Falling oil prices dent Hugo Chávez's clout

With oil prices down by half since July, the Venezuelan leader's largess may dry up.

from the October 20, 2008 edition

Page 2 of 2

Page 1 | 2

PDVSA contributed another $13 billion in 2006, or another 7.3 percent of GDP.

Domestic spending is likely to remain stable for now, but Chávez's "Bolivarian Revolution" abroad – via subsistence programs like Petrocaribe and the Bolivarian Alternative for the Americas (ALBA) – would probably be retooled, says RoseAnne Franco, lead analyst at PFC Energy in Washington.

Chávez sends 300,000 barrels of oil daily at subsidized rates to needy countries in the region.

Heating oil in the US and cut-rate fuel for London's buses have also been gifted.

Recently, President Manuel Zelaya of Honduras, who signed onto Petrocaribe and more recently ALBA, says that Chávez pledged $300 million a year for agriculture and other programs.

"Any investments in countries like Ecuador and Nicaragua, or helping the Bolivian oil company, it's likely you won't see those move forward," says Ms. Franco. "If [Chávez] is under pressure [his government] will focus on the domestic."

Of all OPEC countries, it is Venezuela that is most vulnerable in the face of lower oil prices, says Franco.

That is because Venezuela so heavily relies on imports, including for most of its food needs.

PFC Energy published a report earlier this year saying that for 2008 oil had to stay at $94 a barrel and at $97 next year for Venezuela to finance the imports of goods and services, one macroeconomic indicator.

Chávez has maintained that the Venezuelan government is in good shape, and the government has denied rumors that a currency devaluation and increased taxes or tax hikes loom.

"Many people want oil to keep falling so they can see us fall, but Venezuela won't sink," Chávez recently told a state-run media outlet.

Venezuela has $39 billion in foreign reserves. (The Venezuelan government also has money in a "rainy day" fund, which PFC Energy estimates is another $14 billion.)

But some in Caracas express concern. "I am worried about the political and social problems it will bring," says Alejandro Ovalles, an orange juice vendor in downtown Caracas. "We all depend on oil."

Production in Venezuela has slipped, too, from 3.1 million barrels a day in 1999 to 2.6 million barrels daily last year, according to the Energy Information Administration.

And Chávez spends the money just as quickly as he earns it, says Ian Vásquez, director of the Center for Global Liberty and Prosperity at the Cato Institute, a libertarian think tank in Washington. "When you have an economic situation that depends on wealth distribution rather than wealth creation you expose yourself to being in a very precarious situation," he says.

For now, no one expects any immediate shock. "Right now, [with oil prices at $70], nothing happens. Below $65, that could change. But in the short term, there's no effect," says Luis Pedro Espana, director of Project on Poverty and an economics professor at Andrés Bello Catholic University in Caracas. "Part of the bonanza is in state banks and in international reserves. The government would not feel a recession in the short term."

If the situation does turn into a long-term readjustment for Venezuela, Mr. Espinasa says it could be a political blow. But the impact will be one of perception rather than real pullback, he says, adding that much of what Chávez has pledged has amounted to no more than promises.

That is a sentiment expressed in Nicaragua. "It's hard to say what impact a reduction in aid could cost the economy," says Mr. Aguirre, the president of Nicaragua's congressional budget commission. "For starters, we never knew how much aid Nicaragua received from Venezuela or what it was used for."

• Tim Rogers contributed from Nicaragua and José Orozco from Venezuela.

1 | Page 2