Venezuela. Chavez and Oil :: The Economist
It has been Mr Chávez's extraordinary good fortune that the price of oil increased more than sixfold since he took office in 1999 to its peak last year. That has allowed him to ramp up public spending. With private investors scared off by controls and Mr Chávez's socialist talk, it is this spending binge that helped the economy recover after an opposition-led two-month general strike in 2002-03 and has since fuelled rapid economic growth....And so on.
Venezuelan crude, much of which is heavy and sulphurous, sells for about $10 less than lighter benchmark crudes such as Brent and West Texas Intermediate. Last year the average price for the Venezuelan “basket” of crudes was $56 a barrel. Last month, that figure was about $46. Any further fall might start to constrain Mr Chávez's ability to spend freely at home and abroad.
The 2007 budget is conservatively based on an average price for the Venezuelan basket of $29. But it is also based on average oil production of around 3.4m barrels a day (b/d). Neither of these figures bears much relation to reality and nor does the budget itself. Independent analysts, including OPEC and the International Energy Agency, believe the true production figure to be around 2.5m b/d. To complicate matters further, some of the oil is sold at a discount as part of Mr Chávez's strategy to win influence abroad, and 100,000 b/d is more or less donated to Cuba.
In contrast, total government spending last year was a third higher than originally budgeted. That pattern is likely to be repeated this year. “Quasi-fiscal” or off-budget spending, involving the diversion of oil revenues and the central bank's reserves into funds directly controlled by the president, is large and increasing.
Mr Chávez has a large piggy-bank he can draw on. The forthcoming constitutional reform is likely to strip the central bank of its last vestiges of autonomy.