Venezuela | Milestones

Author: Forrest Jones

Venezuela, home to the world’s largest oil reserves at 298 billion barrels, is having a tough time getting the stuff out of the ground. The country was forced to import crude to offset delays and snags in its own production, a fresh black eye for an already battered economy that is seeing some of the highest inflation rates in the world and soaring bond yields.

And the country can forget about getting by with a little help from its friends. Fellow OPEC member Saudi Arabia and others have sidestepped plans to seriously cut production to drive up oil prices, opting instead to allow prices to fall in an effort to force US shale producers to halt production, as hydraulic fracking concerns cost more to produce.

Saudi Arabia’s Oil minister, Ali Al-Naimi, one of the most powerful individuals in the world’s energy arena, paid a rare visit to Venezuela in November, where he met with the country’s Foreign minister, Rafael Ramírez, himself a former Oil minister, to allay concerns about falling oil prices.

Still, cheaper oil leaves the South American country in a pickle, with bondholders running for the exit doors after president Nicolás Maduro balked at pushing through badly needed reforms. Experts point out that the country can take steps to shore up its finances, although none come without pain.

“There are several ways the country can offset the decline in oil prices. It can devalue, reduce gasoline subsidies and cut government spending,” says Walter Molano, managing partner and head of research at BCP Securities. “Of course, higher oil prices would provide a great deal of relief. Nevertheless, Venezuela needs to implement thorough reforms. Otherwise, it will create too many distortions.”

Some of those reforms could come at the expense of Venezuela’s friends, especially those in the Petrocaribe alliance (an oil alliance of many Caribbean states with Venezuela) who buy the country’s oil at preferential terms.

“If oil prices continue to fall, he [Maduro] may be forced to cut the subsidies it [Venezuela] provides to Petrocaribe,” Molano says.         


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