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Surging Oil Prices Buoy Venezuelan Economy

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The sharp rise in world oil prices are a salve to Venezuela's economy and the government's budget. Increasing oil revenues will ease financial constraints on the government's ambitious socialist reforms.

The price of crude oil closed at $72.21 a barrel on the N. Y. Mercantile Exchange on June 12th. The price has more than doubled since the lows that were hit early this year.

The government of President Hugo Chavez cut it's 2009 budget by 6.7 percent in March in response to the steep drop in the price of oil in the Fall of 2008, caused by the world financial crisis.

The revised 2009 budget is based on an estimate that oil prices will average $40 a barrel for the year. (The initial 2009 budget, which the National Assembly passed in October, 2008, was based on an estimate of $60 a barrel.)

Almost half of the government revenues, and as much as 90 percent of its export earnings, come from oil, mainly from Venezuela's state owned oil company Petroleos de Venezeula (PDVSA). The current soaring oil prices mean that significantly more revenues are flowing into government coffers than were expected.

Venezuela can run a small trade surplus when oil is above $50 a barrel, and begins to enjoy large trade surpluses when oil is above $70 a barrel, as it is now, according to a report by Mark Weisbrot and Rebecca Ray of the Center for Economic and Policy Research.

There is no consensus among experts on whether oil prices will remain high, fall, or climb still higher. Goldman Sachs Group raised its price target for crude oil to $85 a barrel by year's end.

Jack Rasmus, a professor of Economics at St. Mary's College in Moraga, California--the author of a forthcoming book, "Epic Recession and Financial Crisis," to be published by Plutobooks and Palgrave later this year--thinks that sustained high oil prices are dependent on a world economic recovery.

"The short term trend is for a rise in global oil prices, with the proviso that the current trend could reverse should expectations of a world economic recovery become lower," said Prof. Rasmus.

President Chavez's government can use the current increased revenue flow to finance it's ambitious array of socialist reforms. The government has moved to nationalize an increasing number of industries. These have included nationalizations in the steel, cement, telecommunications, food processing, mining, and oil services industries as well as banking.

Venezuela pays compensation to the owners of businesses which it nationalizes. While spread out over years, these are huge transactions for the government.

The government also needs funds for a massive investment in the budding Communal Councils, which are projected as a community based effort at building participatory democracy. The government has committed to funding a budget for each organized Communal Council for it to use in developing it's community. The government's goal is for there to be 50,000 such Communal Councils in Venezuela. Approximately 20,000 Communal Councils have been organized so far, according to a recent report for the North American Congress on Latin America by Steve Ellner.

The extremely popular "Social Missions" require massive funding too. These provide for basic needs of the poor including health care, education, food and housing. The Missions are funded by PDVSA.

 

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Jonathan Nack has been a journalist and activist since 1984. He resides in Oakland, California.
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