No one should be in any doubt about the critical importance of Venezuela’s PetroCaribe programme.
If it were not for the energy lifeline that it has provided to every Caribbean nation other than Trinidad and Barbados, much of the region would by now be in economic free fall.
Under the arrangement, Cariforum nations have received in total, oil on preferential terms at the rate of between 120,000 and 140,000 barrels per day over the past three years.
The largest share of this has been allocated to Jamaica and the Dominican Republic while Cuba, separately, has received around 100,000 barrels per day under a more complex arrangement with Caracas.
Low interest loan repayments
The benefit of the PetroCaribe scheme is that member countries are allowed to retain a part of their payment in the form of a very low interest loan repaid over a twenty five year period.
This has enabled regional governments to use the programme for balance of payment purposes and budgetary support, while others have delayed due payments for long periods.
Less positively, the programme has increased the region’s long term indebtedness
For example, the Dominican Republic’s PetroCaribe-related debt now totals over US$1.23bn, up from US$448.8m in 2006 and Caracas is projecting that over one-third of the Caribbean's total external debt will be owed to Venezuela by 2015.
Despite criticism from those outside the Caribbean who do not like the implied political leverage the programme gives to Caracas, no other nation at this time has the political will to provide this level of support to Caribbean states.
So much so that the US in particular is now faced with the paradox of needing Caracas’ continuing commitment to maintaining PetroCaribe’s programmes in the region if it is to have any guarantee of economic and social stability in the region.
Having said this, there is a need for much greater realism about the arrangement.
Nations within the region and beyond ought to be asking themselves serious questions about what happens if Venezuela finds itself having to increase prices, reduce supply or if it were to need to vary the arrangement in order to address its own economic problems.
Oil sector in crisis
Venezuela’s oil sector accounts for more than three-quarters of total Venezuelan export revenue, about half of total government revenues, and around one-third its gross domestic product (GDP).
Despite oil prices remaining firm, President Chavez is now struggling to address a deepening power supply crisis, the devaluation of the Bolivar, rising inflation, shortages in the shops, and loud political opposition to his centralising reforms.
This is all happening as Venezuela’s oil production stagnates and domestic demand for oil and gas increases as power blackouts cause sales of generators to surge, government to spend huge sums on mobile generating plants and to develop plans to move from Hydro power to oil fired thermoelectric power plants.
The consequence is a rapid increase in domestic demand for fuel oil and diesel and a fall in oil exports.
According to newspaper reports, the nation’s Energy Minister, Rafael Ramirez, has said that a reduction in the export of oil products “may indeed occur in 2010 because our priority is the domestic market”.
Cut in export supplies
However, officials of the state oil company, PDVSA, say privately that a cut in exports is inevitable.
Other reports note that PDVSA officials are suggesting that it may be the Caribbean that bears the brunt of any cuts.
They say that oil exports to Cuba will not be cut, that every effort will be made to maintain or increase exports to the US and China, and by elimination, some exports of fuel oil and gasoil to the Caribbean may be at risk.
If this happens it is uncertain how cuts will be applied.
Cuba and Haiti uneffected
The one country least likely to be effected will be Cuba, given the symbiotic relationship that exists between both nations.
President Chávez has also announced that Venezuela will forgive Haiti’s debt estimated by the IMF to be US$295m.
To be affected
However, the outcome may be less clear for those countries in the region that Venezuela has been critical of politically.
For example, after a military coup ousted Honduras’ President Manuel Zelaya, in 2008 Venezuela halted the delivery of oil there.
The Dominican Republic may also have been penalized over the manner in which it rapidly recognised Mr Zelaya’s successor with it is said Caracas pulling out of a deal to purchase a 49 per cent stake in a Dominican refinery.
Similarly PDVSA is evaluating whether or not to cease operations at the Isla refinery in Curacao.
According to the Venezuelan Energy Minister, PDVSA “cannot make commercial calculations that are not linked to the national interest”.
“Our oil industry is not divorced from the internal policy of our government,” he told reporters, after President Chavez accused the US military of using a base on Curacao to launch spy flights into Venezuelan airspace.
How the Venezuelan Government will respond to a tightening in demand for its oil is far from clear but there is some precedent.
In the summer of 2009, Caracas announced that it planned to change the payment terms for oil and oil products, with PetroCaribe members required to pay up to 80 per cent of their bills, rather than 40 per cent within 90 days of receiving a delivery.
In the end it seems that no change was made as oil prices increased.
Irrespective, in a Caribbean region in which many nations are engaged in IMF programmes, are reducing public expenditure and seeing significant falls in tax and tourism revenues, any significant change in the PetroCaribe arrangement or pricing could come as a shock.
This is not to be alarmist but to try to encourage greater realism about the sustainability of the hugely beneficial programmes in the Caribbean in their present form.
Much of the region’s economic stability depends on the continuation of the PetroCaribe arrangement and its pricing structure: factors which should give pause for thought not only in the region but also amongst those in Washington and Europe not well disposed to Venezuela’s regional role.
David Jessop can be contacted at firstname.lastname@example.org