Chavez's misplaced gloat

Washington Post:

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"Many want the oil price to continue to drop to see us fail, but Venezuela is not going to go under," said Chávez, who has built what he calls his Bolivarian revolution by exporting oil to the United States.

But perhaps more than any oil-exporting country, Venezuela could be particularly exposed if the worldwide financial meltdown continues. That would slow economic growth, reduce the need for petroleum products and further drive down oil prices. Venezuela exports about 1.4 million barrels daily to the United States, about 10 percent of U.S. oil imports.

The dire predictions come as the inflation rate in Venezuela has surpassed 36 percent and the black market rate for dollars has shot well beyond the fixed government rate. JP Morgan, in a research note this month, predicted that economic growth in Venezuela would reach 5 percent this year and 2.5 percent next year. Last year, the economy grew by 8.4 percent.

"Venezuela is the one that's in the most difficult position, relative to the other OPEC countries," said RoseAnne Franco, lead analyst on Latin America for PFC Energy, a consulting firm in Washington.

PFC Energy said in a report that oil must be at least $94 a barrel to ensure Venezuela's macroeconomic stability this year and generate enough money to pay for imports. Although Chávez frequently touts his country's independence from Washington, Venezuela is more reliant than ever on the food, auto parts, medicine, construction materials and other products it imports from the United States and Colombia, a close U.S. ally.

The PFC Energy report said that among OPEC countries, Venezuela requires the highest threshold price by far to maintain its balance of trade payments.

Nigeria needs the barrel to be at least $68 to cover its imports, while two Persian Gulf states -- Saudi Arabia and Iran -- need the price to remain above $55.

Although Venezuela and other oil producers savored high crude prices, the downside has been higher inflation, greater domestic consumption of subsidized petroleum products, erosion of the U.S. dollar and increased government spending, PFC Energy said.

Franco said Venezuela's Central Bank reserves, as well as billions more controlled by the presidency, can provide a cushion for a year if prices continue falling. But she and other energy analysts said Venezuela is particularly vulnerable because of the financial commitments Chávez has made abroad, including plans to construct an oil refinery in Ecuador and the sale of oil at preferential prices to Caribbean countries.

"Venezuelan fiscal profligacy and its huge off-budget populist programs has left it very little room for error," the PFC report said.

The Eurasia Group, a New York-based consulting and political analysis firm, said Chávez also faces serious challenges because Petroleos de Venezuela, the state oil company, faces operational and financial hurdles.

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Although Venezuelan officials say the country produces more than 3 million barrels a day, the International Energy Agency and most oil analysts put the figure below 2.4 million, with more than 700,000 barrels of that sold daily in Venezuela at subsidized prices.

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The Eurasia Group's Patrick Esteruelas, in a recent report on Venezuela's economic and political situation, said the government is unlikely to cut back on social programs as Chávez's allies prepare for state and local elections next month.

"The government will likely muddle through" the rest of the year "by introducing patchwork solutions to rein in inflation and the parallel exchange rate while postponing any significant adjustments until after November's elections," Esteruelas's report said. He said officials would postpone "more painful adjustments until it's absolutely necessary."

When it comes to inflation, Chavez is as clueless as Mugabe. In fact, he has tried some of the same remedies that have only exacerbated the problem. What is really interesting is how clueless Chavez is concerning Venezuela's own interest when it comes to the US economy. He just does not understand how the US economy benefits the world economy and his own. I don't think he is smart enough to make the adjustments to the new reality. He is going to suffer politically at home and in his client states as he has to pull back. Maybe he can borrow money from the Castro brothers.