Is Venezuela's oil boom set to bust? http://www.zoomblog.com/images/justifyfull.gif

Por Venezuela Real - 28 de Octubre, 2008, 12:13, Categoría: Petróleo/Energía

James Painter
BBC NEWS
October 28, 2008

The dizzying collapse in oil prices has started a heated debate in Venezuela about the possible effect on its oil-dependent economy - and the political future of left-wing President Hugo Chavez.

Venezuela is particularly vulnerable to oil prices. It is the Western hemisphere's largest oil exporter. More than 90% of its export revenue and more than half of the government's annual expenditure comes from oil.

President Chavez's right-wing opponents are hoping a sustained drop in the oil price could curb his heavy spending on social programmes and undercut his support.

"Some Venezuelans - the wannabe Yankees - are praying for a continued drop in oil prices," Mr Chavez said recently. "But a price range of US$70 to US$90 a barrel will give us more than enough room."

Foreign reserves

The Venezuelan economy is set to grow for the fourth year running this year on the back of strong oil prices. Last July the price reached more than US$147, but has slumped at one point recently to below US$60. Oil analysts Goldman Sachs say it could drop to US$50 in the event of a world recession.

OIL PRICE DECLINE

The former head of the Venezuelan central bank, Domingo Maza Zavala, thinks that anything less than US$70 a barrel would mean current levels of economic activity could not be sustained.

"We are on the edge of a precipice and we should prepare for contingencies," says Mr Maza Zavala.

"The government is presenting a different panorama to Venezuelans, which is dangerous because the best way of confronting dangers and risks is the truth."

Analysts point out that the key factor is the average price of Venezuelan oil over several months and not the price on any particular day.

"There is no chance of an economic collapse this year," Jose Manuel Puente, from the Public Policy Centre in Caracas, told the BBC.

"Even if the price stays low for the rest of the year, the average price for 2008 will still be around US$95 a barrel".

Government officials are also quick to point out that Venezuela has large foreign exchange reserves of nearly US$40bn.

That figure rises to well over US$50bn when a special discretionary development fund (Fonden) is included which President Chavez has used to spend mostly on foreign policy initiatives.

'Illusion of harmony'

However, even if the short-term outlook may be solid, next year may be another matter if the oil price is consistently below US$60 a barrel, analysts say.

Mr Puente says his main concern is the sustainability of current economic policies. He points to three key weaknesses in the Venezuelan economy, which would be exacerbated by a low oil price - a burgeoning fiscal deficit, high inflation, and balance of payments problems.






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