Investors have been cart-before-horse stoked about Venezuela, and with good reason. There’s lots of upside in an economy that arguably has the world’s largest proven oil reserves and yet has stagnated in the past 14 years. What’s now top-of-mind is how the successor to late president Hugo Chávez stewards state oil company Petróleos de Venezuela SA, whose strategy seems to be to rust while hoping energy prices remain high. Throw in a restive nation of 30 million and a welter of costly social bennies, and this caballero faces tough decisions.
Venezuela is one of the more peculiar players in the Mideast-heavy Organization of Petroleum Exporting Countries. Though it’s OPEC’s fourth-biggest producer, Venezuela has let its output fall by more than a fifth since Chávez came to power, leaving hundreds of billions in revenue on the table during a lengthy period of high crude prices. As promised, the charismatic leader plowed PDVSA’s profits into social welfare projects while starving the enterprise of investment in exploration and production.
The tab left by such profligacy is steep. Morgan Stanley (MS) estimates that 43 percent of 2011 production at debt-laden PDVSA wasn’t even paid for in cash. Per Chávez’s wishes, a good deal of fuel was shipped off on below-market terms to such places as Cuba and Nicaragua (and Boston, even). Making matters worse, Venezuelan engineers and rig roughnecks have bolted the country in favor of bigger salaries and tamer inflation abroad.
Venezuela’s 2011 crude production was comparable to what it was churning out in the 1980s, according to the U.S. Energy Information Administration. Its investment in exploration and production may continue that decline if social spending underwritten by PDVSA continues apace, says the International Energy Agency—a likely outcome if Chávez’s preferred successor, Nicolás Maduro, gets elected.
But, says Kathryn Rooney Vera of Bulltick Capital Markets, “any change in leadership, whoever stays in power, will have to be more pragmatic about oil in order to stay in power. He’ll have to increase revenue, which means opening up PDVSA to more private investment and joint ventures. That, or cutting social spending. It’s the lesser of two evils.”
According to Fitch, the budget deficit in Venezuela has already yawned to an unstable width. With oil prices high last year, Fitch writes, Chávez piled on debt and social promises to secure his reelection, ratcheting his country’s fiscal deficit to more than 7 percent of its gross domestic product.
Vera calculates that the economy’s cry-uncle point—where the government immediately cannot make ends meet, both domestically and to foreign creditors—is at $50-a-barrel crude.
Down in Caracas, a gallon of gas goes for anywhere from $0.04 to a dime, thanks to PDVSA eating a costly subsidy—but one so popular that there was rioting the last time the government tried to cut it. Alas, a tank of 87-octane is cheaper and more available than a jug of cooking oil.