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For political reasons Venezuela will cut off the Central Americans and the Caribbeans before it reduces the flow of oil to Cuba, experts say.
Monday, October 20, 2014
Perspectives

Latin America: End of Petrocaribe?

If economics trumps politics, Petrocaribe could end sooner rather than later, experts say.

BY ENERGY ADVISOR
Inter-American Dialogue 

 

The Petrocaribe alliance, through which Venezuela provides oil on preferential terms to certain Caribbean and Central American countries, is "more noose than lifeline," a recent Scotiabank report said, pointing to uncertainty about the future of the energy accord in light of a deteriorating political, economic and oil sector situation in Venezuela, which creates a great risk for countries dependent on the subsidized oil. Will Petrocaribe disappear any time soon? How much support does the alliance have in Venezuela today? What countries would be most affected by a weakening or end to the program, and what should member countries be doing to prepare themselves for a potential end to the energy alliance?


Anthony T. Bryan, senior fellow at the Institute of International Relations at The University of the West Indies in St. Augustine, Trinidad:
The Maduro administration will continue to phase out

the generous assistance programs, but with a level of support for strategic partners. Some analysts estimate that the programs (including subsidies to Cuba and agreements with China) account for lost revenue equivalent to more than 400,000 barrels per day of Venezuelan oil exports. One-third of Venezuela's oil production is also given away at below-market prices. But the assistance programs, estimated at $20 billion, are still less than the estimated $28 billion in annual cost for domestic energy subsidies. Removing the domestic subsidies could be political suicide; consequently programs such as Petrocaribe will be phased out. If economics trumps politics, Petrocaribe could end sooner rather than later. Jamaica is the most vulnerable member. It is slightly more than one year into a three-year IMF loan program, and Petrocaribe funds provide domestic debt refinancing, budgetary support and infrastructure assistance during a bad economic period. Unlike Nicaragua and Cuba (which has a separate program that will decrease but be maintained), Jamaica is of less ideological and strategic importance to Venezuela. The Dominican Republic (with an excellent energy matrix) and El Salvador (positioned to secure new sources of financing) will probably be the least affected. Unfortunately, Petrocaribe postponed any real incentive for most of its members to seek cheaper fuel sources or develop alternative energy. Only a few members of Petrocaribe (the Dominican Republic, Jamaica, Dominica, Guyana and Suriname) appear to have advanced toward those objectives. Implementing Caribbean and Central American regional energy cooperation plans that have been gathering dust is urgent.

 

Charles Shapiro, member of the Energy Advisor board, president of the World Affairs Council of Atlanta and former U.S. ambassador to Venezuela: The influence of Chavismo is waning. Economic imperative and self-interest dictate that sooner or later Venezuela will reduce the amount of oil going to

Petrocaribe or make the terms more onerous or both. (My guess is that for political reasons Venezuela will cut off the Central Americans and the Caribbeans before it reduces the flow of oil to Cuba.) The beneficiaries of this subsidized oil in these energy-poor nations certainly don't perceive Venezuelan largesse as a noose. For them the danger is life without Petrocaribe. These countries simply cannot afford to replace Petrocaribe hydrocarbons with gasoline and diesel fuel bought on the open market. They need to look seriously at alternatives and plan for what comes next. The increased production of oil and gas in Canada and the United States and the prospective benefit of increased oil and gas production in Mexico present the three North American nations with an opportunity. Working with the Central Americans and the Caribbeans, now is the time to complete the work done to truly tie together the electrical grid of Central America (SIEPAC) and to link that grid to Colombia and Mexico, to introduce the use of more renewables in the Caribbean and to eliminate the technical and, equally as important, the economic barriers to the use of LNG in the smaller Caribbean islands. Above all, this looming crisis presents the opportunity for these countries to build the political consensus necessary to eliminate the use of highly polluting diesel fuel for electrical generation.

 

Leopoldo J. Martínez, CEO ofthe Center for Democracy and Development in the Americas (CDDA):

Petrocaribe is only sustainable if Venezuela increases production substantially, and growing internal pressures as well as lower oil prices project a declining trend for the initiative. Also on the horizon, with the economic and financial problems that Venezuela is facing, assuming no changes in Venezuela's policies, it would make more sense to pledge oil barrels daily to China than to cooperate with the Caribbean because China is a source of liquidity. On the other hand, in spite of the significant subsidy this initiative represents, growth remains low in the Caribbean, and countries' balance of payments are negative. Moreover, the debt portfolio now held by Venezuela is significant. The Dominican Republic alone owes Venezuela $12 billion. The whole portfolio adds $25 billion in debt owed to Venezuela. The situation is similar in Central America, where the country that receives the most benefits is Nicaragua. Indeed it was President Daniel Ortega who recently expressed his worries about this matter to President Obama and concluded that it was necessary to find other forms of energy cooperation given the unsustainability of Venezuelan aid and the resulting vulnerability of the economies of Central America and the Caribbean. I think this presents an excellent opportunity for the United States to build energy partnerships in the region and recover political leadership in the hemi-sphere, now that the U.S. energy position is one of an exporter.

 

Republished with permission from the Inter-American Dialogue's weekly Energy Advisor

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