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Falling oil prices dent Hugo Chávez's clout

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

By Staff writer / October 20, 2008

Mexico City

Sixteen months ago, Venezuelan President Hugo Chávez visited Nicaragua to lay the ceremonial cornerstone to a new $3.9 billion oil refinery to help "liberate" Nicaragua from poverty.

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Today, the cornerstone, outside the city of León, sits among weeds. And with the price of oil 55 percent less than its peak in July, many Nicaraguans are starting to wonder if it will ever amount to more than a mere brick. "Countries like Nicaragua will no longer receive the largess that [Mr. Chávez] promised, including the oil refinery," says Nicaraguan lawmaker Francisco Aguirre.

The Organization of Petroleum Exporting Countries (OPEC) is expected to announce this week that it is cutting oil output to help lift crude prices. Of the dozen countries in the oil cartel – who all have benefited greatly from the high prices of the past few years – few have spread their largess to political friends as much as Chávez.

With crude reaching $145 a barrel this year, the leftist leader has been able to pour billions into social programs at home and lavish the rest abroad, sending subsidized oil from Nicaragua to New York – including up to 100,000 barrels of oil per day to Cuba, discounted by as much as 40 percent – and making pledges to invest in infrastructure, refineries, and agricultural programs everywhere in between.

Now that lower prices are a new norm, at $71.85 a barrel Friday, the clout such largess has earned him could begin to wane. Commodities prices overall are slipping, generating new concern in a region heavily vested in exports of soy, copper, and crude. But it is Chávez who could stand the most to lose: a new report from Deutsche Bank says that Venezuela needs prices to stay at $95 a barrel in order to balance its budget.

Coupled with production declines, Chávez's days as the ultimate benefactor could be coming to a close.

"In terms of revenue and oil dependence, Venezuela is by far the most vulnerable," says Ramon Espinasa, a former chief economist at Venezuela's state-company Petroleos de Venezuela (PDVSA) and today an energy adviser for the Inter-American Development Bank. "It's not just prices falling but volumes are down, which compounds the drop in revenue. That's scary."

Oil income represents more than half of Venezuela's federal budget and more than 90 percent of export earnings.

With oil wealth, Chávez has poured billions into his social "missions," which provide services such as healthcare and literacy programs for the poor.

Spending on social programs, according to government figures, has increased from 8.2 percent of gross domestic product in 1998 to 13.6 percent in 2006.

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.