The principal argument of this article is that reduced oil markets and substantial foreign debt have left the Venezuelan economy in a serious predicament.

The Venezuelan predicament is essentially that of a heavily oil-dependent economy being faced with having to repay two-thirds of the government foreign debt (i.e. $25.3 billion) within two years time during a depressed oil market.

Due to the slump in oil revenues, dollars have become increasingly scarce and shortages of imported parts and raw materials increasingly common. Venezuelan imports, half of which come from the U.S., will fall to almost half of the 1981 figure. Despite the reduction in foreign exchange, the government continues to import food (i.e. 3/4 of Venezuela’s food) at similar levels as before. The true extent of Venezuela’s economic predicament is not fully appreciated by the majority of the population (including many in government), as many see it as just another short-term down period in the cyclical pattern of the oil industry.

Even without the global slump in demand, Venezuela is faced with an aging oil industry. The industry peaked in 1970 at 3.7 million bbl. a day. The subsequent oil-price spikes later in the decade set off Venezuela’s spending and borrowing boom. Increasingly it is faced with competition from Mexico, which has increased its production sevenfold since 1973. The valuable U.S. market has been incrementally lost to this competitor (i.e. U.S. increasing imports from Mexico to 800,000 bbl. daily from next to nothing, while reducing imports from Venezuela by 65%). Since the nationalization of the oil industry in 1975, EXXON Corp. and Royal Dutch/Shell Group (i.e. two largest concession holders in Venezuela) have reduced production from 1.5 million bbl. a day to 320,000 bbl..

OPEC policy has further worsened Venezuela’s declining economy through reductions in oil production quotas and price (i.e. $5 per bbl.). As the oil earnings further deteriorated, the economy took a plunge. This trend is likely to continue as oil dollars make up 95% of Venezuela’s earnings. In addition, inflation could rise as rigid price and foreign-exchange controls are eased and unemployment is already estimated to be as high as 16%.

The state monopoly PDVSA (Petroleos de Venezuela) has had its investment spending greatly reduced. In order to raise new investment capital, the government may be forced to reduce income taxes on the industry, raise gasoline prices or even push PDVSA to borrow abroad. Refinery upgrading projects have been abandoned and the monopoly has even pursued joint ventures with foreign firms to develop natural gas in order to free up more oil for export.

The government is currently undergoing negotiating with foreign banks with regard to its moratorium on repayment of its debt principal. The central bank was able to boost its foreign reserves by restricting imports and dollar spending. The government’s critical challenge is to stimulate private investment, as the government cannot sustain its current practice of continually and unrealistically adding individuals to its payroll (i.e. 9% of the population works for the government).

Summary by David A. Ritchie