While talking heads proclaim - incorrectly - that low oil prices are unequivocally good for the US economy, it is very much not the case for oil producers around the world. Most notably, Venezuela - which 'needs' oil prices above $100 to maintain its socialist utopia - and currently ranks at a lowly 100th on the world's prosperity index, is in grave trouble if this trend continues. Venezuelan bonds plunged to new record lows today as oil prices hit fresh cycle lows, strongly suggesting default or currency devaluation is imminent. However, as is usual (think Mexico) Finance Minister Rodolfo Marco Torres ruled out devaluation even as oil price drop exacerbates country’s finances. As one analyst noted, "there's broad understanding that in the absence of any corrective policy measures that these guys are going to be in serious trouble." It appears they already are.
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As we noted previously, While Saudi Arabia tests the mettle of North American producers, it could be Venezuela that is the most vulnerable.(via Nick Cunningham of OilPrice.com [13])
As a fellow OPEC member, Venezuela has been the most vocal about the need to cut oil production and has called for an emergency meeting [14] of the 12-member oil cartel. That is because Venezuela is in a much weaker position than many of the other member countries, and the recent drop in prices has raised alarm in Caracas.
Using state-owned oil company PDVSA as a piggy bank has allowed the Venezuelan government to increase social spending over the last decade, a key political objective of the late President Hugo Chavez and his successor, Nicolas Maduro. However, using oil revenues for a wide array of spending priorities has also starved PDVSA of money needed for investment in order to boost oil production, let alone keeping output level. Since 2000, Venezuela has seen its oil output drop from 3.5 million barrels per day (bpd) down to 2.5 million bpd.
The bad news for President Maduro is that there was major unrest earlier this year even when oil prices were above $100 per barrel. That is because oil makes up 97 percent [15] of Venezuela’s foreign earnings, and the country needs oil prices of around $120 per barrel [16] for its bloated budget to break even.
Venezuela is in an economic crisis. Annual inflation is estimated to be in excess of 60 percent [15]. The country’s economy actually shrank at a rate of 5 percent in the first six months of 2014. Shortages of food, medicine, shampoo, diapers, and other basics are so common that the government rolled out a plan this past summer to fingerprint [17] people at grocery stores.
Crime is so rampant in the capital that people are afraid to go out at night. For those who can afford it, leaving the country [18] has become the best option.
The government is heavily indebted, and Venezuela’s bonds are now competing with Ukraine’s for the mantle of the world’s riskiest [19]. With bond yields surpassing 16 percent, Venezuela cannot keep up. There is a 50-50 chance of default [19] within the next two years, according to credit rating agency Standard & Poor’s.
The sudden 20 percent decline in oil prices since June is compounding the problem and has the potential to throw the country into crisis. “Venezuela’s oil prices have been high for several years now, and the country is still struggling to pay its debt at those prices,” Russ Dallen of Caracas Capital Markets told The Wall Street Journal [20]. Lower oil prices could bring things to a head.
The Maduro government desperately needs a rise in oil prices, but Saudi Arabia has so far rebuffed calls for an emergency meeting as it pursues a strategy of waiting out higher cost competitors. OPEC does not plan on meeting until Nov. 27. That is still an eternity for a country that is beginning to unravel.
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And it appears other oil producers are suffering too... the Naira hits a new record low...
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