On December 16, 2013, Venezuelan President Nicolas Maduro outlined plans to use a weaker exchange rate in order to lift the prospects of its ailing oil sector and deal with a worsening economic crisis. Venezuela’s foreign exchange reserves have depleted to their lowest levels since 2004. The weaker exchange rate allows the government to earn more Bolivars for every barrel of oil sold, which is priced in dollars on the international market.
The measure appears to apply only to oil transactions. The official exchange rate in Venezuela is 6.3 Bolivars per dollar, while the alternative exchange rate used for oil sales hovers near 12 Bolivars per dollar, according to the Wall Street Journal. Unofficially, exchange rates on the black market often mean people pay as much as 60 Bolivars for every dollar.
The de facto currency devaluation comes as the economy continues to deteriorate. Yields on Venezuela’s sovereign debt reached 15% in early December. Standard & Poors and Moody’s Investors Service, two credit rating agencies, both downgraded Venezuela’s credit rating in mid-December, citing “growing radicalization of the economy.”
The battered economy has also pushed President Maduro to consider raising gasoline prices. Heavy government subsidies result in Venezuelans paying some of the lowest prices at the pump in the world – around 5 cents per gallon. Subsidies are not only expensive for the government, but they also discourage efficiency, and higher domestic consumption eats into potential exports. Slashing subsidies will reduce this enormous fiscal burden, which can cost the government around $12.5 billion per year.
However, Maduro is in a bind because raising gasoline prices and devaluing the currency will only exacerbate inflation, already running at around 54% per year. Stoking inflation will squeeze the Venezuelan people further, already reeling from unemployment and shortages of food.
President Maduro has sought to maintain a grip on all powers of government, following in the footsteps of the late Hugo Chavez. On November 19, the Congress passed, and Maduro signed, a law that grants the President power to rule by decree for the next year. He argues the powers are needed to clean out corruption and reduce the harmful influence of capitalist forces. Buoyed by the populist maneuver, Maduro’s party won municipal elections on December 8, which has given him enough political capital to pursue risky maneuvers to head off a worsening economic crisis.
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The Maduro government is entirely dependent on its flagging oil industry. Venezuela holds the second largest oil reserves in the world at 211 billion barrels. Oil represents 95% of export earnings and about half of budget revenues. Yet Venezuela’s oil exports have declined by nearly half since peaking at 3 million barrels per day in 1997. Natural decline of the nation’s oil fields is a contributing factor, but the mismanagement of Petróleos de Venezuela (PDVSA), the state-owned oil company, is the greater reason for decline.
Source: EIA
In late November, Citigroup published a report concluding that Venezuela presents, “probably the biggest bull risk to the oil market in 2014 outside of the MENA [Middle East and north Africa] region.” Venezuela is struggling to pay its debts, and the government is pillaging PDVSA’s coffers as it searches for cash. Without money to invest in its oil fields, even if Venezuela can avoid a more acute crisis, such as debt default or a coup, its oil output will decline over the long-term.
By. Nick Cunningham
ohanian on Sun, 22nd Dec 2013 3:34 am
yes but what is the true exchange rate?
wildbourgman on Sun, 22nd Dec 2013 3:43 am
Ohanian, I’d say it’s 60 to 1 usd, the black market value is the true market value.
DC on Sun, 22nd Dec 2013 10:11 am
More US agit-prop. Another in an endless sea of US backed stories about how Venezuela is constantly on the brink of collapsing. oilfarce.com didnt bother to mention they have been under US economic siege for years, just like Iran.
I bet oilfarce.com ‘cure’ for Venezuelas problems is a nice right-wing military junta and a de-nationalized oil industry eh?
Makati1 on Sun, 22nd Dec 2013 10:43 am
Sounds like the old Cuba BS when they were the enemy of the US. Of course Venezuela is devaluing as is the US, Japan, the EU, London, etc. ALL currencies are fighting their way to the bottom.
you can always tell the current ‘enemy’ of the Empire by the quantity of negative articles put out by the MSM Ministry of Propaganda.
China, Venezuela, Syria, Iran, etc. The atrocities committed by other countries with ties to the Central Banking Cartel are much worse, but ignored.
ohanian on Sun, 22nd Dec 2013 11:34 am
The official exchange rate in Venezuela is 6.3 Bolivars per dollar.
I have a very bad feeling that if I visit Venezuela as a tourist, I have to buy the local currency at 6.3 to 1 US dollar instead of the TRUE EXCHANGE RATE of 60 to 1 US Dollar.
I have marked Venezuela as a country NOT TO VISIT.
Bob Inget on Sun, 22nd Dec 2013 2:44 pm
Of course there is major mismanagement, corruption in Venezuela. WE are all shocked….shocked, to hear this. Now,
fill er up! (I’ll take my winnings, now)
Actually, for a state almost entirely dependent on oil exports, as awful as poverty, crime is in Venezuela, it can’t begin to compare to South Sudan, Libya, Nigeria, Yemen, Iran, or Iraq whose losses for 2013 alone topped eight thousand dead tens of thousands wounded. In Mexico losses to drug violence topped 50,000 this year.
While oil was not Syria’s principal
export it’s the honey pot enabling a despotic minority to cling to power.
Compare the worst humanitarian disaster in this century, Syria, to gross bungling in Venezuela. No contest.
Ron Patterson on Sun, 22nd Dec 2013 6:18 pm
@DC, get over it. Every article is not planted by the US Government as some kind of grand conspiracy. The article simply gives an overview of the state of the Venezuelan economy. And I would bet it is actually much worse than even this article indicates.
When there is an almost 10 to 1 difference between the official exchange rate and the black market rate, you know something is seriously wrong somewhere.
Alos, Venezuela has, in the past, had a nasty habit of confiscating foreign oil companies assets and paying them pennies on the dollar for them. Now those chickens are coming home to roost. China is almost their only investor and that relationship could cost Venezuela dearly. Either that or it will cost China dearly.
Makati1 on Sun, 22nd Dec 2013 11:46 pm
Ron, you are off the mark. Yes, the US gov. DOES influence most of the published ‘news’ in the US. If you don’t believe that, where are the articles on all of the atrocities in the world? Deems every article is bad mouthing China or Libya or Iran or whatever country is in the cross-hairs of the Central Banking Cartel.
Articles for colleges are from grant loving professors. Articles from news sources like AP are filtered through the government spin. And anything from corporations (your Masters) are definitely spin.
You have to read many sources outside of the US to get a picture of reality.
I read 0ver 20 of those sources daily. It is obvious who is the ‘terrorist country of the week’ just by reading US/MSM news, when the biggest terrorist organization is the US M.I.C./Federal Reserve.