The cost of Venezuela’s oil discounts

/ July 19, 2012

$100 billion. That’s how much oil discounts have cost Venezuela since 1999, according to estimations by a group of oil researchers who go by the name of Subaeshi.

Now, you may wonder what business I have quoting some random group of people from the Internet. But heck, check for yourselves – I can’t see any mistakes in the analysis, but perhaps you can.

The exercise is simple. Starting from the assumption that crude shipped to the Caribbean (er … Cuba) is sold at a 60% discount, and using historical figures from the IEA about Venezuelan oil shipments, they conclude that the subsidy to our “partners” costs some US$ 13 billion every year, or roughly US$ 100 billion since 1999.

Check out Subaeshi’s presentation – it contains some interesting graphs. Apparently, their stuff has been going around the last few days.

I emailed them, and they claim to be oil analysts with advanced degrees who wish to remain anonymous.

I’m a sucker for these kinds of calculations, so let’s debate its merits in the comments section.

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31 thoughts on “The cost of Venezuela’s oil discounts”

  1. economist Ramón Espinasa, teaching at Georgetown University in Washington, who warns that in the case of Pdvsa joined the financial transfers made to the Government, both tax as transfers to the Fonden, assigned functions that are not strictly extraction and exports relating to cooperation agreements.”Half of the exports that Pdvsa does not charge”, says Espinasa. “We are talking about a volume reaching 800,000 barrels per day, of which 400,000 barrels are part of the funding which gave China and that money went directly to the Government- quote from today La Patilla.

    Also, I read somewhere ..along with expropriations,etc. Chavez is responsible for destruction
    of 170,000 private companies in Venezuela

    Welcome to Mercosur! Now Chavez can get another 170,000 companies killed off.

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  4. I totally disagree with these kind of stupid calculations because these calculation are based on a fundamentally wrong ‘if’. Like ‘if we would would sell at market prices we would make more money so this we can calculate as a loss’.

    I am from a country where these political calculations are made constantly and they are BS. Look at the whole picture and take in account that transport costs in Venezuela are very cheap because of the gasoline prices. So doing away with the subside on gasoline is more like robbing Peter to pay Paul.

    That Venezuela is importing gasoline however is crazy. This means that Venezuela is selling the crude instead of the end product and that is always a sign of political mismanagement. That is the discussion that needs be be held. Not the subside itself.

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    • I can only agree that we would not be under-selling away the oil in such quantities to Cuba or say, Bolivia, if it weren’t subsidized to the tune it is now. However, on the other hand, Venezuela would be selling that very same oil, in fact as much as it could realistically produce (fungible like gold that it is) to other countries that pay for it at market price. Couple extra revenue with having actual policy, for example of reinvesting revenue in keeping oil production levels, and the production figures could be much higher. If we were so interested in lower oil prices for poorer nations and our own revenues we would actually try and increase production a little to lower prices somewhat.

      It makes no sense at all, except from the perspective of a government completely incompetent at managing the oil industry that tries to prop up allies for political reasons.

      As for robbing Peter to pay Paul, yeah… the analogy works. Only Peter has a gas guzzling car, and/or is rich, while Paul could benefit enormously from a more rational use of revenues. On the other hand, what incentive is there to produce gasoline in Venezuela if it’s not at all profitable?

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    • So you didn’t understand their analysis, then labeled it as stupid, then went on to rebuznar idiotically on a point that they didn’t make. Sartre was wrong: Hell is readers.

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      • olibaron did seem to initially understand the analysis. He almost correctly stated in the first paragraph: “Like ‘if we would would sell at market prices we would make more money so this we can calculate as a loss’. ” I say almost because he thought it was “like if” and not exactly if. He just never addressed it once he had summarized it, instead going off on the debatable gasoline thing.

        Regarding Sartre, hurtful… :P

        —

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    • Quico, I understand. But in this comment, too, there is something that your intellectual standards aren’t allowing you to see: a debate about oportunity cost, which has been taken for granted in this blog.

      I propose the debate thusly: If you step on the “cuero” at gasoline subsidies, where will it raise up?

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  5. This should be condensed and translated, and the conclusions posted on every single wall of downtown Caracas and Maracaibo.

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  6. As I understand it, olibaron, these guys are calculating revenue derived from exportable surplus only. I.e. they take production, subtract internal consumption (at around 800,000 b/d), and then multiply the remainder by WTI or 60% of WTI. Seems like pretty solid math to me. Disagree?

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  7. It boggles the mind. Suppose you were a die-hard chavista and began quibbling with the numbers. OK, so it’s not $100 billion. What is it – 50 billion? 80 billion? 20 billion? Regardless of the amount, what are we buying with that amount of money? How many highways, world-class ports, houses for the poor could we have built with that amount of money?

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    • One question somebody should explore is the macroeconomics of this much waste in a transition scenario.

      We know that some economists – i’m looking right at you, Fco. Rodriguez – have these near-apocalyptic views of what fiscal adjustment is likely to mean in 2013-2014. (Note that Subaeshi’s presentation estimates that the Current Account has actually been in deficit since 2009 – page 41 – despite crazy high oil prices, in which case we’re even more FUBAR than we’d thought.)

      Other economists – paging Dr. Grisanti and Dr. Guerra – seem to think that current fiscal policy is so crazy, adjustment can be painless to some extent – you can refocus spending from purely wasteful ends to productive ones, and cut off totally useless drains on revenue (like the one you reference in this post) without having to shift resources from the public to the government.

      Maybe the optimistic view is pure pollyanna – magical thinking meant to softball expectations ahead of next year. But one thing I do know: if I’m finance minister, and the fiscal doo-doo hits the fiscal fan, and I have to choose between cutting off the subsidy to the Castro Bros. and cutting spending on schools, hospitals and cops…well, it’s not really a difficult decision, is it?

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      • That’s a great point. All the more reason for step No. 1 of any new government: to come in and do away with all these subsidies. The gasoline subsidy can wait, but until we right our ship in terms of the prices we sell our stuff at, everything else is secondary.

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      • With possibly 22% or more, depending on the price of oil, of national income going to service (mostly external) debt, cutting off all “subsidies” to paises “hermanos” will not only be rational, it will be a necessity. As for calculating the real cost of oil giveaways, it’s not certain Venezuela will ever get any meaningful amount of money/goods in return in the long-run from the “hermano” nations.

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      • (Note that Subaeshi’s presentation estimates that the Current Account has actually been in deficit since 2009 – page 41 – despite crazy high oil prices, in which case we’re even more FUBAR than we’d thought.)

        Well, yes and no. While calculating the non-US oil revenue at discount could be very useful to grasp the kind of cash flow restrictions we face, I’d disagree that is a good proxy for the current account. The thing is that during these years you have piled up claims over the rest of the world (well, over Cuba, Bolivia, Nicaragua, Paraguay and Ecuador) that have entered the BOP capital account as official capital outflows. These claims are real and in theory fully recoverable, you can write off one side of the account without adjusting the other one. You can’t escape the beauty of the BoP accounting

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  8. $100 billion these bozos would have spent outside Venezuela or directed towards their numbered bank accounts.

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  9. 1. If the Castro brothers are re-selling the oil, then their profits are Venezuela’s losses.
    2. The loss in income leads to less investment in the oil producing infrastructure and even less oil produced. This compounds the losses. Remember that production is down 1M barrels/day since Chavez took office.
    3 The math and logic of the Subaeshi group are sound. I am a Ph.D. professional economist.
    4. Put the losses on a per person basis and let everyone know how much they individually pay to Cuba and China.

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  10. What a huge loss! Until you realize that Cuba is providing medical care for millions and millions of Venezuelans; sends sport trainers; military advisors; people to run the Notarias and you think that all this is free of charge?

    The only real loss made to the country oil sector was the opposition backed oil industry sabotage of December 2002 – February 2003 which cost the country – in real terms not claculated terms – at least $14 billion.

    If the assumption that Venezuela sells oil to Cuba at a 60% discount is untrue – which I suspect it is – then the whole analysis is not worth the bytes it is written in. And if there is a discount (which there may well be) then this pays for the services sent to us by our Caribbean brothers.

    Better to look at the excellent performance of the economy since 2000; the sharp fall in poverty since 2004 and the fact that PDVSA is the world’s 36th biggest company (up 30 places) according to Fortune 500 magazine’s global ranking.

    This would be a good post if it’s foundations were not built on sand.

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    • Arturo,
      Those services don’t have to be free of charge, but they shouldn’t be:
      1.- So god damn expensive
      2.- Acquired in a transparent process.
      3.- Determine if they really need to be outsourced, since Venezuela is perfectly capable of training doctors, officers and run its own notarias.

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    • Arturo: “And if there is a discount ”

      Do you see a problem with the very fact that we don’t know?

      —

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    • Plus they come with their own G2 complement, plus some more to advise chavista’s “domestic intelligence”

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