -1.6%, Repsol, Eni, Rosneft and Total, have pledged to invest in increasing production and even to extend more loans to PDVSA. But like China they want to get paid back in oil. Not much is likely to come of these ventures: 10,000 barrels here and 10,000 barrels there is not going solve the problem. What’s really needed is $25 billion in hard currency investments in Venezuela’s Orinoco Basin to improve and add to the so-called “upgraders” — processing plants that can take super heavy oil and turn it into light, more easily transported crude.

So far PDVSA hasn’t gotten any interest in this plan. Though if it were put into place, Venezuela would have little trouble boosting output by 1 million bpd or more by the end of the decade.

The oil is there, but the oil companies are in no hurry to get at it. They have plenty of opportunities to drill in the United States, and are looking forward to the first exploration contracts to be awarded in Mexico. They know someday Venezuela will again become a safe place to invest.

That day may be approaching. Venezuela’s credit default swaps are at five-year highs. According to Reuters, prices for some of its debt issues have fallen to 63 cents on the dollar. Some short term issues are yielding 20%. These are the kind of sovereign yields that presage defaults.

The sad thing for Venezuela is that (barring an explosive rise in oil prices) it’s hard to imagine the situation not getting worse before it gets better. In time the government will simply run out of the dollar reserves it needs to pay its debts and import goods. Trading partners will refuse to ship. Oil companies will refuse to invest. Those tankers of cheap PetroCaribe oil will stop arriving in Havana. Chavez’s daughters will be kicked out of their presidential party palace. And the people of Venezuela will some day be forced to pay more than a dollar to fill up their SUVs.

Forbes



16 Comments on "Cheap Gasoline: Why Venezuela Is Doomed To Collapse"

  1. MSN fanboy on Fri, 21st Feb 2014 7:54 pm 

    Over time, when a government continually gives its people a non-tradable subsidy, they will come to consider it a right, not a privilege. When that happens it will no longer occur to them to be thankful toward their generous president for the handout. When that take-it-for-granted moment occurs, the handout no longer retains any political capital for the ruler who presides over it. On the contrary, once the populous sees the subsidy as a right, it necessarily become a political liability for the leader — tying his hands and preventing the implementation of a more reasonable policy.

    Sounds like every government social plan on earth.
    If you choose to have an economy based on money, not on gifting then socialism/communism does not work as the losses stack to debt.
    Following debt we have inflation (wealth redistribution) towards this debt. The value (of debt) remains constant but the debt makes everyone poorer.
    We either accept capitalism and money, or do away with both.

  2. sjn on Fri, 21st Feb 2014 8:17 pm 

    Well said. It’s human nature to become normalised to whatever are the social customs, whether sustainable, sane, or otherwise.

  3. Northwest Resident on Fri, 21st Feb 2014 9:03 pm 

    Venezuela’s economic problems go much deeper than Cheap Gasoline. Forbes is just doing what they do best — providing some facts, leaving out a lot of others, and putting a spin on an article that best suites their particular interests.

    If you want to really know what is wrong with Venezuela’s economy, you have to go way, way back, starting with the arrival of Christopher Columbus and eventually the Spanish, who found an abundant garden of eden with natives living a peaceful and tranquil sustainable life. Soon, they were enslaved, forced to work in projects that pillaged the resources and destroyed the environment — same thing we see wherever Europeans went back in the days of Empire. Followed closely by Catholicism and their particular brand of barbarities, no doubt importing hundreds if not thousands of pedophile priests to further torment the Venezuelans. Then a string of dictatorships supported and perhaps even put in place by American powers to further extract resources at a very high profit — to the Americans. Then, the discovery of oil, and the ongoing rape and pillaging of Venezuela. It just never stopped, and this is where they are today, utterly destroyed.

    1922 – 1964[edit]

    When oil was discovered at the Maracaibo strike in 1922, Venezuela’s dictator, Juan Vicente Gómez, allowed US oil companies to write Venezuela’s petroleum law.[22] But oil history was made in 1943 when Standard Oil of New Jersey accepted a new agreement in Venezuela based on the 50-50 principle, “a landmark event.”[23] Terms even more favorable to Venezuela were negotiated in 1945, after a coup brought to power a left-leaning government that included Juan Pablo Pérez Alfonso.

    From the 1950s to the early 1980s the Venezuelan economy was the strongest in South America. The continuous growth during that period attracted many immigrants.

    In 1958 a new government again included Pérez Alfonso, who devised a plan for the international oil cartel that would become OPEC.[24] In 1973 Venezuela voted to nationalize its oil industry outright, effective 1 January 1976, with Petróleos de Venezuela (PDVSA) taking over and presiding over a number of holding companies; in subsequent years, Venezuela built a vast refining and marketing system in the US and Europe.[25]

    During Pérez Jimenez’ dictatorship from 1952 to 1958, Venezuela enjoyed remarkably high GDP growth, so that in the late 1950s Venezuela’s real GDP per capita almost reached West Germany’s. On 1950, Venezuela was the world’s 4th largest wealthiest nation per capita[26] However, from 1958/1959 onward, Romulo Betancourt (president from 1959 to 1964) inherited an enormous internal and external debt caused by rampant public spending during the dictatorship. Nevertheless, he managed to balance Venezuela’s public budget and initiate an unsuccessful agrarian reform.[27]

    http://www.geographia.com/venezuela/history.htm

  4. Shaved Monkey on Fri, 21st Feb 2014 10:36 pm 

    Seems like Venezuela is being targeted for regime change,having lots of oil and a socialist government does tend to trigger bombs and manufactured chaos from the powers that be.

  5. DC on Fri, 21st Feb 2014 10:42 pm 

    This is easily one of forbes most sickening and revolting pieces of agit-propaganda out of that filthy rag this year.

    Look at the loaded language-”Squander” all that oil wealth. IoW, they ‘squandered’ it on health and education, provided free clinics-helped make enormous and real reductions in absolute poverty. Instead of going into the pockets of amerikan oil corporations and their local hand picked bag-men(and there trained death-squads).

    The ‘protesters’ being killed-are uS funded and trained provocateurs. The same ‘mystery’ snipers and gunmen that are present in every Us backed regime change op from Thailand, to Ukraine, to Africa and everywhere in between, are also present in Venezuela. Randomly killing people so liars like forbes can write trash like the above-then blame it on the ‘regime’ they want replaced.

    The US kills plenty of protesters every single day. How many people were killed by cowards in US helicopter gunships as they protested the illegal uS invasion of Iraq? Well never-there were so many.

    US agents and their allies among the old elites are the ones sabotaging the economy. Not the gov’t. The govt has no motivation to make things hard for the people and every desire to make them better. The US and its allies however, have everything to gain, and little to lose, by making the people of Venezuela’s lives as miserable as possible-and they are.

    http://www.counterpunch.org/2014/02/20/obama-pushes-for-regime-change-in-venezuela/

    Cheap gaz-o-leen lol! Thats amerikas game.

  6. J-Gav on Fri, 21st Feb 2014 10:58 pm 

    U.S. control freaks will continue to shamelessly meddle in sovereign countries’ affairs for as long as the can get away with it. So, yeah, they’d like to see Venezuela collapse before they do …
    That doesn’t mean Venezuela has been responsibly managed by any of its governments for as long as I can remember.

  7. peakyeast on Fri, 21st Feb 2014 11:14 pm 

    Thanks to DC for providing some badly needed truth to this story.

  8. sjn on Fri, 21st Feb 2014 11:45 pm 

    DC, no argument from me, but the truth stands that people do become normalised; and then are able to be manipulated by propaganda, even against their own true interests. Especially when that plays into fears of losing what they feel entitled to. Agent provocateurs help push events over a threshold, but need enough popular support believing the narrative to be effective.

    Also, the point about money and debt is important. You can’t operate within the global financial system without being enslaved by it. If you try to get out, accidents happen…

  9. Welch on Fri, 21st Feb 2014 11:46 pm 

    DC, you are right on. The CIA and their cover organization with some name like Foundation for the Spread of Democracy or some other crap, doing all they can to overthrow the government because they won’t play the global consumption game. Sickening. Absolutely sickening. Look at the social indicators for the country. Millions of once disenfranchised poor with no voice, no healthcare, crap for education, no future–the majority–were given a voice and future. The Rich, and the Western powers couldn’t stand it. So they kill, and do whatever else they have to do to overthrow the government. So disgusting. F ing criminal.

  10. Yeti on Sat, 22nd Feb 2014 1:33 am 

    DC, do you place none of the blame for their situation on bad management?
    Was it us evil Americans that whispered in Chavez’s ear what a great idea it would be to get “the people” used to gas for less than 1/10th(at least) of what it would normally sell for?
    This piece certainly got your anti-US hackles up more than usual; can we take a guess at your nationality?
    The people of Venezuela deserve better, but you go and keep blaming our “death squads” and not the former bus driver who seems determined to take the country over the cliff.

  11. Davy, Hermann, MO on Sat, 22nd Feb 2014 1:44 am 

    Some of you guys are as bad as Forbes with the parrot squawking. I get so tiered of the worn out anti US propaganda I see here. Come on get more sophisticated please. I am sure the US is involved and meddling in Venezuela’s affairs. What is new about that? You act like there is no opposition in Venezuela. The last election was a close affair and of course the blatant vote rigging by Maduro is legendary. Forbes sucks as a news organization I agree but please don’t act like them.

    This is a case of mismanagement in the highest degree. I admired what Chavez did for the poor. Yet, he didn’t stop there he continued with a many other gifts and subsidies in Venezuela and with his neighbors. He spent enormous sums on the military. He did this all while gutting his goose that was laying the golden egg the national oil company. His policies have led to major distortions in the economy. Inflation, consumer goods shortages, grid issues, rampant crime, and food problems. Top that off with a failing electricity sector because of lack of repair and maintenance. Venezuela relies on hydropower for a significant portion of their power and droughts are leading to outages. There is little backup power. Venezuela has taken on significant debt at a time when inflation is rampant. The gasoline subsidies are enormous. Foreign companies are reluctant to invest there for fear of expropriations. I am curious if China gets their money back from Venezuela. If the tables turn I imagine they may be in the cross hairs. Venezuela did return their Gold holdings a few years ago. I wonder how long that will last in this desperate country.

  12. GregT on Sat, 22nd Feb 2014 6:15 am 

    “Over time, when a government continually gives its people a non-tradable subsidy, they will come to consider it a right, not a privilege.”

    But MSN, what is a government? And where does a government get a non-tradable subsidy from? Without the people, there can be no government, and there can be no subsidies. Governments do not privilege the people, the people privilege their governments.

    “We either accept capitalism and money, or do away with both.”

    Or, we issue our own monies without debt. There is no good reason why we have interest attached to our currencies. Governments could, and have, issued their own currencies. American independence was about separation from the European central banks, and the ability to issue currencies without taxation. It worked very well until 1913, when the central banks, once again, regained control over the issuance of currency, through the Federal Reserve Act. There is nothing ‘federal’ about the FED, it is a privately owned and controlled central bank.

    It is not capitalism that needs to be done away with, it is the central banking cartels.

  13. MSN fanboy on Sat, 22nd Feb 2014 8:42 am 

    GregT “It is not capitalism that needs to be done away with, it is the central banking cartels”
    I am not saying this. I was just(partly) pointing out that any other system than capitalism has the systematic weakness of money. Communism and Socialism appear to come with many “free” perks, but someone has to pay.
    How should I put it, imagine a pressure gauge.
    The pressure is money (Or specifically debt) and the system we choose lets out the pressure at certain points. capitalism maintains the lowest pressure as it most often vents it. (Equilibrium) all other systems build onto the pressure… letting it build up to a critical state (The pressure gauge is in the red)Yet at the time they rationally need to vent the “people” riot etc.. and no venting is done… meaning eventually the pressure is so much that it explodes (hyperinflation) implodes (deflation). Either way, we end up with chaos.
    Capitalism and money co-exist perfectly. (What we currently have is a chimera of capitalism) Any other system that uses money (well tries too), such as communism of fascism fails. As like I pointed out, who pays… in other words, the buck stops here.
    (BTW this analogy is bad :P) If you do understand it congratulations, your clearly smarter than most.

  14. MSN fanboy on Sat, 22nd Feb 2014 8:45 am 

    Capitalism and money co-exist perfectly. ( I meant in the imperfect sense,) and also GregT. Americans had higher taxes under their new government then under the british :D lol

  15. Makati1 on Sat, 22nd Feb 2014 1:26 pm 

    The Banking Cartel is running the world, not governments. What we need is a total collapse and a reset that does away with fiat and where there is no access to the natural resources of the planet.

    Cannot happen you say? How long can a factory sit empty and unmaintained before it is impossible to start it up again. A week? Month? Six months? And if there is no one making drill bits for wells, then what happens when the ones in stock are gone? Or, if the internet goes down due to lack of the millions of people who keep it going day to day, not to mention the gigawatts of energy?

    No, we need total collapse and a reset to a much lower lifestyle. Of course, we will likely not survive it anyway. The billions of dead bodies everywhere will fuel a plague like mankind has never seen. Think about it. There are over 17 million people in NYC alone. When the SHTF, how many of them will get out of there alive? Will the first week’s death toll be one million? Two? More? And who is going to bury those millions? The rats, that’s who.

    We are in a corner and there is no way out this time. All alternatives are bad.

  16. Davy, Hermann, MO on Sun, 23rd Feb 2014 12:52 pm 

    @Makati
    “There are over 17 million people in NYC alone. When the SHTF, how many of them will get out of there alive? Will the first week’s death toll be one million? Two? More? And who is going to bury those millions? The rats, that’s who.”
    Makati replace NYC with 12MIL in greater Manila area for what awaits you!