Wishful Thinking

We’ll get to our Down The Rabbit Hole segment in a few but first…Oil Price.com reports that the Venezuelan opposition is working up a proposal that would see 200,000 bpd (barrels per day) of Venezuela crude exported to a trustee who would then pay creditors who have laid claim on various Venezuela assets abroad.

 Bondholders and creditors are going after Venezuela’s foreign assets in US court for defaulting on payments (not to mention billions in current arbitration awards with many more to come) and those defaults, which exceed $20 billion (I don’t know where they got that number. I haven’t seen anything under $60 billion with the total debt over $120 billion) go beyond the value of Venezuela’s foreign assets.

 OK, I get it. They’re trying to protect Venezuela’s last foreign asset that’s really worth anything, US refiner Citgo which is owned by PDVSA (Venezuela government-owned oil company), with an asset value of $8 billion to $10 billion, and barring a miracle it will be carved up to pay creditors with the process starting in a matter of months. But, is anybody buying this?

 First of all, any proposed deal would have to be accepted by the Maduro regime, which is highly doubtful, and even if the Chavistas agreed, does anyone think they would honor the deal given that they’ve screwed basically everyone on basically every deal they’ve ever made?

 Another major problem with the idea is where will the oil come from? Last month Venezuela exported 715,000 bpd, which is up from last year’s average of just over 600,000 bpd, which was up from the year before. There is no excess capacity so the oil would have to be diverted, most likely from China.

 The Maduro regime is still shipping oil to China to pay for loans they received during both the Chavez and Maduro years ($60 billion), for which they receive no revenue, and any oil sold to China is at a $20 a barrel discount. Does anybody think the Chinese will allow Maduro to divert 200,000 bpd from them? Of course not.

 Venezuela is also still shipping oil to Cuba, ranging from 60,000 to 80,000 bpd in return for Cuba helping to prop up the Maduro regime.

 Then you have the oil they ship to Iran in return for condensate needed to process Venezuela’s extra-heavy crude to produce gasoline and to pay for infrastructure repairs. Take out the oil needed for domestic consumption and there’s nothing left (they’re actually running a deficit).

 The only remaining possibility is to increase production. The problem there is that most oil analysts put Venezuela’s maximum production capacity under current conditions at 850,000 bpd. Anything above that would require massive infrastructure rebuilding with an estimated cost of $10 billion a year for 10 years.

 Given these factors (and more) the odds on this new plan by the opposition happening don’t look good…just wishful thinking.

 Then we have Reuters reporting that a US Court of Appeals rejected Venezuela’s bid to prevent six companies from joining a proposed auction of Citgo shares, owned by PDVSA, to enforce judgements for past expropriations.

 The decision allows the six to move ahead with their $3 billion in claims already upheld by a lower court. The auction process could start in September.

 Let’s head Down The Rabbit Hole…

 Chapter 19 continued…

 …One theme that seemed to surface time and again was good intentions (at least vocally) gone bad. What they proposed always sounded good, generally started out well, and ended badly. The reason for this repeated pattern, they ran out of money. Free healthcare sounds great! Who isn’t in favor of that? With one caveat…the one nobody wants to talk about…how will it be paid for? When I hear, “There’s plenty of money”, or “We’ll figure it out”, I’m reminded of Nancy Pelosi’s famous statement  regarding the “Affordable Care Act” (which tripled my healthcare premiums, by the way). “We have to pass it to find out what’s in it.”  Then it turns out that what’s in it isn’t exactly what we were told but it’s too late. Don’t give me platitudes and generalizations. I want details…how does it work? And who,exactly, is picking up the tab? There is no free lunch!

 Another major problem for Venezuela, which became evident when the money ran out, is the cost of keeping the military happy. Authoritarian regimes maintain power through control of the military. When oil revenues nosedived and they had already squandered or stolen all the borrowed money Maduro began ceding control of various sectors of the economy since he couldn’t just pay them outright. First he put them in control of the oil business which is responsible for almost all the Venezuela government’s revenue (legal anyway). He also turned over control of the distribution of food, medicine, gasoline, and other important items, even water. Another bone thrown the military’s way was control of the “Mining Arc”. They pretty much are in charge of everything of consequence in Venezuela and to make it pay off for them that means corruption of basically everything of consequence. The problem for Maduro is that all those things have basically collapsed under 21st Century Bolivarian Socialism so those things aren’t as lucrative as you might think.

 The extra food and special healthcare benefits have also been severely degraded so the only ones really benefiting are those at the top. Now you know why an army of 150,000 soldiers has 2,000 generals. Many of the rank and file are unhappy and view their commanders with contempt. A journalist in the Caracas airport saw a general walk past a small group of soldiers and they didn’t even salute! They may not voice their displeasure for fear of retribution but it’s clearly out there.

 More tomorrow….

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