The Corner

Chavez Is Betting the Wrong Way on Oil Prices

Oil prices have been dropping fast — and that is not good news for those oil producers who don’t spend tomorrow what they can spend today.  See this excellent article in today’s Wall Street Journal (req. subscription):

Venezuela might have the hardest time pursuing the assertive foreign policy of President Hugo Chávez, a populist and former army officer, if oil prices were to drop much more. Over the past few years, Mr. Chávez has used oil money to try to counter what he sees as harmful U.S. influence in Latin America. Caracas has helped finance some neighbors’ debt, and it has handed out cut-rate oil to dozens of countries, including Fidel Castro’s Cuba — and even some U.S. communities through the state oil company’s Citgo subsidiary.

Unlike Russia, and to a lesser extent Iran, Venezuela has been much more reckless in spending its oil windfall. Last year alone, public spending grew 43%, widening the gap between total government income and outlays to about 1.5% of the total economy, according to estimates by Morgan Stanley.

So far, falling oil prices haven’t dented Mr. Chávez’s spending habits. Just last week, he announced a program to send 100,000 poor Venezuelans each year to vacation in Cuba. He also recently offered the army’s services to build a road in Nicaragua at a projected cost of $350 million.

While economists agree that Mr. Chávez’s free-spending policies may eventually shipwreck the Venezuelan economy, they say that won’t happen — if it happens at all — for at least another year. The main reason: Venezuela has accumulated more than $36 billion of reserves.

But there are signs Mr. Chávez could be headed for trouble, even without a much bigger drop in oil prices. He recently ordered an increase in gasoline prices — which the government has long subsidized — to raise federal revenue. And some economists view his recent nationalization of Venezuela’s biggest telephone and electric companies as a sign his administration is eager to raise more money to keep up its spending.

A further drop in oil prices, then, might leave Mr. Chávez with some tough choices about where to trim the fat. High on the list would be his foreign aid. By far the chief beneficiary of Mr. Chávez’s largess is Cuba, which receives 103,000 barrels a day of refined petroleum products in exchange for the services of Cuban doctors and other specialists. Analysts believe aid to Cuba totals about $3 billion a year.

We shouldn’t forget that dictatorships such as that of Hugo Chavez have a highly characteristic life-cycle.  After a few decades of dictatorship, it becomes obvious that the country’s economy has been ruined by profligate spending meant chiefly to enhance the power and popularity of the dictator by subsidizing indolence.   Mr. Chavez’s popularity depends on his largess, but the strength of his finances (which used to be known as the government budget) depends upon refinery capacity among oil-consuming nations — the essential bottleneck that has caused the current price spike.  If the United States in particular moves to expand refining capacity, oil could drop back down to a more natural equilibrium price below $30 a barrel, and that would make Mr. Chavez very unpopular very quickly.

Mario Loyola — Mr. Loyola is a research associate professor and the director of the Environmental Finance and Risk Management Program at Florida International University and a senior fellow at the Competitive Enterprise Institute. From 2017 to 2019 he was the associate director for regulatory reform at the White House Council on Environmental Quality.

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