Americas Quarterly - Spring 2011

allies in Central America and the Caribbean. Assuming that oil production remains at 2. 4 mbd, Venezuela’s gross oil exports could reach $71.4 billion in 2011 and $81.4 billion in 2012, estimating an average Brent benchmark price of $91 per barrel in 2011 and $105 per barrel in 2012. But the oil that PDVSA sells under preferred conditions must be discounted to determine its true oil export income.

The first of the beneficiaries is Cuba. Under bilateral mutual cooperation agreements, PDVSA, as a partner of the Cuban company Cupet, can operate and process Venezuelan crude oil in Cuba’s Cienfuegos refinery. As a result, PDVSA sends to Cuba 120,000 bpd for an estimated value of $3.2 billion in 2011 and $3.6 billion in 2012. In return, Cuba compensates Venezuela with medical services, sports training, intelligence services, and technical support.

Another set of beneficiaries comprises select countries in Central America and the Caribbean, where PDVSA is financing 50 percent of the value of the exports under preferential conditions. These favorable loans are for 17 to 25 years at a 1 percent interest rate with a one- to two-year grace period. For Venezuela, this will amount to cash losses of $6.2 billion in 2011 and $6.6 billion in 2012, but it also means that the Chávez government is the principal donor and/or financier of the region. The Dominican Republic and Nicaragua, the principal beneficiaries of this pact, each receive 30,000 bpd. In the case of the Dominican Republic, the government receives and refines the oil and then resells its derivatives at market prices. In this operation, the Dominican government will obtain $450 million in 2011 and $500 million in 2012 as favorable loans. The subsidy to Nicaragua is for a similar amount.

The third special case is China, which has disbursed almost $32 billion in loans to Venezuela under preferential terms (the average interest rate is Libor plus 338 basis points) and to which Venezuela has committed

300,000 barrels in oil exports per day for the next ten years. The agreement was at market prices at the moment of delivery, and PDVSA is dedicating about $100,000 to pay the loan. The rest is basically sold at market prices. Under these conditions, Venezuela will pay China $3.2 billion in 2011 and $4.1 billion in 2012.

Taking into account all these factors, plus the expected increase in oil prices, Venezuela’s net oil income is likely to increase to $62 billion in 2011 and $70.7 billion in 2012. Despite this projected windfall, many still believe the country has a cash constraint in hard currency. This perception of scarcity may come from the overvaluation of the exchange rate and the fact that Venezuelans cannot buy all the dollars they want at the official rate of 4. 3 Venezuelan Bolívares to $1. However, Venezuela should have enough resources to fulfill its commitments at least until 2012, even though the expected increase in public spending ahead of the 2012 presidential election would leave the country in a weaker position for 2013 and beyond.

CHEAPEST GASOLINE
IN THE WORLD

Venezuela has the world’s cheapest gasoline. But what does this subsidy mean for Venezuelan society? And who is the principal beneficiary? For 2011, the domestic gasoline price is 2. 1 cents per liter, or 8 cents per gallon at the official exchange rate (half that if using the nonofficial exchange rate). The international market price is 63. 6 cents per liter. Filling a tank in Venezuela is cheaper than buying a can of soda, and the tip for the gas station attendant is often equal to or higher than the cost of the gasoline.

Recently, Chávez declared that PDVSA has more than 90 percent of its refining cost subsidized, estimating the subsidy at $1.5 billion a year. This calculation is incorrect. Instead, it is necessary to compare the domestic price of gasoline with its opportunity cost (that is, its export price). Basically, every liter of gasoline Venezue-

lans sell domestically is one liter not sold on the international market. And since the domestic price of gasoline has remained practically constant in nominal terms, the total subsidy has been increasing with the devaluation of the currency, the increase in the price of oil and the ever-increasing rate of consumption. Assuming 17. 6 billion liters of annual domestic consumption, the total gasoline subsidy amounted to $9.4 billion, or 4. 6 percent of GDP, in 2010.