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Falling oil prices, PetroCaribe and the Caribbean

Falling oil prices, PetroCaribe and the Caribbean

Posted by Shanelle Weir on November 01, 2014

On the face of it, the collapse in global oil prices would seem to be good news for the Caribbean. However, nothing could be further from the truth. Instead the rapid downward price movement in global oil prices between mid-June and mid-October threatens, in the short term, present economic recovery, and could jeopardise countries involved in economic adjustment programmes, if it forces Venezuela to review its PetroCaribe arrangements.

As matters stand, the price of Brent crude, the global benchmark, has fallen over a four month period from US$115.71 to US$82.60 a barrel, the lowest price in almost four years.

So concerned is the IMF about this that at its recent High Level Caribbean Forum held in Jamaica focused on creating economic conditions that will stimulate growth, Alejandro Werner, the Director, of the Fund’s Western Hemisphere Department suggested that all  Caribbean nations need to prepare stress tests that include a halt in the PetroCaribe oil arrangement with Venezuela.

The present price fall, he suggested, could see Venezuela’s oil exports decline by between US$15 to US$20 billion annually, triggering  “an important policy adjustment in Venezuela that might imply some adjustment with PetroCaribe.”

 “In the case in which there is more volatility in Venezuela there might be disruptions in the programme and countries should continue to prepare contingency plans in this event,” Mr Werner told participants.

The IMF’s view in one or another form now seems to be widespread at high policy levels in North America and Europe, with most experts and officials suggesting that if, as is expected, the present weakness in oil prices continues well into 2015, Venezuela may have difficulty servicing its foreign debt commitments. It may therefore have no option other than to review its subsidies programmes and the PetroCaribe arrangement.

According to the specialist industry publication, the Petroleum Argus, oil accounts for more than 95 percent of the country’s exports and approximately 45 percent of government income. The Bank of America estimates that for every dollar that oil prices drop, Venezuela is losing US$770 million in net revenue over a year. Both figures suggest that if global prices remain at low levels, Government which has one of the world's biggest fiscal deficits, estimated at 15 percent of GDP, will struggle to service its debt, maintain domestic subsidies programmes and meet its international commitments on present terms.

Venezuela’s President, Nicolas Maduro, has however given public assurances that his country will not default on its debt and has also said that the social programmes that help those in Venezuela who support him and his party that these will continue. He has also attacked international news agencies for spreading fears that a debt default is possible, saying, "there'll be no catastrophe or collapse," and that "Venezuela has guaranteed all the resources it needs to keep prospering."

In an attempt to stem the falling price of oil President Maduro is now seeking an emergency summit of Organization of Petroleum Exporting Countries (OPEC) nations to discuss reducing levels of production in order to force up prices. However,  given Saudi Arabia’s strategic and economic interest in continuing to pump oil at present levels , a decline in Chinese consumption, slow rates of economic recovery in much of the developed world, and long-term energy self-sufficiency in the US, any change in present OPEC positions seems unlikely.

Most economists also suggest that Venezuela’s situation has been made worse by a dramatic fall over time in its production to around 2.4 million barrels per day, it existing commitment to supply oil to China to repay loans, and generous arrangements like that under PetroCaribe which defer payments and see only modest revenues flow back to Caracas.

 

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