The Islamic Post Blog


Venezuelan Economy Stable ‘For Now’ by Khalida
February 2, 2009, 11:02 am
Filed under: February Volume I- 2009, Latino/Caribe | Tags:

By Noora Ahmad

Islamic Post Staff Writer

“Venezuela has enough savings to face any crisis,” said Venezuelan President Hugo Chavez, according to the Venezuelan daily, El Universal. In an effort to dispel global misconceptions regarding the Venezuelan economy, President Hugo Chavez has recently insisted, repeatedly, in the annual address to his national assembly, on January 13, that the country is not in economic crisis, even with last year’s landslide in oil prices.
Mark Weisbrot, co-director and economist at the Center for Economic Policy Research, in Washington, D.C. (CEPR), concurs: “It is clear that Venezuela can be expected to run current account surpluses for the foreseeable future, even at oil prices far below the levels that are currently forecasted, by any experts, in the field,” wrote Mr. Weisbrot late last year, in a report entitled “Oil Prices and Venezuela’s Economy.” “However, even if the economy were to somehow fall into a current account deficit, the government has $40 billion in reserves, at the Central Bank and another $37 billion, in other hard currency assets. These reserves amount to 23 percent of GDP, thus providing an enormous cushion for any unanticipated events.”
And unanticipated it has been. Before oil prices began to climb earlier this month, speculations ran rampant over the causes and effects of the skyrocket in oil prices and their subsequent plummet, which occurred at the same rapid pace. In answer to the current low oil prices, which have been perceived as the effect, of a decrease, in global demand, Venezuela is tempering its output, like other OPEC countries, with a cut of 189,000 barrels per day.
Yet, according to a 60 Minutes segment which aired January 8, a decrease in the demand for oil may not be what caused gas prices to fall. CBS Correspondent Steve Kroft reported during the segment that unheeded experts are saying rapid rise and fall in prices “was a speculative bubble, not unlike the one that caused the housing crisis, and that it had more to do with traders and speculators on Wall Street” than with how much gas consumers were, or were not, putting into their sports utility vehicles.
Steve Kroft claimed: “A recent report out of MIT, analyzing world oil production and consumption, also concluded that the basic fundamentals of supply and demand could not have been responsible for last year’s run-up in oil prices. And Michael Masters [who testified before the Committee on Homeland Security and Governmental Affairs of the United States Senate last April on the same matter] says the U.S. Department of Energy’s own statistics show that if the markets had been working properly, the price of oil should have been going down, not up.”
With regards to speculation Mr. Kroft asserts: “Over time, the big Wall Street banks were allowed to buy and sell as many oil contracts as they wanted for their clients, circumventing regulations intended to limit speculation. And in 2000, Congress effectively deregulated the futures market, granting exemptions for complicated derivative investments called oil swaps, as well as electronic trading on private exchanges.”
He also claimed there was no way of knowing who did the circumvention, as the deals were done secretly. These secret deals could, as oil prices swing back up, render production cuts, a potentially perilous move for producers and consumers alike, according to Michael T. Klare, author of Rising Powers, Shrinking Planet: The New Geopolitics of Oil. “As long as prices remain low,” said Mr. Klare, “Oil companies have no incentive to invest in costly new production ventures, which means no new capacity is being added to global inventories, while available capacity continues to be drained. Simply put, what this means is that, when demand begins to surge again, global output is likely to prove inadequate,” driving the price back up.
In addition, the price may not come back down so easily next time as “most ‘easy oil’ reservoirs have now been exhausted,” according to Klare, “Which means that virtually all remaining global reserves are going to be of the ‘tough oil’ variety. These require extraction technology far too costly to be profitable, at a moment when the per barrel price remains under $50,” concluded Michael Klare. This signifies that if OPEC countries like Venezuela do not continue to explore new oil drilling avenues, the oil shortage could become a very real crisis.
Even given this assessment, Venezuela is going ahead with its charitable CITGO heating oil program in the United States, despite reports to the contrary which, like those commenting on the country’s prospective economic losses, claimed the country could no longer afford such excesses.  CITGO CEO Alejandro Granado and Citizens Energy Chairman, Joseph P. Kennedy II, gave a press conference earlier this month confirming that income-eligible households may apply to receive up to 100 free gallons of heating oil. Mr. Kennedy pointed out that he is “personally aware of President Chavez’s genuine concern for the most vulnerable, regardless of where they may live.”

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