October 19, 2008
As the Price of Crude Plunges, Venezuela Is Poised to Face a Lot of Pain
BOGOTA, Colombia -- Venezuelan President Hugo Chávez has delighted in the economic meltdown in the United States, mocking the Bush administration for its bailout plan and predicting the end of American economic dominance.
The U.S. model of capitalism is collapsing," Chávez, a self-avowed socialist, told reporters recently.
But Venezuela's oil-fueled economy is deeply intertwined with the United States and is poised to face major challenges as the crisis pushes down the price of crude, economic analysts and oil experts say.
The price of a barrel of oil has fallen from $147 in July to less than $70, and analysts say the drop is a blow to Chávez's free-spending administration, which depends on oil for 50 percent of government revenue and 95 percent of its export earnings. Other oil-producing countries, which like Venezuela ramped up spending as the price of oil rose to historic highs in recent years, also face serious economic problems, analysts say.
Robert Bottome, editor of Veneconomia, a Caracas business newsletter, said that if the price continues to fall, Chávez's populist government will face economic turmoil.
"The common perception is that the Venezuelan government goes bankrupt," he said, "that they cannot meet their obligations."
Chávez has said that such prognostications are wishful thinking generated by his foes and that Venezuela, with $40 billion in Central Bank reserves, will ride out the storm. He is among the leaders in OPEC, the Organization of the Petroleum Exporting Countries, who will attend an emergency meeting Friday that could lead to a production cut to boost prices.
"Many want the oil price to continue to drop to see us fail, but Venezuela is not going to go under," said Chávez, who has built what he calls his Bolivarian revolution by exporting oil to the United States.
But perhaps more than any oil-exporting country, Venezuela could be particularly exposed if the worldwide financial meltdown continues. That would slow economic growth, reduce the need for petroleum products and further drive down oil prices. Venezuela exports about 1.4 million barrels daily to the United States, about 10 percent of U.S. oil imports.
The dire predictions come as the inflation rate in Venezuela has surpassed 36 percent and the black market rate for dollars has shot well beyond the fixed government rate. JP Morgan, in a research note this month, predicted that economic growth in Venezuela would reach 5 percent this year and 2.5 percent next year. Last year, the economy grew by 8.4 percent.
"Venezuela is the one that's in the most difficult position, relative to the other OPEC countries," said RoseAnne Franco, lead analyst on Latin America for PFC Energy, a consulting firm in Washington.
PFC Energy said in a report that oil must be at least $94 a barrel to ensure Venezuela's macroeconomic stability this year and generate enough money to pay for imports. Although Chávez frequently touts his country's independence from Washington, Venezuela is more reliant than ever on the food, auto parts, medicine, constructio
The PFC Energy report said that among OPEC countries, Venezuela requires the highest threshold price by far to maintain its balance of trade payments.
Nigeria needs the barrel to be at least $68 to cover its imports, while two Persian Gulf states -- Saudi Arabia and Iran -- need the price to remain above $55.
Although Venezuela and other oil producers savored high crude prices, the downside has been higher inflation, greater domestic consumption of subsidized petroleum products, erosion of the U.S. dollar and increased government spending, PFC Energy said.
Franco said Venezuela's Central Bank reserves, as well as billions more controlled by the presidency, can provide a cushion for a year if prices continue falling. But she and other energy analysts said Venezuela is particularly vulnerable because of the financial commitments Chávez has made abroad, including plans to construct an oil refinery in Ecuador and the sale of oil at preferential prices to Caribbean countries.
"Venezuelan fiscal profligacy and its huge off-budget populist programs has left it very little room for error," the PFC report said.
The Eurasia Group, a New York-based consulting and political analysis firm, said Chávez also faces serious challenges because Petroleos de Venezuela, the state oil company, faces operational and financial hurdles.
The company has added thousands of workers and is estimated to have a workforce topping 70,000. It is responsible for much more than pumping oil. The company is in the food distribution business in Venezuela, for instance, and funds foreign development programs as far away as Bolivia.
Although Venezuelan officials say the country produces more than 3 million barrels a day, the International Energy Agency and most oil analysts put the figure below 2.4 million, with more than 700,000 barrels of that sold daily in Venezuela at subsidized prices.
Ramón Espinasa, a former chief economist at the state oil company, said Venezuela might not feel the pain for now because the average price of a barrel this year is still high, about $115, despite the recent plunge in prices. But next year, he said, the average could be $70 or lower.
"In 2009, you're going to have to spend less than in 2008, and you're going to have to prioritize," he said.
Venezuelan officials have sent mixed signals about what actions they will take in the face of the new economic realities.
Officials recently said the country would rein in spending, with Chávez announcing that the government would cut waste and "put an end to mega-salaries."
But the $79 billion budget for 2009 is significantly higher than the $64 billion budgeted for this year, Ricardo Sanguino, president of the National Assembly's finance commission, said in public comments Wednesday. The 2009 budget assumes the price of a barrel at $60, nearly double the $35 figure used for this year's budget. Chávez has also committed billions to nationalize the cement industry and purchase a Spanish bank's Venezuelan unit.
The Eurasia Group's Patrick Esteruelas, in a recent report on Venezuela's economic and political situation, said the government is unlikely to cut back on social programs as Chávez's allies prepare for state and local elections next month.
"The government will likely muddle through" the rest of the year "by introducing patchwork solutions to rein in inflation and the parallel exchange rate while postponing any significant adjustments until after November's elections," Esteruelas's report said. He said officials would postpone "more painful adjustments until it's absolutely necessary."