April 2020 – @alvaroriosroca – On the morning of Thursday, March 26, as is customary, we began writing the monthly Sunday edition and we thought we would do so on the analogy and parallelism that exists between the subsidies to energy companies practiced in several Latin American countries and the crown virus, and what is politically correct and what is economically correct. I’ll leave it for the next issue.
At mid-morning, we learned of the forceful action taken by the U.S. government to put a price tag of 15 million dollars on Maduro’s head and of course on the dictatorial regime that accompanies him because of direct links to drug trafficking and the transnational organized crime. Many others will be watching crouching and perhaps scared.
Trump, in his purest pragmatic style of governing, which, of course, many inside and outside his country do not like, launches this measure against Maduro with the aim of giving him a final blow and at very particular moments.
Oil prices have plummeted by 44% in the last twelve months due to the prediction of reduced demand (the result of the virus) in the face of restrictions on economic activity, and above all on the movement of private vehicles, commercial aircraft, cruise ships and others in several countries around the world. In addition, Saudi Arabia and Russia have decided not to agree to lower production in order to raise prices. Perfect storm for the moment for the hydrocarbon sector and to impact the frackers in USA.
These frackers of shale oil in the USA are the most affected by the low prices, because many areas (sweetspots) do not cover production costs at these prices of 20 to 30 USD/barrel to continue fracking the rock and maintain and/or increase production.
On the other side of the spectrum, costs in Saudi Arabia and Russia are either covered without problem or are already covered by conventional oil production and its long production plateaus without problem. This does not mean that the state coffers of these two countries do not suffer. They do and a lot but they have already made the decision. The very liberal Texas Republicans, who are the driving force behind the fracking, support most of Trump’s policies and are very concerned about the low oil prices, particularly the thousands of companies that are doing the business.
We will then agree that the thrust of putting a price on the head of Maduro and his regime is accompanied by basic premises to do so. Let’s see.
Maduro and his regime are first hit when the income from their almost sole source of exports plummets significantly. If we make history the approximate revenues from oil exports in Venezuela are: 45.6 billion dollars (BUSD) (2009), 55.8 BUSD (2014), 17.2 BUSD (2019) and 7.4 BUSD at current projected prices. The 2019 and current figures are even lower because of the sanctions imposed by the USA and because of having to triangulate with prices. As we see, Maduro’s regime is without economic oxygen.
In the environment of uncertainty in the world economy due to the trade war, the oil price war and the panic over the virus, Venezuela’s strong allies, particularly Russia, Iran and China, have no focus to concentrate on defending Maduro and delivering fresh resources that will let him breathe and that he may never see again. In other words, good timing for the lunge.
Fallen Maduro, is the final objective not true, will be Guaido or some other opponent to take the reins of the country and the oil sector. Without a doubt, due to the bad and corrupt management in PDVSA, production can be raised and efficiency improved with the participation of private companies and with production costs similar to those of Arabia and Russia. Can it be not? Besides, Maduro had already been privatizing and ceding under the table to private companies. The economic interest of the lunge.
Finally, let’s not forget that the campaign in the United States is entering its final phase soon and there is nothing better for Trump and his followers, and also millions of undecided people than to be able to stop and remove from power a supposed narco-dictator who is very close to their borders. The political interest for the lunge.
*Former Minister of Hydrocarbons of Bolivia and current managing partner of Gas Energy Latin America