Falling crude prices squeeze Chavez oil diplomacy

January 7, 2009 COHA

By IAN JAMES and RACHEL JONES

CARACAS, Venezuela (AP) — Venezuela’s slumping oil earnings are starting to squeeze President Hugo Chavez’s public spending spree and curb the international aid he uses to counter U.S. influence.

State-owned Citgo Petroleum Corp., which is based in Houston and distributes Venezuelan oil in the U.S., suspended a free heating oil program for poor Americans this week, according to Citgo’s nonprofit partner Citizens Energy.

Some are now predicting a drastic pullback in Chavez’s oil-fueled largesse elsewhere.

“Venezuela’s oil diplomacy will retrench,” said Larry Birns, director of the Washington-based Council on Hemispheric Affairs. “The government is not in a position to continue the subsidies, so at the very least this is going to reduce Chavez’s clout as a regional power-maker.”

Citizens, based in Boston, said a program that distributes free fuel for 200,000 American households in 23 states has been suspended by Citgo. Last year the program cost Venezuela $100 million.

Citgo has refused to comment since the announcement Monday.

Oil is the financial engine behind Chavez’s socialist government. Accounting for nearly 94 percent of exports and half the national budget, it pays for everything from subsidized food to free universities, allowing Chavez to expand the state payroll and nationalize businesses.

It has also bankrolled an international aid bonanza in which Chavez showers allies with cheap fuel, refining projects and cash donations. With international aid, Chavez has cemented ties with left-leaning allies and promoted his vision of a united Latin America increasingly independent of the United States.

In 2007 alone, Venezuela pledged more than $8.8 billion in aid, financing and energy funding abroad, according to an Associated Press tally at the time.

But oil prices have fallen 67 percent since their July peak and the Venezuelan economy has come under strain. Annual inflation now tops 32 percent in Caracas, and growth fell by nearly half last year to 4.9 percent, the slowest rate since 2003.

Oil prices are now well below the $60 a barrel Venezuela budgeted for 2009, making a deficit likely for the first time in five years. And experts say output is sagging at state oil company Petroleos de Venezuela SA, where profits are often used to finance Chavez’s social programs instead of to explore for new oil fields.

Chavez, campaigning to abolish presidential term limits, vows not to cut back on the public spending that has made him popular. He has accumulated $42.2 billion in Central Bank reserves and billions more in savings as a cushion.

But he may now be forced to spend much of that money at home. Critics are asking that Venezuelan ally Cuba pay cash for the nearly 100,000 barrels it receives every day.

“Chavez is going to have to significantly pare back his diplomatic ambitions” to maintain support at home, said Patrick Esteruelas, an analyst at the New York-based Eurasia Group.

One of Chavez’s biggest international initiatives has been the Petrocaribe pact, which sells oil to Caribbean and Central American countries largely on credit, charging 1 percent interest over 25 years. Venezuela has financed more than $2 billion in sales to the pact’s 18 members since 2005, sometimes accepting as partial payment cattle, bananas, sugar, and medical care from Cuban doctors.

Plunging oil prices have changed the terms of that deal: Recipients now pay for at least 50 percent of the oil up front, up from 40 percent when crude prices topped $100 a barrel.

Still, the pact isn’t likely to disappear soon: The alliances it has furthered are valuable to Venezuela in international forums such as the United Nations, where small countries’ votes sometimes carry the same weight as those from larger nations, said Alejandro Grisanti, a Latin American analyst at Barclay’s Capital in New York.

Officials in more than a dozen beneficiary nations report no cuts in aid, and Venezuelan Oil Minister Rafael Ramirez insists that Petrocaribe shipments will continue: “There is no plan to modify that contract.”

Yet even if cutbacks are not publicly disclosed, analysts including Rafael Amiel, managing director for Latin America at IHS Global Insight, expect Petrocaribe shipments and other assistance to dwindle substantially by the third quarter of 2009.

Some beneficiaries have amassed large debts to Venezuela. Analysts doubt Bolivia will be able to repay the more than $100 million it owes. Meanwhile, Venezuela is reevaluating how to finance refineries planned for Nicaragua and Ecuador.

“The government is attempting to project the image that it has put away resources that will enable the country to function more or less as it now is for upwards of a year,” Birns said. But, he said, “Venezuela is beginning to hurt and will hurt a good deal more in the near future.”

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Associated Press writers contributing to this report included Theresa Bradley in Mexico City, Carlos Valdez in La Paz, Bolivia, and correspondents in Petrocaribe countries.

(This version CORRECTS Petrocaribe financing since 2005, sted 2004, in graf 15.)