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Caribbean Trade & Economy

Venezuelans Addicted to Cheap Oil Need Price Jolt

Author: Manish Shah
Last Update: 3:33 AM ET January 15 2015

Surprisingly, during the period,even though oil price boomed, Venezuela’s national debt surged from less than $30 billion to $130 billion and growing.

What Happened to $700 Billion?

What happened to this vast sum of money and what did Venezuela get in return?

In short, Venezuelans and the country’s leaders chose to squander its good fortune from the oil boom. Venezuela does not even have a reserve fund.

The Venezuelan government embarked on monopolising all exports, nationalising industries, implementing price controls and allocating foreign exchange at artificially low rates to favoured customers and industries so that the government could spend and implement policies to help the poor.

Chavez ramped up social spending for the poor with no oversight and many of these projects are half-finished or have delivered little benefit to society. Cash handouts are very popular in the slums, but that has led to a huge surge in inflation.

Healthcare provided with the help of Cuban doctors has been the lone success of all the social projects.

In addition, Chavez used oil to carry out regional diplomacy and cut deals with several neighbouring nations to supply cheap oil to win diplomatic favours with no economic gains.

Venezuela sells 30 percent of its annual production virtually free in the domestic market and sells additional 10 percent under its PetroCaribe initiative. Worse, oil production has not been growing and most foreign explorers have left the nation.

As noted, the retail price of petrol at the pump has been no more than 5 cents a liter, far below the cost of exploration and refining and much less than the international price of 70 cents a liter.

For the mismanaged nation, things were difficult but manageable in the last ten years with the oil price slowly increasing from the low teens in 2000 peaking at $145 a barrel in July 2008.

Venezuela had access to a growing amount of dollars but the government still kept a tight control on how these dollars were allocated to businesses for imports.

Businesses also started asking dollars for fake imports and began transferring money to the US, Spain and Panama. The demand for dollars escalated as businesses invented new ways to take the capital out of the country and the trust deficit with the Chavez government widened.

While Venezuelan businesses and industries were starved for dollars, Venezuela used precious foreign exchange to win international favours.

The automotive industry is the prime example of how bad the situation is in Venezuela.

Fuel Everywhere but No Cars

After peaking at 492,000 vehicles in 2007, auto production has been in a steep decline and production is expected to dip below 8,000 this year, only because automakers do not have access to foreign exchange to import components.

Therefore, the nation has fuel but no vehicles.

Most of the auto dealers have gone out of business and those that are still in business are surviving on fixing cars if they can find parts.

How Much Venezuela Gets from Exports

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