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  1. Analysis
June 21, 2015

Poverty and plenty: dark days for South America’s oil giant

The 'resource curse' is biting deep in Venezuela, where the oil price crash is laying waste to an economy entirely dependent on oil revenue. With import cuts forcing citizens to queue in their hundreds for basic goods and the Maduro government unwilling to overhaul its policies in the face of the crisis, economic stability and social order in the country are balanced on a knife edge.

By Chris Lo

protest venezuela

"Ten years from now, 20 years from now, you will see: oil will bring us ruin," the late Juan Pablo Pérez Alfonso told a journalist in 1976. "Oil is the devil’s excrement."

Bolds words from anyone, but especially from Pérez Alfonso, Venezuela’s late hydrocarbons minister, eminent diplomat and one of the masterminds behind the Organization of Petroleum Exporting Countries (Opec). That vivid statement was effectively a warning of the so-called resource curse, also referred to as the ‘paradox of plenty’, by which many (but by no means all) resource-rich developing countries suffer lower growth and stability than those with fewer resources. This might be due to a lack of diversification, overexposure to volatile commodity markets or misallocation of revenues, among other economic slippery slopes.

Venezuela, which plays host to the world’s largest proven oil reserves, has long been held up as a prime example of the resource curse. The country has a large and well-established oil and gas industry, led by national oil company PDVSA, exploring and producing from massive deposits in regions like the Gulf of Venezuela and the onshore Orinoco Belt (the latter of which is estimated to contain more than half a trillion barrels of crude). But Venezuela’s longstanding overreliance on oil revenues, along with a mix of questionable, ideologically-driven economic policies, has left the country in a fragile position.

Academic and former Venezuelan Minister of Trade and Industry Moisés Naím summed up the country’s fiscal woes in a 2013 article for Bloomberg after the death of President Hugo Chávez: "[Venezuela] has one of the world’s largest fiscal deficits, highest inflation rates, worst misalignment of the exchange rate, fastest-growing debt, and one of the most precipitous drops in productive capacity – including that of the critical oil sector."

Venezuela’s oil price crisis

Given Venezuela’s already brittle economy and its reliance on oil – which makes up around 96% of its export revenues, 45% of the state’s budgeted revenues and 12% of its total GDP – the country is hitched perilously to the wagon of global commodity prices. The oil price crash that started in June 2014, therefore, has hit the nation and its people harder than most other oil-producing states.

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The Venezuelan government’s failure to diversify the national economy has led to general declines in manufacturing and agriculture, leaving its people dependent on imports for a large range of basic goods, including food. Oil revenues in a buoyant market have covered those import costs in the past, but with oil prices plummeting from more than $100 per barrel in summer 2014 to less than $50 at the start of this year, that vital revenue lifeline has been slashed unmercifully.

The heavy, sour crude primarily produced in Venezuela is valued at around $5-8 per barrel below market price, meaning that the country needs a higher market price to drive growth than most oil producers. Harold Trinkunas, director of the Brookings Institute’s Latin America Institute, noted in 2015 that for every dollar lost on the oil price, the government loses $775m in annual revenue.

As a result, and with no competitive production sectors outside of oil easing the pressure, already strained government spending on the import of basic items has dropped from $2.8bn in January 2014 to an estimated $1.5bn in January this year. The resulting shortages have left Venezuelans queuing in their hundreds to gain access to half-empty store shelves. This has fuelled discontent, with polls showing rapidly deteriorating support for President Nicolás Maduro’s government among Venezuelan voters.

Sporadic incidents of violence have reportedly broken out in the supermarket queues. The wave of nationwide protests that broke out in 2014 showed that anti-government sentiment was already high; with the new pressure heaped on by the oil price crash, it’s clear that the fate of the Maduro government, and the Venezuelan economy more broadly, rests on a knife edge.

Opec and allies: a diplomatic world tour

President Maduro, no doubt sensing that his political legitimacy and the ideological credibility of his party is on the line, responded to the crisis with a diplomatic world tour to rally support from Venezuela’s traditional allies. His main objectives have been twofold: firstly, to secure fresh capital to pay debts and fund vital imports, and secondly to persuade Opec, of which Venezuela is a member, to agree to cut production to artificially inflate oil prices. On both counts he has struggled to find success.

"Venezuela’s longstanding overreliance on oil revenues has left the country in a fragile position."

A prominent trip to Beijing at the beginning of the year yielded questionable results. China has already made massive loans ($50bn since 2007) to Venezuela as part of oil-for-loans deals, and nearly half of the 600,000 barrels of oil transported from Venezuela to China every day go towards repaying those debts. No doubt Maduro was hoping to extend those loan arrangements, but instead he emerged from discussions with an unconfirmed deal that would see China invest $20bn in Venezuelan projects, which while positive, seem unlikely to provide the liquid cash injection the government needs to service its debts and feed its people.

The core Gulf members of Opec, meanwhile, are standing firm in their position that the cartel will not cut production, despite high-profile meetings between Venezuelan oil minister Asdrubal Chavez and the likes of Saudi Arabia, Qatar and Iran. In December 2014, Saudi Arabia’s oil minister Ali al-Naimi put across his and other Opec members’ position in no uncertain terms.

"As a policy for Opec – and I convinced Opec of this, even [Opec secretary general] Mr al-Badri is now convinced – it is not in the interest of Opec producers to cut their production, whatever the price is," he said. "Whether it goes down to $20, $40, $50, $60, it is irrelevant."

Unfortunately for producers like Venezuela, Iran and Nigeria, which are in most urgent need of higher prices, Opec members with large cash reserves are more interested in maintaining supply to consolidate their market presence. And as much as a low oil price is proving disastrous for some Opec members, others have compelling long-term reasons to keep the price low, leaving the likes of Venezuela without a lifeline. As Lloyd’s List summarised in December: "The cartel’s strategy, led by Saudi Arabia, the world’s biggest oil exporter, is to keep the price of oil down long enough for US oil drillers using fracking and other costly methods to extract oil from shale deposits in places like North Dakota and Texas to be pushed out of the business."

Petrocaribe: unaffordable ideology?

While conditions abroad are leaving Venezuela increasingly isolated in its struggles, the government’s policies at home and in the surrounding region are not helping either. The country’s socialist regime has always been reluctant to adapt to changing circumstances, often putting ideology before economic common sense. Certainly, Venezuela’s history of costly social programmes has helped improve living conditions and bring many Venezuelans out of poverty, and during the oil boom these policies were affordable.

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But with the oil revenues that have funded these programmes now compromised and people queuing for food outside supermarkets and demonstrations on the streets, statements from Maduro like, "We will never cut one bolivar of what we spend on education, food, housing…on our people" begin to sound more like empty populism than meaningful policy.

Another issue on which the Venezuelan government has showed a lack of flexibility is the Petrocaribe programme, launched in 2005, under which the country sends hundreds of thousands of barrels of subsidised oil to many smaller Central American and Caribbean countries like Cuba, Nicaragua and Jamaica to promote solidarity in the region. Although the Petrocaribe shipments have reportedly come down from 400,000 barrels a day to 200,000 barrels since 2012, Maduro looks likely to ignore recommendations from the likes of the International Monetary Fund, which last year advised the country to further reduce the programme, or eliminate it entirely.

Even with the reductions made so far, the policy potentially cost Venezuela $24bn in lost oil revenue in 2014 alone, according to a Reuters analysis. A Barclays report on Petrocaribe noted the irony that Venezuela was putting its economy in jeopardy by continuing to ship subsidised oil to countries that are running more stable economies.

Nevertheless, Maduro’s support for the scheme has remained resolute, publicly at least, with many observers suggesting that in Caracas, the political implications of ending the programme outweigh the economic risks of continuing it. "It will be a heavy blow to the socialist revolution to say they cannot support their brothers in Haiti or their fellow revolutionaries in Nicaragua, let alone its staunch ally, Cuba," Texas University Latin America energy expert Jorge Piñón told the Financial Times earlier this year. "It will be like admitting Venezuela is an economic failure."

The tumbling oil price has clearly had a devastating effect on the Venezuelan economy, and there are many external factors outside the government’s control that have contributed to the country’s problems. But ideologically-driven economic policy and stiff-backed inflexibility have to take a share of the blame for failing to protect the people from the predictable effects of the volatile market upon which it has become entirely too dependent.

Maduro is quick to accuse the West of an "international conspiracy to try making Venezuela look like it’s bankrupt", as he put it in a recent political broadcast, but to continue to ignore the facts in the face of drastically shifting conditions puts Venezuela at genuine risk of economic meltdown and social disorder. Maduro’s long-term plan to save the economy from bankruptcy is still unclear, but with parliamentary elections coming up at the end of 2015, the voters of Venezuela may end up making the decision for him.

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