Monday, July 14, 2008

Chavez to expand Venezuela's oil pact

Venezuelan President Hugo Chavez is flexing the country's petroleum muscle once again, stating he seeks to expand Venezuela's oil pact to poor nations in the Caribbean.

Chavez stated "Nations taking part in Petrocaribe initiative will now be required to pay just 40% of the bill within 90 days - down from the current 50%. The rest can be paid over the next 25 years at a fixed rate of 1% percent as long as oil prices are above US$100 a barrel.

"That could compensate for the horrible curve of the jump in oil prices," Chavez said. He added that 70 percent of payments may be deferred if oil reaches US$150 a barrel.

AP Photo

In this photo released by Miraflores Press Office, Venezuela's President Hugo Chavez speaks during the opening ceremony of the Petrocaribe Summit in Maracaibo, Venezuela, Sunday, July 13, 2008. President Hugo Chavez sought to expand an oil-supply pact that is delivering fuel to 17 nations, calling it a tool against poverty and dismissing opponents' accusations that he is giving away Venezuela's oil wealth.

Sounds really generous to me... Venezuela is unarguably of the wealthier Caribbean nations in the
Caribbean, however it does remain a country with many economic problems. Calculating if such a long-term donation is even feasible is difficult to do. So many variables could arise in the next 25 years which could cause the cash flow from its oil accounts receivable ledger simply stop...

New government could come into power who don't honor the repayment. Alternative energy could leap frog and bring the price of oil down substantially. A new government could come into power in Venezuela and re-arrange the terms, leaving small Caribbean contries with little bargaining power against Venezuela: their provider of energy and also regional political and economic power.

No less the gesture as it stands is a nice one, and in reality there is just so much domestic investment that is possible given Venezuela's limited FDI and internal domestic capacities. Oil drills may be in shortage, but so is the industry as a whole since the PDVSA strikes. Given the set backs, PDVSA remains a relatively vibrant operation, turns a profit and even manages to give Chavez some diplomatic barganing chips by making Venezuela into a gracious, oil rich country which cares about its region and the poor of world... unlike the United States, which is a underlying point Chavez hopes to make through such efforts.