The Petro-Dictatorship’s Unfortunate Love Affair
Over the last few months, there has been a noticeable plunge in global oil prices — marking the biggest decrease in more than two years and an almost 30% price per barrel decrease since October of last year. Indicative of a global market shift in energy — the world’s most affluent currency — geopolitics have also experienced a change of guard. In Vienna, where peace talks ended two weeks ago regarding an Iranian nuclear deal, diplomats told The Wall Street Journal that they believed the depreciation of petroleum may cause Iranian officials to be more conciliatory in negotiations.
For years, petro-dictatorships like Venezuela, Russia, Iran, and Saudi Arabia, have managed to dodge social upheaval through programs and security resources purchased with oil royalties— but perhaps for not much longer. The overarching question seems to illustrate a common goal; will a decrease in oil prices translate to greater personal and political freedoms in petro-dictatorships?
Contemporary Venezuela may provide the perfect case-study to answer this question. Though the goal should obviously be to note the rise and fall of economic and political freedom, in society, it can never be perfectly quantifiable or interchangeable. Though the economic and societal influence of Venezuela’s oil dependence cannot be wholly generalized, it denotes a real truth about how dictatorships manage their citizens.
Perhaps more so than any other nation, Nicolas Maduro’s Venezuela has experienced a continually and deepening dependence on oil profits to calm protests.
Since January of this year, large scale protests between chavista-loyalist and democracy aligned opposition demonstrators have dominated the public sphere.
Three years ago, the world stopped for a moment to watch a series of oil rich nations contemplate a similar fate. The citizens of these countries lead an organized opposition movement to achieve greater political and economic freedoms, working to shift away from the dictatorships of their past and towards hopeful democracy. This socio-political movement that swept audiences everywhere would later be known as the Arab Spring.
In September 2011, during the early months of the movement, many feared the very real possibility that ‘oil could drown it.’ Which is to say that once the tumult started, the oil-rich regimes — nations who were more effective at fending off attempts at revolution — may move to crush neighborly opposition. In reality, the Arab Spring dethroned just one oil-funded ruler — Libya’s Muammar al-Qaddafi — and only because NATO’s intervention prevented the rebel’s certain defeat.
The lesson here was simple: the price of oil and the pace of freedom move in opposite directions in oil-rich petrolist states. In addition, repression remains easiest when oil prices are exuberant, supply is low, and developed nations are starved with demand.
In the last week, a clear and divisive split between OPEC’s usually cohesive nations has occurred. On Monday, Venezuela called for a special OPEC meeting to deal with the price drop, while Iranian officials demanded production cuts to force the global price upward. The trade organization’s indifferent leader, Saudi Arabia, has shunned pessimistic oil price forecasts — as they are notably more prepared to deal with market collateral. Analyst believe that the chaos will inevitably lead to both price and production cheating between members — a usually uncommon reality — which will inevitably diminish OPEC’s global influence.
The on-ground ‘collective’
Venezuela relies heavily on oil revenues to pay for imports, everything from car parts to basic food products, and this supply might be compromised if cash runs dry. In addition, sustained low oil prices may force government officials to sell foreign assets — such as Citgo — and gold from its central bank reserves. “It is going to become politically difficult to continue to manage scarcer petrodollar cash-flow with current oil prices,” Siobhan Morden, head of Latin America research at Jefferies, told Reuters. Morden estimates that the current drop in oil prices has already resulted in a ten billion dollar loss (in annual revenues) for the Venezuelan government.
These negative trends are now further reinforced by the Deutsche Bank’s estimate that a break-even price is roughly US$160 per barrel for Venezuelan product — nearly double the current value. “A price of US$95 per barrel is already a stress level for Venezuela, so this is definitely going to add some strain on the balance sheet of PDVSA and the sovereign,” Ben Ramsey, a Latin America analyst at JP Morgan, told Reuters.
Officially, Caracas sets its budget at the low target of $60 per barrel of oil, a precedent set by former President Hugo Chavez. By the books, it means that excess revenue can be funneled elsewhere to off-budget expenditures — usually to satisfy political patrons or to trump powerful social groups.
The cost for insuring Venezuelan debt has continued to soar amid speculation about a default. If one is to be avoided, Mr. Maduro will be forced to consider a major currency devaluation and cuts in gasoline and electricity subsidies. The move, however, will make it hard to maintain the unpopular largesse for Cuba, Nicaragua, and Ecuador — clients who effectively secured Venezuela’s recent vote onto the UN Security Council.
Francisco Monaldi, the Director of the Centro de Energía del IESA, writes, “For a government that is reluctant to adjust and has the worst set of economic policies, this decline in (foreign exchange) income will bring higher inflation, more scarcity and lower purchasing power to Venezuelans…The economic adjustment required will involve giving up a lot of the gains in poverty reduction that the country had in the previous decade. Politically the government will get into a very difficult level of popular support.”
The decreasing price forecast is especially damaging considering the country’s public food shortages and inflation issues, leaving the Maduro administration to make a dire choice between modeling a socialist regime and making pragmatic economic decisions that simultaneously encourage market freedoms.
Observers have called for a policy response that includes a devaluation as well as fiscal and monetary tightening, but political considerations are also likely to come into play ahead of parliamentary elections next year.
With rampant OPEC cheating on the horizon, an election to fake next year, continued strong protests on the way, and a nuanced petroleum market continuously evolving, Venezuela is left with a stark reality. It must, for all intents and purposes, cheat on OPEC to survive the short-term assault and yet somehow find a way to revolutionize its economy to combat overwhelming debt. The next few months will be critical, and the price of oil will undoubtedly dictate Venezuela’s relevant future.