Falling Oil Prices Dent
Hugo Chávez's Clout
By Sara Miller Llana
Mexico City - Sixteen
months ago, Venezuelan
President Hugo Chávez
visited Nicaragua to lay
the ceremonial
cornerstone to a new
$3.9 billion oil
refinery to help
"liberate" Nicaragua
from poverty.
Today, the cornerstone,
outside the city of
León, sits among weeds.
And with the price of
oil 55 percent less than
its peak in July, many
Nicaraguans are starting
to wonder if it will
ever amount to more than
a mere brick. "Countries
like Nicaragua will no
longer receive the
largess that [Mr. Chávez
promised, including the
oil refinery," says
Nicaraguan lawmaker
Francisco Aguirre.
The Organization of
Petroleum Exporting
Countries (OPEC) is
expected to announce
this week that it is
cutting oil output to
help lift crude prices.
Of the dozen countries
in the oil cartel – who
all have benefited
greatly from the high
prices of the past few
years – few have spread
their largess to
political friends as
much as Chávez.
With crude reaching $145
a barrel this year, the
leftist leader has been
able to pour billions
into social programs at
home and lavish the rest
abroad, sending
subsidized oil from
Nicaragua to New York –
including up to 100,000
barrels of oil per day
to Cuba, discounted by
as much as 40 percent –
and making pledges to
invest in
infrastructure,
refineries, and
agricultural programs
everywhere in between.
Now that lower prices
are a new norm, at
$71.85 a barrel Friday,
the clout such largess
has earned him could
begin to wane.
Commodities prices
overall are slipping,
generating new concern
in a region heavily
vested in exports of
soy, copper, and crude.
But it is Chávez who
could stand the most to
lose: a new report from
Deutsche Bank says that
Venezuela needs prices
to stay at $95 a barrel
in order to balance its
budget.
Coupled with production
declines, Chávez's days
as the ultimate
benefactor could be
coming to a close.
"In terms of revenue and
oil dependence,
Venezuela is by far the
most vulnerable," says
Ramon Espinasa, a former
chief economist at
Venezuela's
state-company Petroleos
de Venezuela (PDVSA) and
today an energy adviser
for the Inter-American
Development Bank. "It's
not just prices falling
but volumes are down,
which compounds the drop
in revenue. That's
scary."
Oil income represents
more than half of
Venezuela's federal
budget and more than 90
percent of export
earnings.
With oil wealth, Chávez
has poured billions into
his social "missions,"
which provide services
such as healthcare and
literacy programs for
the poor.
Spending on social
programs, according to
government figures, has
increased from 8.2
percent of gross
domestic product in 1998
to 13.6 percent in 2006.
PDVSA contributed
another $13 billion in
2006, or another 7.3
percent of GDP.
Domestic spending is
likely to remain stable
for now, but Chávez's
"Bolivarian Revolution"
abroad – via subsistence
programs like
Petrocaribe and the
Bolivarian Alternative
for the Americas (ALBA)
– would probably be
retooled, says RoseAnne
Franco, lead analyst at
PFC Energy in
Washington.
Chávez sends 300,000
barrels of oil daily at
subsidized rates to
needy countries in the
region.
Heating oil in the US
and cut-rate fuel for
London's buses have also
been gifted.
Recently, President
Manuel Zelaya of
Honduras, who signed
onto Petrocaribe and
more recently ALBA, says
that Chávez pledged $300
million a year for
agriculture and other
programs.
"Any investments in
countries like Ecuador
and Nicaragua, or
helping the Bolivian oil
company, it's likely you
won't see those move
forward," says Ms.
Franco. "If [Chávez] is
under pressure [his
government] will focus
on the domestic."
Of all OPEC
countries, it is
Venezuela that is most
vulnerable in the face
of lower oil prices,
says Franco.
That is because
Venezuela so heavily
relies on imports,
including for most of
its food needs.
PFC Energy published
a report earlier this
year saying that for
2008 oil had to stay at
$94 a barrel and at $97
next year for Venezuela
to finance the imports
of goods and services,
one macroeconomic
indicator.
Chávez has maintained
that the Venezuelan
government is in good
shape, and the
government has denied
rumors that a currency
devaluation and
increased taxes or tax
hikes loom.
"Many people want oil
to keep falling so they
can see us fall, but
Venezuela won't sink,"
Chávez recently told a
state-run media outlet.
Venezuela has $39
billion in foreign
reserves. (The
Venezuelan government
also has money in a
"rainy day" fund, which
PFC Energy estimates is
another $14 billion.)
But some in Caracas
express concern. "I am
worried about the
political and social
problems it will bring,"
says Alejandro Ovalles,
an orange juice vendor
in downtown Caracas. "We
all depend on oil."
Production in
Venezuela has slipped,
too, from 3.1 million
barrels a day in 1999 to
2.6 million barrels
daily last year,
according to the Energy
Information
Administration.
And Chávez spends the
money just as quickly as
he earns it, says Ian
Vásquez, director of the
Center for Global
Liberty and Prosperity
at the Cato Institute, a
libertarian think tank
in Washington. "When you
have an economic
situation that depends
on wealth distribution
rather than wealth
creation you expose
yourself to being in a
very precarious
situation," he says.
For now, no one
expects any immediate
shock. "Right now, [with
oil prices at $70],
nothing happens. Below
$65, that could change.
But in the short term,
there's no effect," says
Luis Pedro Espana,
director of Project on
Poverty and an economics
professor at Andrés
Bello Catholic
University in Caracas.
"Part of the bonanza is
in state banks and in
international reserves.
The government would not
feel a recession in the
short term."
If the situation does
turn into a long-term
readjustment for
Venezuela, Mr. Espinasa
says it could be a
political blow. But the
impact will be one of
perception rather than
real pullback, he says,
adding that much of what
Chávez has pledged has
amounted to no more than
promises.
That is a sentiment
expressed in Nicaragua.
"It's hard to say what
impact a reduction in
aid could cost the
economy," says Mr.
Aguirre, the president
of Nicaragua's
congressional budget
commission. "For
starters, we never knew
how much aid Nicaragua
received from Venezuela
or what it was used
for." |
