Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Diving Oil Production Puts Venezuela Default on Cards

By

Crucial to Venezuela's economy, dropping oil production continues to raise more questions of Chavez's leadership.

PrintPRINT

Venezuelans shuddered this week at news that production of the black gold fell last year to its lowest level in nine years.

"The Venezuelan economy is becoming more vulnerable to oil prices," said Boris Segura of Nomura Securities. "The recovery of production will not be enough to balance public finances, especially at the gates of the public spending-fest that awaits in 2012."

Production was at 2.78m barrels per day in 2010, down from the 3.01m produced per day the previous year -- a fall of 7.7%. The current price hit $96.97 a barrel at the end of February.

Oil exports did recover in January however, with 2.59m barrels produced per day compared to 2.28m in December 2010, due to a rise in shipments of crude from the Orinoco Belt.

The Economist
opines that the chief cause of Venezuela's current economic problems is Chávez's "pillaging" of state oil company Petróleos de Venezuela (PDVSA).

He has packed it with loyalists, starved it of investment and used it for social spending, cutting its output from 3.3m barrels per day in 1998 to around 2.25m barrels per day, according to industry estimates. Of that, some 1m are sold at subsidized prices at home or to regional allies, leaving just 1.25m for full-price exports.


This issue of subsidized oil was highlighted earlier this month as the government announced plans to claw back the $1.5 billion it spends on discounting oil by cutting domestic use by 100,000 barrels of oil a day.

According to analysts at London research firm Capital Economics, Venezuela is set to be the next country plunged into a debt crisis.

"There is a growing risk that the government will default on its obligations in 2012," reads its February report.

Oil now accounts for 92% of Venezuela's dollar intake. Capital flight has forced many goods the country used to produce to now be imported as Chávez's hostility to business has forced much of the private sector abroad.

In an attempt to counter this, nine months ago Chávez banned trade in foreign currency. Since then, businesses and individuals in need of US dollars have had to turn to the country's central bank, which limits purchases to $50,000 a day. Companies are therefore forced to sharply curb imports. Kellog (K) announced in February that it was no longer "cost-effective" to import into Venezeuala.

Businesses must pay 5.3 BsF for each US dollar in the Central Bank. The official 4.3 BsF rate is only for so-called essential imports, including food and medicine. The black market rate sits at 8 to 9 BsF per US dollar, thanks to the wealthy keen to keep their money in a more stable currency in foreign banks.

Goldman Sachs analyst Alberto Ramos believes the government in Venezuela is likely to devalue the business rate to 6 BsF to the US dollar in the coming months. Devaluation has occurred twice in the past 13 months in an attempt to increase government revenue.

The government was keen to push news that described growth in Venezuela's economy over 2011. Chairman of the Central Bank Nelson Merentes told a local TV station: "In the year 2011 will have a better performance than in 2010. We began a phase of growth and we overcame recession." He also rubbished claims discrediting his bank's figures. The government announced it had emerged from recession with 0.6% fourth-quarter growth, and predicted a more than 2% rise in GDP over 2011.

However, the Venezuelan Federation of Trade and Industry Chambers (Fedecámaras) disagrees with the government's evaluation of economic performance, arguing that the economy will shrink in 2011. One problem it cites is that government controls on the US dollar aren't meeting the needs of large companies.

The Central Bank did announce this week that the economy contracted 1.4% in 2010. Coupled with an astonishing 27% rate of inflation, this has left Venezuela as one of the region's weakest economies.



Despite the economic doom and gloom (which Venezuelans are very used to adapting to) 82% claim to be "happy" or "very happy" according to one recent poll, possibly thanks to their president's outstanding public relations skills.

< Previous
  • 1
Next >
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

PrintPRINT
 
Featured Videos

WHAT'S POPULAR IN THE VILLE