Crashdown Oil Prices - Venezuela's Oil Economy
The Venezuelan Government's economy is fully supported by the foreign currency obtained from the export of oil. Non-oil exports represent a minimum percentage which does not finance any government action regarding social investment or any other type. Although there is currently an income from remittances and private imports, which cushion domestic spending. But this only represents a palliative for some sectors of society that are benefited.
In previous decades, Venezuela exported high purity aluminum. which was made in one of the "Basic Companies" of the state, steel, iron material, bauxite, among other minerals that were processed in these Basic Companies, were also exported. Currently, most of these companies are 100% inoperative.
As a result of the disagreement between Russia and the Organization of Petroleum Exporting Countries (OPEC) to cut pumping and stabilize the market, in addition to the consequences that the Coronavirus has had on the economies of Asia and Europe, there was a 30% collapse of the price of crude oil, which was quoted at $ 31 per barrel at the beginning of the second week of March and which at the end of February was at $ 51.65.
This radical decrease in Venezuelan crude oil prices has not been experienced since Since the Gulf War in 1991.
Shortage
The quality of life of Venezuelans in the most vulnerable social strata will be directly affected. More than 25% of the population has developed a dependence on products imported by the state, which are sold at subsidized prices since they do not have the financial capacity to purchase food at regular prices.
The state obtains the foreign exchange for the import of these food products, from the oil export.
In addition to the effects of Pdvsa's sanctions and operational deterioration, low prices will be an additional limitation for the generation of foreign exchange. On the one hand, because the State will charge less for the crude to be sold in the coming months, and also because it will have to divert a greater amount of the barrels it produces to cover the payment of debt with its commercial partners, particularly China.
Payments to China are made in its crude equivalent, so the drop in its price forces Venezuela to deliver a higher production quota, which leaves a smaller margin for sale.
The gasoline consumed in Venezuela is imported.
Despite being a crude oil producing country and having several refineries spread throughout the territory, the production of gasoline and diesel fuel in Venezuela has reached precarious levels. So in a totally illogical economic game, Venezuela exports oil at low prices and buys gasoline at international prices, and then sells it (gasoline) on the domestic market at a fraction of its value, generating a huge deficit in public spending.
With low oil prices, the state will not have the resources to continue importing, which will affect the quality of public services, less fuel for transportation, maintenance of power plants and food imports.
Summary
Depending on the evolution of the Coronavirus phenomenon and its impact on large buyers of Venezuelan crude, especially China, this situation could continue even further than Q3 2020, which would imply a reduced consumption of crude during that period and the persistence of low prices.
The Government must:
- Reduce non-oil imports of food, medicine.
- Negotiate crude with greater price discounts, especially with the shortage of crude receivers as a result of the sanctions.
- Revert to monetary financing through the Central Bank of Venezuela (BCV) with the issuance of more inorganic money, with brutal impacts on inflation.
- Sell the gold from international reserves, which according to the BCV balance sheets as of February 2020, the issuing entity had close to 102 tons, with 30% of these or 32 tons "frozen" in the Bank of England.
Again, the Venezuelan people would be the most affected by this whole situation.
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Opinión sobre Tecnología, Finanzas y Emprendimiento. Venezuela, Colombia y Latinoamérica Cripto en Español
