Venezuela: OPEC's Dilemma

Venezuela has decided it needs to pump more oil. It has a simple problem. The nation’s income has cascaded as oil prices have fallen from more than $140 last summer to under $40 now. What it cannot get in price, the South American nation needs to make up in volume.

The viability of the Chavez government may hinge on its ability to keep the cash rolling in to cover the costs of social programs and the building and repair of the nation’s infrastructure.

According to Bloomberg, “Venezuela plans to boost oil output at least 12 percent in a joint venture with foreign investors that will cost more than twice what the government previously estimated.” In other words, if the country does not have a full Treasury because it does not have oil revenue, then borrowing to get capital to produce more oil comes at a high price. Who wants to risk lending to a country that cannot pay its bills?

Venezuela is beginning to look like a large number of other large oil exporting countries, both inside and outside OPEC. Canada is being driven into a deep recession because of the falling price of its plentiful crude. The problem is more acute in Russia. Iran has indicated that it cannot fund its budget without oil above $70. Banking systems in some of the large Arab countries are seeking government assistance as their access to capital drops.

The problem is now nearly unsolvable, and it greatly benefits oil consumers. The dilemma is simple. As crude prices fall, the only way that Venezuela can bring in more capital is by raising exports. That floods the market with more supply, taking down prices even further.

Based on that trend, which is not likely to go away, crude is headed under $30.

Douglas A. McIntyre