The precipitous drop in oil prices over the past several months — from more than $147 a barrel to around $40 a barrel today — has Venezuelan President Hugo Chavez singing a slightly different tune. His vituperative anti-American rhetoric has been toned down; he is hinting that the new administration in Washington may bring new opportunities for improved relations. He has even solicited bids from Western oil companies on new fields. His extravagant promises of aid for Cuba, Nicaragua and other countries he has sought to enlist to his pan-American socialist vision — some $38 billion worth of promises — are no longer affordable.
Indeed, buffeted by the fall in oil prices and inflation at a rate of 32 percent, there are signs that the Venezuelan economy, and with it Chavez himself, are almost certainly going to implode. In the 1980s and ’90s, Venezuela was plunged into a severe debt crisis. Chavez is poised to repeat history. According to Deutsche Bank, oil must remain above $90 a barrel for Chavez to fulfill his commitments to heavy housing, food, and fuel subsidies (gasoline in Venezuela is a world-low four to five cents per liter) for Venezuelans and to foment the socialist revolution he dreams of.
With the approach of yet another referendum on whether Chavez should become his nation’s president-for-life, scheduled for late February, Chavez is lavishing even more billions on domestic spending, which is meant to try to bolster his popularity.
During the more than three decades I have traveled through emerging-market countries, I measured the health of their economies using a number of criteria. Some were simple observations — about the state of basic infrastructure, for example, or from conversations with cabbies that gave me a sense of whether things were looking up or down. But there were three criteria that often told me whether to bet for or against the long-term fortunes of a nation’s economy.
First, is there a black market for dollars and how extensive is it? When people are eager to unload their own currency and pay well above official exchange rates for dollars, it’s not a good sign. Second, are financial and human capital fleeing the country? If people are sending their money overseas, or the middle and upper classes are moving abroad in significant numbers, it’s a vote of no confidence. Third, if the government is nationalizing key industries, it’s a safe bet foreign investment is going to dry up.
There is indeed a huge black market in which dollars are being purchased for well over twice the official exchange rate set by the government. Inflation is the highest in Latin America.
Second, according to the Venezuelan Central Bank, $19 billion in private capital was transferred out of the country in 2007. It wasn’t just money taking flight; the number of Venezuelans in the United States increased from just over 90,000 about 10 years ago to almost 178,000 in 2006. Many more have gone to other countries. Most of these émigrés are from the middle and upper classes and represent professional and technical skills Venezuela so needs.
Finally, as Chavez has nationalized major enterprises, including steel and cement factories, and has taken majority stakes in projects owned by major corporations that have pulled out of Venezuela. He will be hard pressed to pay adequate compensation to some of the companies that he has nationalized, and will have to worry about lawsuits and attachments of assets.
U.S.-Venezuelan relations mirror the ironies of our relations with many Mideast oil suppliers. We are paying at the gasoline pump to fund undemocratic regimes whose interests are often hostile to our own. Clearly, our stubborn dependence on foreign oil is a huge self-inflicted wound. But, there is no need to act precipitously against Chavez. He may have us over a barrel now, but in time he will probably sink his own economic boat.
(This entry was published as an op-ed article by the The Providence Journal on January 29, 2009)
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