T&T Guardian -Lessons for Trinidad & Tobago in Venezuela's crisis
Petroleumworld 02 21 2018
Venezuela's crude oil production fell in January to its lowest level in nearly 30 years according to S&P Global Platts. The fall in production is as a direct result of political turmoil, lack of investment in the sector and US sanctions affecting T&T's closest neighbour.
OPEC's monthly report for January, which was released on Monday, showed that last month Venezuela pumped 1.769 million barrels of oil per day. This is significantly lower than the average of 2.373 million barrels per day in 2016 and lower than the 2017 average of 2.072 mmbo/d last year.
Venezuela has more crude oil than any other country in the world and it heavily depends on the commodity to power its economy.
Crude oil makes up about 95 per cent of Venezuela's exports. The country has no other real source of foreign income.
This has led to hundreds of thousands of Venezuelans fleeing their countries with thousands coming to T&T to seek refuge.
Lecturer in economics at the University of the West Indies, Dr Roger Hosein, noted that the sharp production decline has also coincided with the collapse of oil prices from US$100 in 2013 to an average price of US$88.42 in 2014 and to US$44.65 in 2015. He noted that by February 2016, the price of Venezuelan crude oil had collapsed to US$24.25 and the economy was in a tailspin.
“The centre of the economic dilemma in Venezuela is the nurturing and development of a rentier state and society. The government of Venezuela engaged in a series of nationalisation which saw the state's involvement in the economy become more widespread and beyond its capacity to manage the economy.
“As a consequence, the state became larger and the fall in energy sector revenues has crushed its capacity to get things done and in the process this has led to corruption mounting, transparency declining and the inefficiencies of various state-led rentier based policies becoming ever more glaring,” Hosein said.
He added that Venezuela made the classic error of becoming very dependent on the energy sector and perceptibly thinking it could predict oil prices and/or that it was safe to expect buoyant oil prices for a longer period of time. In the context of some irrational assumptions the government supervised the escalation of the energy sector evolving to account for up to 95 per cent of the country's total export revenues.
He noted that under the late President Hugo Chavez—which was further strengthened under President Nicolas Maduro—the state became a primary player in the supply of foreign exchange to the economy.
As the economy imploded, the government introduced a controlled exchange rate policy that maintained an unsustainable peg of the country's currency to the dollar. Specifically, although Venezuela is a major crude oil exporter it is dependent on imports for almost everything else that it needs. In this regard, this means that US dollars earned from energy sector exports are very important because they are used to fund the import bill.
In many ways this is not dissimilar to T&T where earnings from the energy sector or the offshore sector is used to fund the hard currency needed for the imports of the onshore sector.
Hosein said the government has been using its petro-dollars to help maintain an artificially subsidised rate in Venezuela. But this subsidy on dollars has given rise to many social and economic problems within Venezuela.
Hosein said the dilemma in Venezuela provides several lessons for T&T including the following;
• It is imperative to diversify the production base away from a narrow focus on the petroleum industry.
• Don't become too dependent on energy rents for government revenues. In fact, try to run the economy on non-energy sector revenue.
• Manage the state-owned energy companies with standards similar to the private sector companies; ensure checks and balances are in place to prevent employees and/or management from corrupting and distorting the smooth running of the company.
• Manage the economy's debt and try to avoid escalation to the point where the country is unable to service it.
• The exchange rate and inflation rates have to be carefully managed using prudent strategies. Avoid the creation of multi-tiered exchange rate systems and don't be afraid to let the market determine the exchange rate or else the black market would.
• Having a vibrant domestic agricultural sector is not an unwise strategy as it provides an opportunity for the most vulnerable in society to get a meal if they have access to land.
Venezuela's crude production could suffer even further with plans by the Donald Trump administration to impose further sanctions on the country.
Story from Business Guardian
guardian.co.tt 02 15 2018
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