THE IMPACT OF OIL PRICES ON
THE VENEZUELAN ECONOMY: 2008-2009
As an oil-exporting country for almost 100 years, Venezuela is very much affected by the volatility of oil prices. It is for this reason that, in 1959, then Minister of Energy Juan Pablo Perez Alfonso approached the countries of Saudi Arabia, Iran, Iraq, and Kuwait to suggest the creation of a mechanism to stabilize oil prices and consequently the management of government revenues. By studying the oil market closely, OPEC members determine if it is well supplied or if additional production is required, while also attempting to avoid unnecessary market floods. In this way, producers and owners of the resource can be assured a fair return on their investment while offering fair prices to consumers.
OPEC managed to maintain the stability of oil prices during 2006 and the first half of 2007, when oil averaged between $62 and $66 per barrel. However, it lost the ability to keep prices steady in July 2007. This date coincides with the emergence of the first indicators of the U.S. financial crisis. Financial speculators were increasingly turning to the main commodities markets including oil, and this caused the price of crude to jump sharply in the second half of 2007 to $83 per barrel. Even as all indicators showed that the oil market was well supplied, prices continued to increase throughout early 2008, providing evidence of a speculative bubble in which increased oil prices were a response to oil futures markets instead of actual demand. Venezuela has consequently advocated for lowered production by OPEC in order to regain a certain balance in the oil market.[1]
The
sharp decrease in oil prices in early November 2008 was predicted by Venezuela, with the understanding that the speculative bubble would eventually burst and bring
oil prices toward a more realistic rate for producers and consumers. Oil prices
are still in the process of stabilizing as of this writing (mid November 2008).
Venezuela, however, has significant experience in dealing with the fluctuations in the oil market. Considering that approximately 45% of national revenues come from the oil industry, the country has become adept at setting projected oil prices in a manner that limits the impact of fluctuations on the national budget.
When the 2008 budget was calculated, the average price of Venezuelan crude was approximately $55 per barrel. Officials therefore decided to estimate average annual prices of $35 per barrel. After the year 2008 closed with average prices of $97.86 per barrel the decision was made to base the 2009 budget on the relatively conservative rate of $60 per barrel.[2]
Windfall oil revenues obtained by the government of Venezuela in 2008 were invested in the social and economic development of the country. This was done through approvals granted during the year. In 2009, though, the national budget accounts for more of these investments ahead of time, therefore boosting official spending and thus allowing for greater transparency.[3] Furthermore, the government’s expected income from oil in 2008 had already surpassed predictions for the year by October, putting total revenues at over 100% of projections. This will give Venezuela a strong cushion should prices drop further during 2009.
Oxford Analytica recently confirmed this view in its report on the outlook for Venezuela: “the evidence does not seem to indicate that Venezuela's economy is under immediate threat from declining oil prices. Moreover, the government seems likely to be able to continue its high levels of social spending in 2009.”[4]