Publish in Special Reports - Monday, February 25, 2013
Vice President Nicolas Maduro and Oil Minister Rafael Ramirez. (Photo: Venezuela's Oil Ministry)
What happens to Venezuela’s oil sales to Latin America after Chavez?
Ever since Venezuelan President Hugo Chavez missed his own inauguration on January 10, speculation has mounted over how much longer the country's socialist-style revolution will last. Chavez, a controversial, charismatic leader, brought in sweeping changes since taking office 14 years ago, winning support at home and from many Latin American leaders. Yet, when inauguration day came, he was convalescing in a Havana hospital, where he had been since undergoing his fourth cancer surgery in early December.
Chavez developed post-surgical respiratory complications and had to stay in Cuba for recovery. Two months later, he announced over twitter that he was back in Venezuela, but the uncertainty about his health and his ability to govern the country still remains.
Whether or not Chavez recovers enough to resume his role as firebrand-in-chief, his illness provided a reminder of the role Venezuela has come to play in Latin America. Politically, Chavez has replaced Castro as leader of the Latin American left. Perhaps more important for many of the region's smaller countries, Chavez has turned Venezuela's vast natural resources, including the world's largest proven oil reserves, into a key source of economic aid.
From Haiti to Nicaragua to Bolivia, countries across the Caribbean and Latin America have struck deals with the Venezuelan government that allow them to pay off shipments of Venezuelan petroleum over several years at extremely low interest rates and through in-kind goods, from black beans to trousers. Those oil shipments have become key parts of the economy in some countries, particularly small nations that have to import most, if not all, of the petroleum they use. Now, many of those same countries are pondering life after Chavez and weighing the economic impact of his death and the potential loss of aid.
"For small economies like Nicaragua and the Dominican Republic, the [Venezuelan] shipments have a much bigger impact than on larger economies," says Wharton management professor Mauro Guillen, director of the school's Lauder Institute. "Obviously, for Cuba it is really important, perhaps not as much as the Soviet Union previously, but certainly very significant."
On his third trip to Cuba since Chavez fell ill, the South American country's vice president, Nicolas Maduro, told supporters that Chavez was on the road to recovery. "We are ... going to take our commander the love of our people," Maduro said in a nationally televised speech January 24. Chavez, he noted, was "going up the hill and on the path" toward the "next stage" of medical treatment. Perhaps more significant than the reassuring speech was Maduro's traveling companion: Oil Minister Rafael Ramírez, who oversees the country's most important resource. Venezuela sits atop 297.6 billion barrels of petroleum reserves, Ramírez said in a speech last year. That tops Saudi Arabia's proven reserves of 267 billion barrels.
When Chavez took office in 1999, petroleum was trading around $10 per barrel. As of late-January 2013, it was above $96 and in the years between, it had surpassed $100 per barrel on several occasions. The increase in the price of petroleum provided an enormous windfall for the Venezuelan government, which began to take over the nation's oil fields. Multinational companies like ExxonMobil pulled out after refusing to comply with new rules Chavez had set.
Chavez has used the petroleum largesse to gain favor with foreign countries by striking deals to send them oil under preferential terms. Venezuela exported an estimated $61 billion worth of oil last year, according to figures from the Venezuelan government. Calculations from the Organization of the Petroleum Exporting Countries (OPEC), of which Venezuela is a member, were lower but did not take into account production from one of the country's large reserves.
A portion of those exports went to political allies under preferential terms. Take Cuba, the biggest single recipient of oil aid. Chavez considers Castro a role model and has rewarded his politics with an estimated 120,000 barrels per day (bpd) of oil, worth around $3.6 billion last year. In exchange, Venezuela receives Cuban-trained doctors and training of athletes, among other things.
One island to the east in the Greater Antilles, Hispaniola has received less attention but is equally dependent on Chavez's charity. The island, shared by the countries of Haiti and the Dominican Republic, does not have Cuba's politics -- indeed, both nations are close U.S. allies. Yet, that has not stopped Chavez from striking agreements.
The Dominican Republic receives 50,000 barrels of oil per day, which is refined at a Dominican plant partially owned by the Venezuelan government. The Dominican government then sells the gasoline and other products to the market. It utilizes the proceeds as a form of foreign aid to the tune of around $500 million a year. According to the Ministry of Finance, the government owes Venezuela $3.03 billion at an annual interest rate of 1 percent. It has been repaying the debt with cash and shipments of black beans (some of which are imported from the United States), sugar and technical assistance.
After Haiti's devastating 2010 earthquake, Chavez canceled that country's $395 million debt to Venezuela. Chavez also pledged more than $1 billion in future aid, including helping the blackout-prone country construct power plants. Haitian President Michel Martelly has called Venezuela's aid the "most important" in terms of impact.
In Central America, Nicaragua employs a system similar to the Dominican model: receiving some 30,000 barrels of oil per day and turning it into between $400 million and $500 million a year for government coffers. It pays Venezuela with shipments of milk, sugar, coffee and even pants.
The subsidized oil shipments that Venezuela sends to Central America cost the South American country billions a year in unrealized revenue. Recent calculations by economists estimated that the country would receive more than $6 billion a year if it were to sell the oil on the market rather than sending it to Central America as aid.
In total, Venezuela sent oil to 16 countries in 2011, according to a report by PDVSA, the state-owned oil entity. The 243,500 barrels a day that it sent was about one-tenth of the company's output. The aid makes Chavez both incredibly popular in foreign countries and underscores just how much some Latin American countries have come to depend on the president.
"Venezuela has reasserted itself into Latin America and become certainly politically and economically important," says Pomona College professor Miguel Tinker Salas, author of The Enduring Legacy: Oil, Culture and Society in Venezuela. "I think the economic assistance and the political leadership [under Chavez] has gone hand-in-hand."
THE RISE OF CHAVISMO
Despite battling cancer, Chavez soared to a commanding victory in October's presidential election, claiming 55 percent of the vote and defeating the most formidable opponent, Henrique Capriles, he has faced since taking office in 1999. Still wildly popular in the country, Chavez has seen some of his support slip amid a fragmentation of the Venezuelan electorate.
Although poverty and extreme poverty have declined dramatically thanks to social programs, inflation has climbed and shortages of staple goods have angered citizens. A pre-election report in TIME magazine entitled "The Twilight of Chavez" cited rampant crime, inflation and currency problems as reasons for Chavez's waning support in Caracas' poor barrios, former political strongholds for Chavismo (the name given to describe the ideology and government style that has become associated with Chavez.)
Observers agree that one of the main factors behind Chavismo's lasting political power is Chavez himself, an outspoken and charismatic leader whose policies have played well among the poor and middle class. Chavez is also the chief architect of the aid packages that have won him political support from other leaders in Latin America and the Caribbean. The question, then, is what would happen if/when Chavez dies.
Michael Shifter, president of the Inter-American Dialogue and a professor of Latin American studies at Georgetown University's School of Foreign Service, said a new election would be held. In a recent interview, Shifter said, "I think there are going to be new elections. I think the government basically wants some time to figure out its strategy, to consolidate the authority of Nicolas Maduro, who is the key figure now, who I think will be the candidate of the government in the elections against Capriles. I don't know if it's going to take place in a month or two months, but it seems to me that that's the scenario."
As a candidate, Maduro would have to deal with growing discontent over a lack of basic food staples and rising inflation. "Venezuela's economy is fairly strained. After years of the socialist system that Chavez put in place, there's a fairly widespread distribution system that has benefited the poor and kept Chavez very, very popular. But it's also put a strain on government finance," notes Karen Hooper, director of Latin America analysis for Texas-based Strategic Forecasting. "We've seen that although the national oil companies transferring more than $90 billion just in the past year to the government, there may be a cash flow problem."
If there were an election, the current situation might help the most prominent opposition candidate, Capriles. As a candidate last year, Capriles told reporters he would "stop the gifts to the world on behalf of geopolitical alliances of doubtful convenience." Whether that meant he would turn off the oil spigot was not clear.
"For the next government coming in, be it Chavez [a successor or an opponent] ... we're looking at a situation where fiscal cutbacks are going to be necessary or they're going to have to devalue their currency," Hooper says. "It may be to the benefit of the government to pull back on those things," mainly subsidized oil to fellow Latin American governments.
Modifications to the way Venezuela doles out oil aid would bring difficult economic changes to smaller countries that benefit from the agreement. The most vulnerable would be small Caribbean countries that are energy importers. Countries in the Caribbean spend around 13 percent of their gross domestic product on buying oil, the World Bank estimates. If the subsidized Venezuela oil were to dry up, they would have to resort to paying market prices to make up the difference.
Pomona College's Salas, however, believes that it would be in the best interest of any future Venezuelan government to continue the program. The decision to start sending oil at subsidized rates to neighbors actually pre-dates Chavez, he notes, although it has expanded significantly since Chavez took office. "Whatever government comes in, I don't see them tampering with it too much. It's been very much a positive for the country." Salas adds that the current economic situation in Venezuela has been misrepresented in the international press. "I don't really see it, the situation is stable and in report after report it's as if Venezuela is struggling," he says.
While many disagree over how effective Chavez has been as a leader, his impact on the region is widely recognized. As the leader of Cuba's Communist revolution, Fidel Castro, said: "We have to cure him. Chavez is very important for his country and for Latin America."
Republished with permission from http://www.knowledge.wharton.upenn.edu -- the online research and business analysis journal of the Wharton School of the University of Pennsylvania.