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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.
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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.
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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.
@juanmolina
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The downward trend of oil prices is just beginning. The looming effects of fossil fuel use is becoming alarming and countries like Nigeria are beginning to advocate for the ban of generator running on fuel and diesel. The need for countries to embrace emerging Technologies. So sorry about the ills this will pose on the people.
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Indeed. It's just the beginning :(
I think that this fall in prices is a transitory event. Perhaps it will last until the end of the year, but it will not be definitive. Not for now.
In fact, there is a worldwide trend towards the adoption of greener methods for power generation, but the consumption of hydrocarbons will continue for years to come.
Ah! I hope it doesn't get that far. Nigeria legislator are working towards greener energy provision.
I wonder how Venezuela is currently plagued by this much poverty, the most intriguing thing is that Venezuela has one of the highest oil in the world and still need I talk about the corruption in the government, it's really pathetic
It all comes down to one word: Corruption.
The situation that has persisted in Venezuela is really pitiable. Coupled with the current seeming recession, it must be really hard for people there.
I hope everything falls back to normalcy soon.
Thanks for your good wishes.
The crumble in the price of crude oil is also affecting Nigeria. More so, Naira value dropped; a dollar is now sold above #370. It is more bad when the country is depending solely on crude oil when other profitable sectors are available.
Dependence on a single factor of production reflects a great weakness in the economy of any nation.
Diversification must always develop.
The continuous reduction in oil price is one major problem for oil rich countries currently as most oil countries finalize trades with other countries with oil. This is where other countries have to diversify into other things, tourism, food and technology can be a very good way to generate revenue and close the gap for oil price fall.
Previously, Venezuela generated income from the export of a variety of products and raw materials.
Currently these levels of domestic production have decreased and even items have completely disappeared.
Converted into a country totally dependent on oil income, we could suppose that the state industry has increased production and operating levels. This is not like this.
Venezuela's state oil industry PDVSA is currently in default. It does not meet payments to its creditors, workers do not have security conditions and production has fallen to levels of 30 years ago. Currently 500K barrels per day.
I sympathise with the situation there in Venezuela. I am surprised by the importing of gasoline as that is a real triangle trade arrangement which is so destructive on the economy. With the downturn on demand for fuel, it is going to put a lot of pressure on the economy for the next few months. I think your suggestions are right, draw on the reserves to help lessen the blow as the country rides this out. Things will pick up again but no one really knows when.
Great post, thanks - upvoted.
The importation of gasoline is only one aspect of the entire corruption plot within the Venezuelan oil industry.
Recently there was news in the press where it was shown in a video, how they transferred fuel offshore from a Venezuelan-flagged ship.
Selling gold reserves looks like a great option. Unfortunately, the levels of corruption indicate that a large part of these resources would be misappropriated.
Corruption is such a horrible evil, when the country really needs help and support, those with power dig in deeper. I hope one day you get a government that truly gives power to the people and supports the people.
You nailed it!
This is the reality of Venezuela.
Exemplary punishment is necessary.
Coronavirus has affected a lot of economy.
How possible is it to negotiate crude with greater price discount when there are lots of oil producing countries and most of this countries want to sell their oil out. Also not all countries are part of OPEC.
These are economic agreements that the government has had to carry out, since on many occasions it has requested loans with guarantees in oil production, agreements where the nation's resources have been mortgaged.
Hello my dear @juanmolina, sad reality that we face, thanks to God we have not yet had to deal with people infected with COVID-19, however, we are suffering even more because of this pandemic.
We must take extreme hygiene measures. Prevention is the first measure that can protect us.
But as we know, the health situation in our country is very precarious, so the spread will be inevitable. It's just a matter of time.
Government authorities have already confirmed the first two cases in the country.
The oil pumping free-for-all is strolling smack into a global financial system that used to be already reeling from the unfold of Covid-19, which is stretching give chains, inflicting worker shortages, whilst also slicing off travel as conferences are canceled and travelers keep residence.
Appreciated friend @henry-9ja.
Reducing travel and closing borders are measures to prevent the spread that are affecting trade. Many companies are already facing operational risks due to their technological dependence on Chinese products.
This will also bring food shortages. Transportation of seeds for planting and raw material are also affected. The crisis is global.
Your friend, Juan.
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Dear @juanmolina
I've been wondering for quite sometime how can current crash of oil prices affect Venezuela.
As I've mentioned before - this may be the time when civil unrest will grow again and this time Maduro may have difficult time controling narrative. China most likely will not have resources to help him financially, and he needs money to boy "loyalty" of army.
Without support coming from army and with his unpolularity - his power can be challenged quite easily.
You nailed it. also I didn't know that gasoline consumed in venezuela is imported. shocking :/
Yours, Piotr
Appreciated friend Piotr:
Venezuela had oil boom times. Between 1999 and 2014, Venezuela received almost a trillion dollars for oil income.
With these resources it was necessary to invest in internal development, infrastructure, improvements in the electrical and hospital network. But it was not like that.
Resources were squandered trying to build a failed ideological and social model.
The inability to resolve events in the economy has deteriorated the entire social structure of the nation, affecting future generations.
I think I strayed from the main topic, sorry.
Your friend, Juan.
the situation here in Venezuela is very critical, we have enormous needs, especially if we get sick because access to medicine is very expensive and public health is zero on the left.
I believe that the measures you mention can solve the problem and I mostly see selling or negotiating the gold reserves as a solution. The way is to stop being a country that depends on oil income, if we get out of it, the country will be able to start moving forward.
At current gold prices, selling part of the reserves would bring good capital to the state's finances. The sad thing is that a large part of these resources will be devoured by corruption.
This is very strong news for the people who live in this country. Although the news that circulates in the big agencies does not only affect certain countries, the world is involved in this whole situation that will mark a before and after.
The affectation will change the way of life of all the inhabitants of the planet.
And the worst thing is that it only produces an average of 700 thousand barrels of oil and 70% of that production is sold at a discount of 30% of the market value and at 90 days. You can imagine what can happen in 90 days.
Life in Venezuela is not easy.
... and it will get worse.
Hi @juanmolina
About this, I can only read friend. I have can yet to respond.
Upvoted 👌 (Mana: 15/20 - need recharge?)