Venezuelans Addicted To Cheap Oil Need Price Jolt

5:00 PM January 15 – 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 Chavez’s 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.

Chavez’s 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 Chavez’s 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, Chavez’s uninvited attacks on Western powers.

To Chavez’s 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.

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.

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