Does Socialismo Have a Future in a Cheap Oil World?

from CNBC

For Saudi Arabia, its decision last week not to cut oil production seems to have been an attempt to protect market share. But for Venezuela, that decision may mean "game over" for the economy.

Oil accounts for 95 percent of Venezuela's export earnings,and combined with gas, it's 25 percent of the country's gross domestic product. As the price of oil hits a four-year low at $70 per barrel, the OPEC nation's oil-dependent economy is set to implode, experts say, bringing deeper political instability and chaos to the world's 10th-largest oil exporter.

Anti-government protests flared earlier this year as Venezuelans started to feel the effects of the economy's staggering 60 percent inflation and currency controls that have generated scarcity of basic needs such as toilet paper and toothpaste.

The country's heavily government-subsidized economy is expected to contract by 1 percent in 2015, according to IMF projections.

"Scarcity is getting worse in Venezuela. Basic products are so hard to get," said Josseline Viera, a doctor in Venezuela. "It used to be that certain products were scarce, now it's basically everything."

Viera says shortages have made it impossible for hospitals to find essential medical products such as gauze and acetaminophen.

"I basically have to send patients to other hospitals," she said. "But patients have to go to a lot of clinics and hospitals before they find the medical supplies they need for their care. I feel very sorry for my country."

Experts predict the situation in Venezuela will worsen as early as the first half of 2015.

"It will be a year of extreme scarcity," Venezuelan economist Angel Garcia Banchs said. "What's coming to Venezuela is chaos that will probably lead to barbarity and people looting. "

The state of the Venezuelan economy is the result of years of economic mismanagement that the government, for years, was able to cover up by pumping oil revenues to support its populist policies. But this was when oil was at more than $100 per barrel, and despite declining oil production in Venezuela, revenues were enough to keep people happy.

But since this summer, Brent fell from above $115 per barrel to $70, thanks in part to North America's shale boom, and oil analysts predict oil prices will keep declining below $70 for Brent and even more for crude.

One analyst at Nomura recently estimated that Venezuela may need oil prices to hit $200 a barrel to balance its budget. (The precise figure is difficult to determine, because Venezuela doesn't disclose as much economic data as other countries do.)

As oil prices keep falling and Venezuela is left empty-handed, its government will have no other option but to increase taxes, impose price controls and potentially eliminate gasoline subsidies for Venezuelans, something that will create unrest in the South American country, according to Diego Moya-Ocampos, a senior political risk analyst at IHS.

"This scenario increases the threat of a new wave of strong anti-government protests in Caracas and key urban centers," Moya-Ocampos said. "Demonstrations can escalate into road blocks and confrontations between security forces and protesters."

Moya-Ocampos also said that anti-government protests could escalate as in the 1989 "Caracazo" or "Caracas disaster," in which fuel price increases unleashed bloody riots: "This could lead to direct or indirect military intervention to guarantee political stability and bring about a change in the direction of economic policy," he said.

A day after OPEC's announcement that it would not make the production cuts that Venezuela had pleaded for, President Nicolas Maduro tried to reassure Venezuelans that declining oil prices won't affect social programs.

"If we had to cut anything back on our budget, we would cut extravagances, we would cut our own salaries as high officials, but we will never cut one Bolivar of the money that goes to education, food, housing, the missions of our nation," Maduro said Friday during a televised address that was translated from the Spanish by CNBC.

Recent polls show Maduro's popularity has dropped to a record low.

"The economy will overcome politics," said the economist Garcia Banchs, who noted that typically in Venezuela, economic realism has taken a back seat to political priorities. That's about to change. "The economy will be on top, and political changes will have to happen."

Venezuela's oil revenue could face another threat aside from declining prices: approval of Keystone XL pipeline bill, which congressional Republicans have vowed to bring back for another vote after they return to Capitol Hill in January. If passed, the pipeline could mean that heavy crude from Canada would replace the crude Venezuela exports to the United States.

"If Venezuela were not willing to more heavily discount its crude compared to Mexico's crude, then there's no point of getting it (from Venezuela) if we can get it from Canada or Mexico," said Susan Kaufman Purcell, director of the Center for Hemispheric Policy at the University of Miami. "It will clearly affect Venezuela because of the three countries, it's the most unreliable."