Girish Gupta

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Oil Fails to Lubricate Venezuelan Economy
Feb. 24, 2011

Published by Minyanville

Venezuela was thrust into the spotlight this week as rumors spread on Sunday that Colonel Gadaffi of Libya was planning to retreat there. The hearsay was unfounded, despite being peddled by British Foreign Minister William Hague, but did highlight the close ties and personal friendship between Gadaffi and Venezuelan President Hugo Chávez.

Chávez remained silent on Libya but his government did say that events in the Middle East wouldn't affect the world’s oil supplies. OPEC would be happy to make up for any losses, claimed oil minister and president of state-owned Petróleos de Venezuela (PDVSA) Rafael Ramírez.

Nevertheless, events in the Middle East are worrying investors with the price of a barrel of crude oil hitting $100 on Wednesday as rumors spread of Gadaffi planning to destroy oil wells, and the defection of two Libyan fighter pilots added to the turmoil.

“It shows the tensions and fears if Gadaffi engages in a scorched-earth policy and destroys the country’s infrastructure,” said John Kilduff, founding partner of Again Capital in New York. “If that were to happen, it could bring the price of oil up to $110 or $115 a barrel. That’s what taking 1.1 million barrels of oil per day off the market is worth.”

Regardless of its assertions, there is little confidence among Venezuelans of PDVSA’s accountability and honesty about the amount of oil produced. “PDVSA has become a ‘socialist’ petroleum company,” reads an opinion piece in the country’s El Universal newspaper. “It has abandoned much of its specific tasks of exploring, producing, refining, transporting and marketing hydrocarbons in favor of activities such as importing and distributing food, building houses and, even, training athletes.”

The editorial goes on to talk about the corruption in the sector along with the huge subsidies given to domestic oil purchases and the oil exported to friendly nations. It was reported last week that the Venezuelan government is looking to claw back the $1.5 billion in subsidies it spends on the domestic market by cutting 100,000 barrels of oil usage a day.

One method of doing this would be to increase petrol prices. Ramírez put that idea to bed however, saying to Congress in his annual report: “Where did the opposition get the idea that we are going to ration petrol, or that we’re going to increase prices? What’s that all about?” Politically, it would be a very dangerous move for the government. Last time raising petrol prices was attempted in 1989, the Caracazo riots left hundreds dead and led to dangerous political instability.

Ramírez piled praise on Chávez, suggesting that were it not for the socialist president, not only would PDVSA not exist, but oil would be depleted and Venezuela would not be a “sovereign homeland”.

But the rhetoric seems simply to mask the figures. Net profit at PDVSA fell 28.8% to $3.1 billion in 2010 compared to the previous year, again despite an international increase in oil prices. Oil accounts for 95% of Venezuela’s export earnings so what happens to PDVSA is very much intertwined with the country’s economy.

The Venezuelan economy contracted 4% during a year of rising oil prices, the second consecutive year of negative growth for the country. The figure was 3.3% in 2009. The rest of Latin America however, appears to be rebounding, intensifying hard questions about Chávez’s ‘socialist revolution’.

A little hope came with the news that the economy grew for the first quarter in six, gaining 0.6% during the last quarter of 2010. But that sort of growth pales compared to Venezuela's inflation. An inflation rate of 26.9% during 2010 dwarfs the region’s average, and the Financial Times argues that “time has already delivered its verdict” on Chávez’s ‘21st Century Socialism’.

The sentiment was echoed in another El Universal editorial which spoke of the 405% inflation increase over the last 12 quarters as well as a severe devaluation of the Venezuelan Bolivar against the US dollar, with the greenback rising 168% from VEB 1.6 to VEB 4.3.

Relations between Colombia and Venezuela remain tense. The latter admits to owing the former $335m over a clash between  Chávez and Colombia's then president Alvaro Uribe in July 2010, after which Venezuelan importers stopped outstanding debt payments to Colombian exporters. Venezuela restarted repayments after new Colombian president Juan Manual Santos came to power and the countries attempted to work together and renew their relationship. Colombian business owners remain skeptical of Venezuela's will to fully repay the money though.




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© Girish Gupta