PetroCaribe under threat as Venezuela economy struggles
Venezuela’s crumbling economy could leave the Caribbean’s PetroCaribe members exposed
Oil was a tool of domination, Hugo Chávez said, but he believed it could also be used for liberation. PetroCaribe, the regional oil alliance he founded in 2005, was to be a showcase for this vision, letting poor Caribbean countries buy discounted petroleum from Venezuela and use the savings to alleviate poverty.
As oil prices rose sharply between 2006 and 2008, the deal sheltered Caribbean importers from the worst. Since then, PetroCaribe has kept some of their economies afloat. But political and economic crisis in Venezuela now threaten PetroCaribe – and the 16 countries that depend on cheap Venezuelan oil.
Nicolás Maduro, who replaced Chávez as president after his death last year, insists the programme will remain intact. Yet the terms are already tightening, and analysts say the pact will eventually become a casualty of Venezuela’s own economic weakness and foreign indebtedness.
The discounts are deep. PetroCaribe allows members to defer payment for imported oil for up to 90 days, and then pay for 40-60% of the oil over 25 years at 1-2% interest, after a two- or three-year grace period.
A sliding scale, relating to prevailing international oil prices, makes the deal marginally better for Venezuela when oil prices are above $50 a barrel. When Caracas proposed a new 2-4% rate last year, some members baulked: Guatemala and Honduras are no longer interested, saying the terms were not sufficiently appealing.
PetroCaribe is a costly subsidy for Venezuela to bear. Deutsche Bank reckons Venezuela’s government will need an oil price of more than $120/b this year to keep the budget balanced. Yet the average barrel shipped to PetroCaribe members has fetched just $41.
Exports to PetroCaribe members are thought to be around 180,000 barrels a day (b/d), including products sales of about 40,000 b/d. Theses discounts cost Venezuela about $6.7 billion a year, according to RBC, a Canadian bank. Including other bilateral deals, for example a separate supply agreement with Cuba for about 115,000 b/d, shipments of subsidised Venezuelan oil to the region amount to 400,000 b/d, calculates the US’ Energy Information Administration.
In total, Venezuela’s state company, PdV, only receives payment for two-thirds of its petroleum exports, say analysts. Funds aren’t collected efficiently, either, and PetroCaribe also allows for barter arrangements – oil for food and other supplies. That hasn’t helped PdV, the source of all this largesse. Between 2009 and 2013, reckons RBC, the amounts owed to the firm reached $38.7bn.
It is worse than this, too. Opec puts member-state Venezuela’s oil output at 2.3 million b/d (about 500,000 b/d less than the government says it is). Consumption in the country, also heavily subsidised, sits at around 780,000 b/d.
This leaves the world’s largest oil country by reserves with just over 1m b/d to export elsewhere – including to China. About 200,000 b/d of the 640,000 b/d PdV ships there is to service more than $40bn Beijing has lent to Venezuelan since 2007. All told, PdV is losing about $8bn a year from these arrangements, reckons RBC – money that could have bolstered Venezuela’s dwindling foreign currency reserves.
PetroCaribe comes with different problems for its importers. While the interest rate remains low, it is hard to argue against the mechanism for Caribbean countries that would otherwise have to buy their oil at international prices, hurting cash flow.
Even the IMF – hardly a supporter of energy subsidies – acknowledged the importance of PetroCaribe to Jamaica’s economy, saying it had helped finance a “sizeable” maturing foreign currency debt in January and February. It also warned the country of “risks associated with a shift in the PetroCaribe oil-purchasing agreement”.
In Haiti, it provided much-needed funds for reconstruction projects after the 2010 earthquake. (Some critics say the money saved by PetroCaribe hasn’t always been spent wisely or transparently.) Dominica’s prime minister, Roosevelt Skerrit, said recently that funding from PetroCaribe and Alba, a separate though similar Venezuelan regional initiative, had allowed him to “outfit every single police station” and put money in the country’s development bank “for farmers to borrow at zero and 2%”.
Fuel imports for most of PetroCaribe’s members amount to about 7-12% of GDP, a heavy burden for already weak economies, but one that would be much heavier without PetroCaribe.
Guyana, which spends 20% of GDP on its fuel, would be in particular trouble without it. Some analyst say PetroCaribe has saved its members $1bn in energy expenditure, though the figure could be much higher.
But this isn’t free oil. The importers that depend on Venezuela’s petroleum have racked up enormous debts to PdV, which estimates that a third of the Caribbean’s external debt will be owed to it by 2015. By last year, tiny Dominica, which takes about 1,000 b/d from Venezuela, owed $91m.
But the Dominican Republic’s cumulative bill had reached $11.1bn. Only Suriname’s PetroCaribe debt to Venezuela is under 10% of GDP; for the rest, it more than double that (see graphic). It was this kind of financial burden that persuaded some countries, such as Barbados, not to join PetroCaribe in the first place.
Under pressure of its own to pay debts to China, Venezuela will need that money back. Unless it can magic up a recovery in oil production, it will also need to divert some of the petroleum sent to the Caribbean to meet its rising commitments to Asian buyers. “China is a more important ally than the Caribbean,” notes RBC. There have been recent reports of unreliable supplies that haven’t matched quotas. The pact’s terms allow Venezuela to change the supply agreement with just 30 days of notice.
A gradual unwinding of PetroCaribe would be more feasible for the importers than a sudden stop. But the loss of their sugar daddy would hurt local economies badly.
Jamaica reckons PetroCaribe is worth about $600m a year to its economy. The fuel bill for most importers would double if they had to go shopping on the international market.
Ronald Sanders, a former diplomat and now an analyst and commentator on Caribbean affairs, says Antigua and Barbuda, Belize, Dominica, Grenada, St. Lucia, St. Kitts and Nevis and St. Vincent and the Grenadines would be especially hard hit by PetroCaribe’s collapse.
What could replace it? Rising output from Brazil could be one source of oil. Product supplies from the US Gulf could also be tapped. But none of this oil would be as cheap as Venezuela’s.
Harold Trinkunas, head of the Latin America Initiative at the Brookings Institution, a US think tank, suggests a combination of financial hedging, increased natural gas use, greater integration of the region’s electricity grid, energy efficiency, and more renewable energy could wean the region off PetroCaribe.
But so long as PetroCaribe remains in place, its cheap supplies will beat long-term, more expensive alternatives, stunting their development. Big projects for gas and renewable energy would also need either cash flow or access to debt financing, neither of which is easily available to the Caribbean’s weak economies. It all makes PetroCaribe’s members far from passive observers of Venezuela’s political crisis.
Years of mismanagement have damaged PdV and left Venezuela’s economy unable to afford the kind of petro-generosity that sees it hand out cheap oil to the region. But if the Venezuelan government is turfed out, PetroCaribe may end more swiftly than anyone imagined.
It leaves the short-term financial future of many Caribbean countries relying on the survival of Maduro and the Chavista policies that created PetroCaribe – and created the economic mess that will surely bring its collapse anyway.
Figure 1: Oil import bill vs GDP of selected PetroCaribe members