Investors and analysts have started to worry about the impact a downward trend in oil prices could have on Venezuela's budgetary needs, but crude prices are only one part of the equation, Thomas O'Donnell, a political economy analyst and Fulbright Scholar in Venezuela, told BNamericas.
Venezuela's financial fate actually is a combination of three variables including foreign reserves held by the central bank, the price of oil and the length of any recession in the US, Europe or China, O'Donnell said.
"THINGS COULD GET UGLY"
"All three factors have now changed at once," he said. "If the recession persists, prices will stay low and slowly but surely Venezuela and every other OPEC high-population state will exhaust their reserves and will find it very hard to borrow cash."
Venezuela in this scenario would then be forced into borrowing from Russia, Europe, China or the IMF, which does not provide easy money.
"Pakistan ran out of reserves and was turned down by everyone. The Chinese, unlike in the past, would not give cash for political influence but demanded a program of reforms and restructuring to ensure they'd get their money back," O'Donnell said.
"The Pakistanis, humiliated, have turned to the IMF, which will demand the same sorts of measures. And if it gets to this point in Venezuela or and Argentina, things could get ugly," he added.
Venezuela's new finance minister Ali Rodriquez, for instance, began talks with the IMF and World Bank after taking on the job.
"In fact, the IMF sent a delegation to meet him here in Venezuela," O'Donnell said. "Rodriquez is known as highly able and has unassailable revolutionary credentials. It is no wonder he has been given this now-all-important position here."
OIL PRICES
While no one can predict where the price of oil will go, market fundamentals may continue to push the price lower.
"I think the price of oil could very well go as low as US$40/b. That's been in the fundamentals for a long time," O'Donnell said.
"The reasons for high prices have been low spare capacity due to US restrictions on Iran and Iraq for over a decade, OPEC's policy of micromanaging supply and not developing new spare capacity beyond Saudi Arabia's 1.9Mb/d and, of course, the rapid growth in demand from Asia and North America," he added.
Saudi Arabia also had been taking measures to reduce the price of oil before the financial crisis hit and new spare capacity is set to come online in 2009.
"In the past, Venezuela could cheat on its OPEC quota to help, but now they cannot," O'Donnell added. "But as Chávez pointed out the other day, the fall in price of other basic commodities will help Venezuela's cash reserves last."
O'Donnell is a nuclear physicist with the New School University of New York City.
He has a Fulbright scholarship to study the political economy of oil in Venezuela and is a guest professor at the CENDES institute with the Universidad Central de Venezuela in Caracas.
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