The reality behind Venezuelan electricity shortages: a further drop in GDP (and more problems)

Yesterday's front pages carried the news that shopping malls had their schedule curtailed to save electricity.  We had cute stories of people standing in line to wait for the mall to open, or people complaining that there was no more late movies for them to catch.  But all of this quaintness hides a major problem for Venezuela: the electricity production drop, long announced and never dealt with by the government, too busy to solve other country's electricity problem, is set to aggravate our economic problems for years.

The first thing we need to understand is that for a government that has made minimization of problems and outright lies a state policy, to recognize that indeed we need to cut down energy consumption by 20% can only mean that in fact we should cut it down considerably more.  Who will suffer the cuts the most?  All of us because of the implied drop in production that this implies.  Let's look at the direct implications for a few sectors.



Shopping and retail.  Malls, for security reason and for general chaos in the streets have become the main source of entertainment for Venezuelans, becoming the distant relative of the Roman Forum sans politics.  Cutting down hours, forbidding them to open before 11 AM will have many consequences.  Labor: with less hours and less sales many stores will need to curtail personnel to stay alive.  There is no escape.  But the government has announced that firings are forbidden so the only option might be to close shop or bribe employees to quit.  No matter what, unemployment will grow because none of these workers will be able to find a job at the mall next door.  The government has made it very clear: malls are only an emporium of capitalism and it does not care if they close.  The workers of course are guilty by association as Chavez has long lost any respect for the Venezuelan worker.

But that is not all. Peculiar details will affect the economy. For example, what about deliveries? These were usually made when malls opened at 7 AM (before opening to shoppers). But since lights must be shut off until 11 AM that means that the mall cannot open to deliveries until 11 AM, bringing a collapse into all the delivery system and increasing these costs. Distribution schemes must be redesigned and there will be less time during the day to make all the necessary deliveries.  Who will pay? The customers through additional inflation.

Malls in Venezuela are also full of services, from banks to notaries and other public offices.  All of these now will open later, while most likely closing at the same time they used to close.  Closing is not the fault of the worker and they should not have to suffer the consequences of the new schedule, no? More costs again.

And what about solutions?  Chavez simply said that malls should buy their own electricity generating systems.  Two things must be commented here.  First, it is simply scandalous that Chavez announces that the state will serve electricity only to those it wants to serve.  That is a naked privatization of a public service to the interests of a single individual, Chavez.  Second: will the malls be offered preferential dollars to import the electric generating equipment not manufactured in Venezuela?  Of course not since the state has barely enough dollars for food and its political plans.  As a consequence these equipments will be imported at 6 to the USD instead of 2.15.  And let's not go into the installation costs, and the risks that the government as its policies continue to fail will simply take over the private generating facilities that it demanded the private sector to set.  Few will dare to take the risk preferring to close their mall if needed.  And those who will take the risk will pass the cost on the customers, of course.

Steel and aluminum plants.  The government presents as a major sacrifice for the common good that it has decided to close a few production lines for aluminum and steel in Bolivar state.  They also brag that no employee will be fired, thus getting a nice paycheck for doing nothing for maybe a year or two.But there is more to it than this gesture.

The fact of the matter is that aluminum production has been in trouble for a decade already and steel production at SIDOR has been plagued with problems since it was nationalized by the government in 2008.  Some trade union guys already last year were saying that the government was going to use the electricity excuse to close down facilities it is unable to manage properly since nationalization. Whether this governmental strategy is a maneuver to dodge its incompetence blame/guilt is in fact irrelevant.  What matters is the consequences of deliberately (or unwillingly?) dropping the production of steel and aluminum.

The first consequence is that a drop of steel and cement production (another nationalized sector also showing trouble) will force a drop in the construction sector, a major employment sector. Thus promises for subsidized housing will not be met, and forget about the massive infrastructure requirements after a decade of chavismo neglect (forget about compensating the highway deficit and the necessary fast expansion of public transport). GDP down, unemployment up, inflation up as people will pay whatever it takes when they need to fix their property.  That extra paid cash for cement et al. will be going to resellers of course, not to the nationalized industries.

Can the government import what supplies are about to default? Unlikely as too much of our currency is already spent on food importations. Imports of steel and cement and aluminum cannot be afforded right now.

But this goes further. Among the few exports Venezuela still managed to do were aluminum and steel products. What will happen when contracts will have to be forfeited? Venezuela's clients will look somewhere else for supplies. How will Venezuela recover its markets? With penniless ALBA countries? Gimme a break!

Food production.  How will electricity cuts go down there?  A a tropical country it goes without saying that refrigeration needs are considerable.  How will these electricity gobblers fare?  Will they be exempted?  Probably, but they still will suffer from a decrease in national productivity while the government will import all the food it needs for its Mercal/PDVAL programs.  The result will be that agricultural production will go further down and that the current nearly 70% import of food will not only remain but maybe even increase.  Just as the markets for steel were lost so will be farm production be lost because, well, you cannot restart a dairy farm in a few weeks.  Cows need to grow up, be inseminated and deliver their calf before you can expect any milk production, a production heavily dependent on refrigeration stability.

As for food storage and distribution, read again the mall section above where many a grocery store is located without been able to open for morning grocery shopping...

Is there a plan somewhere?

No.

We can read with dismay that since the electricity crisis started no advances were made in thermic electricity generation (in English). That is, the government is till unable to bring to full production scale the thermoelectric plant existing.  We can also read in a lengthy El Nacional article (by subscription) that the gas needed for these pants is not coming, that PDVSA has failed to deliver.  Instead these generating plant are using a much more expensive fuel oil. 

More worrisome is that long terms plans are not announced, in particular on hydroelectricity that the government simply gives up. Even though there are still significant sites to exploit the government is not interested "for 500 year". Other sources will be "explored" without any details since that October press conference.

Short term plans are even worse.  Even though the schedule on restriction was announced on December 21, ONLY TODAY did the electricity minister (yes, the new bureaucratic job has just been created) will receive the mall directors to work out more realistic compromises.  Translation: the government detected the outcry form its own supporters at cutting down mall schedules and is rushing now to work out a deal and calm down its own supporters deprived of their usual entertainment venues.  Yet another shinning example of chavismo improvisation and day to day search of the covering band aids to the deep economic and social injuries inflicted on the country.

We have here the dangerous mix of incompetence, populism and ideology, the three at work together to wreck the country as the wreckers are not aware really of the consequences of their actions.

Incompetence: the government has known since at least 2005 of the gravity of the crisis coming ahead.  Nothing was done until it exploded.  To add insult to injury, a less graver crisis provoked by the precedent El Niño phenomenon was simply forgotten, or ignored as a recurrent feature.

Populism: solutions for that problem could have been implemented long ago, the plans existed already BEFORE Chavez came to office.  These plans could have been easily modified to suit the propaganda needs of the revolution and executed anyway.  But the government had other interests and ways to waste state money.  That is why the deep populism of chavismo has blocked increase in energy prices, from gas for cars to electricity for home.  That would have been the very first measure to be taken progressively, to force the Venezuelan consumer to moderate its energy consumption.  Now it is too late.  Amen of all the electricity stolen from pro Chavez poor districts or the numerous governmental dependencies that simply did not bother paying their electric bills for months if not years....

Ideology: Its heavy hand is written everywhere.  Chavez has managed energy programs in many countries of South and Central America, including oil gifts to the poor in the US, and talk about abundant Venezuelan energy available for cheap to any country willing to join the ALBA.  Now Venezuela is a basket case, the laughing joke of the Americas.....  But there is second aspect of the ideological curse at play: the government has apparently no qualms in killing Venezuelan productivity as long as its electors can watch Chavez's cadenas on TV, at home.  This is very simple to understand: the government ideological goal is Cuba where a whole country is enslaved by a government that will give for nothing crumbs for the people to live on.  Chavismo in fact could not care less as to whether the malls or the steel mills close: their economic policy is really to use oil money to create a country of dependence; and they are way on their way to achieve it.

Whichever way you look at our current predicament there is only one culprit: Chavez and the sycophantic folks he put in charge.   El Niño might have aggravated the problem, but the problem started long ago when the electricity distribution grid showed its aging and disrepair.  Twist and shout and blame as he might, Chavez cannot hide that upgrade, increased production capacity and rationalization plans of consumption should have started before 2005, not December 2009.

Next?

My text on Venezuela 2010 perspectives might need to be amended further, toward a darker scenario.  If there is not a better rationing plan to come, the first trimester economic drop could be as high as 5%.  Even if the oil prices increase.  After all, the only country that could in the next three months import enough oil at better prices is the US and this one has dropped its Venezuelan imports, in some months by 16%!(in English). Forget about other markets as Venezuela foolishly, to avoid selling to the US is willing to give fabulous payment conditions while it takes on itself the more expensive costs of shipping!

The foolishness of Chavez ideological economics is finally coming home to roost. Get ready for hard times ahead.