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Crude Economics
Oil Price Plunge Hits Venezuela the Hardest

These are not good days to be in the business of selling oil. The world is awash in the commodity, and that glut has depressed prices to levels less than half of what they were last summer. For oil majors, that means it’s time to tighten belts, reduce capital expenditures, and cull less productive projects. For petrostates, it’s a more complicated problem. Regimes around the world have consolidated power based on revenues generated from crude sales, and entire national economies rely on the oil sector. But if petrostates all across the world have it bad these days, Venezuela has been the hardest hit by the drop in prices, as the FT reports.

Like many other petrostates, Venezuela has used oil revenues to fund populist policies to placate what might otherwise be a restive public. Caracas is therefore loathe to trim its budget. But with domestic oil production stagnating, the country can’t expect to squeeze more out of its cash cow. Even when oil prices were above $100 per barrel, Caracas was forced to ration everything from toilet paper to sugar, milk to drinking water. Now, with crude trading around $50 per barrel, the Maduro government is trying to stave off creditors and manage its mounting debt. As investment bank head Russ Dallen, quoted in the FT, said,  “Venezuela is running on fumes…the current oil income is insufficient to allow the country to pay its debts, fund its imports and service its foreign bonds.”

The latest indignity: the South American country’s taps are running dry as its largest beer distributor closes breweries because it can’t import necessary ingredients. Venezuela certainly can’t put all of the blame on ever-cheaper oil—we were seeing evidence of these problems well before the bottom fell out of the global crude market—but it’s making things much worse for the socialist nation.

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  • Jacksonian_Libertarian

    Socialism doesn’t work anywhere it has been tried, eventually the lack of the “Feedback of Competition” so burdens the Nation, that bankruptcy and collapse are inevitable. In Venezuela’s case, Hugo Chavez’s first act was to nationalized (created a Government Monopoly owned Oil Monopoly) their Oil industry, and thereby killed the goose that lays the golden eggs. Long before the present price drops, Venezuela’s oil production has been falling and production costs have been rising.

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