Ford stuck with devalued bolivars

As reported in Barron’s, Venezuela Devalues Bolivar By 44%, Wiping Out Ford’s LatAm Profit, building cars in foreign countries is a great idea, until it isn’t.

Venezuela devalued its currency bolivar by 44% today. … This move followed a 32% devaluation in February. … This devaluation essentially wipes out Ford Motor‘s (F) profits in Latin America, … look for similar announcements from Toyota (TM), Clorox (CLX), Diageo (DEO), Mead Johnson (MJN), Revlon (REV), Mattel (MAT), and Tupperware (TUP).

As explained in an Oil Price article at Motley Fool, Venezuela is being hit hard by declining oil production:

Venezuela holds the second largest oil reserves in the world at 211 billion barrels. Oil represents 95% of export earnings and about half of budget revenues. Yet Venezuela’s oil exports have declined by nearly half since peaking at 3 million barrels per day in 1997. Natural decline of the nation’s oil fields is a contributing factor, but the mismanagement of Petróleos de Venezuela (PDVSA), the state-owned oil company, is the greater reason for decline.

People that didn’t like Hugo Chavez will blame Marxism, but Venezuela’s Orinoco crude oil is very heavy and involves more technical challenges in extracting and refining than lighter crudes. Oil Price noted last year:

Because the Orinoco crude is very heavy, to an API gravity of 9 degrees, it is difficult to produce and requires a considerable energy investment to extract and process the crude. …

There is thus a history of project slippage and missed targets that is unlikely to improve in the short term. New plans for further investment either by the Chinese, Indians or Russia are now on hold, while the Presidential election to replace President Chavez is decided, but the experience in the last couple of years is likely indicative that progress in increasing production will be difficult to achieve and when set against a rising domestic consumption (as the Export Land Model predicted) is already leading to a fall in exports.

The Export Land Model predicts that as oil production in oil-producing nations peaks, their exports will decline even faster than the production declines because they will reserve more and more oil for internal needs.


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