Falling oil prices add to economic woes in Venezuela

Reports of shipment of light crude from Algeria suggest a more pragmatic attitude

An operator works on an oil drill in Venezuela.
An operator works on an oil drill in Venezuela.D. G. / BLOOMBERG

The news did not go down well among Venezuelan president Nicolás Maduro’s opponents: according to Reuters, the country is to receive a shipment of crude from Algeria on October 26.

Several analysts contend that this shipment, which has yet to be confirmed by state oil company Petróleos de Venezuela (Pdvsa), is an affront to national sovereignty in a country that holds the world’s largest oil reserves.

In reality, the move is a timid demonstration of pragmatism by the Bolivarian government, whose leaders espouse the same leftist ideals defended by former president Hugo Chávez.

The Maduro administration has been forced to take this emergency measure to reduce costs amid dropping oil prices – the average price of a barrel of Venezuela’s various crudes closed at $82.72, or around €65, on Friday – and the impossibility of increasing production in the short term.

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Venezuela produces extra heavy crude in oil fields located in the southeast of the country. Because it is so dense, the oil needs to be blended with other components before being processed at local refineries.

The high cost of naphtha, the diluent used to transport the viscous crude along the pipelines, was making a big dent in Pdvsa’s accounts. Now, according to Reuters, Caracas has decided to sign a contract with Algeria to purchase Saharan Blend, an extra light crude that is easier to refine. This should ease the burden on the state oil company, which already contributes $96 of every $100 that the state collects in taxes.

The measure should go mostly unnoticed by the general population. President Maduro is so far refusing to raise the price of gas – which is practically given away – and other derivatives. State subsidies cost the national coffers around $14.6 billion in the first half of 2014, a 13.3 percent rise from the same period last year, according to analysis firm Ecoanalítica.

Meanwhile, the government has exhibited other small signs of economic pragmatism: Pdvsa has decided to stop crude shipments that do not bring in revenue, such as those related to the PetroCaribe agreement, which involves the exchange of oil for essential goods.

Local oil production dropped by 195,000 barrels a day in the second quarter of 2014, and now stands at around 2,700,000 barrels, according to independent firms.

Maduro has said the government has “plans to overcome any situation, no matter how low they push down oil prices, and to guarantee the foreign reserves the country needs to keep the economy running.”

Maduro has “plans to overcome any situation, no matter how low they push down oil prices"

Venezuela, which has had a strict control over exchange rates since 2003, has opted to reduce the private sector’s access to dollar reserves, leading to mounting debt with suppliers and a growing shortage of essential items ranging from prescription drugs to toilet paper.

Economist Francisco Faraco told EL PAÍS that in order to maintain the government’s current spending levels, a barrel of oil would have to sell for $120, an unthinkable price in the current global situation.

Maduro has requested an urgent meeting of OPEC countries, which are scheduled to gather on November 27, to suggest reducing production to prevent a drop in prices. But Saudi Arabia, one of the group’s most powerful members, seems inclined to accept current market prices.

There is also an excess of supply because of increased output in the US, slower growth in China, and an increasingly sluggish recovery in the euro zone. The International Energy Agency and OPEC, among others, agree that world demand for oil will grow 1.2 percent this year, on a par with supply.

Venezuela’s accounts are beginning to reflect this reality. Late last week, it held a little over $19 billion in foreign reserves, the lowest level since October 2003.