Low oil prices don't kill people

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Imagine blaming the rain for the leaks in your ceiling. It doesn’t make sense, right? And yet this is what is going on in Venezuela’s public sphere, as government officials blame natural cycles in prices for the problems caused by their own mistakes.

Predicting the behavior of any economic variable is a thankless task. Oil prices are no different – regardless of how much you’ve studied, when it comes to predicting them,  you’ll most likely get them wrong. Here is a graph showing predictions in different points in time, and what actually happened. So Venezuelan government officials should not be offended when we say they, too, suck at this. Their problem is that they don’t prepare for their own mistakes.

OilPrices

At the beginning of 2014, Venezuelan government officials –like most analysts- expected oil prices to remain stable around $100 per barrel, about an average level for the previous three years. With this number in mind, authorities drew up a “currency budget” – an estimate of the amount of dollars that the economy would supply to travelers and students abroad, for debt payments, and crucially, for importers of the goods and services we –public and private sector- need for the sake of local production and consumption.

But by July 2014 – surprise! – oil prices started tanking. Venezuela’s oil basket went from around $100 per barrel in June 2014 to $69 by November, 21st, its lowest level since September 2010. This is far from what the government terms “the fair price of oil of 100 $/b,” which basically means “the price we used to calculate our $42.7 billion Currency Budget for 2014.”

According to Pdvsa, Venezuela’s oil basket averaged for the year 92.76 $/b up to November 21, but this number is dropping fast. Even if oil prices were to magically return to said level for the rest of the year, our currency budget would still be $5.3 billion short. But if oil prices follow international estimates for 2015 and Venezuela’s oil basket averages around 74 $/b, we would end up $19 billion short compared to the 2014 currency budget.

For obvious reasons, some are starting to call 2015 “el daño que viene” (meaning “the coming harm,” a pun based on “el año que viene,” i.e. “the coming year”).

Besides being prepared, we should also be clear: if it gets rough, it will not be because oil prices fell.

First, let’s not forget that in 2013 and through the first half of 2014, we actually had an oil price close to the “desired” level of 100 $/b. But Venezuela’s economy was already suffering from scarcity, unable to properly supply medicines, shampoo or milk. We already had the highest inflation in the world. We had to cut imports. We accumulated billions in accounts payable to private importers. And we saw our international reserves fall.

Why? It is not hard to figure out that the problem was there before oil prices fell. Some of the “allocated” currency ended up being used by smugglers and “raspadores” – to import stuff that was then smuggled to Colombia to be sold at market prices, or to take advantage of cuency allocations in order to sell dollars in the black market. We dare say currency estimates don’t consider how much the bachaqueros and raspacupos need to do their job.

The problem is that we really should know better. We’ve gone through this many times before.

Volatility in oil prices is one of the many reasons why all of Venezuela’s governments have professed a goal to reduce dependency on oil income. Planning investment projects, or social programs, or imports turns difficult when your budget depends largely on a pesky variable that probably won’t behave as expected.

Depending exclusively on oil makes you vulnerable. We know that well. We actually have a very recent experience to confirm that. Remember 2009? We were told by the late Hugo Chávez that we were “blindados” (i.e. shielded) and that our economy was not going to be hit by the effects of the financial crisis. But the time it took our country to fall into recession was the time it took oil prices to fall, and we should not forget that by then we had $43 billion in international reserves to face the blow.

We know we have volatile income, and yet we do nothing about it.

If we had not learned anything before 2009, we could have learned it then: it is important to reduce our dependence on imports, it is important to promote exports from other industries so they can also bring currency to the country, and –perhaps the easiest lesson of all- it is important to save some cash.

Yet we did nothing in that direction, and everything in the opposite direction.

By the end of 2014, we depend more on imports, non-oil exports are at their lowest level ever at 3.6% of total exports, and international reserves – a decent proxy for the country’s savings – are at their lowest level since 2003. Analysts are now predicting a GDP contraction of -4% for the year.

You shouldn’t let anyone tell you there are blackouts because it didn’t rain enough. It is not acceptable to say there is scarcity because people are “shopping too much,” and it is aatrociousto claim that obesity has gone up in Venezuela because “people are eating better because they have more money.”

Don’t let anyone tell you our recession is because oil prices fell. It’s because our policy-makers failed.

1 COMMENT

  1. The real contrast here is with Evo’s Bolivia: all the crazy lefty rhetoric, all the populism, all the Cuba-worship but…a sane macroeconomic management system, including real provisions for saving in boom years to spend more in busts. Result? Growth and economic stability, even as authoritarianism grows.

    I just think we should be clear: macro-chaos isn’t caused by lefty authoritarianism. These things are conceptually separate. You can have one without the other.

    • I hate it when your lefty side is right.
      It would be interesting to know just how exactly cubanoid is Bolivia — in comparison with Vzla.

      • It would be interesting to know just how exactly cubanoid is Bolivia — in comparison with Vzla.

        Bolivia is more decentralized than Venezuela or Cuba, with a poor transport system that impedes centralization. In fairness to Bolivia, one should bear in mind that the mountains make the construction of roads or railways much more difficult.

        You could make the analogy that petroleum and agriculture rich Santa Cruz is to La Paz as Maracaibo is to Caracas, but with the relative power of Santa Cruz much higher than that of Maracaibo. Maracaibo today represents only a fraction of Venezuela’s petroleum and agriculture, but Santa Cruz [+ Tarija] represents all of of Bolivia’s petroleum and a substantially larger proportion of Bolivia’s agricultural production compared to Maracaibo. Bolivia is inherently set up for two opposing power centers. The continual migration from the relatively poor Andes to relatively rich Santa Cruz also reduces the relative power of La Paz to Santa Cruz. [ I use petroleum instead of oil because Bolivia produces much more natural gas compared to petroleum. Lot of natural gas powered vehicles in Bolivia.]

        The collective farm approach in Cuba will never work in Bolivia. In the 1952 Revolution, Bolivian peasants were granted title to their plots. They would never give that up without a fight. That peasants already had title to their land is one reason why Che Guevara had little success in attracting local support in the countryside where he was operating. Bolivians looking at an Argentine trying to “save” them, while remembering long-standing Argentine arrogance towards Bolivians, was another.

        The anarchic strain in Bolivian politics- Evo’s party used a lot of roadblocks on the way to the top- which not too long ago featured coup-of-the-month – will also impede Bolivia’s going the Fidel route. [Which reminds me of an old joke. “The problem with Bolivia is that there is too much anarchy in its politics” Reply: “No, the problem with Bolivia is that there is too much anarchy in its military.” ]

        For these cultural reasons, I doubt that Bolivia will follow on the Cubanization path. At the same time, Evo has certainly allied himself with the Cubans and with Chavismo- note the recent UN vote on condemning North Korea on human rights violations. Bolivia voted with Venezuela, Cuba, Russia, and China.

        • Lovely full explanation. Thank you, BT.
          Another question, if I may: Does Bolivia have Smartmatic machines that the government trots out during elections?
          (This is not to say that cheating can’t be accomplished with a paper-pencil trail, but at least there is far less potential of non-transparent hacking from far-away centers of manipulation.)

        • Some data on growing importance of Santa Crua
          1976 : Santa Cruz Department/State was 15.3% of Bolivia’s population
          2010: Santa Cruz Department/State was 26.7% of Bolivia’s population
          1976: Santa Cruz Department/State population was less than half of La Paz
          2010 Santa Cruz Department/State population nearly equal to that of La Paz Department/State
          2014 Santa Cruz Department/State population greater than that of La Paz Department/State
          http://www.ine.gob.bo/indice/indice.aspx
          One counter to this narrative is to point out that many of the military golpistas of the 1970s-early 1980s had Santa Cruz connections.

    • Evo changed his position on ‘macro-chaos’ quite recently.

      Because he did have his fair share of nationalizations and macroeconomic stupidity at the beginning of his government, but for a reason he realized that the masses would have kicked his government out, had he chosen to go the Venezuelan way with no holds barred, and that his lefty credentials/ideological affiliations wouldn’t really have mattered to save him in an internal scenario of widespread shortages and economic turmoil.

      He explained that quite clearly at the 2013 Foro de Sao Paulo meeting. Listen to what he says after the minute 6:31 in this video below:

      Evo is going against far-lef principles just to maintain the political and economic stability of Bolivia. What shows that he’s probably smarter than Maduro, Cristina and the dudes at Podemos.

  2. Timely post Abadi/Lira, as OPEC meets in Vienna to consider production cuts. That is, in the face of competitive supplies from fracking in the US, once a much stronger customer of OPEC-member oil.

  3. “You shouldn’t let anyone tell you there are blackouts because it didn’t rain enough. It is not acceptable to say there is scarcity because people are “shopping too much,” and it is aatrociousto claim that obesity has gone up in Venezuela because “people are eating better because they have more money.”

    But, but, how am I gonna to cheat, deceit and mock those stupid masses while I keep stealing dollars to pay for my Luis Vuitton ties, my Tommy Hilfiger socks, my Hummers and my daughter’s singing career?? D:

  4. Venezuela’s ongoing non-planning economic difficulty has been on-going since at least the first oil spike in the 1970’s CAP years, only now much worse with the incredible mis-management of the last 15 years. The real Venezuelan tragedy is yet to come sometime in the future, when electricity progressively supplants gasoline for motor vehicle power, and petroleum will be used in lesser quantities for chemicals/asphalt/etc.

    • In the U.S., gasoline for autos already accounts for less than half of total consumption. The lowering of demand for vehicle fuel will not be rapid, and the slack will be taken up with other uses. I do not see any “collapse” in world petroleum demand coming from electric vehicles.

      • Not a collapse, but it is already clear there is a steady shifting. I just came from taking a hybrid taxi…in Poland, which is not precisely the most advanced country on that in the EU.

  5. Allow me to put here a post I wrote some time back…look at the chart at the bottom. It shows GDP growth for Norway, Nigeria and Venezuela in the last 40 years.
    The pattern is clear, particularly after 1976: Venezuela’s variation is pathetic.

    What is not clear to me is why there is no political movement trying to explain these things to the normal population. This is so feudal: Venezuelans elite think the population is made up of pure imbeciles who can’t understand.

    • “Venezuelans elite think the population is made up of pure imbeciles who can’t understand.”

      Uhhh… Imbeciles, no. Sufficiently educated to be able to understand such a dialogue? Unfortunately, the majority are not. Not that the majority in America and Europe can follow it either, the small percentage who can is greater than in Venezuela.

  6. the crass mismanagement has been going on for more than 12 years , but the consequences a the time could be disguised or papered over or white washed by the billions of dollars from Venezuelans oil income . then in time the consequences mounted up , became worse as the mismanagement continued so that even a 100$ bls couldnt be enough to cover up the worsening consequences , this was the case at the start of the year , not as happens inevitably with any resource prices are falling and the consequences are becoming so bad and evident that they stand out like a bloody nose.

    The mismanagement is the primary cause , if we handt had any mismanagement the fall in prices would have minimal effect for us , but we have to accept that for may years the windfall of oil prices did manage to make the consequences of the regimes mismanagement less noticiable than otherwise would have been the case. Now the double whammy effect of falling prices and the worsening consequences of 15 years of mismanagement are making things truly horrendous.

    Its not that the oil prices dont matter , they do , but the basic difference lies in the mismanagement of the countries economy for all these years creating a situation which not even high prices can help alleviate.

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