What is worrying policymakers is that, after a partial recovery in the second quarter, the oil industry has started to misfire again. In the third quarter, exports were 20% down on the third quarter of 2002. Although this is better than the 48% year-on-year collapse of the first quarter, its shows that there is still quite a lot wrong with the industry. In the second quarter there had been a pick-up (year-on-year) which kept the fall in exports down to 3%.
The BCV reported that in the third quarter the oil industry was 9% below where it was in the same period of last year, while the non-oil industry was 6% down. The oil industry accounts for about 30% of the country's economic output. The BCV added that the poor performance of the oil industry had knock-on effects on construction (down 34% compared with the same quarter of 2002), retailing (down 10%), and manufacturing (also down 10%).
The oil problem
The problem clearly lies with the state oil company, Petróleos de Venezuela (PDVSA). Following the collapse of the two-month strike the government sacked hordes of managers and middle-class engineers at PDVSA. The effects of this cull are now coming through. The company has not been re-invigorated. Often, retired managers have been rehired to provide the know-how that is needed and is now missing. The BCV pointed out that the private sector oil industry (ie, the companies which were allowed in to take over difficult or marginal fields) is doing pretty well. It increased activity by 30% in the third quarter, while PDVSA's activity declined by 12.2%.
Overall, oil production was running at an average of 2.6m bpd in the third quarter, according to the BCV figures. Refining averaged 1.2m bpd. And the industry produced 1.5m barrels of orimulsion, its tar-based fuel which is being phased out. For the year as a whole, crude oil production is down by 17% (at around 2.24m bpd); refining is down by 24%, and orimulsion production is down by 21%.
As for oil export revenues, these were 14.6% down in the third quarter compared with the same quarter of 2002. The main reason for the decline was a 27% drop in PDVSA's exports. The private sector's exports in the quarter were up by 17.2%, the BCV reported. They increased the volume of their exports by 38%.
The BCV said that the only comfort was that, quarter-by-quarter, the comparison between what the economy managed last year and what it has been doing this year has narrowed. In the final quarter, when the effects of last year's strike kick in, there may not even be a year-on-year decline, some independent economists forecast. Even so, the year-on-year decline in the third quarter was still 7.1%, compared with 9.4% in the second quarter and 29% in the first.
Cashflow problems
Money is still being withdrawn from the economy. In the third quarter, the economy ran a current account surplus of US$2.8bn. The central bank increased its reserves, but the government is finding that it does not have enough money. So President Hugo Chávez asked the bank to transfer US$1bn from the reserves to the government's account.
The government needs the money because its is spending more than it is taking in through tax revenues and oil royalties. At the end of the third quarter the government admitted to a fiscal deficit of Bs2.7trillion (US$1.68bn). Spending was Bs 23.1tn, while revenues were Bs20.3tn. Spending is up by 28% so far this year, but 40% of the outflow goes on servicing debts. PDVSA has provided the government with Bs6.3tn in royalties, and dividends of Bs1.8bn. Some officials expect the company to provide another dividend in the final part of the year, perhaps as much as Bs1.8tn again. To be fair, non-oil revenues are up by 20%, at Bs9.7tn.
The BCV said that, legally, it could not transfer the money. Domingo Maza, a director at the bank, said that the bank would like to help but that, under the central bank law, the bank could not transfer the money without taking delivery of some security as payment. He said that officials at the bank had been looking at a way to provide the government with the money it wants, perhaps by using the commercial banks.
Chávez was unhappy at the reply and is threatening to go to the supreme court to end what he sees as obstructionist behaviour from the central bank. He even says that he will hold a referendum on the issue. Chávez claims that the government only wants US$1bn of the US$21bn in reserves that he says the central bank holds. He wants to spend the money on rural projects.
What Maza suggests is that the government decides which projects it wants to support and then gets the central bank to persuade the commercial banks to finance these projects, probably by cutting reserve requirements. This would make it easier (and cheaper) for the commercial banks to finance the projects. Maza said that, legally, the central bank could not finance the projects directly.
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