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Venezuelan oil deal leaves Caribbean nations in a blunder

Venezuelan oil deal leaves Caribbean nations in a blunder

Posted by Shanelle Weir on February 04, 2015

For many countries, cheaper oil is helping boost economic growth. But if you're a struggling Caribbean nation dependent on energy subsidies from Venezuela, the crash in oil prices is not welcome news.

Venezuela's heavily oil-dependent economy has been sent into a tailspin by the collapse of crude prices, which has starved the country for cash to pay for domestic energy subsidies and imported goods. With little foreign currency reserves left, the economy is contracting, inflation has soared and the government has resorted to rationing food and other consumer staples.

And with no rebound in oil prices in sight, the country's future is looking bleak. To finance its budget, the government needs oil prices above $140 a barrel, putting generous subsidies for education, food and housing at risk of deep cutbacks.

It has also jeopardized generous financing terms extended to more than a dozen Caribbean nations that rely on Venezuelan oil to fuel their own economies. 

Venezuela launched the so-called Petrocaribe accord in 2005 as it sought to become a low-cost energy provider and win political favor among small island economies heavily reliant on oil imports. But as oil prices have fallen, Venezuela's energy blessing has turned to something of a curse.

Under the terms of the Petrocaribe agreement, the drop in oil prices has—paradoxically—raised members' oil import costs. That's because, as crude prices fall, they lose access to extremely generous financing terms that amount to subsidies.

When oil was over $100 a barrel, Petrocaribe member countries paid just 40 percent of the upfront costs, and Venezuela's state oil company, PDVSA, covered the rest of the expense with a low interest rate loan payable over 25 years. Some have also paid their oil bills with bartered agricultural products or services.

The extra cash from deferred payments helped some countries finance infrastructure projects and other spending programs.

But those finance terms become much less generous as the price of oil falls, forcing member countries to pay more upfront, with payment in full when prices fall below $40 a barrel, according to RBC economist Marla Dukharan.

Cheap oil has also discouraged Petrocaribe countries from diversifying their energy reliance away from oil to more efficient sources like natural gas or renewables like solar, which is in abundant supply in the Caribbean.

"Most Petrocaribe members depend on outdated fuel oil generators to provide the majority of their electricity, a practice that nonsubsidized states have long since dropped," according to a research report by Scotiabank analyst Rory Johnston

The Venezuela oil deals have also left some Petrocaribe countries with sizable debts that Venezuela's cash-strapped government can ill afford to refinance. 

Some Caribbean countries are at much greater risk than others, according to Johnston. Haiti, for example, imported nearly all of its all oil through Petrocaribe in 2013, and had accumulated the highest deferred payments among the group. Suriname and the Dominican Republic have a more diverse source of oil imports and will not be hit as hard by the loss of cheap Venezuelan oil.

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