Published On: Thu, Jan 15th, 2015

PetroCaribe will continue, says Venezuela president

maduro_press_conferenceCARACAS, Venezuela -- Venezuelan President Nicolas Maduro said on Wednesday that the PetroCaribe agreement will continue its path toward the consolidation and transformation of a great economic zone between the regional countries that are involved.

“There are 20 states that participate in PetroCaribe and what we are going to do is transform it into a large economic zone, meaning that PetroCaribe ‘stings and extends’, as it is said in Venezuelan sports slang. PetroCaribe goes into a consolidation and transformation of a great economic zone,” Maduro said.

He explained that such a transformation is vitally necessary in order to provide the mutual benefit of shared development and fair trade among all the Caribbean countries.

“It is one of the major economic areas that must continue to be pursued,” he added.

When PetroCaribe was created ten years ago, Venezuela’s socialist leader Hugo Chávez was still alive, oil prices were high, and Caracas, which sits on the largest energy reserves in the world, could afford to send 200,000 barrels per day of subsidised oil to 13 countries in the region, including Cuba, in return for their political support and sometimes repayment with goods in kind.

The arrangement has cost Venezuela an estimated $44 billion in forgone income since 2005.

Today, however, with oil prices having halved in six months, Venezuela’s economy is in a tailspin and the country may be on the verge of complete collapse, raising doubts as to even the immediate viability of PetroCaribe, Maduro’s most recent assurances notwithstanding.

So far, however, Venezuela has not apparently scaled back PetroCaribe; the latest figures show 206,000 bpd delivered until last September.

According to the Financial Times, one reason for continued shipments could be that the PetroCaribe subsidy shrinks dramatically at lower oil prices. At $100 a barrel, for example, 60 percent of the price is repaid at low interest rates, after two years’ grace. At $50 a barrel, however, the subsidy is only 40 percent.

Meanwhile, the country is grappling with precisely the state of affairs forecast by economists Rudiger Dornbusch and Sebastian Edwards, who in the late 1980s described how countries such as Venezuela that pursue highly expansionary populist policies to the detriment of public finances typically go through four distinct phases in a “boom-bust” cycle.

As expounded by Dornbusch and Edwards, phase III of this predictable cycle is represented by pervasive shortages, extreme acceleration of inflation, and an obvious foreign exchange gap leading to capital flight and demonetization of the economy. The budget deficit deteriorates violently because of a steep decline in tax collection and increasing subsidy costs. The government attempts to stabilize by cutting subsidies and by a real depreciation. Real wages fall massively, and politics become unstable. It becomes clear that the government has lost.

The fourth and final phase is when orthodox stabilization takes over under a new government – something that now appears inevitable.

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