Outrun Change

We need to learn quickly to keep up with the massive change around us so we don't get run over. We need to outrun change.

Now gasoline shortages in the country with the world’s largest amount of proven oil reserves. What economic system could possibly create this mess?

In Venezuela, that sign is needed at hospital pharmacies, bakeries, and now  at gasoline stations. Image Courtesy of Adobe Stock.

The shortages and suffering in Venezuela continues. Your homework for the day: what economic system provides this level of suffering?

  • Foreign reserves are shrinking
  • Bakeries threatened if they bake too many sweets and not enough price-controlled bread
  • Pregnant women are leaving the country to deliver their babies
  • Gasoline shortages appear

3/1/17 – CNN Money – Venezuela is down to its last $10 billion – The country’s foreign reserves are down to $10.5B, from $20B in 2015, and $30B in 2011. That info in sourced to the Central Bank of Venezuela.

Article says inflation is expected to hit 1660% this year and 2880% in 2018.

3/13 – PanamPost – Venezuelan Regime Threatens to Expropriate Bakeries, Jeopardizing Bread – In addition to price controls and currency controls, the government is going to impose output requirements on bakeries. If they don’t produce bread all day at the government limited price, they are subject to take over by the government. Left out of their miscalculation is that the government has stopped importing wheat flour.

 

If bakeries don’t bake enough bread, the government will close the shops.

3/16/17 – Yahoo News – Venezuela arrests brownie and croissant bakers in ‘bread war’ – Well, that didn’t take long.

Bakeries are also required to use 90% of their flour making the basic bread that is most common in the diet of most people. Can’t make too many sweets, in other words.

The government inspectors fanned out and checked up on 700 bakeries. Four bakers were arrested for making too many brownies and sweet goodies instead of bread. One of the bakeries will now be run by the government for 90 days.

3/23/17 – Wall Street Journal – Venezuelan Women in Labor Cross to Columbia to Give Birth – many thousands of people have crossed into Columbia for medical treatment in the last 12 months. Estimates are 1000 expectant women went there to deliver their babies.

Why?

The health care system in Venezuela has slipped from the role model in Latin America for providing healthcare to a system in crisis cannot even get medicine or water or surgical tools or disinfectants. The maternal death rate has skyrocketed from 70 per 100,000 live births back in 2014 all the way up to 131 per 100,000 live births.

One named doctor is quoted as telling his clients to go to Columbia to deliver

3/24/17 – Associated Press – Venezuela asks you and help in boosting medicine supplies – the country’s president is asking the UN for assistance as the country faces massive shortages of medicine. He blames it on economic war against the country and the drop in oil prices.

Hmmm. Is it something other factor that could possibly be causing the shortages?

3/24/17 – Forbes – Congratulations Nicholas – Oil Rich Venezuela Is Running Out Of Gasoline – Yes, the country that has more proven reserves that even Saudi Arabia is running out of gasoline. Refiners in the country cannot meet domestic demand so the government imports fuel at market prices and sells it for a few pennies a gallon. Article says you cannot spend as much as one dollar to fill up any gas tank

There are two completely expected, fully anticipated, you-really-ought-to-have-seen-it-coming consequences.

First with the price so ridiculously low, consumers use huge amounts of gasoline, far more than they would if people had to pay anything resembling a market price.

Second, the built-in subsidy of buying gasoline at world prices and selling it for pennies a gallon means the government is running out of money because of the massive subsidy.

3/23/17 –  Bloomberg – Venezuela’s Fuel Shortage Is Getting Worse – The national oil company is conserving cash in advance of a US$2B payment on foreign debt . That means it is importing less gasoline.

The consequence is shortages of gasoline producing long lines in many cities and no inventory at many gas stations.

Article says the output from refineries in the country is dropping because of lack of spending and infrastructure. Article cites Energy Information Administration statistics showing the country is importing 75,000 barrels a day of gasoline and other refined products.

Let’s do a little math.

EIA table listing Refinery Gasoline Prices by Grade and Sales Type show the bulk category of sales for resale is running $1.489 a gallon in December 2016. Let’s round down to $1.45. There are 42 gallons of oil in a barrel of oil, so I will assume the same ratio for gasoline. I will also assume the pennies per gallon price to consumers is a nickel.

Here’s the math:

Cost to purchase Price to consumers
bulk price, gasoline for resale  $                   1.45  $           0.05
Gallons per barrel                          42                  42
Price per barrel  $                 60.90  $           2.10
Imports per day, in barrels                   75,000            75,001
Cost of imports per day  $         4,567,500  $      157,502
Days per year                     365             365
Cost per year  $  1,667,137,500  $57,488,267
Annual subsidy  $ 1,609,649,234

This buy-at-market-to-sell-for-pennies strategy translates into something in the range of a $1.6B subsidy on an annual basis.

Compare that to the $2B loan payment due next month, as mentioned in the previous article and a mere $10B of foreign reserves as mentioned at the top of this post.

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