There is little that Hugo Chávez, Venezuela’s notoriously long-winded president, talks about more than how his “Bolivarian revolution” has won back the country’s independence from the “Yankee empire”.
“We must recognise that we are the new liberators and builders of the new fatherland,” the former tank commander told soldiers at a military parade this month.
But the Opec nation remains more dependent than ever on something less easy for the fiery socialist leader to demonise – oil.
With fewer than 100 days to go until the October 7 presidential election, the issue of Venezuela’s growing “oil dependency” and the government’s record of economic mismanagement has come to the fore as recent polls show Mr Chávez in a statistical tie with opposition leader Henrique Capriles Radonski.
“There is no question about it. Venezuela is not only more dependent on oil, but it is more dependent on the price of oil, as production has not increased,” says Jorge Piñon, a research fellow at the University of Texas.
The rise in oil prices since Mr Chávez came to power in 1998 has been a boon in many ways, allowing him to bolster his popularity by splurging oil revenues on social programmes, in to which state-owned oil company PDVSA funnelled some $53bn between 2006 and 2010.
The problem, however, is that PDVSA has neglected to invest in its core business, causing production to decline: it spent just $1bn in exploration activities over the same period. Venezuela produced 2.72m barrels a day in 2011, according to BP’s annual statistical review, versus 3.48m bpd in 1998 when Mr Chávez was first elected. This has made the economy more dependent on oil prices staying high.
“Oil prices are the Achilles heel of the Venezuelan economy,” added Mr Piñon.
Venezuelan oil prices fell to a low of $86.17 a barrel last month, after peaking at $116.85 a barrel in March. Despite Mr Chávez’s wishful prediction recently that oil prices should stabilise at around $100, fears that prices will continue to slide have triggered concerns about Venezuela’s $340bn economy, which relies on oil for 95 per cent of export earnings.
London-based Capital Economics calculates that if Brent oil prices fall to $85 a barrel, as they expect, the decline in Venezuela’s oil revenues would be equivalent to 2.5 per cent of gross domestic product.
This is unlikely to hinder Mr Chávez’s pre-electoral spending binge that is already well under way. Analysts are increasingly concerned that the populist leader is sweeping the problem under the carpet.
“Venezuela is going to need a meaningful adjustment next year, which will first involve devaluing the currency,” says Boris Segura, an analyst at Nomura Securities. He adds that spending will also have to be cut back significantly, and fewer dollars allotted for imports, possibly aggravating shortages of basic goods.
Paradoxically, one import that could be squeezed is oil products. Lack of investment by PDVSA has led to a decline in refining activities, and Venezuela imports 40,000 barrels per day of oil products, including petrol, from the US, versus a previous high of 32,000 bpd in 2011, according to data from the US Energy Information Administration.
Given that petrol retails locally at 9 cents a gallon, or around $5 a barrel, but costs around $200 at international prices, Venezuela is losing some $2.5bn a year on the trade, points out Juan Cristóbal Nagel, a Venezuelan economist and blogger.
Still, analysts point out that should the government need to prevent unpopular problems like shortages from worsening, it can always resort to borrowing more from countries like China, in exchange for future oil deliveries, and the government can also issue more debt.
José Guerra, an economic adviser for the opposition, warns that the government is ill-prepared for a fall in oil prices, and argues that the economy would be better managed by the opposition, because it understands markets better.
“This government only knows of one way to solve the problem: printing money and getting into debt,” said Mr Guerra. “Venezuela is in an extremely vulnerable situation,” he warns, calculating that for every dollar that oil prices fall, the government forgoes some $800m in revenues each year.
Such concerns seem to have taken their toll on Mr Chávez’s electoral standing. In a poll by Consultores 21 taken between June 15 and June 26, Mr Chávez had 45.9 per cent support against 45.8 per cent for Mr Capriles, although other polls give the president a double-digit lead.
Still, Mr Chávez is not the first Venezuelan president to fail to alleviate the country’s heavy reliance on “the devil’s excrement”, as Juan Pablo Pérez Alfonso, former Venezuelan oil minister and Opec founder, called oil when he predicted it would bring his nation ruin.
