OilVoice - Low Oil Prices Set to Determine Chavez's Future

Low Oil Prices Set to Determine Chavez's Future

Thursday, February 12, 2009

The price of a barrel of oil directly affects levels of investment in the oil industry, to global demand figures for crude, and everything in between. This week however, oil prices are set to play a significant role in deciding the fate of Venezuela's colourful President, in a referendum on the constitutional limits of terms of office.

This Sunday voters will go to the polls to decide upon whether to scrap a constitutional restriction, that currently limits the length of term for the office of President and for other political positions.

Quite simply, Hugo Chavez's popularity in South American Nations is irreversible intertwined with the success of the oil industry, both global and domestic.

Having been accredited with raising Venezuelan living standards during the oil boom, Chavez's popularity now sits at a cross roads with both prices and demand now in freefall.

The oil-rich nation's official government budget for 2009 is based on it producing 3.6 million barrels of oil per day (bopd), and selling them at a price of $60 a barrel. However, current international industry figures suggest that Venezuela is producing significantly below this figure, at a rate of 2.5 million barrels a day – selling half of it at the market rate of $32 a barrel and the remainder at a substantial loss.

Throughout his tenure the populist leader has used his nation's significant oil income to fund nationalisation projects, food imports, as well as both health and education programmes. However, the President's high public spending social policies appear to lack the foresight that the entirety of the nation's economy is dangerously dependent upon one resource.

The referendum is Chavez's second attempt at overturning the constitutional constraint on the length of term in office (having narrowly lost an initial vote in 2007), and even if he wins he faces an ongoing struggle during 2009 unless the price of oil climbs drastically from its current $40 a barrel level. The industry has already seen a huge drop in income, costing thousands of jobs in the sector.

Well aware of the problems that lay ahead, Barclays Capital said last week that, under pressure from depleted oil revenues, the President may well be forced to devalue the Bolivar currency to 2.95 per dollar, from its current peg of 2.15.

Barclays also said that tax increases and a cut in public spending were almost inevitable, given the circumstances.
The seemingly desperate President has already acted by removing $12 billion form the nation's central bank's currency reserves, to starve off inflated spending cuts.

President Chavez, who in the past has been far from frugal with his nations oil incomes and mineral wealth – even subsidising fuel for London buses during Ken Livingstone's time as mayor –is having his hand forced in an attempt to stabilise an economy facing an unprecedented economic squeeze. Come what Sunday it may all prove to be too little too late for the enigmatic leader.