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Venezuela Faces Hard Choices w/ Falling Oil Price

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#6470

Anonymous

Although OPEC announced production cuts of 1.5 million barrels per day last month, the oil price has failed to rebound, with the markets anticipating falling oil demand arising from the international financial and economic crises. In Venezuela, this has put pressure on both the government and state oil company PDVSA.
Reliance on oil revenues. The government has based its 2009 budget on a price of $60 per barrel. Oil revenues account for some 90% of Venezuela’s export earnings, more than 50% of the government’s budget revenues and around 30% of gross domestic product.
There is thus much at stake. Government rhetoric is now dominated by talk of saving money and austerity, and the country being able and willing to take steps to live with oil prices at 2007 levels ($60 to $70 dollars per barrel) or less. Stress is also being put on the scale of Venezuela’s international reserves of nearly $40 billion.
Competition for government funds. PDVSA has been suffering from under-investment in its core business for some years, as windfall profits from rising oil prices are deployed in domestic social programs and to support international political ambitions.
As prices and revenues fall, and inflation approaches 40%, the government will have to make some tough choices between domestic and international political priorities and investing to sustain its oil industry:
Already it appears that construction of the ambitious $4 billion oil refinery project in Nicaragua is being “postponed.”
Cuba could face a reduction in its 90,000 barrels per day of heavily subsidized crude oil, and Venezuelan support to upgrade Cuba’s Soviet-era refineries
may become problematic.
The logic and value of the subsidized oil supply arrangements for PetroCaribe’s participant countries must be under review, despite the contractual commitments involved.
Policy shift? The falling oil price makes the need to address eroding Venezuelan production capacity even more urgent. It will need to lift its investment “game” if it is to sustain and grow its oil production to take advantage of global demand growth in the future.
Therefore, the rapid fall in oil prices could prompt a material change in government priorities. Allowing PDVSA to retain a greater share of the revenue it generates to compensate for falling oil prices–so it can at least maintain its current investment plans–will be a first step and test of government intent. If PDVSA receives this support, there will obviously be even less funds for domestic and international commitments.
The recent dramatic fall in the oil price could prove to be a brutal reminder that failure to continue to invest results in production decline. The longer prices remain low, the more difficult the situation will become for the government and PDVSA. If PDVSA fails to attract foreign funding, it may have to make major sacrifices in terms of domestic and international plans to maintain a satisfactory level of investment. The alternative is to sacrifice its future.

To read an extended version of this article, log on to Oxford Analytica’s Web site

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