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.
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.