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Sara Schaffer and Ezequiel Minaya:
Venezuela vulnerable to oil's fall




CARACAS—This week's plummeting world oil prices are throwing into doubt financial stability in Venezuela, which relies on the commodity for most of its income.

Oil exporters from Russia to Iran are suffering with the lowest crude oil prices since June 2012. But few are as vulnerable as Venezuela, where a free-spending populist government had already been grappling with a recession, widespread shortages, and massive protests earlier this year.

The price of the Venezuelan barrel—heavier and more expensive to process than Middle East oil—fell to $77.65 on Friday, the lowest price since late 2010. The price drop was due to “ample” supply and weakening worldwide demand, the ministry said in its weekly oil price report Friday. Venezuelan oil has now tumbled nearly $15 since early September.

“We were already in a critical and precarious situation with oil prices at $97,” said Tamara Herrera, chief economist at the Caracas-based research firm, Síntesis Financiera.

The drop in oil price this week spurred worries among investors over whether Venezuela could default on its external sovereign debt, which totals $35.4 billion, according to government figures. State oil company Petróleos de Venezuela SA, known as PdVSA, carries another $32 billion in debt.

Yields on Venezuela's benchmark bonds—a broad measure of the reward investors need to lend to the country—surged to more than 18% on Thursday, a five-year high and the highest of any debtor nation, well above the level for war-torn Ukraine or Argentina, which recently defaulted.

“There is a clear risk that the authorities will run out of money,” said David Rees, an economist at Capital Economics consultancy in London.

The decline heaps pressure on President Nicolás Maduro 's embattled government, prompting ever more politically toxic choices between cutting spending in a recession or restricting imports even more in a country that is already hit by shortages and relies on imports for 75% of all goods and services.

Venezuela's foreign reserves fell below $20 billion earlier this month, low compared with both other large Latin American economies and with global oil powers.

Some, like Ms. Herrera, say the crisis could force the government to take painful steps to improve government finances like raising the price on the country's nearly free gasoline, along with carrying out a devaluation of the bolívar currency, which would allow dollar income earned by oil to go further in local currency terms.

 

But none of those choices come risk-free. Devaluing the currency, for instance, will raise the price of imports and add more fuel to the world's highest inflation rate, estimated by most economists at above 60%. Raising the price of gasoline would be politically unpopular at a time when just one in three Venezuelans approve of the president.

“With a drop in oil prices, it's no big mystery, things are going to get much worse here,” said Luis Leon, a 20-year-old college student and waiter.

Mr. Maduro insists the country will be fine. On Wednesday, instead of addressing oil panic, he called a news conference to discuss a political conspiracy involving “foreign adversaries.”

Faced with questions about oil, he said, “We're doing fine. The price of oil will hit a floor, and it will go up again, and Venezuela will continue with its social spending plans.”

Venezuela, where oil accounts for 96% of export revenue, enjoyed a good ride for much of the past decade as oil prices rocketed and the government raked in more than $100 billion a year in oil sales, according to official figures. This enabled the government of President Hugo Chávez to bankroll his self-styled socialist revolution through massive spending on housing, food and other subsidies.

But even amid high oil prices, the country started running out of dollars.

Part of Venezuela's bind is that of the 2.7 million barrels produced here each day, only 1.2 million bring in cash revenue, says Ramón Espinasa, a former chief economist at PdVSA.

That is because Venezuela ships oil to Cuba and other Caribbean countries through special agreements, and doesn't earn cash on it. It also ships hundreds of thousands of barrels to China annually, to pay off tens of billions in loans made by Beijing, say former oil industry executives.

Now, with the price of oil falling, Venezuela will have to pony up even more barrels to China to cover its debts. Meanwhile, up to 800,000 barrels a day are consumed domestically at pennies on the gallon.

Even when oil prices were booming, Venezuela has increasingly struggled to paper over cracks in the economy. The country suffers from a collapsing local currency and a moribund industry after wide swaths of the private sector was taken over by the government. It is set to contract by nearly 3%, far more than any other major country in Latin America.

Until now, the government has saved dollars by restricting imports, which have fallen by a third over the past two years. Since the government controls all the dollars in the country through currency controls, it can curtail imports by restricting the dollars needed to buy them. This has resulted in shortages of everything from baby diapers to medicines to car parts.

Citizens are increasingly fed up. Earlier this year—with oil prices still around $100 a barrel—Venezuelans across the country rose up to protest shortages and what demonstrators said was economic mismanagement.

Lenni Pirela, a retired port worker, said he recently traversed the western city of Maracaibo and entered 15 different supermarkets looking for powdered milk for his grandchildren.

“The situation here is drastic,” he said. Everything is getting worse.”

 

Sara Schaefer Munoz is Wall Street Journal correspondent in Latin America; Ezequiel Minaya is Venezuela correspondent for Dow Jones Newswires/The Wall Street Journal. Petroleumworld reprint this article in the interest of our readers.

Editor's Note: This commentary was originally published by The New York Times on October 11, 2014. Petroleumworld reprint this article in the interest of our readers.

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