The impact of low oil prices on Venezuela

| Jan. 25, 2015 | Caracas, Venezuela

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Venezuela’s economy is in tatters. With severe shortages, there are are now queues of hundreds, thousands of people outside supermarkets. Annual inflation is running at more than 64%. On the black market, the local currency has lost 65% of its value against the US dollar in the last year.

At a supermarket line in Caracas, I found 60-year-old lab assistant Antonia Rodríguez waiting for milk.

“This government is filth,” she told me. “There’s no food! If Chávez were alive, this wouldn’t be happening.”

Former president Hugo Chávez lubricated his socialist revolution with the world’s largest oil reserves. Some 96% of the country’s foreign income is derived from selling oil. When Chávez came to power in 1999, he toured the nations of OPEC and invited their heads of state to Caracas for a major summit. Prices went up and stayed there for years.

But Chávez is dead, and his successor Nicolas Maduro is paying the bill. International oil prices have halved in the last few months.

In his annual State of the Nation speech on Wednesday, Maduro admitted the country was suffering. He blamed the problems on an economic war being waged against Venezuela, part of which is the fall in oil prices.

“There’s less foreign currency,” the president told Congress. “The oil barrel has gone from $96 to $40 but God won’t fail us. God will provide.”

That line, “God will provide,” angered many in Venezuela, evidence to them that there is little hope left for the country’s spluttering economy.

Outside a pharmacy in Caracas the following morning, hundreds stood in line hoping to buy basics such as diapers.

Maureen Garban, 55, bakes and sells cakes for a living. Though she struggles to find sugar.

“Maduro is waiting for a miracle but it’s not going to happen,” she told me.

Last year, Maduro faced the biggest anti-government protests in Venezuela in more than a decade. Now, with oil revenues in free fall, Maduro’s popularity is in the low twenties and looks to be falling. Pockets of protest have begun to form across the country.

Even those who once supported Chávez, like Rodriguez in the supermarket line, are unhappy with Maduro’s handling of the economy. The opposition has called for further protests.

Cheap oil puts the president in a tough position. Bringing in pragmatic economic policies would hurt poor Venezuelans, who form the base of his support.

Currency controls, enacted over a decade ago by Chávez, have created a black market on which the dollar sells for 30 times its strongest official value. But devaluing the currency, which would provide the government more local currency, would exacerbate inflation and lower the value of Venezuelans’ savings.

During his speech to Congress, Maduro did slightly revamp the currency controls though not to any great extent.

Another option for him is to end a $12 billion-a-year subsidy on petrol at the pump, which allows Venezuelans to fill up their cars for just a few cents.

In the speech, Maduro described the subsidy as a distortion that needed to end. However, he made no concrete pronouncements. Politically, a price rise could spark major riots—just as it did when a similar move was tried in 1989.

In a recent cartoon by Venezuelan satirist EDO, Maduro is shown as a sweating snake charmer trying to persuade a barrel of oil to rise.

So far, the magic hasn’t worked.

For World Report, this is Girish Gupta in Caracas