A few months ago, we mentioned Venezuela’s success in reorienting its oil sales from the United States to the People’s Republic. We lauded the move, since American refineries on the Gulf were (and are) experiencing oil gluts.
Early last month, however, a group of Venezuelan oil analysts called Subaeshi (their Twitter account is here) argued that PDVSA had incurred a terrible opportunity cost from this policy. So I took a look at it.
Unless I am missing something, they are wrong. PDVSA is not incurring huge opportunity costs by selling to China instead of the United States.
On slide 13, they assume that sales to China earn only 10% of the WTI price because of “shipping and insurance costs and debt-repayment obligations” against 85% in the U.S. because of only “shipping and insurance costs.”
PDVSA receives less cash when the oil is delivered simply because its Chinese customers have pre-paid for it.
The analysis makes no sense. A cash-flow analysis would book the loan revenue when the loan was made rather than when the oil was delivered. An income analysis would book the income when the account payable (the loan) was extinguished. (Simple version of the latter: the loan would raise PDVSA’s cash (an asset) and the loan (a liability) by the same amount. Delivery of the oil would then extinguish the loan liability, generating income.)
Inasmuch as PDVSA loses money on sales to China relative to America, it is a function of higher transport costs, the interest rate on the loans, and any price discounts granted the Chinese buyers. Caribbean freight rates are about $1.35 per barrel (some OPEC data); since there is no data on shipping rates from the Caribbean to China, let’s double it for an opportunity cost of $1.35. (That’s actually kind of silly, since there is no real relationship between spot rates and distance: see page 55.) The interest rate on Chinese loans is around 3.4%; so call it 0.9% for a nine-month gap between borrowing and payback ... or 85¢ per barrel.
Total cost: $2.20 per barrel. It would not be unheard of for a supplier to offer discounts of up to $2 per barrel to regular buyers. Call it $4.20, then. Not huge, not chump change.
But there is the possibility that PDVSA gets a much higher price in China. Venezuela’s Merey blend generally tracks WTI. (See page 6 at OPEC’s December Monthly Report and page 27 at OPEC’s 2012 annual report. Maya from Mexico generally trades at a larger discount.) But WTI is still cheaper than Brent: $14.21 per barrel in November; $10.97 now.
And China benchmarks to Brent, not WTI. It is illegal to export crude from the United States; only Americans can buy at WTI.
It is possible that Venezuelan crude trades at less, because it is heavy. But it would have to trade at $10.97 − $4.20 = $6.77 less for PDVSA to be losing money on this deal. That does not seem likely.
In short: the Subaeshi analysis seems fundamentally flawed. I will of course change my mind with new data, but right now the Venezuelan turn to China seems like good business, even if done for the wrong reason.