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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Ludicrous Proposal By Venezuela’s Maduro To Combat Oil Price Damage

Ludicrous Proposal By Venezuela’s Maduro To Combat Oil Price Damage

Venezuela’s economy is in desperate trouble. The country is highly dependent on oil reserves and has no significant substitute for black gold in the near term. That reality makes Venezuelan President Nicolas Maduro’s recent efforts to tout the country’s technology industry laughable.

Maduro was quoted as saying "We need to generate new sources of revenue besides oil that will force us to produce more and better quality products. In addition, a large percentage of those currencies will go back to the industry for investment." A deeper look at the numbers here reveals that Maduro is doing the equivalent of rearranging deck chairs on the Titanic and then holding a press conference about it.

Prior to the oil price crash, exports of that commodity accounted for roughly 96 percent of Venezuela’s export earnings, 45 percent of budget revenues, and 12 percent of national GDP. With Venezuelan GDP around $400 billion by purchasing power parity, that means that the oil industry accounted for just under $50 billion in annual economic activity, or roughly $1,600 in annual income for every man, woman, and child in the country (based on ~$13,500 in GDP per capita). Related: Case Builds For Argentina As The World’s Next Shale Hotspot

With oil prices having crashed by more than half over the course of the last two years, this means that the economic value of the oil industry to Venezuela is likely around $25 billion. Not all of that economic impact will hit Venezuela though since some of the revenues went to foreign firms. That percentage of value sent abroad for foreign goods and services that are directly tied to the oil industry is rather low though since Venezuela famously nationalized everything they could that was related to the industry. A very generous estimate suggests that Venezuela’s annual loss from the collapse in oil prices is $20 billion or about $650 per person (around 5 percent of total income). For the government itself, the loss has probably blown a hole in the budget equal to around 20 percent of the government’s revenues. Related: Tanker Companies Profiting From Low Oil Prices

To offset this level of economic destruction, Maduro’s plan is to compensate with factories making servers, desktop computers, laptops, tablets, etc. These products are all much lower margin than oil and require significant foreign components. For instance, Intel is one of the very few suppliers of processors that will be needed for many of these machines. Optimistically, Venezuela might be able to make a profit on each machine of $50 each and source an additional $100 of local goods and services. That means that Maduro’s factory would generate $150 in increased GDP for each device made. Again, these figures are rough and purposely optimistic for Venezuela here. Related: Nigeria Could Shoot Itself In The Foot With New Oil Revenue Plans

Yet even using these numbers, Maduro’s factory, running at full steam and putting out 400,000 devices per year would only add $60 million to national GDP. Thus to offset the $20 billion hit from oil, Maduro would need more than 330 such factories all across the country. To put this in perspective, Venezuela would need to become Apple overnight in order to offset the hit from oil. That’s extremely unlikely to happen to say the least. Maduro’s opening of factories might make for good PR, but it comes nowhere near being a significant factor to offset the loss of Venezuela’s oil revenues.

By Michael McDonald of Oilprice.com

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  • doogie on October 14 2015 said:
    Laughable is a good word to describe Venezuela.

    They should go for a practical investment like growing pulpwood to make diapers and toilet paper. That would fill a real need in that country.

    Typical socialist foolishness!
  • O'Leary on October 14 2015 said:
    Would you buy a new or used server made by a failed bus driver?

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