Hugo Chávez’s Venezuela could be in serious trouble.
Its economy has been in a dire state of recession for the past two years. Heavy dependence on oil revenues to drive the economy is both a blessing and a curse. The fact that Venezuela showed a positive growth in GDP by .6 percent in the fourth quarter of 2010 is a possible sign of hope, but despite this positive indicator, the economy contracted by 1.4 percent in 2010 as a whole with an unsustainable high inflation rate of 27 percent. These figures are some of the worst in Latin America.
Still, the Chávez government sees the upturn in the fourth quarter as a definite sign of economic revival. The Finance Ministry is predicting economic growth of at least 2 percent this year and a reduction in inflation to 22 percent.
Many analysts doubt these optimistic figures. In a recent report the Deutsche Bank stated that it expects Venezuela’s 2011 inflation rate to be either 27 or 28 percent. The executive president of Venezuela’s largest industrial chamber, Ismael Perez Vigil, seems to support these speculations. He told the Associated Press, “There’s no reason to think there will be a recovery.”
Critics of the Chávez administration blame the country’s economic crisis on the nationalization of private industry, namely Petróleos de Venezuela or PDVSA. Venezuela is largely dependent on its oil industry, which accounts for 95 percent of export earnings.
PDVSA has been contending with many technical issues that have resulted in a steep drop in efficiency. In the last decade, production capacity fell from 3.3 million barrels to around 2.3 million barrels. A spokesman at the Isla refinery of Curacao reported that output at the facility has been averaging around 225,000 barrels a day, though maximum capacity is 325,000 barrels a day.
However, instability in Libya may affect the oil industry and some speculate that Venezuela will benefit. Chairman of Libya’s National Oil Corp, Shukri Ghanem, stated that since the country’s conflict started, oil production has fallen from 1.6 to 500,000 million barrels a day. The strain in the supply market has pushed oil prices up in recent weeks. In just the last week of February, the average price for Venezuela’s basket of crude oil and refined products rose by $6.09 to $91.11 per barrel.
Dr. Kent Moors, an internationally recognized expert on oil policy, surmises: “On balance, the longer MENA (Middle East North Africa) problems remain, the better ought to be the opportunities for sourcing crude from other regions. That would certainly seem to favor North and South American production. And… the PDVSA-led Petrocaribe initiative may benefit significantly.”
Pitzer Politics Professor Nigel Boyle agrees that Libya’s decreased oil production will benefit PDVSA. Professor Boyle explains, “The crisis pushes up the price of oil and that benefits the oil producers.” However, he added that “Libya is a large producer but in the larger picture it is not one of the top ranked producers.” In fact, Libya is only the eighteenth ranked producer of oil in the world. Therefore, the current crisis may be raising oil prices now but it probably will not have a long lasting impact on PDVSA or the Venezuelan economy.
Even if, as Dr. Moors suggests, other countries do turn to Venezuela for more oil, they might not be well received. Mr. Chávez has recently announced his aspiration to send one million barrels of oil per day to China within the next three years. “All the oil (supply) that you all need to increase in the coming years, is here in Venezuela,” he told a Chinese delegation in mid-March.
Last year China opened a crucial $20 billion credit line to Venezuela, which is being repaid in oil shipments. Venezuelan officials report sending 300,000 barrels a day to China specifically to repay the credit line.
After the visit from the Chinese delegation in mid-March, Venezuelan officials are evaluating another four billion dollars in Chinese loans in exchange for oil.
Although Libya’s drop in oil production has recently increased oil prices and PDVSA is reaping the benefits, it seems doubtful that the instability in North Africa will have a lasting effect. Yet as Venezuela struggles to rise above its economic crisis, it continues to rely heavily on its oil industry and Chinese loans. Is PDVSA enough to keep Venezuela afloat? The outlook is bleak with the company’s current inefficiencies. This will be a telling year to see if Venezuela’s slight economic growth at the end of 2010 was insignificant or if it will continue its upward trend.The well dries up for Venezuela’s economy