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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

5:00 PM January 15 Ė For a decade, Venezuela has been enjoying rising oil price but with the sharp and swift turn in energy market the nation is bracing for harder times ahead.

The 48 percent plunge in oil price in 2014 has dramatically altered the fortunes of oil producing nations and oil-rich/dollar-poor Venezuela may have to confront yet another crisis.

Oil has been boon and curse to this resource-rich South American nation with 30 million people. Venezuela, with the largest proven oil reserves in the world and a vocal founding member of the Organisation of Petroleum Exporting Countries (OPEC) cartel, is also the fifth largest oil exporter in the world.

To say Venezuela is going through several crises is an understatement and many of these crises are covered by spirited journalists, but none have so far focused on the root cause of the widening and deepening crises.

Chavez Catapults on Support in Slums

The reign of Hugo Chavez coincided with the bull market in oil that finally lost its momentum in the last five months as the US began pumping more oil and natural gas from new fields and China throttled down its economic growth.

The perfect storm of rising supply met falling global demand growth in the oil market.

Hugo Chavez presided over Venezuela from 1999 until his death on March 5, 2013. NicolasMaduro, a follower of Chavezís brand of populism, took over in April 2013.

Maduro has kept intact most of the Chavez policies, despite the dramatic reversal in the oil market.

Venezuela has for decades elected leaders who focused on policies that favoured the rich and the upper middle class. And the benefits of oil exports occasionally filtered down to the bottom 80 percent of population and rarely to the 30 percent who live in extreme poverty.

For decades, Venezuela relied on oil and other commodities to generate foreign exchange and failed to develop other manufacturing and service industries that can diversify its export basket.

Chavezís appeal was built on that promise of sharing oil wealth with the bottom half of the population, his ardent supporters, and he was voted into office with much fanfare and expectations of sharing the oil wealth with the poor.

Many in slums were believers of Chavezís constant rhetoric of providing housing and healthcare to the poorest and blamed the business owners and middle class for creating poverty in the nation. Not to mention, Chavezís uninvited attacks on Western powers.

To Chavezís credit, healthcare access for the poor has improved, housing has been provided to many more than in the previous three decades and the nation has embarked on an expansion of its highway and railroad network with the help of Chinese contractors.

But much of the capital funding has been just wasted.

Nearly Free Gasoline in Venezuela

Chavez, like his predecessor, supported and enabled the addiction to cheap oil that Venezuela enjoyed for decades and kept the domestic retail price of petrol at the pump below 5 cents a liter (19 cents per US gallon).

A gasoline price increase in 1989 triggered massive protests and left hundreds dead; Chavez did not forget that.

No politician has dared to increase the absurdly low petrol price for more than 25 years, and that is where most of the problems lie.

In the last 14 years, Venezuela has exported nearly $700 billion of oil and yet the economy has expanded at less than annual rate of 2.5 percent, below the Latin American regional average.

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