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Oil Slams Venezuela, Probability of Default Soars to 84%

Facing US Fracking, Canadian Tar Sands, & OPEC

OPEC member Venezuela has one of the largest oil and natural gas proven reserves in the world. It’s the 12th largest producer in the world. It’s still one of the top suppliers of crude oil to the US. Oil produces 95% of Venezuela’s export earnings. Oil and gas account for 25% of GDP. Oil is Venezuela’s single most important product. Oil is its critical source of foreign currency with which to pay for all manner of imported consumer and industrial products. But the price of oil has plunged 35% since June.

Venezuela was already in trouble before the price of oil plunged. The fracking boom in the US and the tar-sands boom in Canada have been replacing Venezuelan imports of crude to the US for years. The Keystone pipeline, if Congress approves it, will replace costly oil trains to move Canadian tar-sands crude to US refineries, making it even more competitive with Venezuelan crude. Shipments of crude from Venezuela to the US will continue to dwindle.

Venezuela’s budget deficit is 16% of GDP, the worst in the world. Inflation is running at a white-hot 63%, also the worst in the world. The economy is heavily subsidized, but now the money for the subsidies is running out.

Currency controls have been instituted to shore up the Bolivar. But instead, they’re strangling what is left of the economy. Anti-government protests and riots burst on the scene earlier this year as the exasperated people couldn’t take it any longer. The scarcity of even basic consumer products such as toothpaste and toilet paper has now spread across the spectrum, including medical supplies. Next year, scarcity is going to be even worse. Venezuelan economist Angel Garcia Banchs worries that “what’s coming to Venezuela is chaos that will probably lead to barbarity and people looting.”

It doesn’t help the budget that the government sells its most valuable export commodity at heavily subsidized prices at home, based on a special though iffy deal: the people get cheap energy, and in return, hopefully, they don’t riot, or outright revolt. The hope is that the government gets to stay in power a little longer even as it is going bankrupt.

Yet social spending isn’t going to get cut, promised President Nicolas Maduro on state TV on Friday. “If we had to cut anything in our budget, we would cut extravagances, we would cut our own salaries as high officials, but we will never cut one Bolivar of the money that goes to education, food, housing, the missions of our nation,” he said.

And he did what others leaders around the world do when they run out of money and real options: he promised that he’d create a commission to identify unnecessary spending that then can be cut. The announcement was supposed to infuse confidence into frazzled bondholders.

Nor does it help that the government subsidizes even poorer countries, particularly its ally Cuba, which receives a gift of 100,000 barrels of oil per day. This gift amounts to an annual loss of revenues, depending on the price used to figure it, of several billion dollars.

Venezuela’s international reserves are plunging. In mid-November, President Nicolas Maduro moved $4 billion – obtained from China – from the shadows to a fund that is counted as part of the international reserves. This miraculous appearance of new money caused Venezuelan bonds to jump in intraday trading. But a week later, the international reserves dropped by $1.3 billion to $22.2 billion. Turns out, Venezuela had burned through one third of the Chinese money in one week. At that rate, the out-of-money date would be the end of March.

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