Low oil prices fuel death spiral of Venezuelan regime

By Roger Noriega

Source: IASW

Oil prices plummeting to four-year lows has compounded Venezuela’s budget and governability crisis, leading that government to call for an emergency meeting of OPEC member nations. Until now, Venezuela’s petrodollars have prevented a complete collapse. Now that oil prices are declining drastically, the government does not have the revenue to placate its political base and buy off power-hungry rivals. (Ironically, the reliable source of oil revenue from the United States is propping up Maduro’s hostile regime.)

The price of oil benchmark West Texas Intermediate dropped today to its lowest point in over 4 years, reaching just $80.38 a barrel. Experts point to two causes for the steep decline, an excess supply and a decision by Saudi Arabia to cut its prices in hopes of undermining competition from US shale. Oil revenue is vital to Venezuela’s economy, making up 95% of its export earnings and nearly half of its fiscal income. Analysts have concluded that, in order for Venezuela to sustain its current spending levels, oil prices have to reach $120 a barrel-nearly 50% higher than current lows.

The precipitous drop in oil prices could not have come at a worse time for Venezuelan leader Nicolás Maduro. For years, his predecessor Hugo Chávez and he have burdened Venezuela with massive corruption, suffocating bureaucracy, bloated social programs, ruinous economic policies, and anti-competitive measures (such as the illegal seizure of ExxonMobil’s operations). These ruinous practices have caused food shortages, power outages, rampant insecurity, and crumbling infrastructure.

The drop in oil revenue exacerbates Venezuela’s already substantial economic woes. Last month, Standard and Poor’s downgraded the South American country’s credit rating into junk territory. It also has an inflation rate of 63.4%, the highest in Latin America. Rumors of default have been swirling for months, and the reduced oil revenue makes it all the more likely. Venezuela’s appeal for an OPEC meeting, presumably to advocate for a higher price, comes just after a ruling by a World Bank arbitration body ordering the government to pay ExxonMobil $1.6 billion in compensation for the 2007 expropriation of the US company’s operations in the Orinoco basin. Venezuela still has more than 20 pending cases against it based on similar abuses.

Maduro has been postponing budget cuts or other remedial measures for fear of upsetting his crumbling political base and roiling domestic opposition. Some analysts estimate that Venezuela could avoid collapse with oil prices as low as $60—but only after serious structural adjustments and curtailing of profligate spending.

If Maduro is forced to slash social programs or rein in corruption to compensate for lost oil revenue, it will threaten his shaky grip on power. His predicament underscores his dangerous dependence on Cuban advisors—who excel at repression, not reform.