Venezuela's oil trap: economically speaking, other than oil nothing else is happening.Say what you want about China or India, to global oil mavens Venezuela and Cambodia are the two most intriguing venues in 2007. The latter is the new kid on the block, an emerging oil power that could earn billions of dollars annually via petroleum exports and thereby shift the geopolitical ge·o·pol·i·tics
n. (used with a sing. verb)
1. The study of the relationship among politics and geography, demography, and economics, especially with respect to the foreign policy of a nation.
a. map of Asia (more about this in the next issue of TIE), but Venezuela is the wild card, an increasingly unstable factor in the global oil supply equation. This fact comes in large part because of the volatile individual who occupies that nation's presidency.
Hugo Chavez came to power as the result of oil, specifically the sharp decline in oil prices--and thus Venezuela's import revenues. It is fair to say that Venezuela's political consensus was already in tatters tat·ter 1
1. A torn and hanging piece of cloth; a shred.
2. tatters Torn and ragged clothing; rags.
tr. & intr.v. following the imprisonment Imprisonment
See also Isolation.
former federal maximum security penitentiary, near San Francisco; “escapeproof.” [Am. Hist.: Flexner, 218]
German prison ship in World War II. [Br. Hist. of Carlos Andres Perez in 1998 and several coup attempts, including the 1992 coup led by a young army Lieutenant-Colonel named Hugo Chavez, who was later elected President.
When Chavez took power in January 1999, oil prices had fallen sharply to just $8 per barrel. The steep downturn in international oil prices which began a decade before had a severe impact on the Venezuelan economy. Fiscal cuts spurred by the loss of revenues, high interest rates, and the sharp downturn in export earnings drove Venezuela into recession in 1998.
By 1999, the Venezuelan economy was contracting and one in three of its citizens lived in dire poverty. The chief ingredient chief ingredient (chēf in·grēˑ·dē· behind the country's political rot was oil, and the inflation and corruption that oil seemingly makes a permanent part of Venezuela's political economy. The fact of that social and political rot enabled the rise to power of Hugo Chavez, but it is also the chief and growing threat to his continuance as president of Venezuela.
The leftist left·ism also Left·ism
1. The ideology of the political left.
2. Belief in or support of the tenets of the political left.
left rhetoric regarding Chavez paints him in heroic terms, the revolutionary and visionary, the leader of a populist political surge that is sweeping the Americas. But the reality is more modest, namely that Chavez is the latest in a long line of Venezuelan political opportunists who have used oil revenues and inflation to entice support from different elements of the country's population, both the impoverished majority and the influential middle class. As much as Nigeria, Iraq, or Cambodia, oil has come to dominate and distort civil society in Venezuela and is the determining factor in that nation's convoluted political system.
In terms of his political orientation Noun 1. political orientation - an orientation that characterizes the thinking of a group or nation
ideology, political theory
orientation - an integrated set of attitudes and beliefs , Chavez is hardly remarkable, being a precise response to the social equation in Venezuela. When oil prices spiked last year to more than $70 per barrel, the political currency of Chavez soared even as the nation's currency, the bolivar, sank to all-time lows against the dollar. Despite the vast increase in Venezuela's export income last year, Chavez managed to alienate foreign investors via several heavy-handed expropriations and accelerated both inflation and the deterioration in living standards living standards npl → nivel msg de vida
living standards living npl → niveau m de vie
living standards living npl among his country's poorest citizens--once his most powerful and reliable base of political support.
Decades of inflation have done enormous damage to the economic psychology of Venezuelans, who instinctively hoard dollars and physical assets such as automobiles and consumer durables Consumer durables
Consumer products that are expected to last three years or more, such as an automobile or a home appliance.
See durable goods. . To protect themselves from the ravages rav·age
v. rav·aged, rav·ag·ing, rav·ages
1. To bring heavy destruction on; devastate: A tornado ravaged the town.
2. of inflation, which is now the highest in Latin America Latin America, the Spanish-speaking, Portuguese-speaking, and French-speaking countries (except Canada) of North America, South America, Central America, and the West Indies. , the new elite that now surrounds Chavez maintain foreign bank accounts and homes, this even while spouting spout·ing
n. Chiefly Pennsylvania & New Jersey
See gutter. See Regional Note at gutter.
a. radical chavista slogans. The very same cycle of corruption and incompetence that operated under previous regimes exists under Chavez, just with different characters and names.
Early in 2007, Chavez announced that he would chop three zeros off new bolivar currency bills to bolster Venezuelans' perception of a strong currency in a bid to curb inflation, The bolivar, named after Chavez's nineteenth-century hero Simon Bolivar, trades above 4,500 bolivars to the dollar on the parallel market, around double the official fixed exchange rate of 2,150 bolivars.
Oil is now everything in Venezuela, but there is little in the way of new investment, or even new contracts, in the oil sector. As the Chavez government gradually expropriates foreign oil services projects, the government is discouraging new investments and convincing foreign oil companies that the country is not a reliable partner. And this all comes as reliance on oil is growing: In 2006, oil represented 91 percent of Venezuela's exports versus 80 percent five years ago.
A February 15, 2007, article in the Wall Street Journal notes that those professionals from the oil industry and other sectors who can leave Venezuela are doing so in growing numbers, driven out by inflation and the radical political course taken by Chavez. Though Venezuela has sharply increased public sector spending in the past several years, the private economy is in dire straits as the Chavez government repeats old mistakes. The country's over-dependence on oil, the decline in energy prices, and the operational problems at PDVSA PDVSA Petroleos De Venezuela, SA (the Venezuelan state-owned petroleum company) have put Venezuela in a vise between rising internal inflation and falling external revenues, forcing the Chavez administration to look for alternative economic resources.
Patrick Esteruelas, Latin America analyst at the Eurasia Group, tells TIE that as the Chavez government moves to increase government intervention in the economy, the importance of oil and the ability of the oil monopoly, PDVSA, to expand or even maintain production grows. Yet this trend also works to make PDVSA "the weakest link in the chain" when it comes to Venezuela's economy, he adds.
Esteruelas notes that PDVSA's contribution to social expenditures in Venezuela grew from 16 percent of revenue in 2005 to 21 percent in 2006, a trend that could limit the company's capital expenditures in future. Indeed, he confirms that Venezuela is unable to meet its 3.1 million barrel per day OPEC OPEC: see Organization of Petroleum Exporting Countries.
in full Organization of the Petroleum Exporting Countries
Multinational organization established in 1960 to coordinate the petroleum production and export policies of its quota and currently is producing just 2.4 million barrels per day Barrels per day (abbreviated BPD, bbl/d, bpd, bd or b/d) is a measurement used to describe the amount of crude oil (measured in barrels) produced or consumed by an entity in one day. . Under-production by PDVSA, coupled with the fact that the Chavez government did not believe that oil prices would ever fall back to $50 per barrel, has created huge financial pressures on Venezuela and the state oil sector.
Whether or not Venezuela can stabilize or even increase oil output may be the determining factor as to whether Chavez remains in power. In April 2002, Chavez was almost removed from office by a coup that was supported by a broad segment of the population, particularly the professional managers in the oil industry. Only a few months later, Chavez faced a strike organized by PDVSA management who sought to force him out of office by removing his access to oil revenue.
As a result of the strike, Venezuela ceased exporting its then-daily average of 2.8 million barrels of oil and oil derivatives. Shortages soon erupted throughout Venezuela and gasoline imports were required to keep the country from descending into economic paralysis and chaos. Chavez responded by firing PDVSA's upper management and dismissing 18,000 skilled PDVSA engineers and other employees. Chavez justified this action by alleging their complicity in gross mismanagement mis·man·age
tr.v. mis·man·aged, mis·man·ag·ing, mis·man·ag·es
To manage badly or carelessly.
mis·manage·ment n. and corruption in their handling of oil revenues, while opposition supporters of the fired workers stated that his actions were politically motivated.
Because of the fragile dynamic between Venezuela's government and the large proportion of the population who depend upon government subsidies paid for with oil revenues for their subsistence, foreign investors would do well to consider whether, given a choice between cutbacks in public spending and delaying or even defaulting on foreign debt payments, Venezuela won't choose the latter.
Venezuela's foreign debt only totals about $40 billion, including about $10 billion in short-term debt Short-term debt
Debt obligations, recorded as current liabilities, requiring payment within the year. , but if confronted with a choice between staying in power and defaulting on his country's financial obligations to investors in the United States, Europe, and elsewhere, you should have no doubt that Chavez would immediately choose default--and would do so gladly.
PDVSA is starting to borrow heavily to replace capital funds being confiscated con·fis·cate
tr.v. con·fis·cat·ed, con·fis·cat·ing, con·fis·cates
1. To seize (private property) for the public treasury.
2. To seize by or as if by authority. See Synonyms at appropriate.
adj. by the Venezuelan government, with $8 billion in new debt issued already this year. This amount includes a $3.5 billion loan facility from Japan, a $1 billion loan by French giant BNP BNP B-type natriuretic peptide, brain natriuretic peptide Physiology A 32-residue peptide hormone produced predominantly in the ventricles, secreted in response to fluid overload–eg, CHF. See Atrial natriuretic peptide. , and a $7 billion Eurobond issue that was wildly oversubscribed Refers to connecting more users to a system than can be fully supported if all of them were using it at the same time. Networks and servers are almost always designed with some amount of oversubscription, counting on the fact that everybody does not need the service simultaneously. by credulous cred·u·lous
1. Disposed to believe too readily; gullible.
2. Arising from or characterized by credulity. See Usage Note at credible. gringo grin·go
n. pl. grin·gos Offensive Slang
Used as a disparaging term for a foreigner in Latin America, especially an American or English person. investors. Those investors who are so anxious to own Venezuelan paper do not yet seem to have considered the inevitable financial implications of Chavez's spendthrift One who spends money profusely and improvidently, thereby wasting his or her estate.
Under various statutes, a spendthrift is a person who wastes or reduces her estate through excessive drinking, gambling, idleness, or debauchery in a manner that exposes that individual or populist policies. With reserves in the $35 billion range, Venezuela has sufficient resources to keep the fiscal wolf away from the door for about two years, sources tell TIE.
When you add together the cost of rapidly rising public sector expenditures, support for Chavez allies in the region and around the world, weak oil prices, and mounting operational and management problems at PDVSA, the financial outlook for Venezuela seems increasingly problematic. Then consider the action earlier this year of Ecuadorian President Rafael Correa, who seeks a haircut of 60 percent on the country's foreign debt, an action taken with the advice and active encouragement of Hugo Chavez. As Venezuelan oil production slowly edges lower, the financial pressures on Chavez will grow as his spoiled citizens demand new and greater largess lar·gess also lar·gesse
a. Liberality in bestowing gifts, especially in a lofty or condescending manner.
b. Money or gifts bestowed.
2. Generosity of spirit or attitude. from the state.
While it has been almost two decades since Venezuela insisted on a 50 percent debt reduction under U.S. Treasury U.S. Treasury
Created in 1798, the United States Department of the Treasury is the government (Cabinet) department responsible for issuing all Treasury bonds, notes and bills. Some of the government branches operating under the U.S. Treasury umbrella include the IRS, U.S. Secretary Nicholas E Brady's strategy for reducing third world debt, there should be no doubt that so long as Hugo Chavez remains in power, Venezuela's economic situation will continue to deteriorate. In that event, do not be surprised one day to see Chavez himself--or perhaps his successor--call anew for regional debt reduction to lighten the economic worries of his captive countrymen, especially if oil prices stay away from the triple-digit crude prices about which Chavez himself once dreamed.
Crafty Political Opportunist op·por·tun·ist
One who takes advantage of any opportunity to achieve an end, often with no regard for principles or consequences.
The leftist rhetoric regarding Hugo Chavez paints him in heroic terms, the revolutionary and visionary, the leader of a populist political surge that is sweeping the Americas. But the reality is more modest, namely that Chavez is the latest in a long line of Venezuelan political opportunists who have used oil revenues and inflation to entice support from different elements of the country's population, both the impoverished majority and the influential middle class. Under-production by PDVSA, coupled with the fact that the Chavez government did not believe that oil prices would ever fall back to $50 per barrel, has created huge financial pressures on Venezuela and the state oil sector. Whether or not Venezuela can stabilize or even increase oil output may be the determining factor as to whether Chavez remains in power.
Christopher Whalen is global risk editor of TIE and a Managing Director of Institutional Risk Analytics.