BY DAVID JESSOP — On the face of it, the collapse in global oil prices would seem to be good news for the Caribbean. However, nothing could be further from the truth. Instead, the rapid downward price movement in global oil prices between mid-June and mid-October threatens – in the short term – present economic recovery, and could jeopardise countries involved in economic adjustment programmes, if it forces Venezuela to review its PetroCaribe arrangements.
As matters stand, the price of Brent crude, the global benchmark, has fallen over a four-month period from US$115.71 to US$82.60 a barrel, the lowest price in almost four years.
So concerned is the IMF about this that at its recent High Level Caribbean Forum held in Jamaica, focussed on creating economic conditions that will stimulate growth, Alejandro Werner, the Director of the Fund’s Western Hemisphere Department, suggested that all Caribbean nations need to prepare stress tests that include a halt in the PetroCaribe oil arrangement with Venezuela.
Knock-on impacts from hits on Venezuela’s revenues
The present price fall, he suggested, could see Venezuela’s oil exports decline by between US$15 to US$20 billion annually, triggering “an important policy adjustment in Venezuela that might imply some adjustment with PetroCaribe”.
“In the case in which there is more volatility in Venezuela, there might be disruptions in the programme and countries should continue to prepare contingency plans in this event,” Mr Werner told participants.
The IMF’s view in one or another form now seems to be widespread at high policy levels in North America and Europe, with most experts and officials suggesting that if, as is expected, the present weakness in oil prices continues well into 2015, Venezuela may have difficulty servicing its foreign debt commitments. It may therefore have no option other than to review its subsidies programmes and the PetroCaribe arrangement.
According to the specialist industry publication, the Petroleum Argus, oil accounts for more than 95 per cent of the country’s exports and approximately 45 per cent of government income. The Bank of America estimates that for every dollar that oil prices drop, Venezuela is losing US$770 million in net revenue over a year. Both figures suggest that if global prices remain at low levels, the Government, which has one of the world’s biggest fiscal deficits, estimated at 15 per cent of GDP, will struggle to service its debt, maintain domestic subsidies programmes and meet its international commitments on present terms.
Venezuela’s President, Nicolas Maduro, has however given public assurances that his country will not default on its debt and has also said that the social programmes that help those in Venezuela who support him and his party will continue. He has also attacked international news agencies for spreading fears that a debt default is possible, saying, “there’ll be no catastrophe or collapse,” and that “Venezuela has guaranteed all the resources it needs to keep prospering”.
OPEC’s halt on production
In an attempt to stem the falling price of oil, President Maduro is now seeking an emergency summit of Organization of Petroleum Exporting Countries (OPEC) nations to discuss reducing levels of production in order to force up prices. However, given Saudi Arabia’s strategic and economic interest in continuing to pump oil at present levels, a decline in Chinese consumption, slow rates of economic recovery in much of the developed world, and long-term energy self-sufficiency in the US, any change in present OPEC positions seems unlikely.
Most economists also suggest that Venezuela’s situation has been made worse by a dramatic fall over time in its production to around 2.4 million barrels per day, its existing commitment to supply oil to China to repay loans, and generous arrangements like that under PetroCaribe which defer payments and see only modest revenues flow back to Caracas.
Impacts for the Caribbean
What all this indicates is that while the fall in global oil prices may bring some regional respite on key input costs such as those for aviation in relation to tourism, or for agriculture, Caribbean domestic energy prices, which feed into national competitiveness, are unlikely to change.
Worse, it remains unclear what would happen if the Caribbean were either to see a significant increase in the PetroCaribe interest rates or lose the arrangement entirely.
While there are many other suppliers of energy at current world market prices, few Caribbean economies have the ability to pay.
The US seems disinclined to step in, preferring gradually and over time to help develop longer term initiatives on a country by country basis that result in a mix of energy sources appropriate to the location.
Structural changes of this kind take time and above all their success or otherwise will depend on governments and oppositions identifying – on a national interest basis – long term needs, and having an environment that makes economic sense for private sector led investment in newer technologies.
Energy futures of regional oil producers
It also requires nations like Trinidad to consider whether it any longer sees its energy future with the region. Having over many decades had poor experiences with its neighbours in CARICOM, it may not wish ever again to go down that route. Likewise the Dominican Republic has some longer term choices to make. Commercial interests are already well advanced in their plans to construct a major liquefied natural gas (LNG) receiving terminal to supply gas for domestic power generation. It is a development that could lead in time to the country becoming a gas redistribution centre for the region, if US licensing arrangements were to permit investment across the region in LNG receiving terminals and facilities.
Regional petrochemical exploration attempts
In the longer term, Latin America and the Caribbean have huge potential reserves of gas and oil, onshore and offshore, but the timing of exploration and exploitation will depend on future prospects for energy prices.
Energy and financial security
Despite energy prices being directly linked to future Caribbean competitiveness and growth, the PetroCaribe arrangement has not so far driven down costs, but rather has been used to support government expenditure on social and other programmes.
This is a legitimate political choice, but the current oil price fall ought to give pause for thought across the region about long term stability and future requirements.
Energy security requires a high degree of national consensus, practicality, and a willingness to think not in terms of what works now or offers immediate political advantage, but what is in the long term national interest of every nation within the region.